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As filed with the Securities and Exchange Commission on October 9, 1997
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FRANKLIN FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
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MICHIGAN 38-3372606
(State or other jurisdiction of incorporation (Primary Standard Industrial (I.R.S. Employer Identification No.)
or organization) Classification Code Number)
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24725 WEST TWELVE MILE ROAD, SOUTHFIELD, MICHIGAN 48034 (248) 358-4710
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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READ P. DUNN
PRESIDENT
FRANKLIN FINANCE CORPORATION
24725 WEST TWELVE MILE ROAD
SOUTHFIELD, MICHIGAN 48034
(248) 358-4710
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Please send copies of all communications to:
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James S. Fleischer, P.C. Donald L. Kunz
Michael S. Sadow, Esquire HONIGMAN MILLER SCHWARTZ AND COHN
SILVER, FREEDMAN & TAFF, L.L.P. 2290 First National Building
(A limited liability partnership including professional corporations) Detroit, Michigan 48226
1100 New York Avenue, N.W. (313) 256-7800
Seventh Floor, East Tower
Washington, DC 20005-3934
(202) 414-6100
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are being offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933 check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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Title of Each Amount Proposed Maximum Proposed Maximum
Class of Securities to be Offering Price Aggregate Offering Amount of
to be Registered Registered(1) Per Share(1) Price(1) Registration Fee
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[ ]% Noncumulative Exchangeable 2,070,000 shares $10.00 $20,700,000 $6,272.73
Preferred Stock, Series A, par value
$10.00 per share
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(1) Estimated solely for the purpose of calculating the registration fee.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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1,800,000 SHARES
FRANKLIN FINANCE CORPORATION
[___]% NONCUMULATIVE PREFERRED STOCK, SERIES A
(LIQUIDATION PREFERENCE $10.00 PER SHARE)
EXCHANGEABLE INTO PREFERRED STOCK
OF
FRANKLIN BANK, N.A.
Franklin Finance Corporation (the "Company") is hereby offering 1,800,000
shares of its [__]% Noncumulative Exchangeable Preferred Stock, Series A, par
value $10.00 per share (the "Series A Preferred Shares"). The Company has been
formed for the purpose of acquiring, holding and managing real estate mortgage
assets that are intended to generate sufficient income to permit the declaration
of dividends on the Series A Preferred Shares at the stated rate and to meet the
operating expenses of the Company. Dividends on the Series A Preferred Shares
are payable at the rate of [__]% per annum of the liquidation preference (an
amount equal to $[__] per annum per share), if, when and as declared by the
Board of Directors of the Company. Dividends are not cumulative and, if
declared, are payable quarterly in arrears on the last day of March, June,
September and December in each year, commencing December 31, 1997. If no
dividend is declared on the Series A Preferred Shares by the Company for a
quarterly dividend period, holders of the Series A Preferred Shares will have no
right to receive a dividend for that period, and the Company will have no
obligation to pay a dividend for that period, whether or not dividends are
declared and paid for any future period. Dividends in each dividend period will
accrue from the first day of the period, whether or not declared or paid in the
prior period.
SEE "RISK FACTORS" COMMENCING ON PAGE 13 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SERIES A
PREFERRED SHARES. AMONG THE RISKS WHICH PROSPECTIVE INVESTORS SHOULD CONSIDER
ARE THE FOLLOWING:
- No prior operating history of the Company;
- Dependence on Franklin Bank, N.A., a national bank (the "Bank") as
Advisor and Servicer;
- Geographic concentration in Michigan of properties securing the
Company's initial mortgage loan portfolio;
- Possible adverse effect on the Company's cash flow in the event of a
significant decline in interest rates;
- Possible restrictions on operations of the Company or the Company's
ability to pay dividends by financial institution regulatory
authorities;
- If the Bank is experiencing financial difficulties, Series A Preferred
Shares may be exchanged for Series A preferred shares of the Bank which
will not be listed on the Nasdaq National Market or any exchange and
have other distinct risks;
- Possibility of conflicts of interest between the Company and the Bank
and affiliates of the Bank and that the owner of the Bank's common
stock may have investment goals and strategies that differ from those
of the holders of the Series A Preferred Shares; and
- Since dividends are not cumulative, if no dividend is declared on the
Series A Preferred Shares by the Company for a dividend period, holders
of the Series A Preferred Shares will have no right to receive a
dividend for that period.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE SERIES A PREFERRED SHARES ARE NOT DEPOSIT ACCOUNTS OR OTHER DEBT
OBLIGATIONS OF THE BANK AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY OR OTHERWISE INSURED.
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INITIAL PUBLIC OFFERING PRICE UNDERWRITING COMMISSION(1) PROCEEDS TO COMPANY(2)
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Per Share....... $10.00
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Total(3)........
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(1) The Company and the Bank have agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933.
(2) Before deducting expenses payable by the Company estimated at $287,500.
(3) The Company has granted the several Underwriters an option for 30 days to
purchase up to an additional 270,000 Series A Preferred Shares at the
initial public offering price per Series A Preferred Share, less
underwriting commissions, solely to cover over-allotments, if any. If such
option is exercised in full, the total initial public offering price,
underwriting commission and proceeds to the Company will be $20,700,000,
$[__________] and $[___________], respectively.
The Series A Preferred Shares are offered severally by the Underwriters,
as specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that the
Series A Preferred Shares will be ready for delivery through the facilities of
The Depository Trust Company in New York, New York, on or about
[_________________], 1997 against payment therefor in immediately available
funds.
RONEY & CO.
PRINCIPAL FINANCIAL SECURITIES, INC.
The date of this Prospectus is ____________, 1997.
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The Series A Preferred Shares are not redeemable prior to [____________],
2002 (except upon the occurrence of a Tax Event as described herein). On and
after [___________], 2002, the Series A Preferred Shares may be redeemed for
cash at the option of the Company, in whole or in part, at a redemption price of
$10.00 per share, plus the accrued and unpaid dividends for the most recent
quarter, if any, thereon, subject to the receipt of prior approval from the
Office of the Comptroller of the Currency or any successor regulatory agency.
The Series A Preferred Shares will not be subject to any sinking fund or
mandatory redemption and will not be convertible into any other securities of
the Company.
Under certain circumstances, each Series A Preferred Share will be
exchanged automatically (the "Automatic Exchange") for one newly issued Series A
preferred share of the Bank (the "Bank Preferred Shares") if the appropriate
regulatory agency directs in writing (a "Directive") an exchange of the Series A
Preferred Shares for Bank Preferred Shares because (i) the Bank becomes
"undercapitalized" under prompt corrective action regulations, (ii) the Bank is
placed into conservatorship or receivership or (iii) the appropriate federal
regulatory agency, in its sole discretion and even if the Bank is not
"undercapitalized," anticipates the Bank becoming "undercapitalized" in the near
term (the "Exchange Event"). CONSEQUENTLY, AN INVESTMENT IN SERIES A PREFERRED
SHARES COULD BE REPLACED BY AN INVESTMENT IN BANK PREFERRED SHARES AT A TIME
WHEN THE BANK'S FINANCIAL CONDITION IS DETERIORATING OR WHEN THE BANK HAS BEEN
PLACED INTO CONSERVATORSHIP OR RECEIVERSHIP. POTENTIAL INVESTORS IN THE SERIES A
PREFERRED SHARES, THEREFORE, SHOULD CAREFULLY CONSIDER THE DESCRIPTION OF THE
BANK SET FORTH ELSEWHERE IN THIS PROSPECTUS. In the event of the Automatic
Exchange, the Bank Preferred Shares would constitute a new series of preferred
shares of the Bank, would have the same dividend rights, liquidation preference,
redemption options and other attributes as the Series A Preferred Shares, except
that the Bank Preferred Shares would not be listed on the Nasdaq National Market
or any other quotation system, and would rank pari passu in terms of cash
dividend payments and liquidation preference with any outstanding shares of
preferred stock of the Bank. Holders of Series A Preferred Shares cannot
exchange their Series A Preferred Shares for Bank Preferred Shares voluntarily,
and, absent the occurrence of the Automatic Exchange, holders of Series A
Preferred Shares will have no dividend, voting, liquidation preference or other
rights with respect to the Bank or any security of the Bank. See "Description of
Series A Preferred Shares--Automatic Exchange".
The Company expects that all of its mortgage assets will be acquired from
the Bank, or its affiliates. All of the shares of the Company's common stock,
par value $300.00 per share (the "Common Stock"), are owned by the Bank. The
Bank currently intends that, so long as any Series A Preferred Shares are
outstanding, it will maintain direct or indirect ownership of at least a
majority of the outstanding shares of Common Stock of the Company.
A PURCHASE OF SERIES A PREFERRED SHARES IS A PURCHASE OF SECURITIES ISSUED
BY THE COMPANY AND IS NOT A PURCHASE OF SECURITIES ISSUED BY, OR OTHERWISE AN
INVESTMENT IN, THE BANK. NO OBLIGATION OF THE COMPANY IS GUARANTEED BY THE BANK.
The Company expects to qualify as a real estate investment trust (a
"REIT") for federal income tax purposes, commencing with the taxable year ending
December 31, 1997. No person or persons acting as a group is permitted to
beneficially own more than 9.9% of any series of preferred stock of the Company,
including the Series A Preferred Shares, with limited exceptions.
Prior to the offering, there has been no market for the Series A Preferred
Shares. The Company has applied for listing of the Series A Preferred Shares on
the Nasdaq National Market, subject to official notice of issuance, under the
symbol FSVBP. The Bank intends to register the Bank Preferred Shares with the
OCC promptly following the issuance of such shares, but does not intend to apply
for listing of the Bank Preferred Shares on any national securities exchange or
for quotation of the Bank Preferred Shares through the Nasdaq System.
Consequently, there can be no assurance as to the liquidity of the trading
markets for the Bank Preferred Shares, if issued, or that an active public
market for the Bank Preferred Shares would develop or be maintained.
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SERIES A
PREFERRED SHARES OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ
NATIONAL MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITH RESPECT
TO THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF THE BANK.
THESE FORWARD-LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND UNCERTAINTIES.
FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS INCLUDE, AMONG OTHERS, THE
FOLLOWING POSSIBILITIES: (1) COMPETITIVE PRESSURE IN THE BANKING INDUSTRY
INCREASES SIGNIFICANTLY; (2) CHANGES IN THE INTEREST RATE ENVIRONMENT REDUCE
MARGINS; (3) GENERAL ECONOMIC CONDITIONS ARE LESS FAVORABLE THAN EXPECTED,
RESULTING IN, AMONG OTHER THINGS, A DETERIORATION IN CREDIT QUALITY; (4) THE
IMPACT OF REGULATORY CHANGES IS OTHER THAN EXPECTED; (5) CHANGES IN BUSINESS
CONDITIONS AND INFLATION; AND (6) CHANGES IN THE SECURITIES MARKETS.
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TABLE OF CONTENTS
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PROSPECTUS SUMMARY ............................................................................... 1
The Company ................................................................................ 1
Risk Factors ............................................................................... 2
The Bank ................................................................................... 4
Possible Conflicts of Interest ............................................................. 5
The Offering ............................................................................... 6
THE FORMATION .................................................................................... 9
The Formation .............................................................................. 9
Benefits to the Bank and its Affiliates .................................................... 9
BUSINESS AND STRATEGY ............................................................................ 10
TAX STATUS OF THE COMPANY ........................................................................ 13
RISK FACTORS ..................................................................................... 13
No Operating History; Dependence Upon Bank as Advisor and Servicer ......................... 14
Risk of Automatic Exchange Upon a Decline in the Bank's Capital Position or the
Receivership of the Bank .................................................................. 14
Dividend and Other Regulatory Restrictions on Operations of the Company .................... 15
Risks Associated with Changes in Interest Rates That Would Adversely Affect the
Company's Ability to Pay Dividends ........................................................ 16
Dividends Not Cumulative ................................................................... 17
Risks Associated with Mortgage Loans Generally ............................................. 17
Risks Associated with Changes in Real Estate Market Conditions That May Adversely
Affect the Company's Results of Operations ................................................ 18
Delays in Liquidating Defaulted Mortgage Loans ............................................. 19
Legal Considerations That May Limit the Company's Collection of Principal and
Interest and Adversely Effect the Company's Results of Operations ......................... 19
Environmental Considerations That May Adversely Effect the Company's Results of Operations . 20
Risk of Future Revisions in Policies and Strategies By Board of Directors .................. 20
Ability to Increase Leverage May Adversely Affect the Company's Interest Income ............ 20
Relationship with the Bank; Conflicts of Interest .......................................... 21
No Third Party Valuation of the Mortgage Loans; No Arm's-Length Negotiations with Affiliates 22
Tax Risks .................................................................................. 22
No Prior Market for Series A Preferred Shares or for Bank Preferred Shares, If Issued ...... 24
THE COMPANY ...................................................................................... 24
USE OF PROCEEDS .................................................................................. 25
CAPITALIZATION ................................................................................... 27
BUSINESS AND STRATEGY ............................................................................ 28
General .................................................................................... 28
Dividends .................................................................................. 28
Liquidity and Capital Resources ............................................................ 30
General Description of Mortgage Assets; Investment Policy .................................. 30
Acquisition of Initial Portfolio ........................................................... 31
Management Policies and Programs ........................................................... 33
Description of Initial Portfolio ........................................................... 37
Servicing .................................................................................. 47
Employees .................................................................................. 49
Competition ................................................................................ 50
Legal Proceedings .......................................................................... 50
MANAGEMENT ....................................................................................... 50
Directors and Executive Officers ........................................................... 50
Independent Directors ...................................................................... 51
Audit Committee ............................................................................ 51
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Credit Committee ................................................... 52
Compensation of Directors and Officers ............................. 52
Limitations on Liability of Directors and Officers ................. 52
The Advisor ........................................................ 52
CERTAIN TRANSACTIONS CONSTITUTING THE FORMATION .......................... 53
The Formation ...................................................... 53
Benefits to the Bank and its Affiliates ............................ 55
DESCRIPTION OF SERIES A PREFERRED SHARES ................................. 56
General ............................................................ 56
Dividends .......................................................... 57
Automatic Exchange ................................................. 58
Voting Rights ...................................................... 59
Redemption ......................................................... 60
Rights Upon Liquidation ............................................ 61
Independent Director Approval ...................................... 62
Restrictions on Ownership .......................................... 63
DESCRIPTION OF CAPITAL STOCK ............................................. 63
Common Stock ....................................................... 63
Preferred Stock .................................................... 63
Restrictions on Ownership and Transfer ............................. 64
FEDERAL INCOME TAX CONSIDERATIONS ........................................ 66
Taxation of the Company ............................................ 66
Failure to Qualify ................................................. 72
Tax Treatment of Automatic Exchange ................................ 72
Taxation of United States Stockholders ............................. 72
Taxation of Foreign Stockholders ................................... 74
Information Reporting Requirements and Backup Withholding Tax ...... 76
Other Tax Consequences ............................................. 77
ERISA CONSIDERATIONS ..................................................... 77
General ............................................................ 77
Plan Asset Regulation .............................................. 78
Effect of Plan Asset Status ........................................ 79
Prohibited Transactions ............................................ 79
Unrelated Business Taxable Income .................................. 80
CERTAIN INFORMATION REGARDING THE BANK ................................... 80
UNDERWRITING ............................................................. 80
EXPERTS .................................................................. 82
RATINGS .................................................................. 82
CERTAIN LEGAL MATTERS .................................................... 82
ADDITIONAL INFORMATION ................................................... 82
GLOSSARY ................................................................. 84
INDEX TO FINANCIAL STATEMENT ............................................. F-1
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information appearing elsewhere in this Prospectus. See "Glossary" commencing at
page [____] for the definitions of certain terms used in this Prospectus. The
offering of 1,800,000 shares of [____]% Noncumulative Exchangeable Preferred
Stock, Series A, par value $10.00 per share (the "Series A Preferred Shares"),
is referred to herein as the "Offering". Unless otherwise indicated, all
information in this Prospectus assumes that the over-allotment option described
in "Underwriting" is not exercised.
THE COMPANY
Franklin Finance Corporation is a newly-formed Michigan corporation
incorporated on September 25, 1997 and created for the purpose of acquiring,
holding and managing real estate mortgage assets ("Mortgage Assets"). The
Company has been formed by Franklin Bank, N.A., a national bank, to provide the
Bank with a means of raising capital for bank regulatory purposes. The Series A
Preferred Shares will be treated as capital for regulatory purposes for the
Bank, up to regulatory limits. The Company has five directors of whom two are
independent directors. An "Independent Director" is a director who, prior to and
subsequent to his appointment, is not and will not be a director, officer or
employee of the Bank or any affiliate of the Bank or any person or persons that,
in the aggregate, own more than one percent of the common stock of the Bank and
is not an officer or employee of the Company. The issuance of the Series A
Preferred Shares by the Company is a more cost-effective means of raising
capital for the Bank than if the Bank were to issue preferred stock itself,
because of the Company's ability to deduct for income tax purposes the dividends
payable on the Series A Preferred Shares as a result of its qualification as a
REIT. The Company will elect to be subject to tax as a REIT under the Internal
Revenue Code of 1986, as amended (the "Code"), and will generally not be subject
to federal income tax to the extent that it distributes its earnings to its
stockholders and maintains its qualification as a REIT. In order to be treated
as a REIT, the Company is required to distribute dividends (other than capital
gain dividends) to its stockholders in an amount equal to at least 95% of the
Company's "REIT Taxable Income". See "Federal Income Tax Considerations" for a
discussion of the requirements to qualify as a REIT. All of the shares of the
Company's common stock, par value $300.00 per share (the "Common Stock"), are
owned by the Bank. The Bank currently intends that, so long as any Series A
Preferred Shares are outstanding, it will maintain direct or indirect ownership
of at least a majority of the outstanding shares of Common Stock of the Company.
For information regarding restrictions on ownership of the Series A Preferred
Shares, see "Description of Capital Stock--Restrictions on Ownership and
Transfer".
The Company currently expects to pay an aggregate amount of dividends with
respect to its outstanding shares of capital stock equal to approximately 100%
of the Company's "REIT Taxable Income" (which excludes capital gains). Dividends
will be declared at the discretion of the Board of Directors after considering
the Company's distributable funds, financial requirements, tax considerations
and other factors. Although there can be no assurances, because (i) the Mortgage
Assets are interest bearing, (ii) the Series A Preferred Shares represent only
approximately 50% of the Company's capitalization and (iii) the Company does not
anticipate
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incurring any indebtedness, the Company currently expects that both its cash
available for distribution and its "REIT Taxable Income" will be in excess of
amounts needed to pay dividends on the Series A Preferred Shares. See "Risk
Factors -- Risks Associated with Changes in Interest Rates That Would Adversely
Affect the Company's Ability to Pay Dividends".
A PURCHASE OF SERIES A PREFERRED SHARES IS A PURCHASE OF SECURITIES ISSUED
BY THE COMPANY AND IS NOT A PURCHASE OF SECURITIES ISSUED BY, OR OTHERWISE AN
INVESTMENT IN, THE BANK. NO OBLIGATION OF THE COMPANY IS GUARANTEED BY THE BANK.
The principal executive offices of the Company are located at 24725 West
Twelve Mile Road, Southfield, Michigan 48034, telephone number (248) 358-4710.
RISK FACTORS
The purchase of the Series A Preferred Shares offered hereby is subject to
certain risks. See "Risk Factors" commencing on page 13. Among such risks are
the following:
- The Company is a newly organized corporation with no operating
history. The Company will be dependent in virtually every phase of its
operations on the diligence and skill of the officers and employees of
the Bank and its affiliates. To the extent officers and employees of
the Bank and its affiliates do not exercise an appropriate level of
diligence and skill, the Company's results of operations may be
adversely affected.
- A decline in the performance or capital levels of the Bank or the
placement of the Bank into conservatorship or receivership could lead
to the exchange of the Series A Preferred Shares for Bank Preferred
Shares, which would represent an investment in the Bank and not in the
Company. An investment in the Bank is subject to certain risks that
are distinct from the risks associated with an investment in the
Company. For example, an investment in the Bank would involve risks
relating to the capital levels of and other federal regulatory
requirements applicable to the Bank and the performance of the Bank's
loan portfolio. In the event of receivership of the Bank, the claims
of the Bank's depositors and of its secured, senior, general and
subordinated creditors will be entitled to a priority of payment over
the claims of holders of equity securities such as the Bank Preferred
Shares. As a result, if the Bank were to be placed into receivership
after the Automatic Exchange or if the Automatic Exchange were to
occur after receivership of the Bank, the holders of the Bank
Preferred Shares likely would receive, if anything, substantially less
than holders of the Series A Preferred Shares would have received had
the Series A Preferred Shares not been exchanged for Bank Preferred
Shares. Potential investors in the Series A Preferred Shares should
carefully consider the risks with respect to an investment in the Bank
set forth in the Bank Prospectus attached hereto as Annex I. In
addition, the Bank Preferred Shares will not be listed on the Nasdaq
System and therefore will be an illiquid investment with a
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value not readily determinable. Each individual holder of Bank
Preferred Shares will be required to determine the fair market value
of the Bank Preferred Shares received to determine the tax effect of
the Automatic Exchange. Any such determination may be subject to
challenge by the IRS.
- Because of the relationship between the Company and the Bank and its
affiliates, conflicts of interest may arise between the Bank and its
affiliates and the Company. The Bank and its affiliates may have
interests which are not identical to those of the Company.
Consequently, conflicts of interest may arise with respect to
transactions, including without limitation, the Company's acquisition
of the Initial Portfolio; future acquisitions of Mortgage Loans from
the Bank or its affiliates; servicing of Mortgage Loans, particularly
with respect to Mortgage Loans that become Classified or placed in
Nonaccrual Status or which have been, more than once during the
preceding twelve months, more than 30 days past due in the payment of
principal and interest; future dispositions of Mortgage Loans to the
Bank or any of its non-bank subsidiaries; and the modification of the
Advisory Agreement or the Servicing Agreements. Any resolution of a
conflict may adversely effect the Company's results of operations.
- As a subsidiary of the Bank, the Company is subject to the risk that
banking authorities will restrict the ability of the Company to
transfer assets, to make distributions to stockholders, including
dividends to the holders of Series A Preferred Shares, or to redeem
shares of Preferred Stock. Under certain circumstances, certain of
these restrictions could result in the Company's failure to qualify as
a REIT which could result in the inability of the Company to pay
dividends on the Series A Preferred Shares.
- Because the rate at which dividends are to be paid is fixed and a
majority of the Mortgage Loans that constitute the Initial Portfolio
are adjustable rate Mortgage Loans, a significant decline in interest
rates may adversely affect the Company's ability to pay dividends on
the Series A Preferred Shares. In such an interest rate environment,
the Company may experience an increase in prepayments on its Mortgage
Loans and may find it more difficult to purchase additional Mortgage
Loans bearing rates sufficient to support payment of the dividends on
the Series A Preferred Shares.
- Dividends are not cumulative. Consequently, if the Board of Directors
does not authorize and declare a dividend on the Series A Preferred
Shares for any quarterly period, including if prevented by federal
regulators from paying such dividend, the holders of Series A
Preferred Shares would not be entitled to receive dividends whether or
not funds are or subsequently become available. The board of directors
of the Company (the "Board of Directors") may determine, in its
business judgment, that it would be in the best interests of the
Company to pay less than the full amount of the stated dividends on
the Series A Preferred Shares or no dividends for any quarter, even if
funds are available. To remain qualified as a
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REIT, however, the Company must distribute annually at least 95% of
its "REIT Taxable Income" to stockholders, and the Company expects
that the Board of Directors will authorize dividends on the Series A
Preferred Shares quarterly.
- Risks associated with mortgage loans generally, and particularly the
geographic concentration of the Company's mortgage loan portfolio in
Michigan, could adversely affect the value of the Series A Preferred
Shares and the Mortgage Loans held by the Company. The quality of the
Company's loan portfolio is dependent on the cash flow of borrowers,
regional economic conditions and residential and commercial real
estate values. Adverse changes affecting any of the above mentioned
segments are likely to have an adverse impact on the Company's
Mortgage Loans and, as a result, the Company's financial condition and
results of operations may deteriorate which could adversely affect the
Company's ability to pay dividends.
- The Board of Directors may amend or revise (in certain circumstances
subject to the approval of a majority of the Independent Directors)
the policies of the Company set forth herein, including the Company's
policy regarding incurring indebtedness. To the extent the Company
were to change its policy with respect to the incurrence of
indebtedness, the Company would be subject to risks associated with
leverage, including, without limitation, changes in interest rates,
prepayment risk and risks of various hedging strategies which may
adversely affect the Company's ability to pay dividends on the Series
A Preferred Shares.
- The Company is subject to risks associated with the failure of the
Company to maintain its status as a REIT. If the Company fails to
maintain its status as a REIT for federal income tax purposes, it will
be subject to corporate income tax and will not be permitted to
deduct, for income tax purposes, dividends on the Series A Preferred
Shares or the Common Stock and may not generate sufficient after-tax
income to support payment of dividends on the Series A Preferred
Shares.
THE BANK
The Bank is a national bank with its deposits insured by the FDIC to the
maximum extent permitted by law. At June 30, 1997, the Bank had total assets of
$487.8 million, total deposits of $417.3 million and stockholders' equity of
$32.0 million. Its common stock trades on the Nasdaq National Market under the
symbol "FSVB". At June 30, 1997, the Bank conducted business from three regional
banking offices which generally offer traditional banking services and one
business center office exclusively catering to small and medium sized business
customers in Michigan. For the year ended December 31, 1996 and the six months
ended June 30, 1997, the Bank had net income of $905,600 ($2.5 million excluding
the one time SAIF recapitalization assessment) and $2.1 million, respectively;
and a return on average assets of .19%, (.83% excluding the SAIF assessment) and
.83%, respectively.
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Under certain circumstances, each Series A Preferred Share will be
exchanged automatically for one newly issued Series A preferred share of the
Bank (a "Bank Preferred Share") if the appropriate regulatory agency directs in
writing an exchange of the Series A Preferred Shares for Bank Preferred Shares
because (i) the Bank becomes "undercapitalized" under prompt corrective action
regulations, (ii) the Bank is placed into conservatorship or receivership or
(iii) the appropriate regulatory agency, in its sole discretion and even if the
Bank is not "undercapitalized," anticipates the Bank becoming "undercapitalized"
in the near term (the "Exchange Event"). CONSEQUENTLY, AN INVESTMENT IN SERIES A
PREFERRED SHARES COULD BE REPLACED BY AN INVESTMENT IN BANK PREFERRED SHARES AT
A TIME WHEN THE BANK'S FINANCIAL CONDITION IS DETERIORATING OR THE BANK HAS BEEN
PLACED INTO CONSERVATORSHIP OR RECEIVERSHIP. POTENTIAL INVESTORS IN THE SERIES A
PREFERRED SHARES, THEREFORE, SHOULD CAREFULLY CONSIDER THE DESCRIPTION OF THE
BANK SET FORTH IN THE BANK PROSPECTUS ATTACHED HERETO AS ANNEX I. See also
"Description of Series A Preferred Shares--Automatic Exchange". The Bank will be
considered to be "undercapitalized" under the prompt corrective action
regulations established pursuant to the FDICIA, if it has (i) a core capital (or
leverage) ratio of less than 4.0%, (ii) a Tier 1 risk-based capital ratio of
less than 4.0%, or (iii) a total risk-based capital ratio of less than 8.0%.
Tier 1 or core capital consists of common shareholders' equity, noncumulative
perpetual preferred stock, and minority interests in consolidated subsidiaries,
less certain intangible assets and investments in certain subsidiaries. Total
capital consists of core capital plus supplementary capital (which includes
cumulative perpetual preferred stock, qualifying subordinated debt, and a
limited amount of the allowances for loan and lease losses) to the extent such
supplementary capital does not exceed 100% of core capital, less certain equity
investments. For purposes of the prompt corrective action regulations, the
Bank's capital category is determined as of the most recent date (i) certain
quarterly financial reports are required to be filed with the regulators; (ii) a
final report of examination has been delivered to the Bank; or (iii) the Bank is
notified in writing by the OCC of its capital category or a change in such
category. At June 30, 1997 and December 31, 1996 and 1995, the Bank's core
capital (or leverage) ratio was 6.29%, 5.99% and 6.58%, its Tier 1 risk-based
capital ratio was 7.96%, 7.27% and 7.85%, and its total risk-based capital ratio
was 10.81%, 10.04% and 10.59%, respectively. After giving effect to the
Offering, the June 30, 1997 ratios would have been 8.73%, 12.35% and 15.20%,
respectively.
The Bank Preferred Shares will only be issued upon the occurrence of the
Automatic Exchange. The Bank Preferred Shares will not be registered with the
Commission but are being registered with the OCC. A copy of the prospectus filed
with the OCC relating to the Bank Preferred Shares is affixed to this Prospectus
(the "Bank Prospectus") as Annex I. The principal executive offices of the Bank
are located at 24725 West Twelve Mile Road, Southfield, Michigan 48034, and its
telephone number at such address is (248) 358-4710.
POSSIBLE CONFLICTS OF INTEREST
The Bank and its affiliates may have interests which are not identical to
those of the Company. Consequently, conflicts of interest may arise with respect
to transactions, including without limitation, the Company's acquisition of the
Initial Portfolio; future acquisitions of
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Mortgage Loans from the Bank or its affiliates; servicing of Mortgage Loans,
particularly with respect to Mortgage Loans that become Classified or placed on
Nonaccrual Status or which have been, more than once during the preceding twelve
months, more than 30 days past due in the payment of principal and interest;
future dispositions of Mortgage Loans to the Bank or any of its non-bank
subsidiaries; and the modification of the Advisory Agreement or the Servicing
Agreements.
It is the intention of the Company and the Bank that any agreements and
transactions between the Company, on the one hand, and the Bank or their
affiliates, on the other hand, are fair to all parties and consistent with
market terms, including the prices paid and received for Mortgage Loans,
including those in the Initial Portfolio, on their acquisition or disposition by
the Company or in connection with the servicing of such Mortgage Loans. The
requirement in the Certificate of Designation establishing the Series A
Preferred Shares that certain actions of the Company be approved by a majority
of the Independent Directors is also intended to ensure fair dealings between
the Company, the Bank and their respective affiliates. However, there can be no
assurance that such agreements or transactions will be on terms as favorable to
the Company as those that could have been obtained from unaffiliated third
parties. See "Risk Factors--Relationship with the Bank and its Affiliates;
Conflicts of Interest" and "Business and Strategy--Management Policies and
Programs--Conflict of Interest Policies".
THE OFFERING
For a more complete description of the terms of the Series A Preferred
Shares specified in the following summary, see "Description of Series A
Preferred Shares".
Issuer................. Franklin Finance Corporation, a newly-formed Michigan
corporation created for the purpose of acquiring,
holding and managing Mortgage Assets.
Securities Offered..... 1,800,000 Series A Preferred Shares. The Company has
granted the Underwriters an option for 30 days to
purchase up to an additional 270,000 Series A
Preferred Shares at the initial public offering price
solely to cover over-allotments, if any.
Ranking................ With respect to the payment of dividends and amounts
upon liquidation, the Series A Preferred Shares will
rank senior to the Company's Common Stock. Additional
shares of preferred stock of the Company (the
"Preferred Stock") ranking senior to the Series A
Preferred Shares may not be issued without the
approval of holders of at least two-thirds of the
Series A Preferred Shares. Additional shares of
Preferred Stock ranking on a parity with the Series A
Preferred Shares may not be issued without the
approval of a majority of the Independent Directors.
See "Description of
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Series A Preferred Shares--Independent Director
Approval".
Use of Proceeds......... The net proceeds to the Company from the Offering,
together with proceeds received in connection with
the sale of shares of Common Stock to the Bank, will
be used to purchase the Company's initial portfolio
of Mortgage Assets and to pay the expenses of the
Offering and the formation of the Company (currently
estimated by the Company to be approximately
[$________] in the aggregate). See "Use of Proceeds".
Dividends............... Dividends on the Series A Preferred Shares are
payable at the rate of [ ]% per annum of the
liquidation preference (an amount equal to $[ ] per
annum per share), if, when and as declared by the
Board of Directors of the Company. If declared,
dividends are payable quarterly in arrears on the
last day of March, June, September and December in
each year, commencing December 31, 1997. Dividends
accrue in each quarterly period from the first day of
such period, whether or not dividends are paid with
respect to the preceding period. Dividends on the
Series A Preferred Shares are not cumulative and,
accordingly, if no dividend is declared on the Series
A Preferred Shares by the Company for a quarterly
dividend period, holders of the Series A Preferred
Shares will have no right to receive a dividend for
that period, and the Company will have no obligation
to pay a dividend for that period, whether or not
dividends are declared and paid for any future period
with respect to either the Series A Preferred Shares
or the Common Stock. If no dividend is paid on the
Series A Preferred Shares for a quarterly dividend
period, the payment of dividends on the Common Stock
(100% of which is owned by the Bank) will be
prohibited for that period and at least the following
three quarterly dividend periods. See "Description of
Series A Preferred Shares--Dividends".
Liquidation Preference.. The liquidation preference for each Series A
Preferred Share is $10.00, plus an amount equal to
the quarterly accrued and unpaid dividends, if any,
thereon. See "Description of Series A Preferred
Shares--Rights Upon Liquidation".
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Redemption............. The Series A Preferred Shares are not redeemable
prior to [ ], 2002 (except upon the occurrence of a
Tax Event as defined in "Description of Series A
Preferred Shares--Redemption"). On and after [ ],
2002, the Series A Preferred Shares may be redeemed
for cash at the option of the Company, in whole or in
part, at any time and from time to time, at a
redemption price of $10.00 per share, plus the
accrued and unpaid dividends for the most recent
quarter, if any, thereon. Upon the occurrence of a
Tax Event, the Company will have the right at any
time to redeem the Series A Preferred Shares in whole
(but not in part) at a redemption price of $10.00 per
share, plus the accrued and unpaid dividends for the
most recent quarter, if any, thereon. The Series A
Preferred Shares will not be subject to any sinking
fund or mandatory redemption and will not be
convertible into any other securities of the Company.
See "Description of Series A Preferred
Shares--Redemption".
Automatic Exchange..... Each Series A Preferred Share will be exchanged
automatically for one Bank Preferred Share upon the
occurrence of the Automatic Exchange. See
"Description of Series A Preferred Shares--Automatic
Exchange".
Voting Rights.......... Except as described herein with respect to certain
voting rights in the Company, holders of Series A
Preferred Shares will not have any voting rights. In
any matter on which the Series A Preferred Shares may
vote (as expressly provided herein or as may be
required by law), each Series A Preferred Share will
be entitled to one vote. See "Description of Series A
Preferred Shares--Voting Rights".
Ownership Limits....... Ownership of more than 9.9% of any outstanding series
of Preferred Stock, including the Series A Preferred
Shares offered hereby, is restricted in order to
preserve the Company's status as a REIT for federal
income tax purposes. See "Description of Capital
Stock--Restrictions on Ownership and Transfer".
Trading................ The Company has applied for listing of the Series A
Preferred Shares on the Nasdaq National Market,
subject to official notice of issuance, under the
symbol "FSVBP".
Ratings................ It is not expected that the Series A Preferred Shares
will be rated by any independent rating agency.
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THE FORMATION
THE FORMATION
Prior to or simultaneously with the completion of the Offering, the
Company, the Bank and its affiliates will engage in the transactions described
under "Certain Transactions Constituting the Formation--The Formation". These
transactions are designed to (i) facilitate the Offering, (ii) transfer the
ownership of the Initial Portfolio (defined below) to the Company and (iii)
enable the Company to qualify as a REIT for federal income tax purposes
commencing with its taxable year ending December 31, 1997.
The following chart outlines the relationship between the Company, the
Bank and its affiliates relevant to the Offering following completion of the
Offering.
--------------------------
| |
| FRANKLIN BANK, N.A. |
| (THE BANK) | Public
| | Preferred
-------------------------- -- Stockholders
| 100% | Advisory |
| Common | Agreement | 100%
| Stock | | Series A
------------------------- | Servicing | Preferred
| | | Agreements | Shares
----------------------------- --------------------------------
| | | |
| FRANKLIN HOME LENDING | | FRANKLIN FINANCE CORPORATION |
| GROUP, INC. | | (THE COMPANY) |
| | | |
----------------------------- --------------------------------
BENEFITS TO THE BANK AND ITS AFFILIATES
The Bank is required by the OCC to maintain certain levels of capital for
bank regulatory purposes. The Bank has informed the Company that the Series A
Preferred Shares will be treated as capital of the Bank for regulatory purposes.
The Bank has indicated to the Company that such treatment, together with the
Company's ability to deduct, for income tax purposes, the dividends payable on
the Series A Preferred Shares as a result of the Company's qualification as a
REIT, will provide the Bank with a more cost-effective means of obtaining
capital for regulatory purposes than if the Bank were to issue preferred stock
itself.
The Bank will realize certain other benefits from the Offering and the
other transactions constituting the formation of the Company, including (i) the
receipt by the Bank of the net proceeds from the sale of the Series A Preferred
Shares in connection with the sale to the Company of the Initial Portfolio and
(ii) the receipt of advisory and servicing fees under the Advisory Agreement and
the Servicing Agreements. It is also expected that the Bank will receive
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dividends in respect of the Common Stock held by the Bank. See "Certain
Transactions Constituting the Formation--Benefits to the Bank and Its
Affiliates".
BUSINESS AND STRATEGY
The Company's principal business objective is to acquire, hold and manage
Mortgage Assets that will generate net income for distribution to stockholders.
The Company expects that all of its initial Mortgage Assets will be acquired
from the Bank as whole loans ("Mortgage Loans") secured by first mortgages or
deeds of trust on single-family (one- to four-unit) residential real estate
properties or by commercial real estate properties. The Company may also from
time to time acquire investment grade mortgage securities that qualify as real
estate assets under Section 856(c)(6)(B) of the Code. Mortgage loans underlying
the mortgage securities will be secured by single-family residential,
multifamily or commercial real estate properties located in the United States.
Simultaneously with the consummation of the Offering, the Bank will
purchase shares of Common Stock for a price equal to $18 million. The Company
will use the aggregate proceeds of $36 million received in connection with both
the Offering and such sale of shares of Common Stock to the Bank to purchase a
portfolio of Mortgage Loans (the "Initial Portfolio") from the Bank. If the
Underwriters exercise their option to purchase additional Series A Preferred
Shares to cover over-allotments, the Bank will purchase additional shares of
Common Stock for a price equal to the aggregate public offering price of the
additional Series A Preferred Shares purchased pursuant to the Underwriters'
over-allotment option, and the Company will use the additional proceeds from any
such additional sales of Series A Preferred Shares and shares of Common Stock to
purchase additional Mortgage Loans of the types described in "Business and
Strategy--Description of Initial Portfolio". Simultaneously with the
consummation of the Offering (or upon the exercise by the Underwriters of their
over-allotment option), the Bank will also purchase additional shares of Common
Stock for a price equal to the aggregate amount of underwriting commissions and
expenses incurred by the Company in connection with the Offering (including
without limitation any underwriting commissions associated with the exercise by
the Underwriters of their over-allotment option) and all expenses incurred by
the Company in connection with its formation in order to provide the Company
with funds sufficient to pay such expenses. See "Use of Proceeds".
On June 30, 1997, the pool of Mortgage Loans from which the Initial
Portfolio will be selected had an aggregate outstanding principal balance of
approximately $43.9 million. Approximately 60% (measured by aggregate
outstanding principal balance) of such pool consists of Mortgage Loans secured
solely by first mortgages or deeds of trust on single-family (one- to four-unit)
residential properties ("Residential Mortgage Loans"). See "Business and
Strategy--Description of Initial Portfolio--Residential Mortgage Loans". The
remainder of such pool consists of Mortgage Loans secured by first mortgages or
deeds of trust on commercial real estate properties ("Commercial Mortgage
Loans"). See "Business and Strategy--Description of Initial
Portfolio--Commercial Mortgage Loans". The Bank will enter into servicing
agreements with respect to the Residential Mortgage Loans and the Commercial
Mortgage Loans (the "Servicing Agreements") pursuant to which it will service
the Mortgage Loans included in the
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Initial Portfolio and will be entitled to receive fees in connection with the
servicing of such Mortgage Loans. The Bank in its role as servicer under the
Servicing Agreements is hereinafter referred to as the "Servicer". The Company
will not receive income from servicing loans. See "Business and
Strategy--Servicing".
The Company and the Bank believe, based on Bank management's experience in
evaluating mortgage loans, that the fair value of the Initial Portfolio will
approximately equal the amount (approximately $36 million) that the Company will
pay for the Initial Portfolio. However, no third party valuations of the
Mortgage Loans constituting the Initial Portfolio have been or will be obtained
for purposes of the Offering. See "Risk Factors--No Third Party Valuation of the
Mortgage Loans; No Arm's-Length Negotiations with Affiliates".
The Company will enter into an advisory agreement with the Bank (the
"Advisory Agreement") pursuant to which the Bank will administer the day-to-day
operations of the Company. The Bank in its role as advisor under the terms of
the Advisory Agreement is hereinafter referred to as the "Advisor". The Advisor
will be responsible for (i) monitoring the credit quality of Mortgage Assets
held by the Company, (ii) advising the Company with respect to the acquisition,
management, financing and disposition of the Company's Mortgage Assets and (iii)
holding documents relating to the Mortgage Assets as custodian on behalf of the
Company. The Advisor may from time to time subcontract all or a portion of its
obligations under the Advisory Agreement to one or more of its affiliates
involved in the business of managing Mortgage Assets. The Advisor may, with the
approval of a majority of the Board of Directors, as well as a majority of the
Independent Directors, subcontract all or a portion of its obligations under the
Advisory Agreement to unrelated third parties. The Advisor will not, in
connection with the subcontracting of any of its obligations under the Advisory
Agreement, be discharged or relieved in any respect from its obligations under
the Advisory Agreement. The Advisor and its personnel have substantial
experience in mortgage finance and in the administration of Mortgage Assets.
The Advisory Agreement has an initial term of five years, and will be
renewed automatically for additional five-year periods unless notice of
nonrenewal is delivered to the Advisor by the Company. The Advisory Agreement
may be terminated by the Company at any time upon 90 days' prior notice. As long
as any Series A Preferred Shares remain outstanding, any decision by the Company
either not to renew the Advisory Agreement or to terminate the Advisory
Agreement must be approved by a majority of the Board of Directors, as well as
by a majority of the Independent Directors. The Advisor will be entitled to
receive an annual advisory fee equal to $125,000. See "Management--The Advisor".
See "Certain Transactions Constituting the Formation--Benefits to the Bank
and Its Affiliates" for information regarding the aggregate amounts payable to
the Bank and its affiliates in connection with the Offering and the transactions
to be entered into in connection with the Offering.
The Company's Board of Directors is composed of five members, two of whom
will be Independent Directors. Certain actions by the Company require the prior
approval of a majority
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of Independent Directors. See "Description of Series A Preferred
Shares--Independent Director Approval". So long as there are only two
Independent Directors, any action that requires the approval of a majority of
the Independent Directors must be approved by both Independent Directors.
Pursuant to the Certificate of Designation establishing the Series A Preferred
Shares, the Independent Directors are required to take into account the
interests of the holders of both the Series A Preferred Shares and the Common
Stock in assessing the benefit to the Company of any proposed action requiring
their approval. The Company currently has four officers. The Company has no
other employees and does not anticipate that it will require additional
employees. See "Management".
The Company may from time to time purchase additional Mortgage Assets or
interests in Mortgage Assets out of proceeds received in connection with the
repayment or disposition of Mortgage Assets or the issuance of additional shares
of Common Stock or Preferred Stock. Additional shares of Preferred Stock ranking
senior to the Series A Preferred Shares may not be issued by the Company without
the approval of holders of at least two-thirds of the outstanding Series A
Preferred Shares. Additional shares of Preferred Stock ranking on a parity with
the Series A Preferred Shares may not be issued by the Company without the
approval of a majority of the Independent Directors. See "Description of Series
A Preferred Shares--Voting Rights" and "-- Independent Director Approval". The
Company does not currently intend to issue any additional shares of Preferred
Stock unless it simultaneously issues additional shares of Common Stock to the
Bank, and the aggregate proceeds to be received from such issuance of Common
Stock approximately equals the sum of the aggregate offering price of such
additional Preferred Stock and the Company's expenses (including any
underwriting commissions or placement fees) incurred in connection with the
issuance of such additional shares of Preferred Stock. It is currently
anticipated that the Company will issue additional shares of Preferred Stock if
such issuance would provide the Bank with the most cost-effective means of
raising capital for bank regulatory purposes at the time. See "Certain
Transactions Constituting the Formation--Benefits to the Bank and Its
Affiliates".
The Company currently anticipates that all of the Mortgage Loans that it
may acquire in the future will be purchased from the Bank and affiliates of the
Bank. No arrangements or procedures are currently in place regarding the
acquisition by the Company of Mortgage Loans from unaffiliated third parties.
The Company expects that any additional Mortgage Loans acquired by the Company
will be whole loans or mortgage securities, will represent first lien positions,
will be acquired on a basis consistent with secondary market standards and will
have been originated and underwritten in conformity with standards generally
applied by the Bank or affiliates of the Bank at the time the Mortgage Loans
were originated. The Company currently intends to maintain approximately 60% of
its portfolio of Mortgage Assets in Residential Mortgage Loans and mortgage
securities, and approximately 40% of its portfolio in Commercial Mortgage Loans.
Initially, the Company will not hold a significant amount of mortgage
securities, although there is no limit on the amount that may be purchased. The
Company does not contemplate ownership of property other than Mortgage Assets
and does not contemplate ownership of 10% or more of the outstanding voting
securities of any one issuer. The Company's current policy is not to acquire any
Commercial Mortgage Loan if such Commercial Mortgage Loan would constitute more
than 5% of the total book value of the Mortgage Assets of the Company at the
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<PAGE> 18
time of its acquisition. The Company's current policy prohibits the acquisition
of any Mortgage Loan or any interest in a Mortgage Loan (other than an interest
resulting from the acquisition of mortgage securities), which Mortgage Loan (i)
is delinquent in the payment of principal or interest; (ii) is or was at any
time during the preceding 12 months (a) Classified, (b) in Nonaccrual Status, or
(c) renegotiated due to financial deterioration of the borrower; or (iii) has
been, more than once during the preceding 12 months, more than 30 days past due
in the payment of principal or interest. Mortgage Loans acquired by the Company
in the future will be whole loans owned by the Bank or an affiliate of the Bank.
Loans that are in Nonaccrual Status are generally loans that are past due 90
days or more in principal or interest and Classified loans are troubled loans
which are deemed substandard or doubtful and where the full collectibility of
principal and interest on such loan is doubtful.
As a newly-formed entity, the Company has no prior operating history. As
of the date hereof, it has $1,000 in assets, $1,000 in stockholder's equity and
no indebtedness. Immediately after the issuance by the Company of the Series A
Preferred Shares to the public and the Common Stock to the Bank and the purchase
by the Company of the Initial Portfolio, the Company (assuming that (i) the
Underwriters' over-allotment option is not exercised and (ii) there are
$1,045,000 in aggregate offering and organizational expenses) will have $36
million in Mortgage Assets, $18 million of stated capital attributable to the
Series A Preferred Shares, $[____] million of stated capital attributable to the
Common Stock and $[_____] million of additional paid-in capital. See
"Capitalization".
TAX STATUS OF THE COMPANY
The Company will elect to be taxed as a REIT under Sections 856 through
860 of the Code, commencing with its taxable year ending December 31, 1997. As a
REIT, the Company generally will not be subject to federal income tax on net
income and capital gains that it distributes to the holders of its Common Stock
and Preferred Stock, including the Series A Preferred Shares.
In the opinion of the Company's special tax counsel, Seyburn, Kahn, Ginn,
Bess, Deitch and Serlin, P.C. ("Seyburn Kahn"), commencing with the Company's
taxable year ending December 31, 1997, the Company will be organized in
conformity with the requirements for qualification as a REIT, and its proposed
method of operation will enable it to meet the requirements for qualification
and taxation as a REIT under the Code. A REIT is subject to a number of
organizational and operational requirements, including a requirement that it
currently distribute to stockholders at least 95% of its "REIT Taxable Income".
Notwithstanding qualification for taxation as a REIT, the Company may be
subject to federal, state and/or local tax. See "Risk Factors--Tax Risks" and
"Federal Income Tax Considerations".
RISK FACTORS
Prospective investors should carefully consider the following information
in conjunction with the other information contained in this Prospectus before
purchasing Series A Preferred Shares in the Offering. For a description of
certain risk factors relating to the Bank and the Bank
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<PAGE> 19
Preferred Stock, prospective investors should carefully review and consider the
information contained in the section entitled "Risk Factors" in the attached
Bank Prospectus. This Prospectus contains certain forward-looking statements and
information relating to the Company and the Bank that are based on the beliefs
of management as well as assumptions made by and information currently available
to management. In addition, the words "anticipate," "believe," "estimate,"
"expect," "intend" and similar expressions, as they relate to the Company, the
Bank or the Company's or the Bank's management, are intended to identify
forward-looking statements. Such statements reflect the current views of the
Company or the Bank with respect to future events and are subject to certain
risks, uncertainties and assumptions, including the risk factors described in
this Prospectus. Should one or more of these risks or uncertainties materialize,
or should underlying assumptions prove incorrect, actual results may vary
materially from those described herein as anticipated, believed, estimated,
expected or intended. The Company and the Bank do not intend to update these
forward-looking statements.
NO OPERATING HISTORY; DEPENDENCE UPON BANK AS ADVISOR AND SERVICER
The Company is a newly organized corporation with no operating history and
no revenues to date. The Company will be dependent for the selection,
structuring and monitoring of its Mortgage Assets on the diligence and skill of
its officers (all of whom are also officers of the Bank or its affiliates) and
the officers and employees of the Bank, as Advisor. See "Management". In
addition, the Company will be dependent upon the expertise of the Bank, as
Servicer, for the servicing of its Mortgage Loans. To the extent officers and
employees of the Bank and its affiliates do not exercise an appropriate level of
diligence and skill, the Company's results of operations may be adversely
affected. The Advisor may subcontract all or a portion of its obligations under
the Advisory Agreement, and the Servicer may subcontract all or a portion of its
obligations under the Servicing Agreements, to one or more affiliates, and under
certain conditions to non-affiliates, involved in the business of managing or
servicing, as the case may be, Mortgage Assets. In the event the Advisor or the
Servicer subcontracts its obligations in such a manner, the Company will be
dependent upon the subcontractor to provide any such services. See
"Management--The Advisor" and "Business and Strategy--Servicing".
RISK OF AUTOMATIC EXCHANGE UPON A DECLINE IN THE BANK'S CAPITAL POSITION OR THE
RECEIVERSHIP OF THE BANK
The purchase of Series A Preferred Shares involves a high degree of risk
with respect to the performance and capital levels of the Bank. A decline in the
performance and capital levels of the Bank or the placement of the Bank into
conservatorship or receivership could result in the exchange of the Series A
Preferred Shares for Bank Preferred Shares, which would be an investment in the
Bank and not in the Company. As a result, holders of Series A Preferred Shares
would become preferred stockholders of the Bank at a time when the Bank's
financial condition was deteriorating or when the Bank had been placed into
conservatorship or receivership. An investment in the Bank is also subject to
certain risks that are distinct from the risks associated with an investment in
the Company. For example, an investment in the Bank would involve risks relating
to the capital levels of, and other regulatory requirements applicable to, the
Bank and the performance of the Bank's loan portfolio. An investment in the Bank
is also subject to the general
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risks inherent in equity investments in depository institutions. In the event of
a liquidation of the Bank, the claims of depositors and secured, senior, general
and subordinated creditors of the Bank would be entitled to a priority of
payment over the claims of holders of equity interests such as the Bank
Preferred Shares. As a result, if the Bank were to be placed into receivership
after the Automatic Exchange or if the Automatic Exchange were to occur after
receivership of the Bank, the holders of the Bank Preferred Shares likely would
receive, if anything, substantially less than the holders of the Series A
Preferred Shares would have received had the Series A Preferred Shares not been
exchanged for Bank Preferred Shares. Furthermore, there can be no assurance that
the Bank would be in a financial position, after the occurrence of the Automatic
Exchange, to make any dividend payments on the Bank Preferred Shares. Potential
investors in the Series A Preferred Shares should carefully consider the risks
with respect to an investment in the Bank set forth in the Bank Prospectus
attached hereto as Annex I. See also "Description of Series A Preferred
Shares--Automatic Exchange".
Although the Series A Preferred Shares will be listed on the Nasdaq
National Market, the Bank does not intend to apply for listing of the Bank
Preferred Shares, for which the Series A Preferred Shares will be exchanged
automatically on a one-for-one basis upon the occurrence of the Automatic
Exchange, on any national securities exchange or for quotation of the Bank
Preferred Shares through the Nasdaq System. Consequently, there can be no
assurance as to the liquidity of the trading markets for the Bank Preferred
Shares, if issued, or that an active public market for the Bank Preferred Shares
would develop or be maintained. Therefore, the value of the Bank Preferred
Shares will not be readily determinable. The Automatic Exchange will be a
taxable exchange with respect to which each holder of the Series A Preferred
Shares will have a gain or loss, as the case may be, measured by the difference
between the basis of such holder in the Series A Preferred Shares and the fair
market value of the Bank Preferred Shares received in the Automatic Exchange.
Each individual holder will be required to determine the fair market value of
the Bank Preferred Shares received to determine the tax effect of the Automatic
Exchange. Any such determination may be subject to challenge by the IRS.
DIVIDEND AND OTHER REGULATORY RESTRICTIONS ON OPERATIONS OF THE COMPANY
Because the Company is a subsidiary of the Bank, regulatory authorities
will have the right to examine the Company and its activities. Under certain
circumstances, including any determination that the Bank's relationship to the
Company results in an unsafe and unsound banking practice, such regulatory
authorities will have the authority to restrict the ability of the Company to
transfer assets, to make distributions to its stockholders (including dividends
to the holders of Series A Preferred Shares, as described below), or to redeem
shares of Preferred Stock, or even to require the Bank to sever its relationship
with or divest its ownership of the Company. Such actions could potentially
result in the Company's failure to qualify as a REIT. See "--Tax Risks".
Payment of dividends on the Series A Preferred Shares could also be
subject to regulatory limitations if the Bank becomes "undercapitalized" for
purposes of the OCC prompt corrective action regulations, which is currently
defined as having a total risk-based capital ratio of less than 8.0%, a Tier 1
risk-based capital ratio of less than 4.0% or a core capital (or leverage) ratio
of
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less than 4.0%. At June 30, 1997, the Bank's total risk-based capital ratio was
10.81%, its Tier 1 risk-based capital ratio was 7.96% and its core capital (or
leverage) ratio was 6.29%. Such ratios, adjusted to give effect to the sale of
Series A Preferred Shares in the Offering, would have been 15.20%, 12.35% and
8.73%, respectively.
If the Automatic Exchange occurs, the Bank would likely be prohibited from
paying dividends on the Bank Preferred Shares. In all circumstances following
the Automatic Exchange, the Bank's ability to pay dividends would be subject to
various restrictions under OCC regulations.
The Bank's ability to pay dividends is governed by the National Bank Act
and OCC regulations. Under such statute and regulations, all dividends by a
national bank must be paid out of current or retained net profits, after
deducting reserves for losses and bad debts. The National Bank Act further
restricts the payment of dividends out of net profits by prohibiting a national
bank from declaring a cash dividend on its shares of common stock until the
surplus fund equals the amount of capital stock or, if the surplus fund does not
equal the amount of capital stock, until one-tenth of the Bank's net profits for
the preceding half year in the case of quarterly or semi-annual dividends, or
the preceding two half-year periods in the case of annual dividends, are
transferred to the surplus fund. In addition, the prior approval of the OCC is
required for the payment of a dividend if the total of all dividends declared by
a national bank in any calendar year would exceed the total of its net profits
for the year combined with its net profits for the two preceding years, less any
required transfers to surplus or a fund for the retirement of any preferred
stock.
The OCC has the authority to prohibit the payment of dividends by a
national bank when it determines such payment to be an unsafe and unsound
banking practice. In addition, the Bank would be prohibited by federal statute
and the OCC's prompt corrective action regulations from making any capital
distribution if, after giving effect to the distribution, the Bank would be
classified as "undercapitalized" under the OCC's regulations.
Furthermore, in the event the Bank is placed into conservatorship or
receivership (whether before or after the Automatic Exchange), the Bank would
likely be unable to pay dividends on the Bank Preferred Shares. In addition, in
the event of a liquidation of the Bank, the claims of the Bank's depositors and
of its secured, senior, general and subordinated creditors would be entitled to
a priority of payment over the dividend and other claims of holders of equity
interests such as the Bank Preferred Shares issued pursuant to the Automatic
Exchange.
The Company currently expects that its net income will be in excess of
amounts needed to pay dividends on the Series A Preferred Shares. See "Business
and Strategy--Dividends".
RISKS ASSOCIATED WITH CHANGES IN INTEREST RATES THAT WOULD ADVERSELY AFFECT THE
COMPANY'S ABILITY TO PAY DIVIDENDS
The Company's income will consist primarily of interest payments on the
Mortgage Assets held by it. The Company anticipates that approximately 46% of
its Commercial Mortgage Loans and approximately 44% of its Residential Mortgage
Loans will bear interest at adjustable rates.
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If there is a decline in interest rates (as measured by the indices upon which
the interest rates of the Mortgage Loans are based), then the Company will
experience a decrease in income available to be distributed to its stockholders.
In such an interest rate environment, the Company may experience an increase in
prepayments on its Mortgage Loans and may find it more difficult to purchase
additional Mortgage Loans bearing rates sufficient to support payment of the
dividends on the Series A Preferred Shares. Because the rate at which dividends
are required to be paid on the Series A Preferred Shares is fixed, there can be
no assurance that a declining interest rate environment would not adversely
affect the Company's ability to pay dividends on the Series A Preferred Shares.
DIVIDENDS NOT CUMULATIVE
In order to qualify as Tier 1 capital, dividends on the Series A Preferred
Shares are not cumulative. Consequently, if the Board of Directors does not
declare a dividend on the Series A Preferred Shares for any quarterly period,
the holders of the Series A Preferred Shares would not be entitled to recover
such dividend whether or not funds are or subsequently became available. The
Board of Directors may determine, in its business judgment, that it would be in
the best interests of the Company to pay less than the full amount of the stated
dividends on the Series A Preferred Shares or no dividends for any quarter
notwithstanding that funds are available. Factors that would generally be
considered by the Board of Directors in making this determination are the
Company's financial condition and capital needs, the impact of legislation and
regulations as then in effect or as may be proposed, economic conditions, and
such other factors as the Board may deem relevant. To remain qualified as a
REIT, the Company must distribute annually at least 95% of its "REIT Taxable
Income" (not including capital gains) to stockholders. See "--Tax Risks," below
and "Federal Income Tax Considerations--Taxation of the Company--Organizational
Requirements".
RISKS ASSOCIATED WITH MORTGAGE LOANS GENERALLY
An investment in the Series A Preferred Shares may be affected by, among
other things, a decline in real estate values. In the event the Mortgage Assets
held by the Company become nonperforming, the Company may not have funds
sufficient to pay dividends on the Series A Preferred Shares. Factors that could
affect the value of the Mortgage Assets held by the Company include the
following:
Concentration in Michigan. Geographically, the Company's Mortgage Loans
will be generally concentrated in the State of Michigan. Geographic
concentration of loans may present risks in addition to those present with
respect to Mortgage Loans generally. All of the properties underlying the
Company's Residential and Commercial Mortgage Loans included in the Initial
Portfolio are located in Michigan. Mortgage Loans secured by properties located
in Michigan may be subject to a greater risk of default than other comparable
Mortgage Loans in the event of adverse economic, political or business
developments or natural hazards that may affect Michigan and the ability of
property owners in Michigan to make payments of principal and interest on the
underlying mortgages. The Company complies with general hazard insurance policy
requirements
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<PAGE> 23
of Fannie Mae ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC")
or the Bank's underwriting guidelines.
No Credit Enhancement or Special Hazard Insurance. The Company generally
does not intend to obtain credit enhancements such as mortgagor bankruptcy
insurance or to obtain special hazard insurance for its Mortgage Loans, other
than standard hazard insurance, which will in each case only relate to
individual Mortgage Loans. Accordingly, during the time it holds Mortgage Loans
for which third party insurance is not obtained, the Company will be subject to
risks of borrower defaults and bankruptcies and special hazard losses that are
not covered by standard hazard insurance (such as those occurring from floods
unless flood insurance has been obtained on an individual basis). In addition,
in the event of a default on any Mortgage Loan held by the Company resulting
from declining property values or worsening economic conditions, among other
factors, the Company would bear the risk of loss of principal to the extent of
any deficiency between (i) the value of the related mortgaged property, plus any
payments from an insurer (or guarantor in the case of Commercial Mortgage Loans)
and (ii) the amount owing on the Mortgage Loan. The Initial Portfolio has a loan
to value ratio of approximately 65%.
Special Risks Relating to Commercial Mortgage Loans. The Company
anticipates that approximately 40% (measured by aggregate outstanding principal
amount) of its portfolio of Mortgage Assets on an ongoing basis will consist of
Commercial Mortgage Loans. Commercial Mortgage Loans have certain distinct risk
characteristics. The Company's current policy is not to acquire any Commercial
Mortgage Loan if such Commercial Mortgage Loan would constitute more than 5% of
the total book value of the Mortgage Assets of the Company at the time of its
acquisition. Commercial Mortgage Loans generally lack standardized terms, which
may complicate their structure. Commercial real estate properties themselves
tend to be unique and are more difficult to value than residential real estate
properties. Commercial Mortgage Loans also tend to have shorter maturities than
Residential Mortgage Loans and may not be fully amortizing, meaning that they
may have a significant principal balance or "balloon" payment due on maturity.
In addition, commercial real estate properties are generally subject to
relatively greater environmental risks than non-commercial properties and to the
corresponding burdens and costs of compliance with environmental laws and
regulations. See "--Environmental Considerations". Also, there may be costs and
delays involved in enforcing rights of a property owner against tenants in
default under the terms of leases with respect to commercial properties. For
example, tenants may seek the protection of the bankruptcy laws, which could
result in termination of lease contracts.
RISKS ASSOCIATED WITH CHANGES IN REAL ESTATE MARKET CONDITIONS THAT MAY
ADVERSELY AFFECT THE COMPANY'S RESULTS OF OPERATIONS
The results of the Company's operations will be affected by various
factors, many of which are beyond the control of the Company, such as: (i) local
and other economic conditions affecting real estate value; (ii) the ability of
tenants to make lease payments; (iii) the ability of a property to attract and
retain tenants, which may in turn be affected by local conditions such as an
oversupply of space or a reduction in demand for rental space in the area, the
attractiveness of properties to tenants, competition from other available space
and the ability of the owner to pay
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<PAGE> 24
leasing commissions, provide adequate maintenance and insurance, pay tenant
improvement costs and make other tenant concessions; (iv) interest rate levels
and the availability of credit to refinance such loans at or prior to maturity;
and (v) increased operating costs, including energy costs, real estate taxes and
costs of compliance with environmental controls and regulations. The results of
the Company's operations depend on, among other things, the level of interest
income generated by the Company's Mortgage Assets, the market value of such
Mortgage Assets and the supply of and demand for such Mortgage Assets. Further,
no assurance can be given that the values of the properties securing the
Mortgage Loans included in the Company's Initial Portfolio have remained or will
remain at the levels existing on the dates of origination of such Mortgage
Loans.
DELAYS IN LIQUIDATING DEFAULTED MORTGAGE LOANS
Even assuming that the mortgaged properties underlying the Mortgage Loans
held by the Company provide adequate security for such Mortgage Loans,
substantial delays could be encountered in connection with the liquidation of
defaulted Mortgage Loans, with corresponding delays in the receipt of related
proceeds by the Company. An action to foreclose on a mortgaged property securing
a Mortgage Loan is regulated by state statutes and rules and is subject to many
of the delays and expenses of other lawsuits if defenses or counterclaims are
interposed, sometimes requiring several years to complete. Furthermore, in some
states an action to obtain a deficiency judgment is not permitted following a
nonjudicial sale of a mortgaged property. In the event of a default by a
mortgagor, these restrictions, among other things, may impede the ability of the
Company to foreclose on or sell the mortgaged property or to obtain proceeds
sufficient to repay all amounts due on the related Mortgage Loan. In addition,
the Servicer will be entitled to deduct from collections received all expenses
reasonably incurred in attempting to recover amounts due and not yet repaid on
liquidated Mortgage Loans, including legal fees and costs of legal action, real
estate taxes and maintenance and preservation expenses, thereby reducing amounts
available to the Company.
LEGAL CONSIDERATIONS THAT MAY LIMIT THE COMPANY'S COLLECTION OF PRINCIPAL AND
INTEREST AND ADVERSELY EFFECT THE COMPANY'S RESULTS OF OPERATIONS
Applicable state laws may regulate interest rates and other charges and
require certain disclosures to borrowers. In addition, most states have other
laws, public policy and general principles of equity relating to the protection
of consumers, unfair and deceptive practices and practices which may apply to
the servicing and collection of the Mortgage Loans. Depending on the provisions
of the applicable law and the specific facts and circumstances involved,
violations of these laws, policies and principles may limit the ability of the
Company to collect all or part of the principal of or interest on the Mortgage
Loans, may entitle the borrower to a refund of amounts previously paid and, in
addition, could subject the Company to damages and administrative sanctions.
Management of the Company believes the laws of the State of Michigan with regard
to Mortgage Loans do not impose any uniquely unfavorable burdens or conditions.
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<PAGE> 25
ENVIRONMENTAL CONSIDERATIONS THAT MAY ADVERSELY EFFECT THE COMPANY'S RESULTS OF
OPERATIONS
In the event that the Company is forced to foreclose on a defaulted
Mortgage Loan to recover its investment in such Mortgage Loan, the Company may
be subject to environmental liabilities in connection with the underlying real
property which could exceed the value of the real property. Although the Company
intends to exercise due diligence to discover potential environmental
liabilities prior to the acquisition of any property through foreclosure,
hazardous substances or wastes, contaminants, pollutants or sources thereof (as
defined by state and federal laws and regulations) may be discovered on
properties during the Company's ownership or after a sale thereof to a third
party. If such hazardous substances are discovered on a property which the
Company has acquired in foreclosure or otherwise, the Company may be required to
remove those substances and clean up the property. There can be no assurance
that in such a case the Company would not incur full recourse liability for the
entire cost of any removal and clean-up, that the cost of such removal and
clean-up would not exceed the value of the property or that the Company could
recoup any of such costs from any third party. The Company may also be liable to
tenants and other users of neighboring properties. In addition, the Company may
find it difficult or impossible to sell the property prior to or following any
such clean-up.
RISK OF FUTURE REVISIONS IN POLICIES AND STRATEGIES BY BOARD OF DIRECTORS
The Board of Directors has established the investment policies and
operating policies and strategies of the Company, certain of which are described
in this Prospectus. These policies may be amended or revised from time to time
at the discretion of the Board of Directors (in certain circumstances subject to
the approval of a majority of the Independent Directors) without a vote of the
Company's stockholders, including holders of the Series A Preferred Shares. The
ultimate effect of any change in the policies and strategies set forth in this
Prospectus on a holder of Series A Preferred Shares may be positive or negative.
See "Business and Strategy--Management Policies and Programs".
ABILITY TO INCREASE LEVERAGE MAY ADVERSELY AFFECT THE COMPANY'S INTEREST INCOME
Although the Company does not currently intend to incur any indebtedness
in connection with the acquisition and holding of Mortgage Assets, the Company
may do so at any time (although indebtedness in excess of 20% of the aggregate
amount of net proceeds received in connection with the issuance of Preferred
Stock and Common Stock may not be incurred without the approval of a majority of
the Independent Directors of the Company). To the extent the Company were to
change its policy with respect to the incurrence of indebtedness, the Company
would be subject to risks associated with leverage, including, without
limitation, changes in interest rates, prepayment risk and risks of various
hedging strategies which may adversely affect the Company's ability to pay
dividends on the Series A Preferred Shares.
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<PAGE> 26
RELATIONSHIP WITH THE BANK; CONFLICTS OF INTEREST
The Bank is involved in virtually every aspect of the Company's existence.
The Bank is the sole holder of the Common Stock of the Company and administers
the day-to-day activities of the Company in its role as Advisor under the
Advisory Agreement. The Bank also services the Company's Mortgage Assets in its
role as Servicer under each of the Servicing Agreements. In addition, other than
the Independent Directors, all of the officers and directors of the Company are
also officers or directors of the Bank or its affiliates. As the holder of all
of the outstanding voting stock of the Company, the Bank will have the right to
elect all directors of the Company, including the Independent Directors.
The Bank may have interests which are not identical to those of the
Company. Consequently, conflicts of interest may arise with respect to
transactions, including without limitation, the Company's acquisition of the
Initial Portfolio; future acquisitions of Mortgage Loans from the Bank or its
affiliates; servicing of Mortgage Loans, particularly with respect to Mortgage
Loans that become Classified or placed on Nonaccrual Status or which have been,
more than once during the preceding twelve months, more than 30 days past due in
the payment of principal and interest; future dispositions of Mortgage Loans to
the Bank or any of its non-bank subsidiaries; and the modification of the
Advisory Agreement or the Servicing Agreements.
For example, conflicts of interest may arise between the Bank and the
Company with respect to the Commercial Mortgage Loans included in the Initial
Portfolio. The Company's interest will be limited to its interest in the
Commercial Mortgage Loan, but the Bank may have other interests as a result of
the Bank's overall relationship with the mortgagor in the course of its
commercial lending business. In addition, certain of the Commercial Mortgage
Loans are cross-collateralized with other credit facilities with the Bank. As a
result of the Bank having a relationship with the mortgagor of a Commercial
Mortgage Loan, including as lender with respect to other outstanding loans to
such mortgagor, the Bank, in its role as Advisor and Servicer, may have
different interests with respect to such Commercial Mortgage Loan in the event
that such Commercial Mortgage Loan becomes Classified or placed on Nonaccrual
Status or is otherwise past due in the payment of principal and interest. As a
result of such conflict, the Company may hold a Commercial Mortgage Loan for a
shorter or longer period of time than would otherwise be the case if the Bank
were not the Servicer of the Commercial Mortgage Loan or the Advisor to the
Company.
It is the intention of the Company and the Bank that any agreements and
transactions between the Company, on the one hand, and the Bank, on the other
hand, are fair to all parties and consistent with market terms, including the
prices paid and received for Mortgage Assets, including the Mortgage Loans in
the Initial Portfolio, on their acquisition or disposition by the Company or in
connection with the servicing of such Mortgage Assets. The requirement in the
Certificate of Designation establishing the Series A Preferred Shares that
certain actions of the Company be approved by a majority of the Independent
Directors is also intended to ensure fair dealings between the Company, the Bank
and their respective affiliates. However, there can be no assurance that such
agreements or transactions will be on terms as favorable to the Company as those
that could have been obtained from unaffiliated third parties. Any resolution of
a conflict
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<PAGE> 27
may adversely effect the Company's results of operations. See "Business and
Strategy--Management Policies and Programs--Conflict of Interest Policies".
NO THIRD PARTY VALUATION OF THE MORTGAGE LOANS; NO ARM'S-LENGTH NEGOTIATIONS
WITH AFFILIATES
The Company and the Bank intend that the fair value of the Initial
Portfolio will approximately equal the amount (approximately $36 million) that
the Company will pay for the Initial Portfolio. However, no third party
valuations of the Mortgage Loans constituting the Initial Portfolio were
obtained for purposes of the Offering, and there can be no assurance that the
fair value of the Initial Portfolio does not differ from the purchase price
payable by the Company.
In addition, it is not anticipated that third party valuations will be
obtained in connection with future acquisitions and dispositions of Mortgage
Assets even in circumstances where an affiliate of the Company is selling the
Mortgage Assets to, or purchasing the Mortgage Assets from, the Company.
Accordingly, although the Company and the Bank intend that future acquisitions
or dispositions of Mortgage Assets will be on a fair value basis, there can be
no assurance that the consideration to be paid (or received) by the Company to
(or from) the Bank or any of their respective affiliates in connection with
future acquisitions or dispositions of Mortgage Assets will not differ from the
fair value of such Mortgage Assets.
TAX RISKS
Adverse Consequences of Failure to Qualify as a REIT. The Company intends
to operate so as to qualify as a REIT under the Code. Although the Company
believes that it will be owned and organized and will operate in such a manner,
and Seyburn Kahn will render certain opinions, described under "Federal Income
Tax Considerations" below, regarding the Company's qualification as a REIT, no
assurance can be given that the Company will be able to operate in such a manner
so as to qualify as a REIT or to remain so qualified. Qualification as a REIT
involves the application of highly technical and complex Code provisions for
which there are only limited judicial or administrative interpretations. The
determination of various factual matters and circumstances, not entirely within
the Company's control and not addressed by the opinion of Seyburn Kahn, may
affect the Company's ability to qualify as a REIT. Although the Company is not
aware of any proposal in Congress to amend the tax laws in a manner that would
materially and adversely affect the Company's ability to operate as a REIT, no
assurance can be given that new legislation or new regulations, administrative
interpretations or court decisions will not significantly change the tax laws in
the future with respect to qualification as a REIT or the federal income tax
consequences of such qualification.
The Company is relying on the opinion of Seyburn Kahn, special tax counsel
to the Company, regarding various issues affecting the Company's ability to
qualify, and retain qualification, as a REIT. Such opinion is not binding on the
Internal Revenue Service ("IRS").
If in any taxable year the Company fails to qualify as a REIT, the Company
would not be allowed a deduction for distributions to stockholders in computing
its taxable income and would
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<PAGE> 28
be subject to federal income tax (including any applicable alternative minimum
tax) on its taxable income at regular corporate rates. As a result, the amount
available for distribution to the Company's stockholders would be reduced for
the year or years involved which could result in the inability of the Company to
pay dividends on the Series A Preferred Shares. In addition, unless entitled to
relief under certain statutory provisions, the Company would also be
disqualified from treatment as a REIT for the four taxable years following the
year during which qualification was lost. A failure of the Company to qualify as
a REIT would not by itself give the Company the right to redeem the Series A
Preferred Shares. See "Description of Series A Preferred Shares--Redemption".
Notwithstanding that the Company currently intends to operate in a manner
designed to qualify as a REIT, future economic, market, legal, tax or other
considerations may cause the Company to determine that it is in the best
interest of the Company and the holders of its Common Stock and Preferred Stock
to revoke the REIT election. As long as any Series A Preferred Shares are
outstanding, any such determination by the Company may not be made without the
approval of a majority of the Independent Directors. The tax law prohibits the
Company from electing treatment as a REIT for the four taxable years following
the year of such revocation. See "Federal Income Tax Considerations".
REIT Requirements with Respect to Stockholder Distributions. To obtain
favorable tax treatment as a REIT qualifying under the Code, the Company
generally will be required each year to distribute as dividends to its
stockholders at least 95% of its "REIT Taxable Income" (excluding capital
gains). Failure to comply with this requirement would result in the Company's
income being subject to tax at regular corporate rates. In addition, the Company
will be subject to a 4% nondeductible excise tax on the amount, if any, by which
certain distributions considered as paid by it with respect to any calendar year
are less than the sum of 85% of its ordinary income for the calendar year, 95%
of its capital gains net income for the calendar year and any undistributed
taxable income from prior periods.
Redemption Upon Occurrence of a Tax Event. At any time following the
occurrence of a Tax Event (as defined under "Description of Series A Preferred
Shares--Redemption"), even if such Tax Event occurs prior to [ ], 2002, the
Company will have the right to redeem the Series A Preferred Shares in whole but
not in part. See "Description of Series A Preferred Shares--Redemption". Upon
the occurrence of a Tax Event, should the Company not redeem the Series A
Preferred Shares, the Company's ability to pay dividends on the Series A
Preferred Shares may be adversely affected.
Automatic Exchange upon Occurrence of the Exchange Event. Upon the
occurrence of the Exchange Event and a Directive, the outstanding Series A
Preferred Shares will be automatically exchanged on a one-for-one basis into
Bank Preferred Shares. See "Description of Series A Preferred Shares--Automatic
Exchange". Assuming, as is anticipated to be the case, that the Bank Preferred
Shares will be nonvoting, the Automatic Exchange will be taxable, and each
holder of Series A Preferred Shares will have a gain or loss, as the case may
be, measured by the difference between the basis of such holder in the Series A
Preferred Shares and the fair market value of the Bank Preferred Shares received
in the Automatic Exchange. Assuming that such holder's Series
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<PAGE> 29
A Preferred Shares were held for more than one year prior to the Automatic
Exchange and held as capital assets, any gain or loss will be long-term capital
gain or loss. See "Federal Income Tax Considerations--Tax Treatment of Automatic
Exchange".
NO PRIOR MARKET FOR SERIES A PREFERRED SHARES OR FOR BANK PREFERRED SHARES, IF
ISSUED
Prior to the Offering, there has been no public market for the Series A
Preferred Shares and there can be no assurance that an active trading market
will develop or be sustained or that the Series A Preferred Shares may be resold
at or above the initial public offering price.
In the event the Series A Preferred Shares are exchanged for Bank
Preferred Shares, the Bank Preferred Shares will not be listed on the Nasdaq
System or any exchange. There can be no assurance as to the liquidity of the
trading markets for the Bank Preferred Shares, if issued, or that an active
public market for the Bank Preferred Shares would develop or be maintained.
THE COMPANY
The Company is a newly-formed Michigan corporation created for the purpose
of acquiring, holding and managing Mortgage Assets that will generate net income
for distribution to stockholders. The Company has been formed by the Bank to
provide the Bank with a means of raising capital for bank regulatory purposes.
The Company is not a financial institution or insurance company for purposes of
Section 856(a) of the Code. The Series A Preferred Shares will be treated as
capital for the Bank for regulatory purposes. The issuance of the Series A
Preferred Shares by the Company is a more cost-effective means of raising
capital for the Bank than if the Bank were to issue preferred stock itself,
because of the Company's ability to deduct for income tax purposes the dividends
payable on the Series A Preferred Shares as a result of the Company's
qualification as a REIT.
The Company anticipates that approximately 60% of its portfolio of
Mortgage Assets will represent interests in Residential Mortgage Loans and
mortgage securities and that approximately 40% of its portfolio of Mortgage
Assets will represent interests in Commercial Mortgage Loans (in each case
measured by aggregate outstanding principal amounts).
The Company expects that all of the Mortgage Assets in the Initial
Portfolio will be acquired as whole loans from the Bank. The Bank will
administer the day-to-day operations of the Company in its role as Advisor under
the Advisory Agreement. The Company will elect to be subject to tax as a REIT
under the Code, and will generally not be subject to federal income tax to the
extent that it distributes its earnings to its stockholders and maintains its
qualification as a REIT.
All of the Common Stock of the Company is owned by the Bank. The Bank
conducts its business through a network of three regional banking offices and
one business center office serving exclusively small and medium sized business
customers in Michigan. As of June 30, 1997, the Bank had total assets of $487.8
million total deposits of $417.3 million and stockholders' equity of $32.0
million.
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A PURCHASE OF SERIES A PREFERRED SHARES IS A PURCHASE OF SECURITIES ISSUED
BY THE COMPANY AND IS NOT A PURCHASE OF SECURITIES ISSUED BY, OR OTHERWISE AN
INVESTMENT IN, THE BANK. NO OBLIGATION OF THE COMPANY IS GUARANTEED BY THE BANK.
The Series A Preferred Shares will be exchanged automatically on a
one-for-one basis for Bank Preferred Shares upon the occurrence of the Automatic
Exchange. CONSEQUENTLY, AN INVESTMENT IN SERIES A PREFERRED SHARES COULD BE
REPLACED BY AN INVESTMENT IN BANK PREFERRED SHARES AT A TIME WHEN THE BANK'S
FINANCIAL CONDITION IS DETERIORATING OR WHEN THE BANK HAS BEEN PLACED INTO
CONSERVATORSHIP OR RECEIVERSHIP. POTENTIAL INVESTORS IN THE SERIES A PREFERRED
SHARES, THEREFORE, SHOULD CAREFULLY CONSIDER THE DESCRIPTION OF THE BANK SET
FORTH IN THE BANK PROSPECTUS ATTACHED HERETO AS ANNEX I. See also "Description
of Series A Preferred Shares--Automatic Exchange".
For a further description of the operations of the Company, see "Business
and Strategy," "Management," "Risk Factors" and "Federal Income Tax
Considerations".
USE OF PROCEEDS
The proceeds to the Company from the sale of the Series A Preferred Shares
offered hereby are expected to be $18 million (assuming the Underwriters'
over-allotment option is not exercised). Simultaneously with the consummation of
the Offering, the Bank will purchase shares of Common Stock for a price equal to
$18 million. The Company will use the aggregate proceeds of $36 million received
in connection with both the Offering and the sale of shares of Common Stock to
the Bank to purchase the Initial Portfolio from the Bank. See "Business and
Strategy".
If the Underwriters exercise their option to purchase additional Series A
Preferred Shares to cover over-allotments in the Offering, the Bank will
purchase additional shares of Common Stock for a price equal to the aggregate
initial public offering price of such additional Series A Preferred Shares. The
Company will use the additional proceeds from any such additional sales of
Series A Preferred Shares and shares of Common Stock to purchase additional
Mortgage Loans of the types described in "Business and Strategy--Description of
Initial Portfolio". The Company expects that it will purchase any such
additional Commercial and Residential Mortgage Loans within six months from the
exercise by the Underwriters of their over-allotment option. Pending such
purchase, the Company will invest such additional proceeds in mortgage-backed
securities or short-term money market investments.
Simultaneously with the consummation of the Offering, the Bank will also
purchase additional shares of Common Stock for a price equal to the aggregate
amount of underwriting commissions and expenses incurred by the Company in
connection with the Offering and all expenses incurred by the Company in
connection with its formation and the offering of the Series A Preferred Shares
(currently estimated by the Company to be approximately $1,045,000 in the
aggregate) in order to provide the Company with funds sufficient to pay such
expenses.
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<PAGE> 31
Simultaneously with the consummation of any sale of additional Series A
Preferred Shares in connection with the exercise by the Underwriters of their
over-allotment option, the Bank will also purchase additional shares of Common
Stock for a price equal to the aggregate amount of underwriting commissions and
expenses incurred by the Company in connection with the exercise of such
overallotment option in order to provide the Company with funds sufficient to
pay such expenses.
The following table illustrates the use of proceeds by the Company from
the sale of the Series A Preferred Shares offered hereby (assuming the
Underwriters' over-allotment option is not exercised) and the sale of shares of
Common Stock to the Bank described above.
<TABLE>
<S> <C>
Gross proceeds from the Offering of
Series A Preferred Shares ................. $18,000,000
Gross proceeds from the issuance of
shares of Common Stock to the Bank ........ 19,045,000
Public Offering Expenses:
Underwriting commissions ................. [757,500]
Other expenses of the formation
and the Offering ........................ [287,500](1)
-----------
Net proceeds to be applied to the
purchase of Mortgage Assets from
the Bank .................................. $36,000,000
===========
</TABLE>
--------------
(1) Assumes that expenses incurred by the Company in connection with
its formation and the Offering of the Series A Preferred Shares,
other than underwriting commissions, are $287,500. If such
expenses are in excess of $287,500, the Bank will purchase
additional shares of Common Stock for a purchase price equal to
such excess.
Neither the Bank nor any of its affiliates will receive any transaction
fees upon completion of the Offering, including any advance payment in respect
of servicing or advisory fees.
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<PAGE> 32
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
October 3, 1997 (the date of the most recent audited financial statement of the
Company) and as adjusted to reflect (i) the consummation of the Offering
(assuming the Underwriters' over-allotment option is not exercised) and (ii) the
transactions described in "Certain Transactions Constituting The Formation--The
Formation" and the use of the net proceeds therefrom as described under "Use of
Proceeds".
<TABLE>
<CAPTION>
October 3, 1997
----------------------
As
Actual Adjusted
-------- ----------
(In Thousands)
DEBT
<S> <C> <C>
Total long-term debt ................................. $ -- $ --
------- -------
STOCKHOLDERS' EQUITY
Preferred Stock, par value $10.00; 2,500,000
authorized, none issued and outstanding, actual;
and 2,500,000 shares authorized, 1,800,000
shares issued and outstanding, as adjusted ............ -- 18,000
Common Stock, par value $1.00 per share(1);
1,000 shares authorized, 1,000 shares issued and
outstanding, actual; and 60,000 shares authorized,
19,045 shares issued and outstanding, as adjusted ..... 1 5,714
Additional paid-in capital ............................. -- 12,286
------- -------
Total stockholders' equity ........................... $ 1 $36,000
------- -------
TOTAL CAPITALIZATION ..................................... $ 1 $36,000
======= =======
</TABLE>
- -------------
(1) The Company was formed with an initial capitalization of $1,000. Prior to
consummation of the Offering, the charter of the Company will be amended to
increase the authorized capital of the Company and to increase the par value
of the Common Stock to $300.00 per share. Since the par value per share of
the Preferred Stock equals the issue price of a Series A Preferred Share,
the full $18.0 million raised in the Offering will represent Preferred Stock
capital. The par value of the Common Stock will equal 30% of its purchase
price of $1,000 per share and, accordingly, the Bank will be acquiring
19,045 shares of Common Stock upon the consummation of the Offering for an
aggregate purchase price of $19,045,000 (such number of shares of Common
Stock includes Common Stock acquired by the Bank in order to provide
sufficient funds to pay aggregate offering and organization expenses,
currently estimated by the Company to be approximately $1,045,000). As a
result of these issuances of Common Stock, the Common Stock capital amount,
upon consummation of the Offering, will equal $5,714,000. The additional
paid-in capital of $12,286,000 represents the excess of the purchase price
for the Common Stock over the par value of such shares after deducting the
aggregate amount of offering and organization expenses.
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<PAGE> 33
BUSINESS AND STRATEGY
GENERAL
The Company's principal business objective is to acquire, hold and manage
Mortgage Assets that will generate net income for distribution to stockholders.
The Company does not expect to be in the business of selling or trading Mortgage
Assets. The Company will acquire the Initial Portfolio of Mortgage Loans from
the Bank for an aggregate purchase price of approximately $36 million. See
"Certain Transactions Constituting the Formation".
In order to preserve its status as a REIT under the Code, substantially
all of the assets of the Company will consist of Mortgage Loans and other
qualified REIT real estate assets of the type set forth in Section 856(c)(6)(B)
of the Code. See "Federal Income Tax Considerations".
DIVIDENDS
The Company currently expects to pay an aggregate amount of dividends with
respect to its outstanding shares of capital stock equal to approximately 100%
of the Company's "REIT Taxable Income" (excluding capital gains). In order to
remain qualified as a REIT, the Company must distribute annually at least 95% of
its "REIT Taxable Income" (excluding capital gains) to stockholders. The Company
anticipates that none of the dividends on the Series A Preferred Shares and none
or no material portion of the dividends on the Common Stock will constitute
non-taxable returns of capital.
The Company's income will consist primarily of interest payments on the
Mortgage Assets held by it. The Company anticipates that a majority of its
Mortgage Assets will bear interest at adjustable rates. If there is a decline in
interest rates (as measured by the indices upon which the interest rates of the
Mortgage Assets are based), then the Company will experience a decrease in
income available to be distributed to its stockholders. In addition, in such an
interest rate environment the Company may experience an increase in prepayments
on its Residential Mortgage Loans and may find it more difficult to purchase
additional Mortgage Assets bearing rates sufficient to support payment of the
dividends on the Series A Preferred Shares. Because the rate at which dividends
are required to be paid on the Series A Preferred Shares is fixed, there can be
no assurance that a declining interest rate environment would not adversely
affect the Company's ability to pay dividends on the Series A Preferred Shares.
Dividends will be declared at the discretion of the Board of Directors
after considering the Company's distributable funds, financial requirements, tax
considerations and other factors. Although there can be no assurances, because
(i) the Mortgage Assets are interest bearing, (ii) the Series A Preferred Shares
represent only approximately 50% of the Company's capitalization and (iii) the
Company does not anticipate incurring any indebtedness, the Company currently
expects that both its cash available for distribution and its "REIT Taxable
Income" will be in excess of amounts needed to pay dividends on the Series A
Preferred Shares. Accordingly, the Company expects that it will, after paying
the quarterly dividends on the Series A Preferred Shares, pay dividends to
holders of its Common Stock. Assuming (i) the Mortgage Loans included in the
Initial
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<PAGE> 34
Portfolio are held for the 12-month period following completion of the Offering,
(ii) principal repayments are reinvested in additional Mortgage Assets with
characteristics similar to those of the Mortgage Loans included in the Initial
Portfolio and (iii) interest rates remain constant during such 12-month period,
the Company anticipates that the Initial Portfolio will generate interest income
of approximately $2.8 million, after payment of servicing and advisory fees,
during such 12-month period. Since the aggregate annual dividend payment on the
Series A Preferred Shares is $[____] million, based on the foregoing, the
Company anticipates that $[____] million would be available for payment of
dividends on the Common Stock held by the Bank.
There are several limitations which restrict the Company's ability to pay
dividends on the Common Stock (none of which should adversely affect either the
ability of the Company to pay dividends in respect of the Series A Preferred
Shares or the ability of the Company to maintain its status as a REIT). First,
under the Company's current dividend policy, the Company may not make any
distribution in respect of the Common Stock with respect to any year to the
extent that, after taking into account such proposed distribution, total cash or
property distributions on the Company's outstanding shares of Preferred Stock
and Common Stock with respect to that year would exceed 105% of the Company's
"REIT Taxable Income" (excluding capital gains) for that year plus net capital
gains of the Company for that year. This policy regarding the limitations on
payment of dividends in respect of Common Stock may not be modified without the
approval of a majority of the Independent Directors. Second, if the Company
fails to declare and pay full dividends on the Series A Preferred Shares in any
dividend period, the Company may not make any dividends or other distributions
with respect to the Common Stock until such time as dividends on all outstanding
Series A Preferred Shares have been (i) declared and paid for three consecutive
dividend periods and (ii) declared and paid or declared and a sum sufficient for
the payment thereof has been set apart for payment for the fourth consecutive
dividend period. See, "Description of Series A Preferred Shares--Dividends".
Third, Michigan law provides that no dividends (as well as other distributions)
may be paid on the capital stock of the Company if, after giving it effect, the
Company would not be able to pay its debts as they become due in the usual
course of business, or the Company's total assets would be less than the sum of
its total liabilities plus the amount that would be needed, if the Company were
to be dissolved at the time of the distribution, to satisfy the preferential
rights upon dissolution of shareholders whose preferential rights are superior
to those receiving the distribution.
The OCC prompt corrective action regulations prohibit banks from making
"capital distributions" (defined to include a transaction that the OCC
determines, by order or regulation, to be "in substance a distribution of
capital") unless the institution is at least "adequately capitalized" after the
distribution. There can be no assurances that the OCC would not seek to restrict
the Company's payment of dividends on the Series A Preferred Shares under this
provision if the Bank were to fail to maintain the status of at least
"adequately capitalized". Currently, an institution is considered "adequately
capitalized" if it has a total risk-based capital ratio of at least 8.0%, a Tier
1 risk-based capital ratio of at least 4.0% and a core capital (or leverage)
ratio of at least 4.0%. At June 30, 1997, the Bank's total risk-based capital
ratio was 10.81%, Tier 1 risk-based capital ratio was 7.96% and core capital
(or leverage) ratio was 6.29%. Such ratios, adjusted to give effect to the sale
of Series A Preferred Shares in the Offering, would be 15.20%, 12.35% and 8.73%,
respectively. In addition, the Exchange Event may take place under
29
<PAGE> 35
circumstances in which the Bank will not be considered "adequately capitalized"
for purposes of the OCC prompt corrective action regulations. Thus, at the time
of the Automatic Exchange, the Bank would likely be prohibited from paying
dividends on the Bank Preferred Shares. Further, the Bank's ability to pay
dividends on the Bank Preferred Shares following the Automatic Exchange also
would be subject to OCC regulations and resolution of the Bank's board of
directors. In the event that the Bank did pay dividends on the Bank Preferred
Shares, such dividends would be paid out of the Bank's current or retained net
profits.
Under certain circumstances, including any determination that the Bank's
relationship to the Company results in an unsafe and unsound banking practice,
regulatory authorities will have the authority to issue an order which restricts
the ability of the Company to make dividend payments to its stockholders.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal liquidity need will be to fund the acquisition of
additional Mortgage Assets as Mortgage Assets held by the Company are repaid.
The acquisition of such additional Mortgage Assets will be funded with the
proceeds of principal repayments on its portfolio of Mortgage Assets. The
Company does not anticipate that it will have any other material capital
expenditures. The Company believes that cash generated from the payment of
interest and principal on its Mortgage Assets portfolio will provide sufficient
funds to meet both operating requirements and payment of dividends by the
Company in accordance with the REIT Requirements for the foreseeable future.
GENERAL DESCRIPTION OF MORTGAGE ASSETS; INVESTMENT POLICY
Residential Mortgage Loans. The Company may from time to time acquire both
conforming and nonconforming Residential Mortgage Loans consistent with its
primary investment objective to acquire assets primarily for income. Conforming
Residential Mortgage Loans comply with the requirements for inclusion in a loan
guarantee program sponsored by either the FHLMC or FNMA. Under current
regulations, the maximum principal balance allowed on conforming Residential
Mortgage Loans ranges from $214,600 for one-unit residential loans to $442,450
for four-unit residential loans. Nonconforming Residential Mortgage Loans are
Residential Mortgage Loans that do not qualify in one or more respects for
purchase by FNMA or FHLMC under their standard programs. The Company expects
that all of the Residential Mortgage Loans it purchases in the Initial Portfolio
will be nonconforming. Although the Company's policy is to hold Mortgage Loans
to maturity, a substantial portion of the Company's Nonconforming Residential
Mortgage Loans are expected to meet the requirements for sale to investors in
the secondary mortgage market.
Each Residential Mortgage Loan will be evidenced by a promissory note
secured by a mortgage or deed of trust or other similar security instrument
creating a first lien on single-family (one- to four-unit) residential
properties. Residential real estate properties underlying Residential Mortgage
Loans consist of individual dwelling units, individual condominium units, two-
to four-family dwelling units, planned unit developments and townhouses.
30
<PAGE> 36
The Company currently expects that approximately 44% of the Residential
Mortgage Loans to be acquired by it will be adjustable rate Mortgage Loans and
that approximately 56% of the Residential Mortgage Loans will be fixed rate
Mortgage Loans.
Commercial Mortgage Loans. The Company may from time to time acquire
Commercial Mortgage Loans secured by apartment buildings, light industrial and
warehouse properties, office buildings and retail strip centers. The Company
expects that substantially all of the Commercial Mortgage Loans it acquires will
be secured by real estate located in Michigan. Unlike Residential Mortgage
Loans, Commercial Mortgage Loans generally lack standardized terms. Although
Commercial Mortgage Loans are generally nonrecourse to the borrower, the Company
anticipates that substantially all of the Commercial Mortgage Loans that it will
acquire will either be recourse to the borrower or supported by a guarantee of
an affiliate of the borrower. However, there is no requirement that Commercial
Mortgage Loans acquired by the Company have third party guarantees. Commercial
Mortgage Loans may also not be fully amortizing, meaning that they may have a
significant principal balance or "balloon" payment due on maturity. Moreover,
commercial properties, particularly industrial and warehouse properties, are
generally subject to relatively greater environmental risks than non-commercial
properties, generally giving rise to increased costs of compliance with
environmental laws and regulations. See "Risk Factors--Risks Associated with
Mortgage Loans Generally" and "--Environmental Considerations".
The credit quality of a Commercial Mortgage Loan may depend on, among
other factors, the existence and structure of underlying leases, the physical
condition of the property (including whether any maintenance has been deferred),
the creditworthiness of tenants, the historical and anticipated level of
vacancies and rents on the property and on other comparable properties located
in the same region, potential or existing environmental risks, the availability
of credit to refinance the Commercial Mortgage Loan at or prior to maturity and
the local and regional economic climate in general. Foreclosures of defaulted
Commercial Mortgage Loans are generally subject to a number of complicating
factors, including environmental considerations, which are generally not present
in foreclosures of Residential Mortgage Loans. The Company will sell any
foreclosed Mortgage Assets. See "Risk Factors--Risks Associated with Mortgage
Loans Generally--Special Risks Relating to Commercial Mortgage Loans" and
"--Environmental Considerations".
Mortgage Securities. The Company may from time to time acquire investment
grade mortgage securities representing interests in or obligations backed by
pools of Mortgage Assets. The Mortgage Assets underlying the mortgage securities
will be secured by single-family residential, multifamily or commercial real
estate properties located throughout the United States. There is no limit on the
amount of mortgage securities that may be purchased. The Company does not intend
to acquire any interest-only, principal-only or other similar mortgage
securities generally considered to be of a high risk nature. The Company will
not be precluded from investing in mortgage securities where the Bank or one of
its affiliates is the sponsor or issuer.
ACQUISITION OF INITIAL PORTFOLIO
Simultaneously with the consummation of the Offering, the Company will
acquire the Initial Portfolio pursuant to the terms of two mortgage purchase
agreements with the Bank: the
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<PAGE> 37
Residential Mortgage Loan Purchase and Warranties Agreement (the "Residential
Mortgage Purchase Agreement") and the Commercial Mortgage Loan Purchase and
Warranties Agreement (the "Commercial Mortgage Purchase Agreement", and,
together with the Residential Mortgage Purchase Agreement, the "Mortgage
Purchase Agreements"), each to be entered into simultaneously with the
consummation of the Offering. The Residential Mortgage Loans in the Initial
Portfolio will be sold to the Company pursuant to the Residential Mortgage
Purchase Agreement. The Commercial Mortgage Loans in the Initial Portfolio will
be sold to the Company pursuant to the Commercial Mortgage Purchase Agreement.
Each Mortgage Loan will be identified in a schedule appearing as an exhibit to
its respective mortgage purchase agreement (each, a "Mortgage Loan Schedule").
Each Mortgage Loan Schedule will specify, among other things, with respect to
each Mortgage Loan: the interest rate or interest rate formula applicable to
each Mortgage Loan, the original principal amount and the unpaid principal
balance as of the purchase date, the monthly payment, maturity date, mortgagor,
type of mortgaged property, location of the mortgaged property and current
interest rate.
In addition, the Bank will deliver or cause to be delivered to the Company
the mortgage note with respect to each Mortgage Loan (together with all
amendments and modifications thereto) endorsed in blank, the original or
certified copy of the mortgage (together with all amendments and modifications
thereto) with evidence of recording indicated thereon, if available, and an
original or certified copy of an assignment of the mortgage in recordable form.
Such documents will initially be held by the Bank, as Advisor, acting as
custodian for the Company. Although the Company will have the right to record
the assignments of mortgage at any time, it does not currently anticipate doing
so. The Company believes that maintaining record title of the Mortgage Loans in
the name of the Servicer will facilitate the servicing of the Mortgage Loans.
Once the assignments of mortgage are recorded, the Company's lien on the
mortgaged properties will date back to the date of the original mortgages and
rank ahead of any intervening mortgages granted by the borrowers. However, if
the Bank, in violation of the Advisory Agreement and the Servicing Agreements,
sells any of the Company's Mortgage Loans to a third party who records its
assignment of mortgage before the Company records its assignment of mortgage
with respect to such Mortgage Loan, the Company may lose its ownership interest
in such Mortgage Loan. See "--Servicing" and "--Description of Initial
Portfolio--General".
The Bank will make certain customary representations and warranties with
respect to the Mortgage Loans in the Initial Portfolio for the benefit of the
Company, including, among other things: (i) the information provided with
respect to the Mortgage Loans is correct in all material respects; (ii) each
Mortgage Loan is subject to a valid first lien subject only to the lien for
current real property taxes and assessments not yet due and payable, generally
acceptable covenants, conditions, restrictions, rights of way, easements and
other matters of public record present at the time of origination and other
common matters; (iii) the validity of the mortgage documents; (iv) all required
payments have been made; and (v) each Mortgage Loan complies with applicable
federal and state laws, including, without limitation, usury, truth-in-lending,
real estate settlement procedures, consumer credit protection, fair housing,
equal credit opportunity and disclosure laws. See also "Description of Initial
Portfolio". The Bank will be obligated to repurchase any Mortgage Loan sold by
it to the Company as to which there is a material breach of any such
representation or warranty, unless the Bank elects to substitute a qualified
Mortgage Loan for such
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<PAGE> 38
Mortgage Loan. The Bank will also indemnify the Company for damages or costs
resulting from any such breach. The repurchase price for any such Mortgage Loan
will be its outstanding principal amount plus accrued and unpaid interest on the
date of repurchase plus any premium paid by the Company. In addition, under the
terms of the Mortgage Purchase Agreements, the Company will acquire, in addition
to the Mortgage Loans included in the Initial Portfolio, (i) all amounts,
including payments of principal and interest (other than payments of principal
and interest due on or before [_____________], 1997 with respect to the
Residential Mortgage Loans and [_______________], 1997 with respect to the
Commercial Mortgage Loans) held in one or more accounts maintained for the
benefit of or in the name of the Company pursuant to the Servicing Agreements
and (ii) all insurance policies relating to the Mortgage Properties and the
proceeds thereof. See "--Servicing".
MANAGEMENT POLICIES AND PROGRAMS
In administering the Company's Mortgage Assets, the Advisor has a high
degree of autonomy. The Board of Directors, however, has adopted certain
policies to guide administration of the Company and the Advisor with respect to
the acquisition and disposition of assets, use of capital and leverage, credit
risk management and certain other activities. These policies, which are
discussed below, may be amended or revised from time to time at the discretion
of the Board of Directors (in certain circumstances subject to the approval of a
majority of the Independent Directors) without a vote of the Company's
stockholders, including holders of the Series A Preferred Shares. See also
"--Dividends".
Asset Acquisition and Disposition Policies. Subsequent to the acquisition
of the Initial Portfolio, the Company anticipates that it will from time to time
purchase additional Mortgage Loans from the Bank, although Mortgage Loans may be
acquired from unaffiliated third parties, out of proceeds received in connection
with the repayment or disposition of Mortgage Loans or the issuance of
additional shares of Common Stock and Preferred Stock. The Company anticipates
that additional Mortgage Loans purchased from the Bank or its affiliates will be
purchased on terms that are substantially identical to those that could be
obtained by the Company if such additional Mortgage Loans were purchased from
third parties unaffiliated with the Company. No arrangements or procedures are
currently in place regarding the purchase of additional Mortgage Loans from
unaffiliated third parties. The Company currently anticipates that additional
Mortgage Loans acquired by the Company will be of the types described in
"--Description of Initial Portfolio", although if the Bank or its affiliates
develop additional Mortgage Loan products, the Company may purchase such
additional types of Mortgage Loans. In addition, the Company may from time to
time acquire mortgage securities representing interests in or obligations backed
by pools of Mortgage Loans that will be secured by single-family residential,
multifamily or commercial real estate properties located throughout the United
States. The Company currently anticipates that it will not acquire the right to
service any Mortgage Loan it acquires in the future and that the Bank or an
affiliate of the Bank will act as servicer of any such additional Mortgage
Loans. The Company anticipates that any servicing arrangement that it enters
into in the future with the Bank will contain fees and other terms that would be
substantially equivalent to those that would be contained in servicing
arrangements entered into with third parties unaffiliated with the Company.
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<PAGE> 39
The Company currently intends to maintain approximately 60% of its
portfolio of Mortgage Assets in Residential Mortgage Loans or mortgage
securities and approximately 40% of the Company's portfolio of Mortgage Assets
in Commercial Mortgage Loans (in each case measured by aggregate outstanding
principal balances). The Company's current policy is not to acquire any
Commercial Mortgage Loan that constitutes more than 5% of the total book value
of the Mortgage Assets of the Company at the time of its acquisition. In
addition, the Company's current policy prohibits the acquisition of any Mortgage
Loan or any interest in a Mortgage Loan (other than an interest resulting from
the acquisition of mortgage securities), which Mortgage Loan (i) is delinquent
in the payment of principal or interest at the time of proposed acquisition;
(ii) is or was at any time during the preceding 12 months (a) Classified, (b) in
Nonaccrual Status, or (c) renegotiated due to financial deterioration of the
borrower; or (iii) has been, more than once during the preceding 12 months, more
than 30 days past due in the payment of principal or interest.
The Company may choose, at any time subsequent to its acquisition of any
Mortgage Loan, to require the Servicer of the Mortgage Loan to dispose of any
Mortgage Loan, for any reason, including as a result of such mortgage loan
becoming Classified or being placed in Nonaccrual Status or having been, more
than once during the preceding 12 months, more than 30 days past due in the
payment of principal or interest. The Bank has indicated to the Company that it
will purchase, at the then fair value, any Mortgage Loan of the Company that the
Company chooses to dispose of for the foregoing reasons.
Capital and Leverage Policies. To the extent that the Board of Directors
determines that additional funding is required, the Company may raise such funds
through additional equity offerings, debt financing or retention of cash flow
(after consideration of provisions of the Code requiring the distribution by a
REIT of at least 95% of its "REIT Taxable Income" and taking into account taxes
that would be imposed on undistributed taxable income), or a combination of
these methods.
The Company will have no debt outstanding following consummation of the
Offering, and the Company does not currently intend to incur any indebtedness.
However, the organizational documents of the Company do not contain any
limitation on the amount or percentage of debt, funded or otherwise, the Company
might incur. Notwithstanding the foregoing, the Company may not, without the
approval of a majority of the Independent Directors, incur debt for borrowed
money other than debt not in excess of 20% of the aggregate amount of net
proceeds received in connection with the issuance of all outstanding Preferred
Stock and Common Stock of the Company. Any such debt incurred may include
intercompany advances made by the Bank to the Company.
The Company may also issue additional series of Preferred Stock. However,
the Company may not issue additional shares of Preferred Stock senior to the
Series A Preferred Shares without the consent of holders of at least two-thirds
of the outstanding shares of Preferred Stock at that time, voting as a single
class, including the Series A Preferred Shares, and the Company may not issue
additional shares of Preferred Stock on a parity with the Series A Preferred
Shares without the approval of a majority of the Company's Independent
Directors. The Company does not
34
<PAGE> 40
currently intend to issue any additional series of Preferred Stock unless it
simultaneously issues additional Common Stock to the Bank and the proceeds to be
received from the issuance of the Common Stock are approximately equal to the
aggregate offering price of such additional Preferred Stock plus the Company's
expenses (including underwriting commissions or placement fees) in connection
with the issuance of such additional shares of Preferred Stock. It is currently
anticipated that the Company will issue additional shares of Preferred Stock if
such issuance would provide the Bank with the most cost-effective means of
raising capital for bank regulatory purposes at the time. See "Certain
Transactions Constituting the Formation--Benefits to the Bank and Its
Affiliates".
Credit Risk Management Policies. The Company expects that each Mortgage
Loan acquired from the Bank in the future will be a whole loan, will represent a
first lien position and will be originated by the Bank or such affiliate in the
ordinary course of its real estate lending activities based on the underwriting
standards generally applied (at the time of origination) for its own account by
the Bank or the affiliate of the Bank which originated the Mortgage Loan. See
"--Description of Initial Portfolio--Underwriting Standards". The Company also
expects that all Mortgage Loans held by the Company will be serviced pursuant to
the Servicing Agreements, which require servicing in conformity with servicing
guidelines promulgated by the Company or, in the case of Residential Mortgage
Loans, with FHLMC guidelines and procedures. The Company may also choose, at any
time subsequent to its acquisition of any Mortgage Loan, to require the Servicer
of such Mortgage Loans to dispose of any Mortgage Loan for any reason, including
as a result of such Mortgage Loan becoming Classified or being placed in
Nonaccrual Status, or having been, more than once during the preceding 12
months, more than 30 days past due in the payment of principal and interest.
Conflict of Interest Policies. Because of the nature of the Company's
relationship with the Bank, it is likely that conflicts of interest will arise
with respect to certain transactions, including, without limitation, the
Company's acquisition of Mortgage Loans from, or disposition of Mortgage Loans
to, the Bank, foreclosure on defaulted Commercial Mortgage Loans and the
modification of the Advisory Agreement or either of the Servicing Agreements. It
is the Company's policy that the terms of any financial dealings with the Bank
and its affiliates will be consistent with those available from third parties in
the mortgage lending industry. In addition, neither the Advisory Agreement nor
either of the Servicing Agreements may be modified or terminated without the
approval of a majority of the Independent Directors.
Conflicts of interest between the Company and the Bank may also arise in
connection with making decisions that bear upon the credit arrangements that the
Bank or one of its affiliates may have with a mortgagor under a Mortgage Loan.
Conflicts could also arise in connection with actions taken by the Bank as a
controlling person in the Company. It is the intention of the Company and the
Bank that any agreements and transactions between the Company, on the one hand,
and the Bank or its affiliates, on the other hand, including without limitation
the Mortgage Purchase Agreements and Servicing Agreements, are fair to all
parties and are consistent with market terms for such types of transactions. The
Servicing Agreements provide that (i) foreclosures and dispositions of the
Mortgage Loans are to be performed with a view to maximizing the recovery by the
Company as owner of the Mortgage Loans and (ii) the Servicer
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<PAGE> 41
shall service the Mortgage Loans solely with a view toward the interests of the
Company, and without regard to the interests of the Bank or its affiliates. The
requirement in the Certificate of Designation establishing the Series A
Preferred Shares that certain actions of the Company be approved by a majority
of the Independent Directors is also intended to ensure fair dealings between
the Company and the Bank and their respective affiliates. However, there can be
no assurance that any such agreement or transaction will be on terms as
favorable to the Company as would have been obtained from unaffiliated third
parties.
There are no provisions in the Company's Articles of Incorporation
limiting any officer, director, security holder or affiliate of the Company from
having any direct or indirect pecuniary interest in any Mortgage Asset to be
acquired or disposed of by the Company or in any transaction in which the
Company has an interest or from engaging in acquiring, holding and managing
Mortgage Assets. As described herein, it is expected that the Bank and its
affiliates will have direct interests in transactions with the Company
(including without limitation the sale of Mortgage Assets to the Company);
however, it is not currently anticipated that any of the officers or directors
of the Company will have any interests in such Mortgage Assets.
Other Policies. The Company intends to operate in a manner that will not
subject it to regulation under the Investment Company Act of 1940. The Company
does not intend to (i) invest in the securities of other issuers for the purpose
of exercising control over such issuers, (ii) underwrite securities of other
issuers, (iii) actively trade in loans or other investments, (iv) offer
securities in exchange for property or (v) make loans to third parties,
including, without limitation, officers, directors or other affiliates of the
Company. The Company may, under certain circumstances, purchase the Series A
Preferred Shares and other shares of its capital stock in the open market or
otherwise, provided, however, that the Company will not redeem or repurchase any
shares of its Common Stock for so long as any Series A Preferred Shares are
outstanding without the approval of a majority of the Independent Directors. The
Company has no present intention of causing the Company to repurchase any shares
of its capital stock, and any such action would be taken only in conformity with
applicable federal and state laws and regulations and the requirements for
qualifying as a REIT.
The Company intends to publish and distribute to stockholders, in
accordance with Exchange Act rules, annual reports containing financial
statements prepared in accordance with generally accepted accounting principles
and certified by the Company's independent public accountants. The Certificate
of Designation establishing the Series A Preferred Shares provides that the
Company shall maintain its status as a reporting company under the Exchange Act
for so long as any of the Series A Preferred Shares are outstanding.
The Company currently intends to make investments and operate its business
at all times in such a manner as to be consistent with the requirements of the
Code to qualify as a REIT. However, future economic, market, legal, tax or other
considerations may cause the Board of Directors, subject to approval by a
majority of Independent Directors, to determine that it is in the best interests
of the Company and its stockholders to revoke its REIT status.
36
<PAGE> 42
DESCRIPTION OF INITIAL PORTFOLIO
Information with respect to the Residential Mortgage Loans and the
Commercial Mortgage Loans in the Initial Portfolio is presented as of June 30,
1997. The composition of the Initial Portfolio actually purchased by the Company
contemporaneously with the consummation of the Offering will differ from the
Initial Portfolio as described in this Prospectus only to the extent it is
discovered prior to the consummation of the Offering that a Mortgage Loan
included in the Initial Portfolio described herein (i) is delinquent in the
payment of principal or interest; (ii) is or was at any time during the
preceding 12 months (a) Classified, (b) in Nonaccrual Status, or (c)
renegotiated due to financial deterioration of the borrower; or (iii) has been,
more than once during the preceding 12 months, more than 30 days past due in the
payment of principal or interest. In such event a Mortgage Loan similar in
aggregate outstanding principal balance and product type will be substituted for
such non-purchased Mortgage Loan.
References herein to percentages of Mortgage Loans included in the Initial
Portfolio refer in each case to the percentage of the aggregate outstanding
principal balance of the Mortgage Loans in the Initial Portfolio as of June 30,
1997, based on the outstanding principal balances of such Mortgage Loans as of
such date, after giving effect to scheduled monthly payments due on or prior to
such date, whether or not received.
The detailed information set forth in this Prospectus with respect to the
Mortgage Loans applies only to the Initial Portfolio and the Company's portfolio
of Mortgage Assets in the future may or may not have the characteristics
described below.
General. The Initial Portfolio contains 303 Residential Mortgage Loans,
representing approximately 60% of the unpaid principal balance of the Mortgage
Loans contained in the Initial Portfolio, and 23 Commercial Mortgage Loans,
representing approximately 40% of the unpaid principal balance of the Mortgage
Loans contained in the Initial Portfolio. On June 30, 1997, the Mortgage Loans
included in the Initial Portfolio had an aggregate outstanding principal balance
of $35.8 million.
Substantially all of the Residential Mortgage Loans included in the
Initial Portfolio were originated by the Bank in the ordinary course of its real
estate lending activities. All of the Residential Mortgage Loans included in the
Initial Portfolio were originated consistent with the underwriting policies of
the Bank or secondary market standards at the time at which such Mortgage Loans
were originated.
The Initial Portfolio contains 31 Residential Mortgage Loans aggregating
$1.7 million in outstanding principal balance as of June 30, 1997 which are
insured by the Federal Housing Administration ("FHA"). These loans were
originated and continue to be serviced by a third party and were purchased by
the Bank. These loans may have loan to value ratios that are in excess of the
Bank's general underwriting guidelines for conventional residential loans,
although each loan is fully guaranteed by the FHA.
37
<PAGE> 43
Each Commercial Mortgage Loan included in the Initial Portfolio was
originated by the Bank in the ordinary course of its commercial real estate
lending activities.
Excluding the FHA insured loans, all of the Residential Mortgage Loans
included in the Initial Portfolio were originated between 1983 and 1997, and
have original terms to stated maturity from 5-30 years. As of June 30, 1997, the
average outstanding principal balance of a Residential Mortgage Loan was
$84,144. The weighted average number of months since origination of the
Residential Mortgage Loans included in the Initial Portfolio (calculated as of
June 30, 1997) was approximately 66 months. The weighted average Loan-to-Value
Ratio (defined below) of the Residential Mortgage Loans included in the Initial
Portfolio is 74.0%; however, 24.3% of the Residential Mortgage Loans have
Loan-to-Value Ratios of greater than 80%. "Loan-to-Value Ratio" means the ratio
(expressed as a percentage) of the original principal amount of such Mortgage
Loan to the lesser of (i) the appraised value at origination of the underlying
mortgaged property and (ii) if the Mortgage Loan was made to finance the
acquisition of property, the purchase price of the mortgaged property.
All of the Commercial Mortgage Loans included in the Initial Portfolio
were originated between 1983 and 1997, and have original terms to stated
maturity of between three and 30 years. Substantially all Mortgage Loans
included in the Initial Portfolio have mortgage notes which contain
"due-on-sale" provisions.
None of the Mortgage Loans included in the Initial Portfolio (i) is
delinquent in the payment of principal or interest as of June 30, 1997; (ii) is
or was at any time during the preceding 12 months (a) Classified, (b) in
Nonaccrual Status, or (c) renegotiated due to financial deterioration of the
borrower; or (iii) was, more than once during the preceding 12 months, more than
30 days past due in the payment of principal or interest. If, prior to the
acquisition of the Initial Portfolio, any Mortgage Loan included in the
description of the Initial Portfolio herein falls within any of the foregoing
categories, the Company will not purchase such Mortgage Loan but will instead
purchase a Mortgage Loan similar in aggregate outstanding principal balance and
product type which does not fall into any of these categories.
Residential Mortgage Loans. The following types of Residential Mortgage
Loan products, each of which is more fully described below, will be included in
the Initial Portfolio: One-Year ARM, and 5, 10, 15, 20, 25 and 30-year fixed
rate Residential Mortgage Loans. All of these loans are secured by one- to
four-family residential properties.
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<PAGE> 44
The following table sets forth certain information with respect to each
type of Residential Mortgage Loan included in the Initial Portfolio:
TYPE OF RESIDENTIAL MORTGAGE LOAN PRODUCT
<TABLE>
<CAPTION>
Percentage of
Initial Residential
Aggregate Portfolio by
Number of Principal Aggregate Weighted Average
Type Mortgage Loans Balance Principal Balance Remaining Term
- --------------------- -------------- --------- ------------------- ----------------
(In Thousands)
<S> <C> <C> <C> <C>
Fixed Rate .......... 168 $14,257 55.92% 112.83
One-Year ARM ........ 135 11,239 44.08 234.48
--- ------- ------
Total ............... 303 $25,496 100.00% 166.45
=== ======= ======
</TABLE>
Of the Residential Mortgage Loans included in the Initial Portfolio,
approximately 55.92% bear interest at fixed rates. The interest rates of the
fixed rate Residential Mortgage Loans included in the Initial Portfolio range
from 6.00% per annum to 10.49% per annum. The weighted average interest rate of
the fixed rate Residential Mortgage Loans included in the Initial Portfolio is
approximately 8.37% per annum. The following tables contain certain additional
data with respect to the interest rates of the fixed rate Residential Mortgage
Loans included in the Initial Portfolio:
INTEREST RATE OF FIXED RATE RESIDENTIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
Percentage of
Initial Residential
Number of Aggregate Portfolio by
Mortgage Principal Aggregate
Principal Interest Rate Balance Loans Balance Principal Balance
- ------------------------------- -------- --------- -------------------
(In Thousands)
<S> <C> <C> <C>
6.00%-6.49%................... 62 $ 1,984 7.78%
6.50%-6.99%................... -- -- --%
7.00%-7.49%................... 3 341 1.34%
7.50%-7.99%................... 6 913 3.58%
8.00%-8.49%................... 5 822 3.22%
8.50%-8.99%................... 35 4,737 18.59%
9.00%-9.49%................... 23 2,981 11.69%
9.50%-9.99%................... 20 1,791 7.02%
10.00%-10.49%................. 14 688 2.70%
--- ------- -----
Total..................... 168 $14,257 55.92%
=== ======= =====
</TABLE>
39
<PAGE> 45
ORIGINAL TERM OF FIXED RATE RESIDENTIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
Percentage of
Aggregate Initial Residential
Original Term Number of Principal Portfolio by Aggregate
(in months) Mortgage Loans Balance Principal Balance
------------- -------------- --------- ----------------------
(In Thousands)
<S> <C> <C> <C>
0 -- 61............... 52 $ 8,279 32.48%
61 -- 121............... 10 518 2.03
121 -- 181............... 65 2,375 9.31
181 -- 241............... 1 182 0.71
301 -- 361............... 40 2,903 11.39
--- ------- -----
Total........... 168 $14,257 55.92%
=== ======= =====
</TABLE>
Of the Residential Mortgage Loans included in the Initial Portfolio,
approximately 44.08% bear interest at adjustable rates. The interest rates on
the "adjustable rate mortgages" or "ARMs" contained in the Initial Portfolio are
all tied to the one-year Treasury Index (defined below) ("One-Year ARM"), and
adjust periodically. ARMs are typically subject to limitations on lifetime
interest rates as well as periodic interest rate adjustments. The current
interest rates of the Residential Mortgage Loans included in the Initial
Portfolio that are ARMs ranged from 5.50% per annum to 9.49% per annum as of
June 30, 1997. As of June 30, 1997, the weighted average current interest rate
of the Residential Mortgage Loans included in the Initial Portfolio that are
ARMs was approximately 8.11% per annum. The following table contains certain
additional data as of June 30, 1997 with respect to the interest rates of the
Residential Mortgage Loans included in the Initial Portfolio that are ARMs:
CURRENT INTEREST RATE OF ADJUSTABLE RATE
RESIDENTIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
Percentage of
Number of Aggregate Initial Residential
Mortgage Principal Portfolio by Aggregate
Current Interest Rate Balance Loans Balance Principal Balance
----------------------------- --------- --------- ----------------------
(In Thousands)
<S> <C> <C> <C>
5.50 - 5.99................................. 1 $ 135 0.53%
6.00 - 6.49................................. -- -- --
6.50 - 6.99................................. -- -- --
7.00 - 7.49................................. 20 1,537 6.03
7.50 - 7.99................................. 31 2,162 8.48
8.00 - 8.49................................. 42 3,221 12.63
8.50 - 8.99................................. 35 3,724 14.61
9.00 - 9.49................................. 6 460 1.80
--- --------- -----
Total................................... 135 $ 11,239 44.08%
=== ========= =====
</TABLE>
"Gross Margin", with respect to a Residential Mortgage Loan that is an
ARM, means the applicable fixed percentage which, when added to the applicable
index, results in the current interest rate paid by the borrower of such
Residential Mortgage Loan (without taking into account any interest rate caps or
minimum interest rates). Gross Margin is inapplicable to fixed rate Residential
Mortgage Loans. As of June 30, 1997, the weighted average Gross Margin of the
40
<PAGE> 46
Residential Mortgage Loans included in the Initial Portfolio that are ARMs was
approximately 2.46%.
The following table sets forth certain additional data as of June 30,
1997 with respect to the Gross Margins of the Residential Mortgage Loans
included in the Initial Portfolio that are ARMs:
GROSS MARGIN ON RESIDENTIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
Percentage of
Initial Residential
Number of Aggregate Portfolio by
Mortgage Principal Aggregate
Gross Margin Balance Loans Balance Principal Balance
- -------------------------------------------- --------- -------------- -------------------
(In Thousands)
<S> <C> <C> <C>
1.50 - 1.99................................. 24 $ 1,831 7.18%
2.00 - 2.49................................. 36 2,335 9.16
2.50 - 2.99................................. 50 4,440 17.41
3.00 - 3.49................................. 25 2,633 10.33
--- --------- -----
Total................................... 135 $11,239 44.08%
=== ======= =====
</TABLE>
The interest rate of each ARM loan included in the Initial Portfolio
adjusts at the times (each, a "Rate Adjustment Date") and in the manner
described below subject to lifetime interest rate caps, to minimum interest
rates and to maximum annual interest rate increases or decreases, each as
specified in the mortgage note relating to the ARM. Information set forth below
regarding interest rate caps and minimum interest rates applies to the Initial
Portfolio only. Mortgage Loans purchased by the Company after consummation of
the Offering may be subject to different interest rate caps and minimum interest
rates.
Each ARM bears interest at its initial interest rate until its first
Rate Adjustment Date. Effective with each Rate Adjustment Date, the monthly
principal and interest payment on most of the adjustable rate Mortgage Loans
included in the Initial Portfolio will be adjusted to an amount that will fully
amortize the then-outstanding principal balance of such Residential Mortgage
Loan over its remaining term to stated maturity and that will be sufficient to
pay interest at the adjusted interest rate. Most of the Mortgage Loans included
in the Initial Portfolio allow the mortgagor to prepay at any time some or all
of the outstanding principal balance of the Mortgage Loan without fee or
penalty.
One-Year ARM. The interest rate with respect to each One-Year ARM is
fixed at an initial rate for the first twelve monthly payments and adjusts
annually thereafter on the date specified in the related mortgage note to a rate
equal to the then-current Treasury Index (defined below) plus the Gross Margin
set forth in such mortgage note, subject to a maximum annual interest rate
increase or decrease of 2.00%, a lifetime interest rate cap equal to the initial
interest rate with respect to such Residential Mortgage Loan plus 6% and to a
minimum interest rate no less than the Gross Margin. The sum of the Treasury
Index and the Gross Margin is rounded upwards to the nearest 0.125%. The
"Treasury Index" with respect to each One-Year ARM is the weekly
41
<PAGE> 47
average yield on U.S. Treasury securities adjusted to a constant maturity of one
year as published by the Federal Reserve Board in Statistical Release H.15 (519)
or any similar publication or, if not so published, as reported by any Federal
Reserve Bank or by any U.S. Government department or agency and made available
to the Advisor. Should the Treasury Index not be published or become otherwise
unavailable, the Advisor will select a comparable alternative index over which
it has no control and which is readily available.
Fixed Rate Loans. The fixed rate Residential Mortgage Loans which are
included in the Initial Portfolio or may be purchased by the Company will
generally have original terms to stated maturity of five to seven years with
amortization periods of up to 30 years.
Commercial Mortgage Loans. The Commercial Mortgage Loans included in
the Initial Portfolio will consist of multi-family residential rental
properties, warehouse and retail strip center properties located in Michigan.
The borrowers of the Commercial Mortgage Loans included in the Initial Portfolio
are primarily customers of the Bank to which the Bank has extended such
Commercial Mortgage Loans in the ordinary course of its commercial real estate
lending activities. Substantially all of the Commercial Mortgage Loans included
in the Initial Portfolio are either recourse to the borrower or guaranteed as to
the payment of principal and interest by an affiliate of the borrower. The
outstanding principal balances of the Commercial Mortgage Loans included in the
Initial Portfolio ranged from $119,000 to $1.9 million as of June 30, 1997.
The following table sets forth certain information with respect to each
type of commercial property underlying each Commercial Mortgage Loan included in
the Initial Portfolio:
TYPE OF COMMERCIAL MORTGAGE LOAN
<TABLE>
<CAPTION>
Percentage
of Initial Weighted Weighted Weighted
Commercial Average Average Average
Portfolio by Original Current Expected
Aggregate Aggregate Loan-to Loan-to Months
Principal Principal Value Value Remaining
Type of Mortgaged Property Balance Balance Ratio(1) Ratio(2) to Maturity
- --------------------------------------- --------- ------------ -------- -------- -----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Retail strip center.................... $ 7,625 41.2% 72% 69% 57.90
36+ unit apartments.................... 4,921 26.6 63 61 29.89
5-36 unit apartments................... 2,735 14.8 76 67 20.98
Warehouse.............................. 1,391 7.5 56 56 56.00
Industrial............................. 1,263 6.8 52 52 58.00
Office................................. 562 3.1 77 72 50.00
-------- -----
Total............................... $ 18,497 100.0% 68% 64% 44.61
======== =====
</TABLE>
- ---------------
(1) Represents the ratio of the outstanding principal amount of each
Commercial Mortgage Loan at the time of loan origination or
modification, if any, to the value of the property securing such
Commercial Mortgage Loan at the time of loan origination or
modification, if any.
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<PAGE> 48
(2) Represents the ratio of the outstanding principal amount of the
Commercial Mortgage Loan at June 30, 1997 to the value of the property
securing such Commercial Mortgage Loan at the time of loan origination
or modification, if any.
Of the Commercial Mortgage Loans included in the Initial Portfolio,
none are fully amortizing and all will have significant principal balances or
"balloon" payments due upon maturity.
Of the Commercial Mortgage Loans included in the Initial Portfolio,
approximately 54.1% bear interest at fixed rates. The interest rates of the
fixed rate Commercial Mortgage Loans included in the Initial Portfolio range
from 7.50% per annum to 9.99% per annum. The following table contains certain
additional data with respect to the interest rates of the fixed rate Commercial
Mortgage Loans included in the Initial Portfolio (including those variable rate
Commercial Mortgage Loans that have been converted, pursuant to their terms, to
fixed rates):
INTEREST RATE OF FIXED RATE COMMERCIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
Percentage of Initial
Number of Commercial Portfolio
Mortgage Aggregate Principal By Aggregate
Loans Balance Principal Balance
--------- ------------------- ---------------------
(In Thousands)
<S> <C> <C> <C>
7.50 - 7.99%............................. 1 $ 1,780 9.6%
8.00 - 8.49%............................. -- -- --
8.50 - 8.99%............................. 3 4,570 24.7
9.00 - 9.49%............................. 3 2,344 12.7
9.50 - 9.99%............................. 2 1,308 7.1
-- -------- ----
Total................................. 9 $ 10,002 54.1%
== ======== ====
</TABLE>
Of the Commercial Mortgage Loans included in the Initial Portfolio,
45.9% bear interest at variable rates which are typically tied to an index (such
as the Bank's Prime Rate or the U.S. Treasury Index adjusted for a constant
maturity of either one year or three years) and are adjustable periodically. The
current interest rates borne by the variable rate Commercial Mortgage Loans
included in the Initial Portfolio ranged from 7.00% per annum to 10.49% per
annum as of June 30, 1997. The following table contains certain additional data
as of June 30, 1997 with respect to the interest rates of the variable rate
Commercial Mortgage Loans included in the Initial Portfolio:
43
<PAGE> 49
CURRENT INTEREST RATE OF VARIABLE RATE
COMMERCIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
Percentage of Initial
Number of Commercial Portfolio
Mortgage Aggregate Principal By Aggregate
Loans Balance Principal Balance
--------- ------------------- ---------------------
(In Thousands)
<S> <C> <C> <C>
7.00 - 7.49.............................. 1 $ 983 5.3%
7.50 - 7.99.............................. -- -- --
8.00 - 8.49.............................. 1 706 3.8
8.50 - 8.99.............................. 3 1,872 10.1
9.00 - 9.49.............................. 2 2,498 13.5
9.50 - 9.99%............................. 6 2,291 12.4
10.00 - 10.49%........................... 1 145 0.8
--- ------- ----
Total................................. 14 $ 8,495 45.9%
=== ======= ====
</TABLE>
Underwriting Standards. The Bank has represented to the Company that
all of the Residential Mortgage Loans included in the Initial Portfolio were
originated generally in accordance with the underwriting policy customarily
employed by the Bank (or secondary market standards) at the time at which the
Residential Mortgage Loan in the Initial Portfolio was originated. The Bank has
represented to the Company that all of the Commercial Mortgage Loans included in
the Initial Portfolio were originated generally consistent with the underwriting
policies customarily employed by the Bank at the time at which the Commercial
Mortgage Loans in the Initial Portfolio were originated.
Residential Mortgage Loans. The underwriting standards applied at
origination of the Residential Mortgage Loans were intended to evaluate the
borrower's credit standing and repayment ability, and the value and adequacy of
the underlying mortgaged property as collateral. Initially, each prospective
borrower was required to provide a current balance sheet describing assets and
liabilities and a statement of income and expenses, as well as, to the extent
required by applicable state law, an authorization to apply for a credit report
which summarized the borrower's credit history with merchants and lenders and
any record of bankruptcy.
For any prospective borrower, an employment verification was obtained
from the borrower's employer wherein the employer reported the length of
employment with the employer, the employee's current salary, and whether it was
expected that the borrower would continue such employment in the future, or the
borrower submitted such other evidence of employment (such as pay stubs)
satisfactory to the Bank. For a self-employed prospective borrower, the borrower
was generally required to submit copies of personal and business federal income
tax returns for the previous two years. For certain prospective borrowers, the
borrower authorized verification of all deposits at financial institutions at
which the borrower had demand or savings accounts.
Once the credit report and the employment and deposit verifications
were received by the underwriting officer considering the loan application, a
determination was made as to whether the prospective borrower had sufficient
monthly income available (i) to meet the borrower's monthly
44
<PAGE> 50
obligations on the proposed Residential Mortgage Loan (determined on the basis
of the monthly payments due in the year of origination) and other expenses
related to the home (such as property taxes and hazard insurance) and (ii) to
meet other financial obligations and monthly living expenses. In all instances,
the Bank's underwriting policies (including those applied in originating the
Mortgage Loans in the Initial Portfolio) may be varied in cases deemed
appropriate by its underwriting officers.
In determining the adequacy of the property as collateral, an
independent appraisal was made of each property considered for financing. Each
appraiser was selected in accordance with predetermined guidelines established
for appraisers. The appraiser was required to inspect the property and verify
that it was in good condition and that construction, if new, had been completed.
If the appraiser reported any exceptions to the verification, the Bank (or its
predecessor) or its agent determined that such property had been substantially
completed to its satisfaction. The appraisal was based on the appraiser's
judgment of value giving appropriate weight to both the market value of
comparable properties and the cost of replacing the property and other factors
as appropriate. The Bank's or its predecessors' underwriting standards also
required a search of the public records relating to a mortgaged property for
liens and judgments against such mortgaged property, as well as customary title
insurance.
Commercial Mortgage Loans. The loan underwriting procedures and
guidelines utilized by the Bank in connection with the origination of the
Commercial Mortgage Loans included in the Initial Portfolio were intended to
assess the value of the related mortgaged property, the ability of such
mortgaged property to be used by the borrower or its agents and the financial
condition of the borrower, including its ability to service the Commercial
Mortgage Loan. The underwriting guidelines included an internal system for
rating the quality of the mortgaged property.
The underwriting guidelines took into account such factors as
suitability of the mortgaged property for the proposed use; the availability,
rental rates and relative value of comparable properties in the relevant market
area and the anticipated growth or decline in both the immediate and broader
geographic areas in which the mortgaged property is located; the current or
projected occupancy or leasing ratios, if relevant; the condition and age of the
mortgaged property; the management ability of the borrower, including its
business experience and financial soundness; and such other economic,
demographic or other factors as in the judgment of the Bank might affect the
value of the mortgaged property and the ability of the borrower to service the
Commercial Mortgage Loan. For each proposal for a Commercial Mortgage Loan the
commercial lending credit group of the Bank analyzed the proposed transaction
focusing on economic assumptions and the feasibility of the loan, identified and
evaluated potential risks, and made a recommendation to approve or disapprove
the loan. The proposed transaction was then presented to the appropriate senior
officer or committee of the Bank for approval.
Once a loan proposal was approved by the appropriate senior officer or
committee, a loan commitment was issued by the Bank to the proposed borrower,
subject to, among other things, receipt of acceptable environmental (including
Phase I) and appraisal reports and, if deemed appropriate, engineering reports.
The Bank contracted with approved firms to prepare these
45
<PAGE> 51
reports for the account of the Bank. Any environmental exceptions were approved
by the appropriate senior officer or committee of the Bank before the loan was
funded.
Geographic Distribution. All of the residential real estate properties
underlying the Company's Residential Mortgage Loans included in the Initial
Portfolio are located in Michigan. Consequently, these Residential Mortgage
Loans may be subject to a greater risk of default than other comparable
Residential Mortgage Loans in the event of adverse economic, political or
business developments and natural hazards in Michigan that may affect the
ability of residential property owners in Michigan to make payments of principal
and interest on the underlying mortgages. Standard hazard insurance required to
be maintained with respect to Residential Mortgage Loans held by the Company may
not protect the Company against losses occurring from tornados and other natural
disasters. Consequently, in the event of a natural disaster, the Company's
ability to pay dividends on the Series A Preferred Shares could be adversely
affected as the Company will not maintain special hazard insurance to protect
against such losses.
All of the commercial mortgaged properties underlying its Commercial
Mortgage Loans will be located in Michigan. Consequently, these Commercial
Mortgage Loans may be subject to a greater risk of default than other comparable
Commercial Mortgage Loans in the event of adverse economic, political or
business developments in Michigan that may affect the ability of businesses in
that area to make payments of principal and interest on the underlying
mortgages.
Loan-to-Value Ratios; Insurance. Twenty of the non-government insured
Residential Mortgage Loans have Loan-to-Value Ratios of greater than 80%.
Approximately nine of these loans are insured under primary mortgage guaranty
insurance policies. The remainder do not carry such insurance due to waivers of
this requirement by the Bank consistent with the Bank's underwriting policies.
These remaining 11 loans have a weighted average loan-to-value ratio of
approximately 86.9%. "Loan-to-Value Ratio" means the ratio (expressed as a
percentage) of the original principal amount of such Mortgage Loan to the lesser
of (i) the appraised value at origination of the underlying mortgaged property
and (ii) if the Mortgage Loan was made to finance the acquisition of property,
the purchase price of the mortgaged property. At the time of origination of the
Residential Mortgage Loans, each of the primary mortgage insurance policy
insurers was approved by FNMA or FHLMC.
A standard hazard insurance policy is required to be maintained by the
mortgagor with respect to each Residential Mortgage Loan in an amount equal to
the maximum insurable value of the improvements securing such Residential
Mortgage Loan or the principal balance of such Residential Mortgage Loan,
whichever is less. If the residential real estate property underlying a
Residential Mortgage Loan is located in a flood zone, such Residential Mortgage
Loan may also be covered by a flood insurance policy as required by law. No
mortgagor bankruptcy insurance will be maintained by the Company with respect to
the Residential Mortgage Loans in the Initial Portfolio. The Company will not
maintain any special hazard insurance policy with respect to any Residential
Mortgage Loan which could mitigate damages caused by any natural disaster. In
addition, the standard hazard insurance required to be maintained with respect
to Residential Mortgage Loans does not protect the Company against losses
occurring from natural disasters. In
46
<PAGE> 52
the event of any such natural disaster, the Company's ability to pay dividends
on the Series A Preferred Shares could be adversely affected.
A standard hazard insurance policy is also required to be maintained by
the mortgagor with respect to each of the Commercial Mortgage Loans included in
the Initial Portfolio. If the commercial real estate property securing a
Commercial Mortgage Loan is located in a flood zone, such Commercial Mortgage
Loan may be covered by a flood insurance policy as required by law. However, as
with the Residential Mortgage Loans in the Initial Portfolio, no special hazard
insurance or mortgagor bankruptcy insurance will be maintained by the Company
with respect to the Commercial Mortgage Loans in the Initial Portfolio.
SERVICING
The Mortgage Loans included in the Initial Portfolio will be sold to
the Company by the Bank on a servicing retained basis. The Bank will service the
Mortgage Loans included in the Initial Portfolio pursuant to the terms of the
Servicing Agreements. The Bank in its role as servicer under the terms of the
Servicing Agreements is herein referred to as the "Servicer". The Servicer will
receive an annual servicing fee with respect to each Mortgage Loan serviced for
the Company which shall equal the outstanding principal balance of such Mortgage
Loans multiplied by a fee of .375%.
Each Servicing Agreement requires the Servicer to service the Company's
Mortgage Loans in a manner generally consistent with servicing guidelines
promulgated by the Company and, in the case of Residential Mortgage Loans, with
FHLMC guidelines and procedures. The Servicing Agreements require the Servicer
to service the Mortgage Loans solely with a view toward the interests of the
Company, and without regard to the interests of the Bank or its affiliates. The
Servicer will collect and remit principal and interest payments, administer
mortgage escrow accounts, submit and pursue insurance claims and initiate and
supervise foreclosure proceedings on the Mortgage Loans it services. The
Servicer will also provide accounting and reporting services required by the
Company for such Mortgage Loans. Each Servicing Agreement requires the Servicer
to follow such collection procedures as are customary in the industry, including
contacting delinquent borrowers and supervising foreclosures and property
dispositions in the event of unremedied defaults in accordance with servicing
guidelines promulgated by the Company. The Servicer may, in its discretion,
arrange with a defaulting borrower a schedule for the liquidation of
delinquencies, provided that, in the case of Residential Mortgage Loans, no
primary mortgage guarantee insurance coverage is adversely affected. The
Servicer may also be directed by the Company, at any time during the servicing
process, to dispose of any Mortgage Loan which becomes Classified, placed in
Nonaccrual Status or which has been, more than once during the preceding 12
months, more than 30 days past due in the payment of principal and interest.
The Servicer may from time to time subcontract all or a portion of its
servicing obligations under the Servicing Agreements to one or more of its
affiliates or, subject to approval of a majority of the Independent Directors,
may subcontract all or a portion of its obligations under the Servicing
Agreements to an unrelated third party. The Servicer will not, in connection
with
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subcontracting any of its obligations under the Servicing Agreements, be
discharged or relieved in any respect from its obligation to the Company to
perform its obligations under the Servicing Agreements.
Each Servicing Agreement requires the Servicer to pay all expenses
related to the performance of its duties under such Servicing Agreement. In
addition, the Servicer will be required to make advances of principal and
interest and, with respect to the Residential Mortgage Loans and certain
Commercial Mortgage Loans, taxes and required insurance premiums that are due
from mortgagors, unless (with respect to advances of principal and interest) it
determines that such advances are nonrecoverable. If such advances are made, the
Servicer generally will be reimbursed prior to the Company out of proceeds
related to such Mortgage Loan. The Servicer also will be entitled to
reimbursement by the Company for expenses incurred by it in connection with the
liquidation of defaulted Mortgage Loans serviced by it and in connection with
the restoration of mortgaged property. If claims are not made or paid under
applicable insurance policies or if coverage thereunder has ceased, the Company
will suffer a loss to the extent that the proceeds from liquidation of the
mortgaged property, after reimbursement of the Servicer's expenses in the sale,
are less than the outstanding principal balance of the related Mortgage Loan.
The Servicer will be responsible to the Company for any loss suffered as a
result of its failure to make and pursue timely claims or as a result of actions
taken or omissions made by it which cause the policies to be canceled by the
insurer.
In connection with any foreclosure proceedings that the Servicer may
institute, the Servicer may exercise any power of sale contained in any mortgage
or deed of trust, obtain a deed in lieu of foreclosure or otherwise acquire
title to a mortgaged property underlying a Mortgage Loan by operation of law or
otherwise in accordance with the terms of the relevant Servicing Agreement. The
Servicer will not be permitted under the terms of the Commercial Mortgage Loan
Servicing Agreement to acquire title to any commercial real estate property
underlying a Commercial Mortgage Loan or take any action that would cause the
Company to be an "owner" or an "operator" within the meaning of certain federal
environmental laws, unless it has also previously determined, subject to the
approval of the Advisor, based on a report prepared by an independent person who
regularly conducts environmental assessments, that (i) the mortgaged property is
in compliance with applicable environmental laws or that it would be in the best
interests of the Company to take such actions as are necessary to cause the
mortgaged property to comply therewith and (ii) there are no circumstances or
conditions present at the mortgaged property relating to the use, management or
disposal of any hazardous substances, hazardous materials, hazardous wastes or
petroleum-based materials for which investigation, testing, monitoring,
containment, clean-up or remediation could be required under any federal, state
or local law or regulation, or, if any such materials are present for which such
action could be required, that it would be in the best interest of the Company
to take such actions with respect to the mortgaged property.
The Company may terminate either Servicing Agreement upon the happening
of one or more events specified in the Servicing Agreement. Such events relate
generally to the Servicer's proper and timely performance of its duties and
obligations under the Servicing Agreement. In addition, the Company may also
terminate either Servicing Agreement without cause upon 30
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<PAGE> 54
days' notice and payment of a termination fee that is competitive with that
which is generally payable in the industry.
The termination fee will be equal to 2% of the aggregate outstanding
principal amount of the loans then serviced under the applicable Servicing
Agreement. As long as any Series A Preferred Shares remain outstanding, the
Company may not terminate, or elect not to renew, either Servicing Agreement
without the approval of a majority of the Independent Directors. As is customary
in the mortgage loan servicing industry, the Servicer will be entitled to retain
any late payment charges and penalties collected in connection with the Mortgage
Loans serviced by it. In addition, the Servicer will receive any benefit derived
from interest earned on collected principal and interest payments between the
date of collection and the date of remittance to the Company and from interest
earned on tax and insurance impound funds with respect to Mortgage Loans
serviced by it. Each Servicing Agreement requires the Servicer to remit to the
Company no later than the 18th day of each month all principal and interest due
from borrowers of Mortgage Loans serviced by it (unless deemed nonrecoverable by
the Servicer) from the last remittance date.
When any mortgaged property underlying a Mortgage Loan is conveyed by a
mortgagor, the Servicer generally will enforce any "due-on-sale" clause
contained in the Mortgage Loan, to the extent permitted under applicable law and
governmental regulations. The terms of a particular Mortgage Loan or applicable
law, however, may provide that the exercise of the "due-on-sale" clause is
prohibited under certain circumstances related to the security underlying the
Mortgage Loan and the buyer's ability to fulfill the obligations under the
related mortgage note. Upon any assumption of a Mortgage Loan by a transferee, a
fee equal to a specified percentage of the outstanding principal balance of the
Mortgage Loan is typically required, which sum will be retained by the Servicer
as additional servicing compensation.
As a result of the relationship between the Servicer and the Company,
certain conflicts of interest may arise. See "Risk Factors--Relationship with
the Bank and its Affiliates; Conflicts of Interest".
EMPLOYEES
The Company has four officers, each of whom is described further below
under "Management". The Company does not anticipate that it will require any
additional employees because it has retained the Advisor to perform certain
functions pursuant to the Advisory Agreement described below under
"Management--The Advisor". It is currently anticipated that all of the officers
of the Company will also be officers or employees of the Bank or their
affiliates. The Company will maintain corporate records and audited financial
statements that are separate from those of the Bank or any of its affiliates.
None of the officers, employees or directors of the Company will have any direct
or indirect pecuniary interest in any Mortgage Asset to be acquired or disposed
of by the Company or in any transaction in which the Company has an interest or
will engage in acquiring, holding and managing Mortgage Assets.
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COMPETITION
The Company does not anticipate that it will engage in the business of
originating Mortgage Loans. It does anticipate that it will purchase Mortgage
Loans in addition to those in the Initial Portfolio and that all of these
Mortgage Loans will be purchased from the Bank or affiliates of the Bank.
LEGAL PROCEEDINGS
The Company is not the subject of any material litigation. None of the
Company, the Advisor, the Bank or any of its affiliates is currently involved in
nor, to the Company's knowledge, currently threatened with any material
litigation with respect to the Mortgage Loans to be included in the Initial
Portfolio, other than routine litigation arising in the ordinary course of
business, most of which is expected to be covered by liability insurance.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's Board of Directors is composed of five members, two of
whom are Independent Directors. These directors will serve until their
successors are duly elected and qualified. There is no current intention to
alter the number of directors comprising the Board of Directors. Pursuant to the
Certificate of Designation establishing the Series A Preferred Shares, the
Independent Directors are required to take into account the interests of the
holders of both the Series A Preferred Shares and the Common Stock in assessing
the benefit to the Company of any proposed action requiring their consent. In
considering the interests of the holders of the Series A Preferred Shares, the
Independent Directors shall owe the same duties which the Independent Directors
owe to holders of Common Stock. The Company currently has four officers. The
Company has no other employees and does not anticipate that it will require
additional employees. See "Business and Strategy--Employees".
The persons who are directors and executive officers of the Company are
as follows:
Name Position and Offices Held
- ------------------------- -----------------------------------------------
[ ] Director
[ ] Director
Read P. Dunn President and Chief Executive Officer
Edward J. Shehab Director and Senior Vice President
David L. Shelp Director, Treasurer and Chief Financial Officer
David F. Simon Director and Secretary
The following is a summary of the experience of the executive officers
and directors of the Company:
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Read P. Dunn, age 51, is President and Chief Executive Officer of the
Bank and has held these positions since its inception in 1983. Mr. Dunn is a
member of the Bank's Loan, Securities, CRA Compliance and Marketing Committees.
He is a certified public accountant and was the former President and senior
officer at another financial institution for over 14 years.
David L. Shelp, age 51, has been the Treasurer of the Bank since its
inception in 1983. Mr. Shelp was an Assistant Treasurer of another financial
institution in Lansing, Michigan from 1975 to 1981 and its Controller from 1981
to 1983.
Edward J. Shehab, age 37, joined the Bank in 1985 as a financial
analyst. Prior to that time, Mr. Shehab was an assistant secondary trader at
another financial institution. Since 1991, Mr. Shehab has been Vice President of
Finance at the Bank.
David F. Simon, age 50, is Chairman of the Board of the Bank and has
held this position since its inception in 1983. Mr. Simon is a member of the
Bank's Loan, Securities, CRA Compliance and Marketing Committees. He formerly
was an attorney in private practice specializing in securities and financial
institutions law from 1971 to 1991. Mr. Simon is the son-in-law of Edgar M.
Fenton, a Director of the Bank.
INDEPENDENT DIRECTORS
The Company's Certificate of Designation establishing the Series A
Preferred Shares requires that, so long as any Series A Preferred Shares are
outstanding, certain actions by the Company be approved by a majority of the
Independent Directors of the Company. See "Description of Series A Preferred
Shares--Independent Director Approval". [_____________] and [_______________]
are the Company's initial Independent Directors. For so long as there are only
two Independent Directors, any action that requires the approval of a majority
of Independent Directors must be approved by both Independent Directors.
If at any time the Company fails to declare and pay a quarterly
dividend payment on the Series A Preferred Shares, the number of directors then
constituting the Board of Directors of the Company will be increased by two at
the Company's next annual meeting and the holders of Series A Preferred Shares,
voting together with the holders of any other outstanding series of Preferred
Stock as a single class, will be entitled to elect two additional directors to
serve on the Company's Board of Directors. Any member of the Board of Directors
elected by holders of the Company's Preferred Stock will be deemed to be an
Independent Director for purposes of the actions requiring the approval of a
majority of the Independent Directors. See "Description of Series A Preferred
Shares--Voting Rights".
AUDIT COMMITTEE
Upon consummation of the Offering, the Company will establish an audit
committee which will review the engagement and independence of its auditors. The
audit committee will also review the adequacy of the Company's internal
accounting controls. The audit committee will initially be comprised of Messrs.
[_______] and [_______].
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CREDIT COMMITTEE
Upon consummation of the Offering, the Company will establish a credit
committee which will review and approve the acquisition of any additional
Mortgage Loans by the Company, will review the status of all Mortgage Loans
which have become Classified or have been placed in Nonaccrual Status, and will
review the terms and conditions upon which any such Loans are modified or
disposed of by the Company. The credit committee will initially be comprised of
Messrs. Simon, Shehab and Shelp.
COMPENSATION OF DIRECTORS AND OFFICERS
The Company intends to pay the Independent Directors of the Company
fees for their services as directors. The Independent Directors will receive a
fee of $250 for attendance (in person or by telephone) at each meeting of the
Board of Directors or Committee of the Board. However, multiple fees shall not
be paid for two or more meetings attended on the same day. The Company will not
pay any compensation to its officers or employees or to directors who are not
Independent Directors.
LIMITATIONS ON LIABILITY OF DIRECTORS AND OFFICERS
The Company's Articles of Incorporation eliminate, to the fullest
extent permitted by the Michigan law, the personal liability of a director to
the Company or its stockholders for monetary damages for breach of such
director's fiduciary duty. The Company's Articles of Incorporation empower the
Company to indemnify, to the fullest extent permitted by Michigan law, any
director or officer of the Company. The Company's Articles of Incorporation also
empower the Company to purchase and maintain insurance to protect any director
or officer against any liability asserted against him or her, or incurred by him
or her, arising out of his or her status as such.
The by-laws of the Company (the "By-laws") require indemnification of
the Company's directors and officers and specify that the right to
indemnification is a contract right, setting forth certain procedural and
evidentiary standards applicable to the enforcement of a claim under the
By-laws. The By-laws also entitle any director or officer to be reimbursed for
the expenses of defending any claim against him or her arising out of his or her
status as such. The By-laws of the Company also provide that the Company may
enter into contracts with any director or officer in furtherance of the
indemnification provisions contained in the By-laws and allow the Company to
create a trust fund to ensure payment of amounts indemnified.
THE ADVISOR
In connection with the consummation of the Offering and the formation
of the Company as described herein, the Company will enter into the Advisory
Agreement with the Bank to administer the day-to-day operations of the Company.
The Bank in its role as advisor under the terms of the Advisory Agreement is
herein referred to as the "Advisor". The Advisor will be responsible for (i)
monitoring the credit quality of the Mortgage Assets held by the Company, (ii)
advising the Company with respect to the acquisition, management, financing and
disposition of
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<PAGE> 58
the Company's Mortgage Assets and (iii) maintaining custody of the documents
related to the Company's Mortgage Loans. The Advisor may, from time to time,
subcontract all or a portion of its obligations under the Advisory Agreement to
one or more of its affiliates involved in the business of managing Mortgage
Assets or, with the approval of a majority of the Board of Directors as well as
a majority of the Independent Directors, subcontract all or a portion of its
obligations under the Advisory Agreement to unrelated third parties. The Advisor
will not, in connection with the subcontracting of any of its obligations under
the Advisory Agreement, be discharged or relieved in any respect from its
obligations under the Advisory Agreement. Notwithstanding the above, the Company
will control the activities of the Advisor and the Company's directors will
maintain the continuing and exclusive authority to manage the operations of the
Company.
At June 30, 1997, the Advisor held approximately $50.2 million of
residential mortgage loans and approximately $109.8 million of commercial
mortgage loans. In 1996, the Advisor stopped originating residential mortgage
loans except as an accommodation to its business customers. In its commercial
mortgage loan business, the Advisor typically services the commercial mortgage
loans in its portfolio which it has originated.
The Advisory Agreement has an initial term of five years, and will be
renewed automatically for additional five-year periods unless notice of
nonrenewal is delivered to the Advisor by the Company. The Advisory Agreement
may be terminated by the Company at any time upon 90 days' prior notice. As long
as any Series A Preferred Shares remain outstanding, any decision by the Company
either not to renew the Advisory Agreement or to terminate the Advisory
Agreement must be approved by a majority of the Board of Directors, as well as
by a majority of the Independent Directors. The Advisor will be entitled to
receive an annual advisory fee equal to $125,000 with respect to the advisory
and management services provided by it to the Company.
As a result of the relationship between the Bank and the Company,
certain conflicts of interest may arise. See "Risk Factors--Relationship with
the Bank and its Affiliates; Conflicts of Interest".
The principal executive offices of the Advisor are located at 24725
West Twelve Mile Road, Southfield, Michigan 48034, telephone number (248)
358-4710.
CERTAIN TRANSACTIONS CONSTITUTING THE FORMATION
THE FORMATION
Prior to or simultaneously with the completion of the Offering, the
Company, the Bank and its affiliates will engage in the transactions described
below which are designed (i) to facilitate the Offering, (ii) to transfer the
ownership of the Initial Portfolio to the Company and (iii) to enable the
Company to qualify as a REIT for federal income tax purposes commencing with its
taxable year ending December 31, 1997.
The transactions constituting the formation of the Company will include
the following:
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- The Articles of Incorporation of the Company will be amended
to provide for 2,500,000 authorized shares of Preferred Stock
and 60,000 authorized shares of Common Stock, and the Company
will file a Certificate of Designation with the State of
Michigan establishing the terms of the Series A Preferred
Shares.
- The Company will sell to the public 1,800,000 Series A
Preferred Shares in the Offering (assuming the Underwriters'
over-allotment option is not exercised).
- The Bank will acquire 18,000 shares of Common Stock for a
purchase price equal to $18 million. In addition, the Bank
will acquire additional shares of Common Stock for a purchase
price equal to the aggregate amount of underwriting
commissions and expenses of the Offering and the formation of
the Company.
- The Bank will sell the Initial Portfolio to the Company for an
aggregate purchase price equal to approximately $36 million
pursuant to the terms of the Residential Mortgage Purchase
Agreement and the Commercial Mortgage Purchase
Agreement.
- The Company will enter into the Advisory Agreement with the
Bank pursuant to which the Bank, as Advisor, will manage the
Mortgage Assets held by the Company and administer the
day-to-day operations of the Company. See "Management--The
Advisor".
- The Company will enter into the Servicing Agreements with the
Bank pursuant to which the Bank, as Servicer, will service the
Mortgage Loans included in the Initial Portfolio. See
"Business and Strategy--Servicing".
The Bank currently owns, and following the completion of the Offering
intends to continue to own, all of the issued and outstanding shares of Common
Stock of the Company. The Bank currently intends that, so long as any Series A
Preferred Shares are outstanding, it will maintain direct or indirect ownership
of at least a majority of the outstanding shares of Common Stock of the Company.
A PURCHASE OF SERIES A PREFERRED SHARES IS A PURCHASE OF
SECURITIES ISSUED BY THE COMPANY AND IS NOT A PURCHASE OF SECURITIES
ISSUED BY, OR OTHERWISE AN INVESTMENT IN, THE BANK. NO OBLIGATION
OF THE COMPANY IS GUARANTEED BY THE BANK.
In addition to its ownership of 100% of the Common Stock of the
Company, the Bank will also have responsibility for the day-to-day management
and custody of the Company's assets, in its capacity as Advisor under the
Advisory Agreement, and will have responsibility for servicing the Mortgage
Loans as Servicer under the Servicing Agreements. See "Management--The Advisor"
and "Risk Factors--Relationship with the Bank and its Affiliates; Conflicts of
Interest".
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The Company and the Bank intend that the fair value of the Initial
Portfolio will approximately equal the amount (approximately $36 million) that
the Company will pay for the Initial Portfolio. However, no third party
valuations of the Mortgage Loans constituting the Initial Portfolio have been or
will be obtained for purposes of the Offering, and there can be no assurance
that the fair value of the Initial Portfolio will not differ from the purchase
price to be paid by the Company. See "Risk Factors--No Third Party Valuation of
the Mortgage Loans; No Arm's-Length Negotiations with Affiliates" and
"--Relationship with the Bank and its Affiliates; Conflicts of Interest".
BENEFITS TO THE BANK AND ITS AFFILIATES
The Bank and its affiliates expect to realize the following benefits in
connection with the Offering and the formation of the Company:
- The Bank is required by the OCC to maintain certain levels of
capital for regulatory purposes. The Bank has informed the
Company that the Series A Preferred Shares will be treated as
capital of the Bank for regulatory purposes. The Bank would
not be permitted to treat any securities issued by a trust
established by the Bank to securitize its mortgage assets as
capital for regulatory purposes.
- As a result of the Company's qualification as a REIT, the
dividends payable on the Series A Preferred Shares will be
deductible for income tax purposes and will provide the Bank
with a more cost-effective means of obtaining regulatory
capital than if the Bank were to issue preferred stock itself.
- The Bank will receive approximately $36 million at the
consummation of the Offering (assuming no exercise by the
Underwriters of their over-allotment option) in connection
with the sale of the Initial Portfolio to the Company
(approximately $18 million of which represents new funds after
giving effect to the Bank's expense of purchasing the
Company's Common Stock).
- The Bank will be entitled to receive annual advisory and
servicing fees and annual dividends in respect of the Common
Stock. For the first 12 months following completion of the
Offering, these annual fees and dividends are anticipated to
be as follows:
<TABLE>
<S> <C>
Advisory Fee......................................... $ 125,000
Servicing Fee(1)..................................... $ 135,000
Common Stock Dividend(2)............................. [______]
$[ ]
=========
</TABLE>
--------------
(1) Assumes that for the first 12 months following completion of
the Offering, the Company holds Residential Mortgage Loans and
Commercial Mortgage Loans with the same outstanding principal
balances as those Mortgage Loans included in the Initial
Portfolio.
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<PAGE> 61
See "Business and Strategy--Servicing" for a
description of the basis upon which the servicing
fees will be calculated.
(2) The amount of dividends to be paid in respect of the
Common Stock is expected to be equal to the excess of
the Company's "REIT Taxable Income" (excluding
capital gains) over the amount of dividends paid in
respect of Preferred Stock. The aggregate annual
dividend amount of the Series A Preferred Shares is
$[____] million. Assuming that (i) the Mortgage Loans
included in the Initial Portfolio are held for the
12-month period following completion of the Offering,
(ii) principal repayments are reinvested in
additional Mortgage Loans with characteristics
similar to those of the Mortgage Loans included in
the Initial Portfolio and (iii) interest rates remain
constant during such 12-month period, the Company
anticipates that the Initial Portfolio will generate
"REIT Taxable Income" (excluding capital gains) of
approximately $2.8 million, after payment of
servicing and advisory fees, during such 12-month
period.
- The Bank will also be entitled to retain any late payment
charges and penalties collected in connection with the
Mortgage Loans serviced by it. In addition, the Bank, as
Servicer, will receive any benefit derived from interest
earned on collected principal and interest payments between
the date of collection and the date of remittance to the
Company and from interest earned on tax and insurance escrow
funds with respect to Mortgage Loans serviced by it.
DESCRIPTION OF SERIES A PREFERRED SHARES
The following summary sets forth the material terms and provisions of
the Series A Preferred Shares, and is qualified in its entirety by reference to
the terms and provisions of the Certificate of Designation establishing the
Series A Preferred Shares and the Company's Articles of Incorporation, the forms
of which have been filed with the Securities and Exchange Commission (the
"Commission") as exhibits to the registration statement of which this Prospectus
forms a part. See "Description of Capital Stock" below.
GENERAL
The Series A Preferred Shares form a series of the Preferred Stock of
the Company, which Preferred Stock may be issued from time to time in one or
more series with such rights, preferences and limitations as are determined by
the Company's Board of Directors or, if then constituted, a duly authorized
committee thereof. The Board of Directors has authorized the Company to issue
the Series A Preferred Shares.
When issued, the Series A Preferred Shares will be validly issued,
fully paid and nonassessable. The holders of the Series A Preferred Shares will
have no preemptive rights with respect to any shares of the capital stock of the
Company or any other securities of the Company convertible into or carrying
rights or options to purchase any such shares. The Series A Preferred Shares
will not be convertible into shares of Common Stock or any other class or series
of capital stock of the Company and will not be subject to any sinking fund or
other obligation of the Company for its repurchase or retirement.
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The transfer agent, registrar and dividend disbursement agent for the
Preferred Stock will be Boston EquiServe Limited Partnership. The registrar for
shares of Preferred Stock will send notices to shareholders of any meetings at
which holders of the Preferred Stock have the right to elect directors of the
Company or to vote on any other matter.
DIVIDENDS
Holders of Series A Preferred Shares will be entitled to receive, when
and as declared by the Board of Directors of the Company out of assets of the
Company legally available therefor, cash dividends at the rate of [____]% per
annum of the initial liquidation preference (equivalent to $[_____] per share
per annum). If declared, dividends on the Series A Preferred Shares will be
payable quarterly on March 31, June 30, September 30 and December 31 of each
year, at such annual rate, commencing on December 31, 1997. Dividends in each
quarterly period will accrue from the first day of such period, whether or not
declared or paid for the prior quarterly period. Each declared dividend will be
payable to holders of record as they appear on the stock register of the Company
on such record dates, not exceeding 45 days preceding the payment dates thereof,
as shall be fixed by the Board of Directors of the Company or a duly authorized
committee thereof. Dividends payable on the Series A Preferred Shares for any
period greater or less than a full dividend period shall be computed on the
basis of twelve 30-day months, a 360-day year and the actual number of days
elapsed in the period. Dividends payable on the Series A Preferred Shares for
each full dividend period shall be computed by dividing the rate per annum by
four.
The right of holders of Series A Preferred Shares to receive dividends
is noncumulative. Accordingly, if the Board of Directors fails to declare a
dividend on the Series A Preferred Shares for a quarterly dividend period, then
holders of the Series A Preferred Shares will have no right to receive a
dividend for that period, and the Company will have no obligation to pay a
dividend for that period, whether or not dividends are declared and paid for any
future period with respect to either the Series A Preferred Shares or the Common
Stock. If the Company fails to pay or declare and set aside for payment a
quarterly dividend on the Series A Preferred Shares, holders of the Preferred
Stock of the Company, including the Series A Preferred Shares, will be entitled
to elect two directors. See "--Voting Rights".
If full dividends on the Series A Preferred Shares for any dividend
period shall not have been declared and paid, or declared and a sum sufficient
for the payment thereof shall not have been set apart for such payments, no
dividends shall be declared or paid or set aside for payment and no other
distribution shall be declared or made or set aside for payment upon the Common
Stock or any other capital stock of the Company ranking junior to or on a parity
with the Series A Preferred Shares as to dividends or amounts upon liquidation,
nor shall any Common Stock or any other capital stock of the Company ranking
junior to or on a parity with the Series A Preferred Shares as to dividends or
amounts upon liquidation be redeemed, purchased or otherwise acquired for any
consideration (or any monies to be paid to or made available for a sinking fund
for the redemption of any such stock) by the Company (except by conversion into
or exchange for other capital stock of the Company ranking junior to the Series
A Preferred Shares as to dividends and amounts upon liquidation), until such
time as dividends on all outstanding Series A Preferred Shares have been (i)
declared and paid for three consecutive dividend periods and (ii) declared and
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<PAGE> 63
paid or declared and a sum sufficient for the payment thereof has been set apart
for payment for the fourth consecutive dividend period.
When dividends are not paid in full (or a sum sufficient for such full
payment is not set apart) upon the Series A Preferred Shares and the shares of
any other series of capital stock ranking on a parity as to dividends with the
Series A Preferred Shares, all dividends declared upon the Series A Preferred
Shares and any other series of capital stock ranking on a parity as to dividends
with the Series A Preferred Shares shall be declared pro rata so that the amount
of dividends declared per share on the Series A Preferred Shares and such other
series of capital stock shall in all cases bear to each other the same ratio
that full dividends, for the then-current dividend period, per share on the
Series A Preferred Shares (which shall not include any accumulation in respect
of unpaid dividends for prior dividend periods) and full dividends, including
required or permitted accumulations, if any, on such other series of capital
stock bear to each other.
For a discussion of the tax treatment of distributions to stockholders,
see "Federal Income Tax Considerations--Taxation of United States Stockholders"
and "--Taxation of Foreign Stockholders" and for a discussion of certain
potential regulatory limitations on the Company's ability to pay dividends, see
"Risk Factors--Dividend and Other Regulatory Restrictions on Operations of the
Company".
AUTOMATIC EXCHANGE
Each Series A Preferred Share will be exchanged automatically for one
newly issued Bank Preferred Share if the appropriate regulatory agency directs
in writing an exchange of the Series A Preferred Shares for Bank Preferred
Shares because (i) the Bank becomes "undercapitalized" under prompt corrective
action regulations established pursuant to FDICIA, (ii) the Bank is placed into
conservatorship or receivership or (iii) the appropriate regulatory agency, in
its sole discretion and even if the Bank is not "undercapitalized," anticipates
the Bank becoming "undercapitalized" in the near term (i.e., the Exchange
Event). Upon the Automatic Exchange, each holder of Series A Preferred Shares
shall be unconditionally obligated to surrender to the Bank the certificates
representing each Series A Preferred Share of such holder, and the Bank shall be
unconditionally obligated to issue to such holder in exchange for each such
Series A Preferred Share a certificate representing one Bank Preferred Share.
Any Series A Preferred Shares purchased or redeemed by the Company prior to the
Time of Exchange (as defined below) shall not be deemed outstanding and shall
not be subject to the Automatic Exchange.
The Automatic Exchange shall occur as of 8:00 a.m. Eastern Time on the
date for such exchange set forth in the Directive, or, if such date is not set
forth in the Directive, as of 8:00 a.m. on the earliest possible date such
exchange could occur consistent with the Directive (the "Time of Exchange"), as
evidenced by the issuance by the Bank of a press release prior to such time. As
of the Time of Exchange, all of the Series A Preferred Shares will be deemed
cancelled without any further action by the Company, all rights of the holders
of Series A Preferred Shares as stockholders of the Company will cease, and such
persons shall thereupon and thereafter be deemed to be and shall be for all
purposes the holders of Bank Preferred Shares within 30 days
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of such event, and the Bank will deliver to each such holder certificates for
Bank Preferred Shares upon surrender of certificates for Series A Preferred
Shares. Until such replacement stock certificates are delivered (or in the event
such replacement certificates are not delivered), certificates previously
representing Series A Preferred Shares shall be deemed for all purposes to
represent Bank Preferred Shares. All corporate action necessary for the Bank to
issue the Bank Preferred Shares will be completed upon completion of the
Offering. Accordingly, once the Directive is issued, no action will be required
to be taken by holders of Series A Preferred Shares, by the Bank or by the
Company in order to effect the Automatic Exchange as of the Time of Exchange.
Absent the occurrence of the Exchange Event, no shares of Bank
Preferred Shares will be issued. Upon the occurrence of the Exchange Event, the
Bank Preferred Shares to be issued as part of the Automatic Exchange would
constitute a newly issued series of preferred stock of the Bank and would
constitute 100% of the issued and outstanding shares of Bank Preferred Shares.
Holders of Bank Preferred Shares would have the same dividend rights,
liquidation preference, redemption options and other attributes as to the Bank
as holders of Series A Preferred Shares have as to the Company, except that the
Bank Preferred Shares would not be listed on the Nasdaq System. Any accrued and
unpaid dividends for the most recent quarter on the Series A Preferred Shares as
of the Time of Exchange would be deemed to be accrued and unpaid dividends for
the most recent quarter on the Bank Preferred Shares. The Bank Preferred Shares
would rank pari passu in terms of dividend payment and liquidation preference
with any outstanding shares of preferred stock of the Bank. The Bank intends to
register the Bank Preferred Shares with the OCC pursuant to a Bank Prospectus, a
copy of which is affixed to this Prospectus as Annex I and incorporated herein
by reference. The Bank Preferred Shares will not be registered with the
Commission and will be offered pursuant to an exemption from registration under
Section 3(a)(5) of the Securities Act of 1933, as amended (the "Securities
Act"). The Bank does not intend to apply for listing of the Bank Preferred
Shares on any national securities exchange or for quotation of the Bank
Preferred Shares through the Nasdaq System. Absent the occurrence of the
Exchange Event, however, the Bank will not issue any Bank Preferred Shares,
although the Bank will be able to issue preferred stock in series. There can be
no assurance as to the liquidity of the trading markets for the Bank Preferred
Shares, if issued, or that an active public market for the Bank Preferred Shares
would develop or be maintained.
Holders of Series A Preferred Shares cannot exchange their Series A
Preferred Shares for Bank Preferred Shares voluntarily. In addition, absent the
occurrence of the Automatic Exchange, holders of Series A Preferred Shares will
have no dividend, voting, liquidation preference or other rights with respect to
any security of the Bank; such rights as are conferred by the Series A Preferred
Shares exist solely as to the Company.
VOTING RIGHTS
Except as expressly required by applicable law, or except as indicated
below, the holders of the Series A Preferred Shares will not be entitled to
vote. In the event the holders of Series A Preferred Shares are entitled to vote
as indicated below, each Series A Preferred Share will be
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entitled to one vote on matters on which holders of the Series A Preferred
Shares are entitled to vote.
If at the time of any annual meeting of the Company's stockholders for
the election of directors the Company has failed to pay or declare and set aside
for payment a quarterly dividend during any of the four preceding quarterly
dividend periods on any series of Preferred Stock of the Company, including the
Series A Preferred Shares, the number of directors then constituting the Board
of Directors of the Company will be increased by two, and the holders of the
Series A Preferred Shares, voting together with the holders of all other series
of Preferred Stock as a single class, will be entitled to elect such two
additional directors to serve on the Company's Board of Directors at each such
annual meeting. Each director elected by the holders of shares of the Preferred
Stock shall continue to serve as such director until the later of (i) the full
term for which he or she shall have been elected or (ii) the payment of four
quarterly dividends on the Preferred Stock, including the Series A Preferred
Shares.
The affirmative vote or consent of the holders of at least two-thirds
of the outstanding shares of each series of Preferred Stock of the Company,
including the Series A Preferred Shares, voting as a single class without regard
to series, will be required (a) to create any class or series of stock which
shall have preference as to dividends or distribution of assets over any
outstanding series of Preferred Stock of the Company other than a series which
shall not have any right to object to such creation or (b) to alter or change
the provisions of the Company's Articles of Incorporation (including the
Certificate of Designation establishing the Series A Preferred Shares) so as to
adversely affect the voting powers, preferences or special rights of the holders
of a series of Preferred Stock of the Company; provided that if such amendment
shall not adversely affect all series of Preferred Stock of the Company, such
amendment need only be approved by at least two-thirds of the holders of shares
of all series of Preferred Stock adversely affected thereby.
REDEMPTION
The Series A Preferred Shares will not be redeemable prior to
[___________] 2002 (except upon the occurrence of a Tax Event). On or after such
date, the Series A Preferred Shares will be redeemable at the option of the
Company, in whole or in part, at any time or from time to time on not less than
30 nor more than 60 days' notice by mail, at a redemption price of $10.00 per
share, plus the accrued and unpaid dividends for the most recent quarter to the
date of redemption, if any, thereon. Any such redemption may only be effected
with the prior approval of the OCC (unless at such time such approvals are not
required). Unless full dividends on the Series A Preferred Shares have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof has been set apart for payment for the then current dividend
period, no Series A Preferred Shares shall be redeemed unless all outstanding
Series A Preferred Shares are redeemed and the Company shall not purchase or
otherwise acquire any Series A Preferred Shares; provided, however, that the
Company may purchase or acquire Series A Preferred Shares pursuant to a purchase
or exchange offer made on the same terms to holders of all outstanding Series A
Preferred Shares.
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The Company will also have the right at any time, upon the occurrence
of a Tax Event and with the prior written approval of the OCC, to redeem the
Series A Preferred Shares, in whole (but not in part) at a redemption price of
$10.00 per share, plus the accrued and unpaid dividends for the most recent
quarter to the date of redemption, if any, thereon. "Tax Event" means the
receipt by the Company of an opinion of a law or accounting firm experienced in
such matters to the effect that, as a result of (i) any amendment to,
clarification of, or change (including any announced prospective change) in the
laws or treaties (or any regulations thereunder) of the United States or any
political subdivision or taxing authority thereof or therein affecting taxation,
(ii) any judicial decision, official administrative pronouncement, published or
private ruling, regulatory procedure, notice or announcement (including any
notice or announcement of intent to adopt such procedures or regulations)
("Administrative Action") or (iii) any amendment to, clarification of, or change
in the official position or the interpretation of such Administrative Action or
any interpretation or pronouncement that provides for a position with respect to
such Administrative Action that differs from the theretofore generally accepted
position, in each case, by any legislative body, court, governmental authority
or regulatory body, irrespective of the manner in which such amendment,
clarification or change is made known, which amendment, clarification, or change
is effective or such pronouncement or decision is announced on or after the date
of issuance of the Series A Preferred Shares, there is more than an
insubstantial risk that (a) dividends paid or to be paid by the Company with
respect to the capital stock of the Company are not, or will not be, fully
deductible by the Company for United States federal income tax purposes or (b)
the Company is, or will be, subject to more than a de minimis amount of other
taxes, duties or other governmental charges.
RIGHTS UPON LIQUIDATION
In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Company, the holders of the Series A Preferred Shares at
the time outstanding will be entitled to receive out of assets of the Company
available for distribution to stockholders, before any distribution of assets is
made to holders of Common Stock or any other class of stock ranking junior to
the Series A Preferred Shares upon liquidation, liquidating distributions in the
amount of $10.00 per share, plus the accrued and unpaid dividends for the most
recent quarter thereon, if any, to the date of liquidation.
After payment of the full amount of the liquidating distributions to
which they are entitled, the holders of Series A Preferred Shares will have no
right or claim to any of the remaining assets of the Company. In the event that,
upon any such voluntary or involuntary liquidation, dissolution or winding up,
the available assets of the Company are insufficient to pay the amount of the
liquidation distributions on all outstanding Series A Preferred Shares and the
corresponding amounts payable on all shares of other classes or series of
capital stock of the Company ranking on a parity with the Series A Preferred
Shares in the distribution of assets upon any liquidation, dissolution or
winding up of the affairs of the Company, then the holders of the Series A
Preferred Shares and such other classes or series of capital stock shall share
ratably in any such distribution of assets in proportion to the full liquidating
distributions to which they would otherwise be respectively entitled.
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For such purposes, the consolidation or merger of the Company with or
into any other entity, the consolidation or merger of any other entity with or
into the Company or the sale of all or substantially all of the property or
business of the Company shall not be deemed to constitute a liquidation,
dissolution or winding up of the Company.
INDEPENDENT DIRECTOR APPROVAL
The Certificate of Designation establishing the Series A Preferred
Shares requires that, so long as any Series A Preferred Shares are outstanding,
certain actions by the Company be approved by a majority of the Independent
Directors. For so long as there are only two Independent Directors, any action
that requires the approval of a majority of Independent Directors must be
approved by both Independent Directors. [___________] and [____________] are the
Company's initial Independent Directors. See "Management--Independent
Directors". In addition, any members of the Board of Directors of the Company
elected by holders of Preferred Stock, including the Series A Preferred Shares,
will be deemed to be Independent Directors for purposes of approving actions
requiring the approval of a majority of the Independent Directors.
The actions which may not be taken without the approval of a majority
of the Independent Directors include (i) the issuance of additional Preferred
Stock ranking on a parity with the Series A Preferred Shares, (ii) the
incurrence of debt for borrowed money in excess of 20% of the aggregate amount
of net proceeds received in connection with the issuance of Preferred Stock and
Common Stock, (iii) the modification of the general distribution policy or the
declaration of any distribution in respect of Common Stock for any year if,
after taking into account any such proposed distribution, total distributions on
the Series A Preferred Shares and the Common Stock would exceed an amount equal
to the sum of 105% of the Company's "REIT Taxable Income" (excluding capital
gains) for such year plus net capital gains of the Company for that year, (iv)
the acquisition of real estate assets other than Mortgage Loans or
Mortgage-Backed Securities that (A) qualify as real estate assets under Section
856(c)(6)(B) of the Code, (B) are rated investment grade or better by at least
one nationally recognized independent rating organization, (C) are not
interest-only, principal-only or high-risk securities and (D) represent
interests in or obligations backed by pools of mortgage loans, (v) the
redemption of any shares of Common Stock, (vi) the termination or modification
of, or the election not to renew, the Advisory Agreement or any Servicing
Agreement or the subcontracting of any duties under the Advisory Agreement or
the Servicing Agreements to third parties unaffiliated with the Bank, (vii) any
dissolution, liquidation or termination of the Company prior to [___________],
2002, (viii) any material amendment to or modification of either of the Mortgage
Purchase Agreements, including, without limitation, any amendment to the
representations, warranties and covenants contained in such agreements made in
connection with the acquisition of additional Mortgage Loans and (ix) the
determination to revoke the Company's REIT status or the amendment of any of the
ownership limitations contained in the Articles of Incorporation. The
Certificate of Designation requires that, in assessing the benefits to the
Company of any proposed action requiring their consent, the Independent
Directors take into account the interests of holders of both the Common Stock
and the Preferred Stock, including, without limitation, holders of the Series A
Preferred Shares. In considering the interests of the holders of Preferred
Stock, including without limitation the holders
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of the Series A Preferred Shares, the Independent Directors shall owe the same
duties which the Independent Directors owe to the holders of Common Stock.
RESTRICTIONS ON OWNERSHIP
For information regarding restrictions on ownership of the Series A
Preferred Shares, see "Description of Capital Stock--Restrictions on Ownership
and Transfer".
DESCRIPTION OF CAPITAL STOCK
The following summary of the material terms and provisions of the
capital stock of the Company does not purport to be complete and is subject in
all respects to the applicable provisions of the Michigan law and the Articles
of Incorporation of the Company.
COMMON STOCK
General. The Company is authorized to issue up to 60,000 shares of
Common Stock. Upon consummation of the Offering and the transactions described
in "Certain Transactions Constituting the Formation", the Company will have
outstanding 19,045 shares of Common Stock, all of which will be held by the
Bank.
Dividends. Holders of Common Stock are entitled to receive dividends
when, as and if declared by the Board of Directors out of funds legally
available therefor, provided that, so long as any shares of Preferred Stock are
outstanding, no dividends or other distributions (including redemptions and
purchases) may be made with respect to the Common Stock unless full dividends on
the shares of all series of Preferred Stock, including accumulations in the case
of noncumulative Preferred Stock, have been paid for the prior four quarters. In
order to remain qualified as a REIT, the Company must distribute annually at
least 95% of its annual "REIT Taxable Income" (not including capital gains) to
stockholders.
Voting Rights. Subject to the rights, if any, of the holders of any
class or series of Preferred Stock, all voting rights are vested in the Common
Stock. The holders of Common Stock are entitled to one vote per share. All of
the issued and outstanding shares of Common Stock are currently, and upon
consummation of the Offering will be, held by the Bank.
Rights Upon Liquidation. In the event of the liquidation, dissolution
or winding up of the Company, whether voluntary or involuntary, after there have
been paid or set aside for the holders of all series of Preferred Stock the full
preferential amounts to which such holders are entitled, the holders of Common
Stock will be entitled to share equally and ratably in any assets remaining
after the payment of all debts and liabilities.
PREFERRED STOCK
Subject to limitations prescribed by Michigan law and the Company's
Articles of Incorporation, the Board of Directors or, if then constituted, a
duly authorized committee thereof
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is authorized to issue, from the authorized but unissued shares of capital stock
of the Company, Preferred Stock in such classes or series as the Board of
Directors may determine and to establish, from time to time, the number of
shares of Preferred Stock to be included in any such class or series and to fix
the designation and any preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption of the shares of any such class or series, and such
other subjects or matters as may be fixed by resolution of the Board of
Directors.
Preferred Stock, upon issuance against full payment of the purchase
price therefor, will be fully paid and nonassessable. The specific terms of a
particular class or series of Preferred Stock will be described in the
Certificate of Designation relating to that class or series.
A Certificate of Designation relating to each class or series of
Preferred Stock will set forth the preferences and other terms of such class or
series, including, without limitation, the following: (1) the title and stated
value of such class or series; (2) the number of shares of such class or series
offered and the liquidation preference per share of such class or series; (3)
the dividend rate(s), period(s), and/or payment date(s) or method(s) of
calculation thereof applicable to such class or series; (4) whether such class
or series of Preferred Stock is noncumulative or not and, if noncumulative, the
date from which dividends on such class or series shall accumulate; (5) the
provision for a sinking fund, if any, for such class or series; (6) the
provision for redemption, if applicable, of such class or series; (7) any
limitations on direct or beneficial ownership and restrictions on transfer, in
each case as may be appropriate to preserve the status of the Company as a REIT;
(8) any voting rights of such class or series; (9) the relative ranking and
preferences of such class or series as to dividend rights and rights upon
liquidation, dissolution or winding up of the affairs of the Company; (10) any
limitations on issuance of any class or series of Preferred Stock ranking senior
to or on a parity with such class or series of Preferred Stock as to dividend
rights and rights upon liquidation, dissolution or winding up of the affairs of
the Company; and (11) any other specific terms, preferences, rights, limitations
or restrictions of such class or series.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
The Company's Articles of Incorporation contain certain restrictions on
the number of shares of Common Stock and Preferred Stock that individual
stockholders may own. For the Company to qualify as a REIT under the Code, no
more than 50% in number or value of its outstanding shares of capital stock may
be owned, directly or indirectly, by five or fewer individuals (as defined in
the Code to include certain entities) during the last half of a taxable year
(other than the first year) or during a proportionate part of a shorter taxable
year (the "Five or Fewer Test"). The capital stock of the Company must also be
beneficially owned by 100 or more persons during at least 335 days of a taxable
year or during a proportionate part of a shorter taxable year (the "One Hundred
Persons Test"). The ownership by the Bank of 100% of the shares of Common Stock
of the REIT will not adversely affect the Company's REIT qualification because
each stockholder of the Bank counts as a separate beneficial owner for purposes
of the Five or Fewer Test and the capital stock of the Bank is widely held.
Further, the Articles of Incorporation of the Company contain restrictions on
the acquisition of Preferred Stock intended to ensure compliance with the One
Hundred Persons Test. Such provisions include a restriction that if any
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transfer of shares of capital stock of the Company would cause the Company to be
beneficially owned by fewer than 100 persons, such transfer shall be null and
void and the intended transferee will acquire no rights to the stock.
Subject to certain exceptions specified in the Company's Articles of
Incorporation, no holder of Preferred Stock is permitted to own (including
shares deemed to be owned by virtue of the attribution provisions of the Code)
more than 9.9% (the "Ownership Limit") of any issued and outstanding class or
series of Preferred Stock. The Board of Directors may (but in no event will be
required to), upon receipt of a ruling from the IRS or an opinion of counsel
satisfactory to it, waive the Ownership Limit with respect to a holder if such
holder's ownership will not then or in the future jeopardize the Company's
status as a REIT.
The Articles of Incorporation provide that shares of any class or
series of Preferred Stock owned, or deemed to be owned, by or transferred to a
stockholder in excess of the Ownership Limit (the "Excess Shares") will
automatically be transferred, by operation of law, to a trustee as a trustee of
a trust for the exclusive benefit of a charity to be named by the Company as of
the day prior to the day the prohibited transfer took place. Any distributions
paid prior to the discovery of the prohibited transfer are to be repaid by the
original transferee to the Company and by the Company to the trustee; any vote
of the shares while the shares were held by the original transferee prior to the
Company's discovery thereof shall be void ab initio and the original transferee
shall be deemed to have given its proxy to the trustee. Any unpaid distributions
with respect to the original transferee will be rescinded as void ab initio. In
liquidation, the original transferee stockholder's ratable share of the
Company's assets would be limited to the price paid by the original transferee
for the Excess Shares or, if no value was given, the price per share equal to
the closing market price on the date of the purported transfer. The trustee of
the trust shall promptly sell the shares to any person whose ownership is not
prohibited, whereupon the interest of the trust shall terminate. Proceeds of the
sale shall be paid to the original transferee up to its purchase price (or, if
the original transferee did not purchase the shares, the value on its date of
acquisition) and any remaining proceeds shall be paid to a charity to be named
by the Company.
The constructive ownership rules of the Code are complex and may cause
Preferred Stock owned, directly or indirectly, by a group of related individuals
and/or entities to be deemed to be constructively owned by one individual or
entity. As a result, the acquisition of less than 9.9% of a class or series of
issued and outstanding Preferred Stock (or the acquisition of an interest in an
entity that owns shares of such series of Preferred Stock) by an individual or
entity could cause that individual or entity (or another individual or entity)
to own constructively in excess of 9.9% of such class or series of Preferred
Stock, and thus subject such stock to the Ownership Limit. Direct or
constructive ownership in excess of the Ownership Limit would cause ownership of
the shares in excess of the limit to be transferred to the trustee.
All certificates representing shares of Preferred Stock will bear a
legend referring to the restrictions described above.
The Ownership Limit provisions will not be automatically removed even
if the REIT Provisions (as defined herein) are changed so as to eliminate any
ownership concentration
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limitation or if the ownership concentration limitation is increased. The
Articles of Incorporation may not be amended to alter, change, repeal or amend
any of the Ownership Limit provisions without the prior approval of a majority
of the Independent Directors.
The Articles of Incorporation require that any person who beneficially
owns 1% (or such lower percentage as may be required by the Code or the Treasury
Regulations) of the outstanding shares of any class or series of Preferred Stock
of the Company must provide certain information to the Company within 30 days of
June 30 and December 31 of each year. In addition, each stockholder shall upon
demand be required to disclose to the Company in writing such information as the
Company may request in order to determine the effect, if any, of such
stockholder's actual and constructive ownership on the Company's status as a
REIT and to ensure compliance with the Ownership Limit.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax considerations
regarding the Offering is based upon current law, is for general information
only and is not tax advice. The information set forth below, to the extent that
it constitutes summaries of tax matters or tax conclusions, has been reviewed by
Seyburn Kahn, and it is their opinion that such information is accurate in all
material respects. The discussion below is based on existing federal income tax
law, which is subject to change, with possible retroactive effect. The
discussion below does not address all aspects of taxation that may be relevant
in the particular circumstances of each stockholder or to certain types of
stockholders (including insurance companies, tax-exempt entities, financial
institutions or broker-dealers, foreign corporations and persons who are not
citizens or residents of the United States, except to the extent discussed)
subject to special treatment under the federal income tax laws.
EACH PROSPECTIVE INVESTOR IS URGED TO SEEK INDIVIDUAL ADVICE CONCERNING
THE EFFECT ON HIM OR HER OF THE PURCHASE, OWNERSHIP AND SALE OF THE SERIES A
PREFERRED SHARES UNDER FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS, INCLUDING THE
EFFECT OF POSSIBLE CHANGES IN TAX LAW.
TAXATION OF THE COMPANY
General. The Company will elect to be taxed as a REIT under Sections
856 through 860 of the Code and the applicable Treasury Regulations (the "REIT
Requirements" or the "REIT Provisions"), which are the requirements for
qualifying as a REIT, commencing with its taxable year ending December 31, 1997.
The Company believes that, commencing with its taxable year ending December 31,
1997, it will be owned and organized and will operate in such a manner as to
qualify for taxation as a REIT under the Code, and the Company intends to
continue to operate in such a manner, but no assurance can be given that it will
operate in a manner so as to qualify or remain qualified.
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The REIT Requirements are technical and complex. The following
discussion sets forth only the material aspects of those requirements. This
summary is qualified in its entirety by the applicable Code provisions, rules
and regulations promulgated thereunder, and administrative and judicial
interpretations thereof.
In the opinion of Seyburn Kahn, commencing with the Company's taxable
year ending December 31, 1997, the Company will be organized in conformity with
the requirements for qualification as a REIT, and its proposed method of
operation will enable it to meet the requirements for qualification and taxation
as a REIT under the Code. It must be emphasized that this opinion is based on
certain factual assumptions relating to the organization and operation of the
Company and is conditioned upon certain representations made by the Company as
to factual matters, such as the organization and expected manner of operation of
the Company. In addition, this opinion is based upon factual assumptions and
representations of the Company concerning its business and Mortgage Assets.
Moreover, such qualification and taxation as a REIT depends upon the Company's
ability to meet, through actual annual operating results, distribution levels
and diversity of stock ownership and the various qualification tests imposed
under the Code discussed below, the results of which will not be reviewed by
Seyburn Kahn on a continuing basis. No assurance can be given that the actual
results of the Company's operation for any one taxable year will satisfy such
requirements. See "--Failure to Qualify".
If the Company qualifies for taxation as a REIT, it generally will not
be subject to federal corporate income taxes on that portion of its ordinary
income or capital gain that is currently distributed to stockholders. Such
treatment substantially eliminates the federal "double taxation" on earnings (at
the corporate and the stockholder levels) that generally results from investment
in a corporation.
Despite the REIT election, the Company may be subject to federal income
and excise tax as follows:
First, the Company will be taxed at regular corporate rates on any
undistributed "REIT Taxable Income", including undistributed net
capital gains. For tax years beginning after August 5, 1997, the
Company may elect to pay tax on all or a portion of its undistributed
capital gains, but treat such capital gains as having been distributed
to its shareholders. If so elected by the Company, the shareholders
would be taxed on the deemed received capital gains but credited with a
pro rated share of the tax paid by the Company and the amount of deemed
paid tax would generally be creditable on the shareholders' federal
return.
Second, under certain circumstances, the Company may be subject to the
"alternative minimum tax" on certain of its items of tax preferences,
if any.
Third, if the Company has (i) net income from the sale or other
disposition of "foreclosure property" that is held primarily for sale
to customers in the ordinary course of business or (ii) other
nonqualifying net income from foreclosure property, it will be subject
to tax at the highest corporate rate on such income.
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Fourth, if the Company has net income from prohibited transactions
(which are, in general, certain sales or other dispositions of property
held primarily for sale to customers in the ordinary course of
business, other than sales of foreclosure property, involuntary
conversions and sales that qualify for a statutory safe harbor), such
income will be subject to a 100% tax.
Fifth, if the Company should fail to satisfy the 75% gross income test
or the 95% gross income test (as discussed below), but has nonetheless
maintained its qualifications as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on the net
income attributable to the greater of the amount by which the Company
fails the 75% or 95% test, multiplied by a fraction intended to reflect
the Company's profitability.
Sixth, if the Company should fail to distribute, or fail to be treated
as having distributed, with respect to each calendar year at least the
sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of
its REIT capital gain net income for such year, and (iii) any
undistributed taxable income from prior periods, the Company would be
subject to a 4% excise tax on the excess of such required distribution
over the amounts actually distributed.
The Company does not now intend to acquire any appreciated assets from
a corporation generally subject to full corporate-level tax in a transaction in
which any gain on the transfer is not fully recognized. However, in the event of
such an acquisition, the Company could, under certain circumstances, be subject
to tax upon disposition of such assets.
Organizational Requirements. The Code defines a REIT as a corporation,
trust, or association (i) that is managed by one or more trustees or directors;
(ii) the beneficial ownership of which is evidenced by transferable shares, or
by transferable certificates of beneficial interest; (iii) that would be taxable
as a domestic corporation, but for the REIT Requirements; (iv) that is neither a
financial institution nor an insurance company subject to certain provisions of
the Code; (v) the beneficial ownership of which is held by 100 or more persons;
(vi) not more than 50% in value of the outstanding stock of which is owned,
directly or indirectly, by five or fewer individuals (as defined in the Code to
include private foundations and certain pension trusts and other entities) at
any time during the last half of each taxable year; (vii) that is not a bank, an
insurance company or certain other specified types of financial institutions;
and (viii) that meets certain other tests, described below, regarding the nature
of its income and assets. The Code provides that conditions (i) through (iv),
inclusive, must be met during the entire taxable year and that condition (v)
must be met during at least 335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than 12 months. Conditions (v) and
(vi) will not apply until after the first taxable year for which an election is
made to be taxed as a REIT. For purposes of condition (vi), certain tax-exempt
entities are generally treated as individuals, and the beneficiaries of a
pension trust that qualifies under Section 401(a) of the Code and that holds
shares of a REIT will be treated as holding shares of the REIT in proportion to
their actuarial interests in the pension trust. See "--Taxation of United States
Stockholders--Treatment of Tax-Exempt Stockholders".
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Seyburn Kahn is of the opinion that, for purposes of condition (v)
above, beneficial owners of both common and preferred shares of a corporation
are counted toward the 100 holder requirement. The Company expects that the
Series A Preferred Shares will be held by not less than 100 beneficial owners at
all times such shares are outstanding. Such ownership of the Series A Preferred
Shares would allow the Company to meet condition (v) above. Seyburn Kahn is of
the opinion that, in determining whether condition (vi) above is met,
shareholders of a corporation are treated as owning their proportionate share of
any stock held by that corporation. The Company expects that the stock of the
Company and of the Bank will at no time be held directly or indirectly by five
or fewer shareholders who are individuals, private foundations, pension trusts
or other relevant entities that in the aggregate own more than 50 percent by
value of the stock of the Company or the Bank, respectively. Stock ownership of
the Company and the Bank in accordance with the Company's expectation will
satisfy condition (vi) with respect to the Company. In addition, the Company's
Articles of Incorporation include certain restrictions regarding transfer of its
shares, which restrictions are intended to assist the Company in continuing to
satisfy the share ownership requirements described in conditions (v) and (vi)
above. Such transfer and ownership restrictions are described under "Description
of Capital Stock--Restrictions on Ownership and Transfer".
In addition, a corporation may not elect to become a REIT unless its
taxable year is the calendar year. The Company satisfies this requirement.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the income
of the partnership attributable to such share. In addition, the character of the
assets and gross income of the partnership will retain the same character in the
hands of the REIT for purposes of the REIT Requirements, including satisfying
the gross income tests and the assets test.
Income Tests. In order to maintain qualification as a REIT, the Company
must annually satisfy two gross income requirements. First, at least 75% of the
Company's gross income (excluding gross income from prohibited transactions) for
each taxable year must be derived directly or indirectly from investments
relating to real property or mortgages on real property (as interest on
obligations secured by mortgages on real property, certain "rents from real
property" or as gain on the sale or exchange of such property and certain fees
with respect to agreements to make or acquire mortgage loans), from certain
types of temporary investments or certain other types of gross income. Second,
at least 95% of the Company's gross income (excluding gross income from
prohibited transactions) for each taxable year must be derived from such real
property investments as aforesaid and from dividends, interest, and gain from
the sale or other disposition of stock or securities and certain other types of
gross income (or from any combination of the foregoing).
For interest to qualify as "interest on obligations secured by
mortgages on real property or on interests in real property," the obligation
must be secured by real property having a fair market value at the time of
acquisition at least equal to the principal amount of the loan. The term
"interest" includes only an amount that constitutes compensation for the use or
forbearance of
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money. For example, a fee received or accrued by a lender which is in fact a
charge for services performed for a borrower rather than a charge for the use of
borrowed money is not includible as interest; amounts earned as consideration
for entering into agreements to make loans secured by real property, although
not interest, are otherwise treated as within the 75% and 95% classes of gross
income so long as the determination of those amounts does not depend on the
income or profits of any person. By statute, the term interest does not include
any amount based on income or profits except that the Code provides that (i)
interest "based on a fixed percentage or percentages of receipts or sales" is
not excluded and (ii) when the REIT makes a loan that provides for interest
based on the borrower's receipts or sales and the borrower leases under one or
more leases based on income or profits, only a portion of the contingent
interest paid by the borrower will be disqualified as interest.
Rents received or deemed to be received by the Company will qualify as
"rents from real property" in satisfying the gross income requirements for a
REIT described above only if certain statutory conditions are met that limit
rental income essentially to rentals on investment-type properties. In the event
that a REIT acquires by foreclosure property that generates income that does not
qualify as "rents from real property," such income may be treated as qualifying
for two years following foreclosure (which period may be extended by the IRS) so
long as (i) all leases entered into after foreclosure generate only qualifying
rent, (ii) only limited construction takes place and (iii) within 90 days of
foreclosure, any trade or business in which the property is used is conducted by
an independent contractor from which the REIT derives no income. In the event
the special foreclosure property rule applies to qualify otherwise unqualified
income, the net income that qualifies only under the special rule for
foreclosure property may be subject to tax, as described above.
Relief Provisions. If the Company fails to satisfy one or both of the
75% or 95% gross income tests for any taxable year, it may nevertheless qualify
as a REIT for such year if it is entitled to relief under certain provisions of
the Code. These relief provisions will be generally available if the Company's
failure to meet such tests was due to reasonable cause and not due to willful
neglect, the Company attaches a schedule of the sources of its income to its
return, and any incorrect information on the schedule was not due to fraud with
intent to evade tax. It is not possible, however, to state whether in all
circumstances the Company would be entitled to the benefit of these relief
provisions. As discussed above in "--Taxation of the Company--General," even if
these relief provisions apply, a tax would be imposed with respect to the excess
net income.
Asset Tests. At the close of each quarter of its taxable year, the
Company must satisfy three tests relating to the nature of its assets. First, at
least 75% of the value of the Company's total assets must be represented by real
estate assets (including stock or debt instruments held for not more than one
year that were purchased with the proceeds of a stock offering or long-term (at
least five years) debt offering of the Company), cash, cash items, and
government securities. Second, not more than 25% of the Company's total assets
may be represented by securities other than those in the 75% asset class. Third,
of the investments included in the 25% asset class, the value of any one
issuer's securities owned by the Company may not exceed 5% of the value of the
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Company's total assets and the Company may not own more than 10% of any one
issuer's outstanding voting securities.
After initially meeting the asset tests at the close of any quarter,
the Company will not lose its status as a REIT if it fails to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset values.
If the failure to satisfy the asset tests results from an acquisition of
securities or other property during a quarter, the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close of
that quarter. The Company intends to maintain adequate records of the value of
its assets to ensure compliance with the asset tests, and to take such action
within 30 days after the close of any quarter as may be required to cure any
noncompliance but no assurance can be given that such asset tests will be met.
Failure to maintain these records could result in substantial IRS penalties.
Annual Distribution Requirements. In order to be treated as a REIT, the
Company is required to distribute dividends (other than capital gain dividends)
to its stockholders in an amount at least equal to (A) the sum of (i) 95% of the
Company's "REIT Taxable Income" (computed without regard to the dividends paid
deduction and the Company's net capital gain) plus (ii) 95% of the net income,
if any, from foreclosure property in excess of the special tax on income from
foreclosure property, minus (B) the sum of certain items of noncash income. Such
distributions must be paid in the taxable year to which they relate or in the
following taxable year if declared before the Company timely files its tax
return for such year and if paid on or before the first regular dividend payment
after such declaration. To the extent that the Company does not distribute (or
is not treated as having distributed) all of its net capital gain or distributes
(or is treated as having distributed) at least 95%, but less than 100% of its
"REIT Taxable Income," as adjusted, it will be subject to tax thereon at regular
ordinary and capital gains corporate tax rates. The Code permits a stockholder
to elect to be treated for tax purposes as having (i) received a distribution in
the amount specified in the election and (ii) contributed the amount thereof to
the capital of the Company. In the event the Company fails to distribute 100% of
its income and capital gains, the Bank may elect to be so treated. Furthermore,
if the Company should fail to distribute during each calendar year at least the
sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT
capital gain net income for such year, and (iii) any undistributed taxable
income from prior periods, the Company would be subject to a 4% excise tax on
the excess of such required distribution over the amounts actually distributed.
The Company intends to make timely distributions sufficient to satisfy the
annual distribution requirement. For tax years beginning after August 5, 1997,
the Company may elect to pay tax on all or a portion of its undistributed
capital gains, but treat such capital gains as having been distributed to its
shareholders. If so elected by the Company, the shareholders would be taxed on
the deemed received capital gains but credited with a pro rated share of the tax
paid by the Company and the amount of deemed paid tax would generally be
creditable on the shareholders' federal return.
"REIT Taxable Income" is the taxable income of a REIT, which generally
is computed in the same fashion as the taxable income of any corporation, except
that (i) certain deductions are not available, such as the deduction for
dividends received, (ii) it may deduct dividends paid (or deemed paid) during
the taxable year, (iii) net capital gains and losses are excluded, and (iv)
certain other adjustments are made.
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It is possible that, from time to time, the Company may not have
sufficient cash or other liquid assets to meet the 95% distribution requirement
due to timing differences between (i) the actual receipt of income and actual
payment of deductible expenses and (ii) the inclusion of such income and
deduction of such expenses in calculating the taxable income of the Company. In
the event that such an insufficiency or such timing differences occur, in order
to meet the 95% distribution requirement the Company may find it necessary to
arrange for borrowings or to pay dividends in the form of taxable stock
dividends if it is practicable to do so.
Under certain circumstances, the Company may be able to rectify a
failure to meet the distribution requirement for a year by paying "deficiency
dividends" to stockholders in a later year, which may be included in the
Company's deduction for dividends paid for the earlier year. Thus, the Company
may be able to avoid being taxed on amounts distributed as deficiency dividends;
however, the Company will be required to pay interest based upon the amount of
any deduction taken for deficiency dividends.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable
year, and the relief provisions described above do not apply, the Company will
be subject to tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates. Distributions to stockholders in any
year in which the Company fails to qualify will not be deductible by the Company
nor will they be required to be made. In such event, to the extent of current
and accumulated earnings and profits, all distributions to stockholders will be
taxable as ordinary income, and subject to certain limitations of the Code,
corporate distributees may be eligible for the dividends-received deduction.
Unless entitled to relief under specific statutory provisions, the Company will
also be disqualified from taxation as a REIT for the four taxable years
following the year during which qualification was lost, and will not be
permitted to requalify unless it distributes any earnings and profits
attributable to the period when it failed to qualify. In addition, it would be
subject to tax on any built-in gains on property held during the period during
which it did not qualify if it sold such property within 10 years of
requalification. It is not possible to state whether in all circumstances the
Company would be entitled to such statutory relief.
TAX TREATMENT OF AUTOMATIC EXCHANGE
Upon the occurrence of the Automatic Exchange, the outstanding Series A
Preferred Shares will be automatically exchanged on a one-for-one basis for Bank
Preferred Shares. See "Description of Series A Preferred Shares--Automatic
Exchange". The Automatic Exchange will be a taxable exchange with respect to
which each holder of the Series A Preferred Shares will have a gain or loss, as
the case may be, measured by the difference between the basis of such holder in
the Series A Preferred Shares and the fair market value of the Bank Preferred
Shares received in the Automatic Exchange. Because the Bank Preferred Shares
will not be listed on the Nasdaq System or on any exchange, each individual
holder will be required to determine the fair market value of Bank Preferred
Shares received to determine the tax effect of the Automatic Exchange. Assuming
that such holder's Series A Preferred Shares were held as capital assets for
more than one year prior to the Automatic Exchange, any gain or loss will be
long-term capital gain or loss.
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The 1997 Taxpayer Relief Act may also provide certain taxpayers (generally
non-corporate taxpayers) even more favorable long-term capital gain treatment if
the holding period exceeds 18 months.
TAXATION OF UNITED STATES STOCKHOLDERS
As used herein, the term "United States Stockholder" means a holder of
Series A Preferred Shares that is for United States federal income tax purposes
(i) a citizen or resident of the United States, (ii) a corporation, partnership,
or other entity created or organized in or under the laws of the United States
or of any political subdivision thereof, or (iii) an estate or trust the income
of which is subject to United States federal income taxation regardless of its
source.
Distributions Generally. As long as the Company qualifies as a REIT,
distributions to a United States Stockholder up to the amount of the Company's
current or accumulated earnings and profits (and not designated as capital gains
dividends) will be taken into account as ordinary income and will not be
eligible for the dividends-received deduction for corporations. Distributions
that are designated by the Company as capital gain dividends will be treated as
long-term capital gain (to the extent they do not exceed the Company's actual
net capital gain) for the taxable year without regard to the period for which
the stockholder has held its stock. However, corporate stockholders may be
required to treat up to 20% of certain capital gains dividends as ordinary
income, pursuant to Section 291(d) of the Code. A distribution in excess of
current or accumulated earnings and profits will first be treated as a tax-free
return of capital, reducing the tax basis in the United States Stockholder's
Series A Preferred Shares, and a distribution in excess of the United States
Stockholder's tax basis in its Series A Preferred Shares will be taxable gain
realized from the sale of such shares. Dividends declared by the Company in
October, November or December of any year payable to a stockholder of record on
a specified date in any such month shall be treated as both paid by the Company
and received by the stockholder on December 31 of such year, provided that the
dividend is actually paid by the Company during January of the following
calendar year. Stockholders may not claim the benefit of any tax losses of the
Company on their own income tax returns. For tax years beginning after August 5,
1997, the Company may elect to pay tax on all or a portion of its undistributed
capital gains, but treat such capital gains as having been distributed to its
shareholders. If so elected by the Company, the shareholders would be taxed on
the deemed received capital gains but credited with a pro rated share of the tax
paid by the Company and the amount of deemed paid tax would generally be
creditable on the shareholders' federal return.
The Company will be treated as having sufficient earnings and profits
to treat as a dividend any distribution by the Company up to the amount required
to be distributed in order to avoid imposition of the 4% excise tax discussed
under "--Taxation of the Company--General" and "--Taxation of the
Company--Annual Distribution Requirements" above. As a result, stockholders may
be required to treat as taxable dividends certain distributions that would
otherwise result in tax-free returns of capital. Moreover, any "deficiency
dividend" will be treated as a "dividend" (an ordinary dividend or a capital
gain dividend, as the case may be), regardless of the Company's earnings and
profits.
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Losses incurred on the sale or exchange of Series A Preferred Shares
held for less than six months will be deemed a long-term capital loss to the
extent of any capital gain dividends received by the selling stockholder with
respect to such stock.
Treatment of Tax-Exempt Stockholders. Distributions from the Company to
a tax-exempt employee's pension trust or other domestic tax-exempt stockholder
will generally not constitute "unrelated business taxable income" unless the
stockholder has borrowed to acquire or carry its shares of the Company. A
tax-exempt employee's pension trust that holds more than 10% of the shares of
the capital stock of the Company may under certain circumstances be required to
treat a certain percentage of dividends as unrelated business taxable income if
the Company is "predominantly held" by qualified trusts. For these purposes, a
qualified trust is any trust defined under Section 401(a) of the Code and exempt
from tax under Section 501(a) of the Code.
TAXATION OF FOREIGN STOCKHOLDERS
The rules governing United States income taxation of non-resident alien
individuals, foreign corporations, foreign partnerships, and foreign trusts and
estates holding Series A Preferred Shares (collectively, "Foreign Stockholders")
are complex, and no attempt will be made herein to provide more than a summary
of such rules. A Foreign Stockholder should consult with its own tax advisor to
determine the effect of federal, state, and local and country of tax residence
income tax laws on an investment in the Company, including any reporting
requirements.
In general, a Foreign Stockholder will be subject to regular United
States income tax to the same extent as a United States Stockholder with respect
to income or gain derived from its investment in the Company if under all facts
and circumstances such income or gain is "effectively connected" with such
stockholder's conduct of a trade or business in the United States. See
"--Taxation of United States Stockholders". A corporate Foreign Stockholder that
receives income that is effectively connected with a United States trade or
business may also be subject to the branch profits tax under Section 884 of the
Code, which is payable in addition to the regular United States corporate income
tax. The following discussion will apply to a Foreign Stockholder whose income
or gain derived from investment in the Company is not so effectively connected
in light of the facts and circumstances.
The Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA")
significantly affects the federal income tax treatment of the sale or exchange
of shares in REITs held by a Foreign Stockholder. Under FIRPTA, gain or loss
realized on the sale or exchange of a "United States real property interest"
("USRPI") by a foreign taxpayer is treated by statute as effectively connected
with a U.S. trade or business as a matter of law, without regard to the
particular facts and circumstances. Shares of a corporation generally are
treated as a USRPI only if the fair market value of USRPIs owned by the
corporation equals or exceeds 50% of the fair market value of its total assets.
If at no time within the five years preceding the sale or exchange of shares in
the Company the shares constituted a USRPI, gain or loss on the sale or exchange
will not be treated as effectively connected with a U.S. trade or business by
reason of FIRPTA. While ownership of real property within the U.S. (including
ownership of interests in certain entities) is always a USRPI, a loan secured by
a mortgage on U.S. real property constitutes a USRPI only if the
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amounts payable by the borrower are contingent on the income or receipts of the
borrower or the property or otherwise based on the property. Because such
contingent interest is not likely to be present in the residential mortgage
loans to be owned by the Company that are expected to represent approximately
80% of the assets of the Company (although such interest is fairly common in
commercial loans) the Company believes it is unlikely that its shares will be
USRPIs or that it will derive significant gain from the sale or exchange of
USRPIs, although whether its shares are a USRPI or it derives income from USRPIs
will depend upon the facts as they ultimately develop. A distribution of cash to
a Foreign Stockholder that is not attributable to gain from sales or exchanges
by the Company of USRPIs and not designated by the Company as a capital gain
dividend is not subject to FIRPTA but generally will be subject to the
withholding of United States federal income tax at a rate of 30%, unless (i) a
lower treaty rate applies or (ii) the Foreign Stockholder files an IRS Form 4224
with the withholding agent certifying that the investment to which the
distribution relates is effectively connected to a United States trade or
business of such Foreign Stockholder. A Foreign Stockholder who receives a
distribution that has been subject to such withholding tax may file a claim for
refund to the extent the withholding has been imposed on a portion of such
distributions representing amounts in excess of current and accumulated earnings
and profits. Under FIRPTA, distributions of proceeds attributable to gain from
the Company's sale or exchange of a USRPI are subject to income tax at the
normal capital gains rates applicable to United States stockholders (subject to
applicable alternative minimum tax and a special alternative minimum tax in the
case of a nonresident alien individual). Also, these distributions may be
subject to a 30% branch profits tax in the hands of a corporate Foreign
Stockholder not entitled to a treaty exemption or reduced rate of tax. Treasury
Regulations require the withholding of 35% of any distribution that could be
designated by the Company as a capital gain dividend. This amount is creditable
against the Foreign Stockholder's tax liability. It should be noted that the 35%
withholding tax rate on capital gain dividends is higher than the 28% (greater
than one year holding period) or 20% (greater than 18 month holding period)
maximum rate on capital gains of individuals. Capital gain dividends not
attributable to gain on the sale or exchange of USRPIs are not subject to United
States taxation if there is no requirement of withholding.
If the shares of the Company do constitute a USRPI (or did so
constitute within the previous five years), gain or loss on the sale or exchange
of the shares will be treated as effectively connected with the conduct of a
U.S. trade or business unless one or more special rules apply to preclude U.S.
taxation.
If the Company is a "domestically-controlled REIT," a sale of Series A
Preferred Shares by a Foreign Stockholder generally will not be subject to
United States taxation. A domestically controlled REIT is a REIT in which, at
all times during a specified testing period, less than 50% in value of its
shares is held directly or indirectly, under Code attribution rules, by Foreign
Stockholders. Because the Series A Preferred Shares will be publicly traded, no
assurance can be given that the Company will constitute a
domestically-controlled REIT or that it will be possible to ascertain whether or
not it is domestically-controlled.
If the Company is not a domestically-controlled REIT, a sale of Series
A Preferred Shares would be subject to tax under FIRPTA as a sale of a USRPI and
gain or loss would be effectively
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connected with a United States trade or business if either (i) the Series A
Preferred Shares were not "regularly traded" (as defined by applicable Treasury
Regulations) on an established securities market (e.g., the Nasdaq System, on
which the Series A Preferred Shares will be listed) during the quarter in which
the Series A Preferred Shares were sold or (ii) even if the Series A Preferred
Shares were "regularly traded", the selling stockholder held, directly or
indirectly, more than 5% of the Series A Preferred Shares during the five-year
period ending on the date of disposition. The applicable Treasury Regulations
that define "regularly traded" for this purpose may be interpreted to provide
that a security will not be "regularly traded" for any calendar quarter during
which 100 or fewer persons (treating related persons as one person) in the
aggregate own 50% or more of such security or the quarterly trading volume is
less than 7.5% of the average number of the issued and outstanding shares of
such security (2.5% if there are 2,500 or more stockholders of record). In the
event that the Series A Preferred Shares were not "regularly traded" and the
Company did not at that time constitute a domestically-controlled REIT, a
Foreign Stockholder (without regard to its ownership percentage of Series A
Preferred Shares) must treat as effectively connected with a United States trade
or business any gain or loss on any sale or other disposition of Series A
Preferred Shares that occurs within a calendar quarter during which the Series A
Preferred Shares were not "regularly traded" and the shares were a USRPI.
If the gain on the sale of the Company's Series A Preferred Shares were
subject to taxation under FIRPTA, the Foreign Stockholder would be subject to
the same treatment as a United States Stockholder with respect to such gain
(subject to applicable alternative minimum tax and a special alternative minimum
tax in the case of a nonresident alien individual). Notwithstanding the
foregoing, capital gain from sale of shares of a REIT not subject to FIRPTA will
nonetheless be taxable to a Foreign Stockholder who is an individual (under
rules generally applicable to United States Stockholders) if such person is in
the United States for 183 days or more during the taxable year of disposition
and certain other conditions apply. In any event, a purchaser of Series A
Preferred Shares from a Foreign Stockholder will not be required under FIRPTA to
withhold on the purchase price if the purchased Series A Preferred Shares are
"regularly traded" on an established securities market or if the Company is a
domestically-controlled REIT. Otherwise, under FIRPTA the purchaser of Series A
Preferred Shares may be required to withhold 10% of the purchase price and remit
such amount to the IRS.
Shares of the Company owned by a nonresident alien decedent are subject
to United States federal estate tax (which is imposed at rates up to 55%) unless
an estate tax treaty binding upon the United States provides otherwise.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
The Company will report to its stockholders and the IRS the amount of
dividends paid or deemed paid during each calendar year, and the amount of tax
withheld, if any.
United States Stockholders. Under certain circumstances, a United
States Stockholder of Series A Preferred Shares may be subject to backup
withholding at a rate of 31% on payments made with respect to, or cash proceeds
of a sale or exchange of, Series A Preferred Shares. Backup withholding will
apply only if the holder (i) fails to furnish the person required to withhold
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with its Taxpayer Identification Number ("TIN") which, for an individual, would
be his or her Social Security Number, (ii) furnishes an incorrect TIN, (iii) is
notified by the IRS that it has failed properly to report payments of interest
and dividends, or (iv) under certain circumstances, fails to certify, under
penalty of perjury, that it has furnished a correct TIN and has not been
notified by the IRS that it is subject to backup withholding for failure to
report interest and dividend payments. Backup withholding will not apply with
respect to payments made to certain exempt recipients, such as corporations and
tax-exempt organizations. A United States Stockholder should consult with a tax
advisor regarding qualification for exemption from backup withholding and the
procedure for obtaining such an exemption. Backup withholding is not an
additional tax. Rather, the amount of any backup withholding with respect to a
payment to a United States Stockholder will be allowed as a credit against such
United States Stockholder's United States federal income tax liability and may
entitle such United States Stockholder to a refund, provided that the required
information is furnished to the IRS.
Foreign Stockholders. Additional issues may arise pertaining to
information reporting and backup withholding with respect to Foreign
Stockholders, and a Foreign Stockholder should consult with a tax advisor with
respect to any such information reporting and backup withholding requirements.
Backup withholding with respect to a Foreign Stockholder is not an additional
tax. Rather, the amount of any backup withholding with respect to a payment to a
Foreign Stockholder will be allowed as a credit against any United States
federal income tax liability of such Foreign Stockholder. If withholding results
in an overpayment of taxes, a refund may be obtained provided that the required
information is furnished to the IRS.
OTHER TAX CONSEQUENCES
The Company and its stockholders may be subject to state or local
taxation in various state or local jurisdictions, including those in which it or
they transact business or reside. The state and local tax treatment of the
Company and its stockholders may not conform to the federal income tax
consequences discussed above. Consequently, prospective stockholders should
consult their own tax advisors regarding the effect of state and local tax laws
on an investment in the Company.
ERISA CONSIDERATIONS
GENERAL
In evaluating the purchase of Series A Preferred Shares, a fiduciary of
a qualified profit-sharing, pension or stock bonus plan, including a plan for
self-employed individuals and their employees or any other employee benefit plan
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), a collective investment fund or separate account in which such plans
invest and any other investor using assets that are treated as the assets of an
employee benefit plan subject to ERISA (each, a "Plan" and collectively,
"Plans") should consider (a) whether the ownership of Series A Preferred Shares
is in accordance with the documents and instruments governing such Plan; (b)
whether the ownership of Series A Preferred Shares is solely in the interest of
Plan participants and beneficiaries and otherwise consistent with the
fiduciary's responsibilities and in compliance with the requirements of Part 4
of Title I of ERISA, including,
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in particular, the diversification, prudence and liquidity requirements of
Section 404 of ERISA and the prohibited transaction provisions of Section 406 of
ERISA and Section 4975 of the Code; (c) whether the Company's assets are treated
as assets of the Plan; and (d) the need to value the assets of the Plan
annually. In addition, the fiduciary of an individual retirement arrangement
under Section 408 of the Code (an "IRA") considering the purchase of Series A
Preferred Shares should consider whether the ownership of Series A Preferred
Shares would result in a non-exempt prohibited transaction under Section 4975 of
the Code.
The fiduciary investment considerations summarized below provide a
general discussion that does not include all of the fiduciary investment
considerations relevant to Plans and, where indicated, IRAs. This summary is
based on the current provisions of ERISA and the Code and regulations and
rulings thereunder, and may be changed (perhaps adversely and with retroactive
effect) by future legislative, administrative or judicial actions. PLANS AND
IRAS THAT ARE PROSPECTIVE PURCHASERS OF SERIES A PREFERRED SHARES SHOULD CONSULT
WITH AND RELY UPON THEIR OWN ADVISORS IN EVALUATING THESE MATTERS IN LIGHT OF
THEIR OWN PARTICULAR CIRCUMSTANCES.
PLAN ASSET REGULATION
Under Department of Labor regulations governing what constitutes the
assets of a Plan or IRA ("Plan Assets") for purposes of ERISA and the related
prohibited transaction provisions of the Code (the "Plan Asset Regulation", 29
C.F.R. Sec.2510.3-101), when a Plan or IRA makes an equity investment in another
entity, the underlying assets of the entity will not be considered Plan Assets
if the equity interest is a "publicly-offered security".
For purposes of the Plan Asset Regulation, a "publicly-offered
security" is a security that is (a) "freely transferable", (b) part of a class
of securities that is "widely held," and (c) sold to the Plan or IRA as part of
an offering of securities to the public pursuant to an effective registration
statement under the Securities Act and part of a class of securities that is
registered under the Exchange Act within 120 days (or such later time as may be
allowed by the Commission) after the end of the fiscal year of the issuer during
which the offering of such securities to the public occurred. The Series A
Preferred Shares will be registered under the Securities Act of 1933, as amended
(the "Securities Act"), and the Exchange Act within the time periods specified
in the Plan Asset Regulation.
The Plan Asset Regulation provides that a security is "widely held"
only if it is a part of the class of securities that is owned by 100 or more
investors independent of the issuer and of one another. A security will not fail
to be "widely held" because the number of independent investors falls below 100
subsequent to the initial offering as a result of events beyond the control of
the issuer. The Company expects the Series A Preferred Shares to be "widely
held" upon the completion of the Offering.
The Plan Asset Regulation provides that whether a security is "freely
transferable" is a factual question to be determined on the basis of all the
relevant facts and circumstances. The Plan Asset Regulation further provides
that when a security is part of an offering in which the minimum
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<PAGE> 84
investment is $10,000 or less, as is the case with the Offering, certain
restrictions ordinarily will not, alone or in combination, affect the finding
that such securities are "freely transferable". The Company believes that any
restrictions imposed on the transfer of the Series A Preferred Shares are
limited to the restrictions on transfer generally permitted under the Plan Asset
Regulation and are not likely to result in the failure of the Series A Preferred
Shares to be "freely transferable".
A Plan should not acquire or hold the Series A Preferred Shares if the
Company's underlying assets will be treated as the assets of such Plan. However,
the Company believes that under the Plan Asset Regulation the Series A Preferred
Shares should be treated as "publicly-offered securities" and, accordingly, the
underlying assets of the Company should not be considered to be assets of any
Plan or IRA investing in the Series A Preferred Shares.
EFFECT OF PLAN ASSET STATUS
ERISA generally requires that the assets of a Plan be held in trust and
that the trustee, or an investment manager (within the meaning of Section 3(38)
of ERISA), have exclusive authority and discretion to manage and control the
assets of the Plan. As discussed above, the assets of the Company under current
law do not appear likely to be assets of the Plans receiving Series A Preferred
Shares as a result of the Offering. However, if the assets of the Company were
deemed to be assets of the Plans under ERISA, certain directors and officers of
the Company might be deemed fiduciaries with respect to the Plans that invest in
the Company and the prudence and other fiduciary standards set forth in ERISA
would apply to them and to all investments.
If the assets of the Company were deemed to be Plan Assets,
transactions between the Company and parties in interest or disqualified persons
with respect to the investing Plan or IRA could be prohibited transactions
unless a statutory or administrative exemption is available. In addition,
investment authority would also have been improperly delegated to such
fiduciaries, and, under certain circumstances, Plan fiduciaries who make the
decision to invest in the Series A Preferred Shares could be liable as
co-fiduciaries for actions taken by the Company that do not conform to the ERISA
standards for investments under Part 4 of Title I of ERISA.
PROHIBITED TRANSACTIONS
Section 406 of ERISA provides that Plan fiduciaries are prohibited from
causing the Plan to engage in certain types of transactions. Section 406(a)
prohibits a fiduciary from knowingly causing a Plan to engage directly or
indirectly in, among other things: (a) a sale or exchange, or leasing, of
property with a party in interest; (b) a loan or other extension of credit with
a party in interest; (c) a transaction involving the furnishing of goods,
services or facilities with a party in interest; or (d) a transaction involving
the transfer of Plan assets to, or use of Plan assets by or for the benefit of,
a party in interest. Additionally, Section 406 prohibits a Plan fiduciary from
dealing with Plan assets in its own interest or for its own account, from acting
in any capacity in any transaction involving the Plan on behalf of a party (or
representing a party) whose interests are adverse to the interests of the Plan,
and from receiving any consideration for its own account from any party dealing
with the Plan in connection with a transaction involving Plan assets. Similar
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<PAGE> 85
provisions in Section 4975 of the Code apply to transactions between
disqualified persons and Plans and IRAs and result in the imposition of excise
taxes on such disqualified persons.
If a prohibited transaction has occurred, Plan fiduciaries involved in
the transaction could be required to (a) undo the transaction, (b) restore to
the Plan any profit realized on the transaction and (c) make good to the Plan
any loss suffered by it as a result of the transaction. In addition, parties in
interest or disqualified persons would be required to pay excise taxes or
penalties.
If the investment constituted a prohibited transaction under Section
408(e)(2) of the Code by reason of the Company engaging in a prohibited
transaction with the individual who established an IRA or his beneficiary, the
IRA would lose its tax-exempt status. The other penalties for prohibited
transactions would not apply.
Thus, the acquisition of the Series A Preferred Shares by a Plan could
result in a prohibited transaction if an Underwriter, the Company, the Bank, or
any of their affiliates is a party in interest or disqualified person with
respect to the Plan. Any such prohibited transaction could be treated as exempt
under ERISA and the Code if the Series A Preferred Shares were acquired pursuant
to and in accordance with one or more "class exemptions" issued by the
Department of Labor, such as Prohibited Transaction Class Exemption ("PTCE")
75-1 (an exemption for certain transactions involving employee benefit plans and
broker-dealers (such as the Underwriters), reporting dealers, and banks), PTCE
84-14 (an exemption for certain transactions determined by an independent
qualified professional asset manager), PTCE 90-1 (an exemption for certain
transactions involving insurance company pooled separate accounts), PTCE 91-38
(an exemption for certain transactions involving bank collective investment
funds), PTCE 95-60 (an exemption for certain transactions involving an insurance
company's general account) and PTCE 96-23 (an exemption for certain transactions
determined by a qualifying in-house asset manager).
A Plan should not acquire the Series A Preferred Shares pursuant to the
Offering if such acquisition will constitute a non-exempt prohibited
transaction.
UNRELATED BUSINESS TAXABLE INCOME
Plan fiduciaries should also consider the consequences of holding more
than 10% of the Series A Preferred Shares if the Company is "predominantly held"
by qualified trusts. See "Federal Income Tax Considerations--Taxation of United
States Stockholders--Treatment of Tax-Exempt Stockholders".
CERTAIN INFORMATION REGARDING THE BANK
As an integral part of this Prospectus, a copy of the Bank Prospectus
filed with the OCC relating to the Bank Preferred Shares to be issued upon the
Exchange Event is attached hereto as Annex I and is incorporated by reference
herein. All material information relating to the Bank, including information
relating to the Bank's financial position, can be found therein. There has been
no material change in the Bank's affairs since the conclusion of the fiscal year
ended December 31, 1996 which has not otherwise been disclosed by the Bank.
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<PAGE> 86
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement dated
[_____________], 1997 (the "Underwriting Agreement") among the Company, the Bank
and the underwriters named below (the "Underwriters"), the Company has agreed
that the Company will sell to each of the Underwriters, and each of such
Underwriters for which Roney & Co., L.L.C. and Principal Financial Securities,
Inc. are acting as representatives (the "Representatives") have severally agreed
to purchase from the Company, the respective number of Series A Preferred Shares
set forth opposite its name below:
<TABLE>
<CAPTION>
Number of Shares
of Series A
Underwriter Preferred Shares
- ------------------------------------------------------- ----------------
<S> <C>
Roney & Co., L.L.C.....................................
Principal Financial Securities, Inc....................
Total............................................ 1,800,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all the Series A Preferred Shares
offered hereby, if any are taken.
The Underwriters propose to offer the Series A Preferred Shares in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus, and in part to certain securities dealers at such
price less a concession of $[____] per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $[____] per share to
certain brokers and dealers. After the Series A Preferred Shares are released
for sale to the public, the offering price and other selling terms may from time
to time be varied by the Representatives.
The Company has granted the Underwriters an option exercisable for 30
days after the date of this Prospectus to purchase up to an aggregate of 270,000
additional Series A Preferred Shares solely to cover over-allotments, if any. If
the Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of Series A Preferred Shares to be
purchased by each of them, as shown in the foregoing table, bears to the
1,800,000 Series A Preferred Shares offered hereby.
The Company has agreed that, during the period beginning from the date
of this Prospectus and continuing to and including the date 90 days after the
date of this Prospectus, it will not offer, sell, contract to sell or otherwise
dispose of any securities of the Company which are substantially similar to the
Series A Preferred Shares or which are convertible or exchangeable into
securities which are substantially similar to the Series A Preferred Shares
without the prior written consent of the Representatives, except for the Series
A Preferred Shares offered in connection with the Offering.
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<PAGE> 87
The Representatives of the Underwriters have informed the Company that
they do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of Series A
Preferred Shares offered by them.
Prior to the Offering, there has been no public market for the Series A
Preferred Shares.
The Company has filed an application to list the Series A Preferred
Shares, subject to official notice of issuance, on the Nasdaq National Market
(the "Exchange"). In order to meet one of the requirements for listing the
Series A Preferred Shares on the Exchange, the Underwriters have undertaken to
sell the Series A Preferred Shares to a minimum of 400 beneficial holders. The
Representatives have advised the Company that they intend to make a market in
the Series A Preferred Shares prior to commencement of trading on the Exchange,
but are not obligated to do so and may discontinue any such market making at any
time without notice.
The Company and the Bank have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act.
Certain of the Underwriters or their affiliates have provided from time
to time, and expect to provide in the future, investment or commercial banking
services to affiliates of the Company, for which such Underwriters or their
affiliates have received or will receive customary fees and commissions.
EXPERTS
The balance sheet of Franklin Finance Corporation as of October 3, 1997
included in this Prospectus has been so included in reliance on the report of
Grant Thornton LLP, independent certified public accountants, given on the
authority of said firm as experts in auditing and accounting.
RATINGS
It is not expected that the Series A Preferred Shares will be rated by
any independent securities rating service.
CERTAIN LEGAL MATTERS
The validity of the Series A Preferred Shares offered hereby will be
passed upon for the Company by Silver, Freedman & Taff, L.L.P., Washington, D.C.
Certain tax matters described under "Federal Income Tax Considerations" will be
passed upon for the Company by Seyburn, Kahn, Ginn, Bess, Deitch and Serlin,
P.C., Southfield, Michigan. The validity of the Series A Preferred Shares will
be passed upon for the Underwriters by Honigman Miller Schwartz and Cohn,
Detroit, Michigan.
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<PAGE> 88
ADDITIONAL INFORMATION
The Company has filed with the Commission a registration statement (of
which this Prospectus is a part) on Form S-11 (the "Registration Statement")
under the Securities Act, with respect to the Series A Preferred Shares offered
hereby. This Prospectus does not contain all the information set forth in the
Registration Statement, certain portions of which have been omitted as permitted
by the rules and regulations of the Commission. Statements contained in this
Prospectus as to the content of any contract or other document are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. For
further information regarding the Company and the Series A Preferred Shares
offered hereby, reference is made to the Registration Statement and the exhibits
thereto.
The Registration Statement and the exhibits forming a part thereof
filed by the Company with the Commission can be inspected at and copies can be
obtained from the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, or at the following regional offices of the
Commission: 7 World Trade Center, 13th Floor, Suite 1300, New York, New York
10048 and Northwestern Atrium Center, 500 West Madison Street, 14th Floor, Suite
1400, Chicago, Illinois 60661. Copies of such materials can be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. Such material may also be accessed
electronically by means of the Commission's home page on the Internet at
"http://www.sec.gov."
The Certificate of Designation establishing the rights, preferences and
limitations of the Series A Preferred Shares provides that the Company shall
maintain its status as a reporting company under the Exchange Act for so long as
any of the Series A Preferred Shares are outstanding.
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<PAGE> 89
GLOSSARY
"Advisor" means the Bank in its role as advisor under the Advisory
Agreement.
"Advisory Agreement" means the agreement between the Bank and the
Company pursuant to which the Bank will (i) administer the day-to-day operations
of the Company, (ii) monitor the credit quality of the Mortgage Assets held by
the Company, (iii) advise the Company with respect to the acquisition,
management, financing and disposition of the Company's Mortgage Assets and (iv)
maintain custody of the documents related to the Company's Mortgage Loans.
"ARM" or "adjustable rate mortgage" means a Mortgage Loan that features
adjustments of the underlying interest rate at predetermined times based on an
agreed margin to an established index. An ARM is usually subject to periodic
interest rate and/or payment caps and a lifetime interest rate cap.
"Articles of Incorporation" means the Amended and Restated Articles of
Incorporation of the Company.
"Automatic Exchange" means the automatic exchange on a share-for-share
basis of Series A Preferred Shares for Bank Preferred Shares upon the occurrence
of the Exchange Event.
"Bank" means Franklin Bank, N.A., a national bank organized under the
laws of the United States, and the parent of the Company.
"Bank Preferred Shares" means the newly issued series of preferred
stock of the Bank for which the Series A Preferred Shares will be exchanged
automatically upon the occurrence of the Exchange Event.
"Bank Prospectus" means the registration statement pursuant to which
the Bank Preferred Shares are being registered with the OCC.
"Board of Directors" means the board of directors of the Company.
"By-laws" means the by-laws of the Company.
"Classified" means a loan which, for financial institution regulatory
purposes, is designated as "substandard", "doubtful" or "loss". For such
purposes, a substandard asset is one that is deemed inadequately protected by
the current sound worth and paying capacity of the obligor or of the collateral
pledged, if any, because the asset has a well-defined weakness or weaknesses
that jeopardize the liquidation of the debt. An asset classified as doubtful has
all the weaknesses inherent in one classified substandard, with the added
characteristic that the weaknesses make collection or liquidation in full, on
the basis of currently existing facts, conditions and values, highly
questionable and improbable. Assets classified as loss are considered
uncollectible.
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<PAGE> 90
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Mortgage Loan" means a whole loan secured by a first
mortgage or deed of trust on a commercial real estate property.
"Commercial Mortgage Purchase Agreement" means the Commercial Mortgage
Loan Purchase and Warranties Agreement between the Company and the Bank.
"Commission" means the United States Securities and Exchange
Commission.
"Common Stock" means the common stock, par value $300.00 per share, of
the Company.
"Company" means Franklin Finance Corporation, a Michigan corporation.
"Directive" means the writing issued by the appropriate regulatory
agency directing the Automatic Exchange.
"DOL" means the United States Department of Labor.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Excess Shares" means the shares of any class or series of Preferred
Stock owned, or deemed to be owned, by or transferred to a stockholder in excess
of the Ownership Limit.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Event" means the appropriate regulatory agency directs in
writing an exchange of the Series A Preferred Shares for Bank Preferred Shares
because (i) the Bank becomes "undercapitalized" under prompt corrective action
regulations established pursuant to FDICIA, (ii) the Bank is placed into
conservatorship or receivership or (iii) the appropriate regulatory agency, in
its sole discretion and even if the Bank is not "undercapitalized," anticipates
the Bank becoming "undercapitalized" in the near term.
"FDIC" means the Federal Deposit Insurance Corporation.
"FDICIA" means the Federal Deposit Insurance Corporation Improvement
Act of 1991, as amended.
"FHLB" means the Federal Home Loan Bank.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980,
as amended.
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<PAGE> 91
"Five or Fewer Test" means the Code requirement that not more than 50%
in value of the Company's outstanding stock may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code).
"FNMA" means Fannie Mae.
"FNMA Required Net Yield" means (i) with respect to any Mortgage Loan
with an original term of 20, 25 or 30 years, FNMA's required net yield for
30-year fixed rate mortgages (covered by 60-day mandatory commitments) that was
in effect 45 days prior to the effective date of any conversion of such Mortgage
Loan and (ii) with respect to any Mortgage Loan with an original term of 15
years, FNMA's required net yield for 15-year fixed rate mortgages (covered by
60-day mandatory commitments) that was in effect 45 days prior to the effective
date of any conversion of such Mortgage Loan.
"Foreign Stockholders" means holders of Series A Preferred Shares that
are for United States federal income tax purposes (i) non-resident alien
individuals, (ii) foreign corporations and foreign partnerships or (iii) foreign
trusts and estates.
"Gross Margin" means, with respect to a Residential Mortgage Loan that
is an ARM, the applicable fixed percentage which, when added to the applicable
index, calculates to the current interest rate paid by the borrower of the
adjustable rate Mortgage Loan (without taking into account any interest rate
caps or minimum interest rates). Gross Margin is inapplicable to fixed rate
loans.
"Independent Directors" means the members of the Board of Directors
who, prior to and subsequent to their appointment, are not and will not be
directors, officers or employees of the Bank or any affiliate of the Bank or any
person or persons that, in the aggregate, own more than one percent of the
common stock of the Bank and are not officers or employees of the Company.
"Initial Portfolio" means the initial portfolio of Mortgage Loans
purchased by the Company from the Bank.
"IRA" means an individual retirement arrangement under Section 408 of
the Code.
"IRS" means the United States Internal Revenue Service.
"LIBOR" means the London Inter-Bank Offered Rate.
"Lifetime interest rate cap" means, with respect to Mortgage Loans that
are ARMs, the maximum interest rate that may accrue during any period over the
term of such Mortgage Loan as stated in the governing instruments evidencing
such Mortgage Loan.
"Loan-to-Value Ratio" means, with respect to any Mortgage Loan, the
ratio (expressed as a percentage) of the original principal amount of such
Mortgage Loan to the lesser of (i) the appraised value at origination of the
mortgaged property underlying such Mortgage Loan and (ii)
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<PAGE> 92
if the Mortgage Loan was made to finance the acquisition of property, the
purchase price of the mortgaged property.
"Mortgage Assets" means real estate mortgage assets, including mortgage
securities.
"Mortgage Loans" means whole loans secured by single-family (one- to
four-unit) residential real estate properties or by commercial real estate
properties.
"Nonaccrual Status" means a loan on which, in the opinion of
management, principal or interest is not likely to be paid in accordance with
the terms of the loan agreement or on which the principal or interest is past
due 90 days or more and collateral, if any, is insufficient to cover principal
and interest.
"OCC" means the Office of the Comptroller of the Currency, Department
of the Treasury.
"Offering" means the offering of Series A Preferred Shares pursuant to
the Prospectus.
"One Hundred Persons Test" means the Code requirement that the capital
stock of the Company be owned by 100 or more persons during at least 335 days of
a taxable year or during a proportionate part of a shorter taxable year.
"One-Year ARM" means an ARM that adjusts annually beginning in the
month in which the 12th monthly payment is due.
"Ownership Limit" means the provision in the Company's Articles of
Incorporation limiting any person from owning (including shares deemed to be
owned by the attribution provisions of the Code) more than 9.9% of any issued
and outstanding class or series of Preferred Stock.
"Periodic interest rate cap" means, with respect to ARMs, the maximum
change in the coupon rate permissible under the terms of the loan at each coupon
adjustment date. Periodic interest rate caps limit both the speed by which the
coupon rate can adjust upwards in a rising interest rate environment and the
speed by which the coupon rate can adjust downwards in a falling rate
environment.
"Plan" means a pension, profit-sharing, retirement or other employee
benefit plan.
"Plan Asset Regulation" means the DOL regulations determining the
assets of a Plan for purposes of ERISA and the related prohibited transaction
excise tax provisions of the Code.
"Preferred Stock" means preferred stock, par value $10.00 per share, of
the Company.
"Prime Rate" for any date means the lowest prime rate as published in
the "Money Rates" table of The Wall Street Journal for that date.
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<PAGE> 93
"Prospectus" means this prospectus, as the same may be amended.
"Rate Adjustment Date" means, with respect to any ARM, a date on which
the interest rate on such ARM adjusts.
"Registration Statement" means the registration statement filed by the
Company with the Commission on Form S-11 with respect to the Series A Preferred
Shares.
"REIT" means a real estate investment trust as defined pursuant to the
REIT Provisions, or any successor provisions thereof.
"REIT Provisions" and "REIT Requirements" means Sections 856 through
860 of the Code and the applicable Treasury Regulations.
"REIT Taxable Income" shall have the meaning set forth in "Federal
Income Tax Considerations--Taxation of the Company--Annual Distribution
Requirements".
"Residential Mortgage Loan" means a whole loan secured by a first
mortgage or deed of trust on a single family (one-to four-unit) residential real
estate property.
"Residential Mortgage Purchase Agreement" means the Residential
Mortgage Loan Purchase and Warranties Agreement between the Company and the
Bank.
"Securities Act" means the Securities Act of 1933, as amended.
"Series A Preferred Shares" means the shares of Preferred Stock of the
Company offered hereby.
"Servicer" means the Bank in its role as servicer of the Mortgage Loans
under the Servicing Agreements.
"Servicing Agreements" means the servicing agreements entered into by
the Bank with respect to the Residential Mortgage Loans and the Commercial
Mortgage Loans.
"Tax Event" means the receipt by the Company of an opinion of a
nationally recognized law or accounting firm experienced in such matters to the
effect that, as a result of (i) any amendment to, clarification of, or change
(including any announced prospective change) in the laws or treaties (or any
regulations thereunder) of the United States or any political subdivision or
taxing authority thereof or therein affecting taxation, (ii) any judicial
decision, official administrative pronouncement, ruling, regulatory procedure,
notice or announcement (including any notice or announcement of intent to adopt
such procedures or regulations) ("Administrative Action") or (iii) any amendment
to, clarification of, or change in the official position or the interpretation
of such Administrative Action or judicial decision or any interpretation or
pronouncement that provides for a position with respect to such Administrative
Action or judicial decision that differs from the theretofore generally accepted
position, in each case, by any
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<PAGE> 94
legislative body, court, governmental authority or regulatory body, irrespective
of the manner in which such amendment, clarification or change is made known,
which amendment, clarification, or change is effective or such pronouncement or
decision is announced on or after the date of issuance of the Series A Preferred
Shares, there is more than an insubstantial risk that (a) dividends payable by
the Company with respect to the capital stock of the Company are not, or will
not be, fully deductible for United States federal income tax purposes or (b)
the Company is, or will be, subject to more than a de minimis amount of other
taxes, duties or other governmental charges.
"TIN" means Taxpayer Identification Number.
"Treasury Index" means the weekly average yield on U.S. Treasury
securities adjusted to a constant maturity of one year as published by the
Federal Reserve Board in Statistical Release H.15 (519) or any similar
publication or, if not so published, as reported by any Federal Reserve Bank or
by any U.S. Government department or agency.
"Treasury Regulations" means the income tax regulations promulgated
under the Code.
"Underwriters" means those underwriters to which the Company will sell
the Series A Preferred Shares pursuant to the terms of the Underwriting
Agreement.
"Underwriting Agreement" means the underwriting agreement by and among
the Company, the Bank and the Underwriters.
"United States Stockholders" means holders of Series A Preferred Shares
that are for United States federal income tax purposes (i) citizens or residents
of the United States, (ii) corporations, partnerships, or other entities created
or organized in or under the laws of the United States or of any political
subdivisions thereof, or (iii) an estate or trust the income of which is subject
to United States federal income taxation regardless of its source.
"USRPI" means United States real property interest.
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INDEX TO FINANCIAL STATEMENT
Report of Independent Certified Public Accountants......................... F-2
Balance Sheet of Franklin Finance Corporation as of October 3, 1997........ F-3
Note to Financial Statement................................................ F-4
F-1
<PAGE> 96
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
Franklin Finance Corporation:
We have audited the accompanying balance sheet of Franklin Finance Corporation
(the "Company") as of October 3, 1997. This financial statement is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Franklin Finance Corporation as of
October 3, 1997, in conformity with generally accepted accounting principles.
Grant Thornton LLP
Southfield, Michigan
October 6, 1997.
F-2
<PAGE> 97
FRANKLIN FINANCE CORPORATION
BALANCE SHEET
October 3, 1997
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash............................................................. $1,000
======
STOCKHOLDER'S EQUITY
Common Stock, par value $1.00 per share, 1,000 shares
authorized; 1,000 shares issued and outstanding............. $1,000
======
</TABLE>
The Note to the Financial Statement is an integral part of
this Statement.
F-3
<PAGE> 98
FRANKLIN FINANCE CORPORATION
NOTE TO FINANCIAL STATEMENT
1. ORGANIZATION
Franklin Finance Corporation (the "Company"), a wholly-owned subsidiary
of Franklin Bank, N.A. (the "Bank"), was incorporated on September 25, 1997 in
the State of Michigan.
The Company intends to invest in mortgage-related assets financed by
common and preferred stock offerings and expects to generate income for
distribution to its future preferred and common stockholders primarily from the
net interest income derived from its investments in mortgage-related assets. The
Company intends to purchase these mortgage-related assets from the Bank at their
estimated fair values. These assets will be recorded in the Company's financial
statements at the Bank's historical cost basis which will approximate their
estimated fair values. The Company intends to operate in a manner that permits
it to elect, and it intends to elect, to be subject to tax as a real estate
investment trust for federal income tax purposes. The Company has not had any
operations as of October 3, 1997.
The Company intends to sell preferred stock in an underwritten public
offering. The cost of this public offering will be paid by the Company out of
proceeds from a sale of common stock to the Bank. If the public offering is not
consummated, the Bank will pay any offering costs.
F-4
<PAGE> 99
BANK PROSPECTUS ANNEX I
1,800,000 Shares
FRANKLIN BANK, N.A.
[____%] Noncumulative Preferred Stock, Series A
(Liquidation preference $10.00 per share)
The [__%] Noncumulative Preferred Stock, Series A, par value $10.00 per
share (the "Series A Preferred Shares"), of Franklin Bank, N.A. ("Franklin" or
the "Bank") will be issued only upon the automatic exchange of the [____%]
Noncumulative Exchangeable Preferred Stock, Series A (the "Preferred Capital
Shares") of Franklin Finance Corporation, a wholly owned subsidiary of the Bank,
upon the occurrence of certain events. See "Prospectus Summary -- Franklin Bank,
N.A. -- REIT Preferred Offering." Dividends on the Series A Preferred Shares
will be payable at the same rate as the Preferred Capital Shares if, when and as
declared by the Board of Directors of the Bank. For a description of the terms
of the Series A Preferred Shares, see "Description of the Series A Preferred
Shares" herein.
The Series A Preferred Shares rank, in priority of payment of dividends
and rights upon the voluntary or involuntary dissolution, liquidation or winding
up of the Bank, junior to all claims of the Bank's creditors, including the
claims of the Bank's depositors. The Series A Preferred Shares rank superior and
prior to the issued and outstanding common stock of the Bank with respect to
dividend rights and rights upon voluntary or involuntary dissolution,
liquidation or winding up of the Bank, and to all other classes and series of
equity securities of the Bank hereafter issued, other than any class or series
expressly designated as being on parity with or senior to the Series A Preferred
Shares. The common stock of the Bank is the only class of equity securities
currently outstanding.
The Preferred Capital Shares have been registered with the Securities
and Exchange Commission (the "SEC") and an application for listing on the Nasdaq
National Market (the "NMS") has been filed to list the Preferred Capital Shares
under the symbol "FSVBP". In the event the Preferred Capital Shares are
exchanged into Series A Preferred Shares, the Bank does not intend to apply for
listing of the Series A Preferred Shares on any national securities exchange or
for quotation through the Nasdaq System.
AN INVESTMENT IN THE SERIES A PREFERRED SHARES INVOLVES A HIGH DEGREE
OF RISK. INVESTORS SHOULD CAREFULLY CONSIDER THE RISK FACTORS AND OTHER
CONSIDERATIONS RELATING TO THE BANK AND THE SERIES A PREFERRED SHARES. SEE "RISK
FACTORS AND OTHER CONSIDERATIONS."
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE OFFICE OF THE
COMPTROLLER OF THE CURRENCY, THE SECURITIES AND EXCHANGE COMMISSION OR
ANY OTHER FEDERAL AGENCY, OR BY ANY STATE SECURITIES COMMISSION, NOR
HAS SUCH OFFICE , COMMISSION, OTHER AGENCY OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR SAVINGS DEPOSITS
AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT AGENCY. THESE SECURITIES
ARE BEING OFFERED PURSUANT TO A PROSPECTUS FILED WITH THE
OFFICE OF THE COMPTROLLER OF THE CURRENCY.
The date of this Prospectus is [_________, 1997].
<PAGE> 100
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information...................................................... BP-2
Information with Respect to the Registrant................................. BP-3
Prospectus Summary......................................................... BP-4
Risk Factors and Other Considerations..................................... BP-10
Franklin Finance Corporation.............................................. BP-14
Use of Proceeds........................................................... BP-14
Capitalization............................................................ BP-15
Management's Discussion and Analysis
of Financial Condition and Results of Operations................. BP-16
Business ................................................................. BP-33
Regulation................................................................ BP-44
Management................................................................ BP-50
Description of the Series A Preferred Shares.............................. BP-57
Exchange ................................................................. BP-62
Experts ................................................................. BP-62
Legal Matters............................................................. BP-62
Index to Financial Statements............................................... F-1
</TABLE>
AVAILABLE INFORMATION
The Bank is subject to the information reporting requirements of the
Securities Exchange Act of 1934, as amended ("Exchange Act"). In accordance
therewith, the Bank files reports and other information with the Office of the
Comptroller of the Currency ("OCC"). Such reports and other information may be
inspected without charge and copied at prescribed rates at the public reference
facilities maintained by the OCC at 250 E Street, S.W., Washington, D.C. 20219.
The Bank has filed with the OCC a Registration Statement on Form S-11
(including any amendments thereto, the "Form S-11") with respect to the
securities covered by this Prospectus. This Prospectus does not contain all of
the information set forth in the Form S-11, certain items of which are contained
in exhibits to the Form S-11 as permitted by the rules and regulations of the
OCC. For further information with respect to the Bank and the securities offered
hereby, reference is made to the Form S-11, including the exhibits filed as a
part thereof. Statements contained in this Prospectus as to the contents of any
contract or other document referred to are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Form S-11, each such statement being qualified in all
respects by such reference. The Form S-11 and the exhibits thereto may be
inspected without charge and copied at prescribed rates at the public reference
facilities maintained by the OCC at 250 E Street S.W., Washington, D.C. 20219.
BP-2
<PAGE> 101
INFORMATION WITH RESPECT TO THE REGISTRANT
As an integral part of this Prospectus, the Bank has attached complete
copies of its audited financial statements for the fiscal year ended December
31, 1996 and its unaudited financial statements for the six months ended June
30, 1997. All material financial information as of these periods relating to the
Bank can be found in these documents. There has been no material change in the
Bank's financial affairs since the conclusion of these periods, which has not
otherwise been disclosed by the Bank in this Prospectus.
THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITH
RESPECT TO THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF THE
BANK. THESE FORWARD-LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND UNCERTAINTIES.
FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS INCLUDE, AMONG OTHERS, THE
FOLLOWING POSSIBILITIES: (1) COMPETITIVE PRESSURE IN THE BANKING INDUSTRY
INCREASES SIGNIFICANTLY; (2) CHANGES IN THE INTEREST RATE ENVIRONMENT REDUCE
MARGINS; (3) GENERAL ECONOMIC CONDITIONS ARE LESS FAVORABLE THAN EXPECTED,
RESULTING IN, AMONG OTHER THINGS, A DETERIORATION IN CREDIT QUALITY; (4) THE
IMPACT OF REGULATORY CHANGES IS OTHER THAN EXPECTED; (5) CHANGES IN BUSINESS
CONDITIONS AND INFLATION; AND (6) CHANGES IN THE SECURITIES MARKETS.
BP-3
<PAGE> 102
PROSPECTUS SUMMARY
This Prospectus Summary, including the Selected Consolidated Financial
and Other Data, does not purport to be complete and is qualified in its entirety
by the more detailed information and financial statements and notes thereto
appearing elsewhere in this Prospectus. Capitalized terms used in this summary
and not defined herein have the meanings ascribed to such terms elsewhere in
this Prospectus.
FRANKLIN BANK, N.A.
GENERAL
Franklin Bank, N.A. ("Franklin" or the "Bank") is a national bank
headquartered in Southfield, Michigan. The Bank conducts its business through a
network of three regional banking offices which generally offer traditional
banking services and one business center office catering exclusively to small
and medium sized business customers. The Bank was founded in 1983 as a savings
institution and converted to a national bank in 1991.
Franklin's primary business strategy consists principally of attracting
deposits from small and medium sized businesses and making business loans, real
estate loans, indirect lease loans and, to a lesser extent, consumer loans. The
Bank emphasizes products and services principally to businesses whose needs it
believes are not adequately serviced by the larger financial institutions that
dominate the Bank's local market. The Bank's deposits are fully insured by the
Savings Association Insurance Fund ("SAIF") which is administered by the Federal
Deposit Insurance Corporation ("FDIC") up to the maximum permitted by law of
$100,000 per insured depositor. The Bank is subject to comprehensive regulation,
examination and supervision by the OCC and by the FDIC. At June 30, 1997 and
December 31, 1996, the Bank was in compliance with its regulatory capital
requirements and was considered a well capitalized institution. Assets totaled
$487.8 million at June 30, 1997. The Bank's common stock trades on the Nasdaq
National Market under the symbol "FSVB." See "Business."
The executive office of the Bank is located at 24725 West Twelve Mile
Road, Southfield, Michigan 48034, telephone (248) 358-4710.
REIT PREFERRED OFFERING
A registration statement has been filed with the SEC for the public
issuance of $18.0 million of Preferred Capital Shares by Franklin Finance
Corporation, a new real estate investment trust ("REIT") subsidiary of the Bank
(the "REIT Subsidiary"). See "Franklin Finance Corporation." The Preferred
Capital Shares, which would be automatically exchanged for Series A Preferred
Shares upon the occurrence of certain trigger events (specifically, if the
appropriate regulatory agency directs in writing an exchange of the Preferred
Capital Shares for Series A Preferred Shares because (i) the Bank becomes
"undercapitalized" under prompt corrective action regulations established
pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991,
as amended ("FDICIA"), (ii) the Bank is placed into conservatorship or
receivership, or (iii) the appropriate
BP-4
<PAGE> 103
regulatory agency, in its sole discretion, anticipates the Bank becoming
"undercapitalized" in the near term), are designed to qualify as core capital of
the Bank, subject to the regulatory capital requirements and/or limitations
applicable to the Bank. The automatic exchange feature was designed to ensure
that the Preferred Capital Shares provide the same level of capital support to
the Bank on a consolidated basis as other forms of core capital by making the
capital represented by the Preferred Capital Shares directly available to
creditors of the Bank in certain circumstances. Proceeds from the issuance of
the Preferred Capital Shares, together with capital contributions from the Bank
to the REIT Subsidiary, will be used by the REIT Subsidiary to purchase certain
REIT-qualified assets from the Bank's mortgage loan portfolio. Because the REIT
Subsidiary will elect to qualify as a REIT for federal income tax purposes,
dividends payable on the REIT Preferred Capital Shares will be deductible by the
REIT Subsidiary for income tax purposes. The treatment of the REIT Preferred
Capital Shares as core capital of the Bank and the REIT Subsidiary's ability to
deduct, for income tax purposes, the dividends payable on the REIT Preferred
Capital Shares will provide the Bank with a more cost-effective means of
obtaining regulatory capital than if the Bank were to issue preferred stock
itself. See "Regulation - Regulatory Capital Requirements."
The mortgage loans expected to be transferred to the REIT Subsidiary by
the Bank have been selected from the Bank's existing portfolio of fixed and
adjustable-rate mortgage loans. The Bank will determine the fair market values
of the selected mortgage loans based on current market conditions.
THE OFFERING
Securities Offered..................... 1,800,000 Series A Preferred Shares.
Exchange............................... The Series A Preferred Shares are to be
issued, if ever, in connection with an
exchange of the Preferred Capital Shares
of Franklin Finance Corporation, a
wholly owned subsidiary of the Bank. See
"Exchange."
Ranking................................ The Series A Preferred Shares rank
senior to the Bank's common stock, par
value $1.00 per share (the "Common
Stock") and junior to all claims of the
Bank's creditors, including the claims
of the Bank's depositors. Additional
shares of preferred stock ranking senior
to the Series A Preferred Shares may not
be issued without the approval of
holders of at least 2/3 of the Series A
Preferred Shares.
Dividends.............................. Dividends on the Series A Preferred
Shares are payable at the rate of [___]%
per annum of the initial liquidation
preference (an amount equal to $[____]
per annum per share), if, when, and as
declared by the Board of Directors of
the
BP-5
<PAGE> 104
Bank. If declared, dividends are payable
quarterly in arrears on the last day of
March, June, September and December in
each year, or, if such day is not a
business day, on the next business day.
Dividends on the Series A Preferred
Shares are not cumulative and,
accordingly, if no dividend is declared
on the Series A Preferred Shares by the
Bank for a quarterly dividend period,
holders of the Series A Preferred Shares
will have no right to receive a dividend
for that period, and the Bank will have
no obligation to pay a dividend for that
period, whether or not dividends are
declared and paid for any future period.
Upon the exchange of Preferred Capital
Shares for Series A Preferred Shares,
any accrued and unpaid dividends for the
most recent quarter of the Preferred
Capital Shares at the time of the
exchange will be deemed to be accrued
and unpaid dividends on the Series A
Preferred Shares. See "Description of
the Series A Preferred Shares --
Dividends." The Bank's ability to pay
cash dividends is subject to regulatory
and other restrictions described herein.
Liquidation Preference................. The liquidation preference for each
Series A Preferred Share is $10.00, plus
an amount equal to the accrued and
unpaid dividends for the most recent
quarter, if any, thereon for the then-
current dividend period to the date
fixed for liquidation. See "Description
of the Series A Preferred Shares --
Rights Upon Liquidation."
Redemption............................. The Bank may not redeem the Series A
Preferred Shares before [_________],
2002. After such date, the Series A
Preferred Shares may be redeemed for
cash at the option of the Bank, in whole
or in part, at any time and from time to
time, at the redemption price of $10.00
per share, plus the accrued and unpaid
dividends for the most recent quarter
thereon, to the date fixed for
redemption, if any, thereon. Redemption
of the Series A Preferred Shares
BP-6
<PAGE> 105
will be subject to compliance with
applicable regulatory and other
restrictions. See "Description of the
Series A Preferred Shares --
Redemption."
Voting Rights.......................... Holders of Series A Preferred Shares
will not have any voting rights, except
as expressly provided herein. On any
matter on which holders of the Series A
Preferred Shares may vote, each Series A
Preferred Share will be entitled to one
vote. See "Description of the Series A
Preferred Shares -- Voting Rights."
Use of Proceeds....................... The Series A Preferred Shares will only
be issued in connection with an exchange
for the Preferred Capital Shares. The
proceeds from the sale of the Preferred
Capital Shares were used by Franklin
Finance Corporation to purchase a
portfolio of mortgage assets and to pay
expenses associated with the formation
and offering of the Preferred Capital
Shares. The conversion of Preferred
Capital Shares into Series A Preferred
Shares will produce no proceeds to the
Bank. See "Use of Proceeds."
Absence of a Public Market............ There is currently no public market for
the Series A Preferred Shares as such
shares have not been issued and such
shares will not be listed on any
securities exchange or for quotation
through the Nasdaq System.
RISK FACTORS
See "Risk Factors and Other Considerations" for a discussion of the
risk factors and other considerations relating to the Bank and the Series A
Preferred Shares.
BP-7
<PAGE> 106
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The selected consolidated financial and other data of the Bank herein
as of and for the six months ended June 30, 1997 and as of and for the years
ended December 31, 1996, 1995, 1994, 1993 and 1992 have been derived from the
Consolidated Financial Statements of the Bank and the unaudited consolidated
financial statements of the Bank. In the opinion of management all adjustments
(which consist of normal recurring accruals) necessary for a fair presentation
of the results of operations for such periods have been included. The results of
operations for the six months ended June 30, 1997 are not necessarily indicative
of the results that may be expected for the entire year.
<TABLE>
<CAPTION>
At or for the
Six Months
Ended At or for the Year Ended December 31,
June 30, ------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
---------------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C> <C>
INCOME AND BALANCE SHEET ITEMS
Total interest income ................ $ 20,418 $ 39,707 $ 36,656 $ 29,397 $ 28,275 $ 31,441
Total interest expense ............... 8,405 18,113 18,291 14,031 15,271 20,894
Net interest income .................. 12,013 21,595 18,365 15,366 13,004 10,547
Provision for loan losses ............ 1,700 2,410 1,051 220 180 290
Non-interest income .................. 1,978 3,721 3,337 3,111 2,612 1,702
Non-interest expense ................. 9,413 21,609 15,856 14,882 12,171 9,733
Income before accounting change and
extraordinary items(1) ............ 2,060 906 3,356 2,396 2,155 1,447
Net income ........................... 2,060 906(2) 3,356 2,396 2,334 873
Net income applicable to common shares 2,060 906(2) 3,356 1,999 1,516 45
Total assets ......................... 487,815 495,793 487,137 426,810 389,460 391,029
Total average assets ................. 494,647 478,559 434,536 400,178 387,485 400,889
Total loans .......................... 407,090 419,861 374,285 315,957 319,060 335,739
Deposits ............................. 417,276 401,890 399,866 353,315 332,680 340,910
Borrowings ........................... 33,355 61,088 52,750 39,048 27,790 24,100
Common shareholders' equity(3) ....... 31,954 30,336 30,931 25,935 15,897 14,193
Total shareholders' equity ........... 31,954 30,336 30,931 25,935 24,977 23,393
Shares outstanding(4) ................ 3,319,625 3,315,545 3,307,082 3,300,743 1,678,796 1,596,621
PER SHARE
Book value(4) ........................ $ 9.63 $ 9.15 $ 9.35 $ 7.86 $ 9.47 $ 8.89
Primary earnings(4) .................. 0.60 0.27(2) 1.00 0.80 0.85 0.03
Fully diluted earnings(4) ............ 0.60 0.27(2) 0.99 0.74 0.72 0.03
Cash dividends declared - Common(4)(5) .12 0.24 0.17 0.23 0.18 ---
Cash dividends paid - Common(4) ...... .12 0.24 0.23 0.23 0.18 ---
Dividend payout ratio - Common(4)(5) . 19.3% 83.3%(2) 16.1% 27.0% 20.4% ---
Market price:
End of period ...................... $ 14.25 $ 11.75 $ 13.00 $ 8.25 $ 8.75 $ 8.00
52 week high ....................... 14.25 12.50 13.00 9.75 10.50 9.50
52 week low ........................ 9.75 9.25 7.25 7.00 7.75 6.38
</TABLE>
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<PAGE> 107
<TABLE>
<CAPTION>
At or for the
Six Months
Ended At or for the Year Ended December 31,
June 30, -------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSET QUALITY
Nonaccrual loans and real estate owned........ .83% 0.74% 1.96% 0.67% 1.28% 1.91%
Nonperforming assets to total assets.......... 2.27 3.08 2.42 1.78 2.35 2.09
Net charge-offs to average loans.............. 1.01 0.58 0.49 0.19 0.18 0.07
KEY RATIOS
Net interest margin........................... 5.32% 4.89% 4.48% 4.11% 3.49% 2.72%
Net interest spread........................... 4.04 3.75 3.45 3.40 2.97 2.33
Operating expenses to average assets.......... 3.81 4.52 3.65 3.72 3.14 2.43
Return on average assets...................... .83 0.19(2) 0.77 0.60 0.60 0.22
Return on average common shareholders'
equity...................................... 13.56 2.93(2) 11.96 11.98 15.51 6.66
</TABLE>
(1) The accounting change of $178,377 for 1993 resulted from the implementation
of SFAS No. 109 - "Accounting for Income Taxes." The extraordinary item of
$574,069 after tax in 1992 was due to debt refinancing.
(2) Net income included the one time special FDIC assessment for an after tax
expense of $1.6 million. Absent this one time assessment, net income for
1996 would have been $2.5 million, or $0.74 per share; and the return on
average assets and the return on average common shareholders' equity would
have been .52% and 8.26%, respectively.
(3) Preferred stock remaining at December 31, 1993 was entirely
converted/redeemed in 1994. The conversion of the preferred stock into
common stock was the primary cause for the increase in the common
shareholders' equity in 1994.
(4) Adjusted for the 5% common stock dividends declared December 17, 1996, and
paid January 24, 1997, declared December 19, 1995 and paid January 16,
1996, declared December 15, 1994 and paid January 17, 1995 and declared
December 16, 1993 and paid February 1, 1994 and the 7% common stock
dividend declared January 27, 1992 and paid February 24, 1992.
(5) Cash dividends have been paid on the common shares for 16 consecutive
quarters beginning with the first quarter of 1993 through the fourth
quarter of 1996. However, unlike prior years, the fourth quarter 1995
dividend was declared in January 1996 and causes the cash dividends
declared and the dividend pay out ratios to vary in year to year
comparisons.
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<PAGE> 108
RISK FACTORS AND OTHER CONSIDERATIONS
An investment in the Series A Preferred Shares involves a high degree
of risk. Investors should carefully consider the following risk factors and
other considerations relating to the Bank and the Series A Preferred Shares.
THE AUTOMATIC EXCHANGE
The Series A Preferred Shares will be issued in an automatic exchange
for the Preferred Capital Shares, only if (i) the Bank becomes
"undercapitalized" under prompt corrective action regulations, (ii) the Bank is
placed into conservatorship or receivership or (iii) the appropriate federal
regulatory agency, in its sole discretion, anticipates the Bank becoming
"undercapitalized" in the near term. As a result, holders of Preferred Capital
Shares would become holders of Series A Preferred Shares of the Bank at a time
when the Bank's financial condition was deteriorating or when the Bank had been
placed into conservatorship or receivership. In the event of receivership of the
Bank, the claims of depositors and secured, senior, general and subordinated
creditors of the Bank would be entitled to a priority of payment over the claims
of holders of equity interests such as the Series A Preferred Shares. As a
result of such subordination, either if the Bank were to be placed into
receivership after the automatic exchange or if the automatic exchange were to
occur after receivership of the Bank, the holders of the Series A Preferred
Shares likely would receive, if anything, substantially less than the holders of
the Series A Preferred Shares would have received had the Preferred Capital
Shares not been exchanged for Series A Preferred Shares.
BANK PREFERRED SHARES WILL NOT BE LISTED ON THE NASDAQ SYSTEM
Although the Preferred Capital Shares will be listed on the Nasdaq
System, the Bank does not intend to apply for listing of the Series A Preferred
Shares, for which the Preferred Capital Shares will be exchanged automatically
on a one-for-one basis upon the occurrence of an Exchange Event as defined
hereafter under "Exchange", on any national securities exchange or for quotation
of the Series A Preferred Shares through the Nasdaq System. Consequently, there
can be no assurance as to the liquidity of the trading markets for the Series A
Preferred Shares, if issued, or that an active public market for the Series A
Preferred Shares would develop or be maintained.
DIVIDEND AND OTHER REGULATORY RESTRICTIONS ON OPERATIONS OF THE BANK
Federal regulatory authorities have the right to examine the Bank and
its activities. Under certain circumstances, including any determination that
the Bank's activities constitute an unsafe and unsound banking practice, such
regulatory authorities will have the authority to restrict the ability of the
Bank to transfer assets, to make distributions to its stockholders (including
dividends to the holders of Series A Preferred Shares, as described below), or
to redeem shares of preferred stock. Furthermore, in the event the Bank is
placed into conservatorship or receivership, the Bank would be unable to pay
dividends on the Series A Preferred Shares. In addition, in the event of a
liquidation of the Bank, the claims of the Bank's depositors and of its secured,
senior, general and subordinated creditors would be entitled to a priority of
payment over the dividend and other claims
BP-10
<PAGE> 109
of holders of equity interests such as the Series A Preferred Shares issued
pursuant to the Automatic Exchange.
The Bank's ability to pay dividends is governed by the National Bank
Act and OCC regulations. Under such statute and regulations, all dividends by a
national bank must be paid out of current or retained net profits, after
deducting reserves for losses and bad debts. The National Bank Act further
restricts the payment of dividends out of net profits by prohibiting a national
bank from declaring a cash dividend on its shares of common stock until the
surplus fund equals the amount of capital stock or, if the surplus fund does not
equal the amount of capital stock, until one-tenth of the Bank's net profits for
the preceding half year in the case of quarterly or semi-annual dividends, or
the preceding two half-year periods in the case of annual dividends, are
transferred to the surplus fund. In addition, the prior approval of the OCC is
required for the payment of a dividend if the total of all dividends declared by
a national bank in any calendar year would exceed the total of its net profits
for the year combined with its net profits for the two preceding years, less any
required transfers to surplus or a fund for the retirement of any preferred
stock.
The OCC has the authority to prohibit the payment of dividends by a
national bank when it determines such payment to be an unsafe and unsound
banking practice. In addition, the Bank would be prohibited by federal statute
and the OCC's prompt corrective action regulations from making any capital
distribution if, after giving effect to the distribution, the Bank would be
classified as "undercapitalized" under the OCC's regulations.
Payment of dividends on the Series A Preferred Shares could also be
subject to regulatory limitations if the Bank became "undercapitalized" for
purposes of the OCC prompt corrective action regulations, which is currently
defined as having a total risk-based capital ratio of less than 8.0%, a Tier 1
risk-based capital ratio of less than 4.0% or a core capital (or leverage) ratio
of less than 4.0%. At June 30, 1997, the Bank was in compliance with all of its
regulatory capital requirements. As of that date, the Bank's total risk-based
capital ratio was 10.81%, its Tier 1 risk-based capital ratio was 7.96% and its
core capital (or leverage) ratio was 6.29%. Such ratios, adjusted to give effect
to the sale of Preferred Capital Shares in the Offering, would be 15.20%, 12.35%
and 8.73%, respectively.
DIVIDENDS NOT CUMULATIVE
Dividends on the Series A Preferred Shares are not cumulative.
Consequently, if the Board of Directors does not declare a dividend on the
Series A Preferred Shares for any quarterly period, the holders of the Series A
Preferred Shares would not be entitled to recover such dividend whether or not
funds are or subsequently become available. The Board of Directors may
determine, in its business judgment, that it would be in the best interests of
the Bank to pay less than the full amount of the stated dividends on the Series
A Preferred Shares or no dividends for any quarter notwithstanding that funds
are available. Factors that would be considered by the Board of Directors in
making this determination are the Bank's financial condition and capital needs,
the impact of legislation and regulations as then in effect or as may be
proposed, economic conditions, and such other factors as the Board may deem
relevant.
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<PAGE> 110
The Series A Preferred Shares will be issued upon an exchange of the
Preferred Capital Shares. Each Preferred Capital Share will be exchanged
automatically for one Series A Preferred Share if the appropriate regulatory
agency directs in writing an exchange of the Preferred Capital Shares for Series
A Preferred Shares because (i) the Bank becomes "undercapitalized" under prompt
corrective action regulations established pursuant to FDICIA, (ii) the Bank is
placed into conservatorship or receivership or (iii) the appropriate regulatory
agency, in its sole discretion, anticipates the Bank's becoming
"undercapitalized" in the near term. The OCC's prompt corrective action
regulations prohibit "capital distributions" (including dividends) unless an
institution is at least "adequately capitalized." Thus, at the time of the
exchange, by regulation, the Bank may not be permitted to pay dividends on the
Series A Preferred Shares. In addition, the Bank's ability to pay dividends on
the Series A Preferred Shares even if the Bank were "adequately capitalized"
following the exchange would be subject to various restrictions under OCC
regulations.
RISKS ASSOCIATED WITH LOANS GENERALLY
An investment in the Series A Preferred Shares may be affected by,
among other things, a decline in real estate values or a downturn in the
economic or business environment in the State of Michigan. In the event assets
held by the Bank become nonperforming, the Bank may not have sufficient income
or capital to pay dividends on the Series A Preferred Shares. Factors that could
affect the value of the assets held by the Bank include the following:
Geographic Concentration. Substantially all of the loans originated by
the Bank are secured by property located in the State of Michigan, or are made
to individuals or businesses doing business in the State of Michigan. These
loans may be subject to a greater risk of default than other comparable loans in
the event of adverse economic, political or business developments or natural
hazards that may affect this region and the ability of the borrowers in this
region to make payments of principal and interest on the underlying loans.
Commercial Real Estate Lending. The Bank's portfolio of mortgage assets
contains commercial real estate loans. Commercial real estate loans have certain
distinct risk characteristics. These loans generally lack standardized terms,
which may complicate their structure. Commercial real estate properties
themselves tend to be unique and are more difficult to value than residential
real estate properties. Commercial real estate loans also tend to have shorter
maturities than residential mortgage loans and may not be fully amortizing,
meaning that they may have a significant principal balance or "balloon" payment
due on maturity. In addition, commercial real estate properties, particularly
industrial and warehouse properties, are generally subject to relatively greater
environmental risks than non-commercial properties and to the corresponding
burdens and costs of compliance with environmental laws and regulations. See
"--Environmental Considerations." Also, there may be costs and delays involved
in enforcing rights of a property owner against tenants in default under the
terms of leases with respect to commercial properties. For example, tenants may
seek the protection of the bankruptcy laws, which could result in termination of
lease contracts. See "Business--Commercial Real Estate Lending."
Lease Financing and Commercial Lending. The Bank is engaged in both
commercial equipment lease financing, sometimes referred to as lease
discounting, and commercial business
BP-12
<PAGE> 111
lending. See "Business -- Lease Financing" and "-- Commercial Lending." These
types of loans typically involve a higher degree of risk than other types of
lending as they are made on the basis of the borrower's ability to make
repayment from the cash flow of the borrower's business. As a result, the
availability of funds for the repayment of lease financing loans and commercial
business loans may be substantially dependent on the success of the business
itself (which, in turn, is likely to be dependent upon the general economic
environment). The Bank's commercial business loans are usually, but not always,
secured by business assets and personal guarantees, whereas the lease loans are
generally secured by the collateral financed and guaranteed by the lessor and/or
related third parties. However, the collateral securing the loans may depreciate
over time, may be difficult to appraise and may fluctuate in value based on the
success of the business.
ENVIRONMENTAL CONSIDERATIONS
In the event that the Bank is forced to foreclose on a defaulted
mortgage loan to recover its investment in such mortgage loan, the Bank may be
subject to environmental liabilities in connection with the underlying real
property which could exceed the value of the real property. Although the Bank
intends to exercise due diligence to discover potential environmental
liabilities prior to the acquisition of any property through foreclosure,
hazardous substances or wastes, contaminants, pollutants or sources thereof (as
defined by state and federal laws and regulations) may be discovered on
properties during the Bank's ownership or after a sale thereof to a third party.
If such hazardous substances are discovered on a property which the Bank has
acquired in foreclosure or otherwise, the Bank may be required to remove those
substances and clean up the property. There can be no assurances that in such a
case the Bank would not incur full recourse liability for the entire costs of
any removal and clean-up, that the cost of such removal and clean-up would not
exceed the value of the property or that the Bank could recoup any of such costs
from any third party. The Bank may also be liable to tenants and other users of
neighboring properties. In addition, the Bank may find it difficult or
impossible to sell the property prior to or following any such clean-up.
RISK OF FUTURE REVISIONS IN POLICIES AND STRATEGIES BY BOARD OF DIRECTORS
The Board of Directors has established the investment policies and
operating policies and strategies of the Bank, certain of which are described in
the Prospectus. These policies may be amended or revised from time to time at
the discretion of the Board of Directors (in certain circumstances subject to
the approval of a majority of the Independent Directors) without a vote of the
Bank's stockholders, including holders of the Series A Preferred Shares. The
ultimate effect of any change in the policies and strategies set forth in the
Prospectus on a holder of Series A Preferred Shares may be positive or negative.
NO MARKET FOR SERIES A PREFERRED SHARES
Prior to the Exchange Event, there has been no market for the Series A
Preferred Shares as no such shares will have been issued, and there can be no
assurance that an active trading market will develop or be sustained or at what
price the Series A Preferred Shares may be resold.
BP-13
<PAGE> 112
FRANKLIN FINANCE CORPORATION
In 1997, the Bank established Franklin Finance Corporation for the
purpose of acquiring, holding and managing real estate mortgage assets. All of
Franklin Finance Corporation's common stock is owned by the Bank. It is expected
that substantially all of its mortgage assets will be acquired from the Bank.
Franklin Finance Corporation will enter into a subservicing agreement with the
Bank pursuant to which the Bank will service mortgage assets. Franklin Finance
Corporation will be the issuer of the Preferred Capital Shares which, under
certain circumstances, would be exchanged for the Series A Preferred Shares.
USE OF PROCEEDS
The Series A Preferred Shares are to be issued, if ever, in connection
with an exchange of the Preferred Capital Shares, which shares were sold
pursuant to an effective registration statement filed with the SEC. The proceeds
from the sale of the Preferred Capital Shares were used by Franklin Finance
Corporation to purchase a portfolio of mortgage assets. The exchange of
Preferred Capital Shares into Series A Preferred Shares will produce no proceeds
to the Bank.
BP-14
<PAGE> 113
CAPITALIZATION
The following table sets forth the actual capital of the Bank at June
30, 1997 and as adjusted as of such date to give effect to (i) the issuance of
the Preferred Capital Shares by Franklin Finance Corporation (assuming the
Underwriters' over-allotment option is not exercised) and (ii) an exchange of
the Preferred Capital Shares into Series A Preferred Shares of the Bank. This
table should be read in conjunction with the Consolidated Financial Statements
of the Bank and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------------------------
AS AS
ACTUAL ADJUSTED(1) ADJUSTED(2)
------ ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
LIABILITIES:
Deposits........................................................... $417,276 $417,276 $417,276
Repurchase agreements.............................................. 25,880 25,880 25,880
Subordinated capital notes......................................... 7,475 7,475 7,475
Other.............................................................. 5,230 5,230 5,230
-------- -------- --------
Total liabilities........................................... 455,861 455,861 455,861
Minority interest in capital stock of consolidated subsidiary......... --- 18,000(3) ---
SHAREHOLDER'S EQUITY:
[ ]% Noncumulative Preferred Stock, Series A, $10.00 par value,
3,000,000 shares authorized; issued and outstanding,
1,800,000 as adjusted........................................... --- --- 18,000
Common stock, $1.00 par value, 6,000,000 shares authorized,
3,319,625 shares issued and outstanding........................ 3,320 3,320 3,320
Capital contributed in excess of par............................... 24,185 24,185 24,185
Retained earnings.................................................. 4,304 4,304 4,304
Net unrealized holding gains....................................... 145 145 145
-------- -------- --------
Total shareholder's equity............................... 31,954 31,954 49,954
-------- -------- --------
Total liabilities and shareholder's equity.......... $487,815 $505,815 $505,815
======== ======== ========
REGULATORY CAPITAL RATIO
Core (or leverage)................................................. 6.29% 8.73%(3) 9.76%
Tier 1 risk-based capital.......................................... 7.96% 12.35% 12.35%
Total risk-based................................................... 10.81% 15.20% 15.20%
</TABLE>
(1) Adjusted to give effect to the issuance of the Preferred Capital Shares by
Franklin Finance Corporation.
(2) Adjusted to give effect to the exchange of the Preferred Capital Shares
into Series A Preferred Shares of the Bank.
(3) All of the preferred stock of Franklin Finance Corporation, while
outstanding, is eligible as permanent regulatory capital of the Bank and,
as such, is includable in the core capital accounts of the Bank at up to a
maximum of 25% of the Bank's total core (or leverage) capital.
BP-15
<PAGE> 114
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NET INTEREST INCOME
Net interest income, the difference between what is earned on loans and
investments and what is paid for liabilities, primarily deposits, continued its
positive trend. For 1996, 1995 and 1994, net interest income totaled $21.6
million, $18.4 million and $15.4 million, respectively. After the provision for
loan losses, net interest income was $19.2 million, $17.3 million and $15.1
million for the same years' comparison, holding relatively steady as a
percentage of net revenue at 84%, 84% and 83% for 1996, 1995 and 1994.
Expressed as a percentage of average earning assets, net interest margin
improved 9.2%, reaching 4.89% for 1996 compared to 4.48% for 1995 and 4.11% for
1994.
This improvement in 1996 was primarily a function of asset volume rather
than yield. Strong loan growth was especially evident in lease financing, the
highest yielding portfolio. Total interest income for 1996 was $39.7 million,
compared to $36.7 million in 1995 and $29.4 million in 1994.
Analysis of liability volume and price reveals interest expense due to
volume increasing, although the overall cost of funds rates decreased by a
greater amount. The growth in money market balances was the source of the
liability volume increase despite a partial offset by decreased FHLB advances
and other borrowings. As a result, interest expense in 1996 was $18.1 million,
down slightly compared to $18.3 million in 1995, following a surge from $14.0
million in 1994. According to the most recent Uniform Bank Performance Report,
the gap between interest expense of peers and Franklin narrowed from 175 basis
points to 44 basis points in four years. However, interest expense is still too
high and represents a tangible opportunity for future, continued improvement.
Net interest income is, for traditional banks, the most important component
of earnings. Future plans should hinge upon the continued preservation and
improvement of this primary revenue driver. Reducing the overall cost of funds
remains a focus and will be primarily accomplished, short term, through
certificate repricing.
BP-16
<PAGE> 115
The following tables set forth information regarding the components of, and
changes in, the Bank's net interest income.
<TABLE>
<CAPTION>
1996/1995 1995/1994
-------------------------------------- ---------------------------------
Increase/(Decrease)(1) in Increase/(Decrease)(1) in
Volume Rate/Yield Net Volume Rate/Yield Net
------------- ---------- --------- --------- ------------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans................................................ $4,809 $(406) $ 4,403 $2,241 $3,686 $5,927
Investment securities:
U.S. treasuries and mortgage-backed securities..... (1,103) (158) (1,261) 1,028 170 1,198
Interest bearing deposits with banks............... (81) (96) (177) (98) 75 (23)
Other.............................................. 67 20 87 96 61 157
------ ----- ------- ------ ------ ------
Total interest income................................ 3,692 (640) 3,052 3,267 3,992 7,259
------ ----- ------- ------ ------ ------
INTEREST EXPENSE
Deposits............................................. 1,223 (904) 319 1,018 2,356 3,374
FHLB advances........................................ (312) (53) (365) (44) 66 22
Subordinated notes................................... --- --- --- (1) (1) (2)
Other borrowings..................................... (112) (20) (132) 857 9 866
------ ----- ------- ------ ------ ------
Total interest expense............................... 799 (977) (178) 1,830 2,430 4,260
------ ----- ------- ------ ------ ------
NET INTEREST INCOME.................................. $2,893 $ 337 $ 3,230 $1,437 $1,562 $2,999
====== ===== ======= ====== ====== ======
</TABLE>
- ---------------------
(1) The change in interest due to both volume and rate has been allocated
between the factors in proportion to the relationship of the absolute
dollar amounts of the change in each.
BP-17
<PAGE> 116
<TABLE>
<CAPTION>
Year Ended December 31,(1)
------------------------------------------------------------------------
1996 1995
--------------------------------- ---------------------------------
Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans:
Commercial real estate................................ $146,060 $13,897 9.51% $163,220 $15,475 9.48%
Lease Financing....................................... 68,200 6,800 9.97 38,166 3,902 10.22
Commercial............................................ 71,527 6,787 9.49 46,590 4,805 10.31
Residential mortgage.................................. 48,435 4,320 8.92 44,659 3,926 8.79
Residential construction.............................. 22,533 2,076 9.21 19,313 1,941 10.05
Consumer.............................................. 15,211 1,613 10.60 9,588 1,040 10.85
-------- -------- -------- --------
Total loans............................................. 371,966 35,493 9.54 321,536 31,089 9.67
U.S. treasuries and mortgage-backed securities.......... 47,559 2,977 6.26 65,086 4,238 6.51
Interest-bearing deposits with banks.................... 14,133 670 4.74 15,721 847 5.39
Other................................................... 8,398 568 6.76 7,404 482 6.51
-------- -------- -------- --------
Total earning assets/interest income.................... 442,056 39,708 8.98 409,747 36,656 8.95
-------- -------- -------- --------
Cash and due from banks................................. 23,232 16,367
All other assets........................................ 16,194 11,297
Allowance for possible credit losses.................... (2,923) (2,875)
-------- -------- --
Total assets............................................ $478,559 $434,536
======== ========
LIABILITIES
Money markets........................................... $129,833 $ 5,531 4.26% $107,042 $ 4,695 4.39%
Savings accounts........................................ 362 9 2.49 402 10 2.49
NOW checking............................................ 5,690 49 0.86 5,431 49 0.90
Certificates............................................ 81,963 4,942 6.03 93,919 5,516 5.87
Jumbo certificates...................................... 98,331 5,631 5.73 89,944 5,573 6.20
-------- -------- -------- --------
Total interest-bearing deposits......................... 316,179 16,162 5.11 296,738 15,843 5.34
-------- -------- -------- --------
FHLB advances........................................... 6,512 381 5.85 11,806 746 6.32
Subordinated notes...................................... 7,475 693 9.27 7,475 693 9.27
Other................................................... 16,129 877 5.44 16,690 1,009 6.05
-------- -------- -------- --------
Total interest-bearing liabilities/expense.............. 346,295 18,113 5.23 332,709 18,291 5.50
-------- -------- -------- --------
Business/personal checking.............................. 97,021 69,594
Other liabilities....................................... 4,380 4,173
Shareholders' equity.................................... 30,863 28,060
-------- --------
Total liabilities and shareholders' equity.............. $478,559 $434,536
======== ========
Net interest income..................................... $21,595 $18,365
======= =======
Net interest spread..................................... 3.75% 3.45%
==== ====
Net interest margin..................................... 4.89% 4.48%
==== ====
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,(1)
---------------------------------------
1994
---------------------------------------
Average
Balance Interest Yield/Rate
-------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
ASSETS
Loans:
Commercial real estate.................................. $180,243 $15,382 8.53%
Lease Financing......................................... 23,022 2,236 9.71
Commercial.............................................. 30,758 2,808 9.13
Residential mortgage.................................... 40,423 2,582 6.39
Residential construction................................ 14,465 1,386 9.58
Consumer................................................ 7,573 768 10.14
-------- --------
Total loans............................................... 296,484 25,162 8.49
U.S. treasuries and mortgage-backed securities............ 49,181 3,040 6.18
Interest-bearing deposits with banks...................... 22,397 870 3.88
Other..................................................... 5,847 325 5.56
-------- --------
Total earning assets/interest income...................... 373,909 29,397 7.86
-------- --------
Cash and due from banks................................... 10,887
All other assets.......................................... 19,103
Allowance for possible credit losses...................... (3,721)
--------
Total assets.............................................. $400,178
========
LIABILITIES
Money markets............................................. $108,491 $ 3,582 3.30%
Savings accounts.......................................... 516 13 2.52
NOW checking.............................................. 6,804 52 0.76
Certificates.............................................. 120,584 6,180 5.13
Jumbo certificates........................................ 52,125 2,642 5.07
-------- --------
Total interest-bearing deposits........................... 288,520 12,469 4.32
-------- --------
FHLB advances............................................. 16,145 724 4.48
Subordinated notes........................................ 7,489 695 9.28
Other..................................................... 2,710 143 5.28
-------- --------
Total interest-bearing liabilities/expense................ 314,864 14,031 4.46
-------- --------
Business/personal checking................................ 46,051
Other liabilities......................................... 13,960
Shareholders' equity...................................... 25,303
--------
Total liabilities and shareholders' equity................ $400,178
========
Net interest income....................................... $15,366
=======
Net interest spread....................................... 3.40%
====
Net interest margin....................................... 4.11%
====
</TABLE>
- ------------------
(1) Interest and principal balances pertaining to nonaccrual loans are not
included for this analysis.
BP-18
<PAGE> 117
NONINTEREST INCOME
Fueled by deposit service fees and other charges primarily incidental
to business relationships, noninterest income grew 11.5% in 1996 compared to
1995, to $3.7 million compared to $3.3 million, respectively. Noninterest income
in 1994 was $3.1 million. Excluding gains on sales of securities and loans, the
improvement of "core" noninterest income (sustainable, recurring income derived
from operations) from 1995 to 1996 was 18.8% compared to 11.4% from 1994 to
1995.
Loan processing and servicing fees were $795,831 for 1996, $905,728 for
1995 and $805,171 for 1994. Commercial prepayment penalties accounted for the
majority of the increase in 1995 compared to 1994. In 1996, loans that paid off
prematurely were nearer to maturity, consequently the penalty fees were less
than in 1995. Fees from loan servicing continue to decrease as the portfolio,
$5.0 million at year end 1996, diminishes.
Following a year of adjusting to a new third party provider and
subsequent lower sales volume in 1995, investment product income improved 31.7%
in 1996, contrasted to an 81.4% decrease from 1994 to 1995. While the total
volume here is not yet significant, the trend is welcome and expected to
continue.
Notwithstanding steady improvement in noninterest income growth, its
ratio to average assets remains less than peer. New business relationships,
which generate deposit fees, are being added monthly. The investment product
program is undergoing further refinement and sales have increased. In 1997, fee
income will be more rigorously collected from every opportunity. These positive
dynamics point to anticipated continued noninterest income improvement.
The following table sets forth information regarding the Bank's
noninterest income.
<TABLE>
<CAPTION>
Year Ended Percent Change
------------------------------- --------------------
1996 1995 1994 1995-96 1994-95
---- ---- ---- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Deposit service charges.................... $2,200 $1,639 $1,327 34.2% 23.5%
Loan processing and servicing fees......... 796 906 805 (12.1) 12.5
Security and loan gains.................... 415 553 612 (25.0) (9.6)
Investment product income.................. 54 41 221 31.7 (81.4)
Other...................................... 256 198 146 29.3 35.6
------ ------ ------
Total non-interest income.................. $3,721 $3,337 $3,111 11.5% 7.3%
====== ====== ======
</TABLE>
NONINTEREST EXPENSE
Noninterest expense increased in every area except taxes and
supervisory fees, and totaled $21.6 million in 1996 compared to $15.9 million
and $14.9 million in 1995 and 1994, respectively.
The greatest area of increase in percentage terms was beyond control:
the one time assessment to recapitalize the thrift insurance fund. This action,
taken in the third quarter, brought
BP-19
<PAGE> 118
federal insurance premiums to $3.1 million in 1996, up 242.5% over 1995. Future
federal insurance costs, however, will be reduced by an anticipated amount in
excess of $600,000 annually.
Staff was added during 1996, particularly to meet the challenges of
advanced technology and to bring customers higher levels of service and
sophistication. More staff and standard merit increases for existing staff drove
total compensation up 19.1% in 1996 compared to 1995. Total compensation was
$8.7 million, $7.3 million and $6.9 million in 1996, 1995 and 1994,
respectively. Additional staff requires more space and equipment. In addition to
new purchases, existing personal computers were substantially upgraded in 1996
to accommodate higher level software applications. Thus, occupancy and equipment
costs rose 37.2% from 1995 to 1996 compared to 22.3% from 1994 to 1995.
The 58.3% advertising increase in 1996 compared to 1995 was a
conscious, strategic decision considered an investment from which future,
continued value could be derived. Sustained disruption in local banking services
brought on by competitors' mergers and consolidations has provided an opportune
competitive environment for several years. Aggressive, effective advertising was
accelerated to gain further small business market share.
Advertising expenses are, however, budgeted for significant reduction
in 1997 from 1996 levels. Cross selling to the existing customer base will
supplement advertising and lower the acquisition costs of new and expanded
business.
Professional fees, up 55.9% in 1996 compared to 1995 after a 39.5%
reduction in 1995 compared to 1994, were largely the result of outside legal
services, accounting and other consulting fees. Several special projects and
audits were commissioned during 1996 to ensure compliance and enhance
procedures.
Supplies and printing and communication expenses were up 25.4% and
30.5% in 1996 compared to 1995. Every vendor supplying these services will
experience more pressure in 1997 to discount prices and competitively bid for
the Bank's business.
There is plentiful opportunity and admitted need for improvement in
noninterest expense. The two largest areas unrelated to compensation, namely
federal insurance premiums and advertising, are slated for significant
reductions in 1997. Assertive bargaining with vendors, prudent control of
further staff increases and heightened accountability for cost control across
all departments will also advance this initiative.
BP-20
<PAGE> 119
The following table sets forth information regarding the Bank's
noninterest expense.
<TABLE>
<CAPTION>
Year Ended Percent Change
------------------------------- --------------------
1996 1995 1994 1995-96 1994-95
------ ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Salaries......................................... $ 6,843 $ 5,923 $ 5,570 15.5% 6.3%
Employee benefits................................ 1,897 1,417 1,322 33.8 7.2
------- ------- -------
Total compensation expense................... 8,740 7,340 6,892 19.1 6.5
Occupancy and equipment.......................... 2,530 1,844 1,508 37.2 22.3
Advertising...................................... 1,050 663 866 58.3 (23.4)
Professional fees................................ 265 170 281 55.9 (39.5)
Federal insurance................................ 3,116 910 795 242.5 14.5
Taxes and supervisory fees....................... 340 390 388 (12.8) 0.5
Supplies and printing............................ 563 449 322 25.4 39.4
Communication expense............................ 591 453 431 30.5 5.1
Defaulted loan expense........................... 579 528 941 9.7 (43.9)
Other............................................ 3,835 3,109 2,458 23.4 26.5
------- ------- -------
Total non-interest expense................... $21,609 $15,856 $14,882 36.3% 6.5%
======= ======= =======
</TABLE>
INCOME TAXES
Provisions for federal income tax for 1996, 1995 and 1994 were
$390,749, $1.4 million and $978,750, respectively. The year to year differences
reflected fluctuations in pre-tax earnings. Effective tax rates, computed by
dividing the income tax provision by income before taxes, for 1996, 1995 and
1994 were 30.1%, 30.0% and 29.0%, respectively.
EARNING ASSETS
Total loans increased 12.2% and totaled $419.9 million at year end 1996
compared to $374.3 million at year end 1995. With the exception of commercial
real estate, all other loan categories grew by varying degrees, lease financing
and commercial non-real estate the most dominant. Lease financing added $35.2
million and was, at year end 1996, the second largest portfolio segment at
23.2%. Equipment leases are purchased indirectly, primarily in pools, from local
dealers and the demand for this financing is brisk. Commercial term loans and
lines of credit increased 18.1% and represented 19.7% of the total loan
portfolio at year end 1996. Smallest in both absolute dollars and percentage of
portfolio, consumer loans nevertheless grew by 50.4% and totaled $18.7 million
at year end 1996 compared to $12.4 million the previous year. For the most part,
these are purchased pools of installment debt.
Commercial mortgages were at their lowest level in five years at year
end 1996, in both absolute dollars and as a percentage of the total portfolio.
Residential mortgages also declined as a percentage of the total portfolio,
albeit to a lesser degree. Residential and commercial construction during 1996
held relatively steady compared to 1995, with a $33.6 million portfolio at year
end, up 8.4% from $31.0 million at year end 1995.
BP-21
<PAGE> 120
In 1997 the Bank intends to continue its emphasis on lease financing,
and, to a lesser degree, indirect consumer installment loans and residential
construction. Commercial mortgages, one of the most profitable portfolios based
on recent product analysis, including historical charge-off experience, may
again become a more active investment area.
Late in 1996, the ceiling of the highly automated small business line
of credit was raised from $30,000 to $150,000. Still under review for credit
quality, operating costs and efficiency, this product, when fully launched,
should greatly appeal to the small business market and reduce commercial lending
operating costs. In early 1997, an international department, opened under the
auspices of a seasoned professional, began to service customers. Letters of
credit and other forms of import/export financing will be in the portfolio mix
for the first time in 1997. Both the expanded small business line of credit and
new international department support efforts to attract new business
relationships and contribute to future commercial loan growth.
Investment securities, consisting of U.S. Government and agency issues,
mortgage-backed securities and municipal bonds, totaled $49.3 million at year
end 1996 compared to $52.4 million at year end 1995. For both years, all
investment securities were classified available for sale.
BP-22
<PAGE> 121
The following tables set forth information regarding the Bank's loan
portfolio.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------------- ---------------- ---------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial real estate...... $139,499 33.2% $152,868 40.8% $167,283 53.0% $191,753 60.1% $212,687 63.3%
Lease financing............. 97,518 23.2 62,270 16.6 32,491 10.3 20,065 6.3 9,809 2.9
Commercial.................. 82,480 19.7 69,859 18.7 39,296 12.4 27,266 8.6 11,782 3.5
Residential mortgage........ 48,031 11.4 45,833 12.3 42,598 13.5 60,384 18.9 86,691 25.9
Residential construction.... 33,645 8.0 31,034 8.3 25,991 8.2 13,167 4.1 9,487 2.8
Consumer.................... 18,688 4.5 12,422 3.3 8,299 2.6 6,426 2.0 5,284 1.6
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans................. $419,861 100.0% $374,286 100.0% $315,958 100.0% $319,061 100.0% $335,740 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
BP-23
<PAGE> 122
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1996 1995 1994
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Outstanding loan commitments......................... $ 3,300 $ 6,100 $ 7,500
Unused commercial line of credit commitments......... 40,700 36,000 15,200
Unused home equity commitments....................... 12,200 13,600 15,800
Undisbursed residential construction loans........... 9,400 12,100 6,500
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1996
-------------------------------------------------
Within One to After
One Year Five Years Five Years Total
-------- ---------- ---------- --------
(In Thousands)
<S> <C> <C> <C> <C>
Commercial real estate.............. $39,211 $ 74,233 $26,055 $139,499
Lease financing..................... 2,790 94,192 536 97,518
Commercial.......................... 11,924 29,549 41,007 82,480
Residential mortgage................ 1,401 22,986 23,645 48,032
Residential construction............ 21,361 3,328 118 24,807(1)
Consumer............................ 1,658 11,447 5,583 18,688
------- -------- ------- --------
Total disbursed loans............... $78,345 $235,735 $96,944 $411,024
------- -------- ------- --------
TOTAL LOANS ABOVE
Fixed rates......................... $18,550 $163,416 $32,560 $214,526
Floating rates...................... 59,795 72,319 64,384 196,498
------- -------- ------- --------
Total disbursed loans............... $78,345 $235,735 $96,944 $411,024
======= ======== ======= ========
</TABLE>
- ----------------
(1) Does not include $8,838 of residential construction loans which were
not disbursed at December 31, 1996.
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
Consistent with expectations for higher provisions reported here last
year, the provision for loan losses was $2.4 million in 1996 compared to $1.1
million and $220,000 in 1995 and 1994, respectively. Charge-offs against the
reserve in 1996, 1995 and 1994, net of recoveries , were $2.1 million, $1.6
million and $562,078, respectively.
At year end 1996, the allowance as a percentage of total loans was
0.76%, compared to 0.78% at year end 1995 and 1.09% at year end 1994. Net
charge-offs to average loans outstanding were 0.58%, 0.49% and 0.19% for the
years ended 1996, 1995 and 1994, respectively.
Commercial (non real estate) and lease financing experienced the
greatest losses. Commercial charge-offs in 1996 were $953,199 and lease
financing charge-offs were $876,513. In 1995, commercial and lease financing
charge-offs were $217,471 and $1,125,961, respectively. The lease financing
portfolio did, however, have the greatest amount of recoveries in 1996 of any
portfolio with $162,353 compared to $20,025 in 1995.
Losses on transaction accounts, primarily business checking, were up
significantly and totaled $423,620 in 1996 compared to $181,071 and $73,537 in
1995 and 1994, respectively.
BP-24
<PAGE> 123
Real estate charge-offs in 1996, 1995 and 1994, both commercial and
residential, were the lowest of any portfolios.
The lease financing and commercial portfolios have grown rapidly in
recent years as the real estate concentration, both commercial and residential,
has diminished. Liquidation value on non-real estate collateral is less secure,
hence the contrast between historical low charge-off experience. Similarly,
during the same period, business deposit relationships have been the fastest
growing deposit category, bringing with them increased transactional losses.
Measures to control future loan losses include stronger underwriting
standards, a new automated collection system, suspension and probation of lease
dealers whose paper exhibits unacceptable levels of delinquency and loss,
greater scrutiny of new deposit customers and ongoing analysis of where, how and
by whom losses are being perpetrated.
The following table sets forth information regarding the Bank's
allowance for loan losses.
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period............... $2,930 $3,453 $3,795 $4,199 $4,142
Provision for losses......................... 2,410 1,051 220 180 290
CHARGE-OFFS
Commercial real estate..................... 42 172 --- --- 183
Lease financing............................ 877 1,126 438 273 ---
Commercial................................. 953 218 119 45 ---
Residential mortgage....................... 9 --- --- 126 15
Consumer................................... 553 243 223 228 39
------ ------ ------ ------ --------
Total charge-offs............................ 2,434 1,759 780 672 237
RECOVERIES
Commercial real estate..................... 9 17 143 --- ---
Lease financing............................ 163 20 2 85 ---
Commercial................................. 60 37 45 --- ---
Residential mortgage....................... --- 1 1 1 ---
Consumer................................... 62 110 27 2 4
------ ------ ------ ------ --------
Total recoveries............................. 294 185 218 88 4
------ ------ ------ ------ --------
Net charge-offs.............................. 2,140 1,574 562 584 233
------ ------ ------ ------ --------
Balance at end of period..................... $3,200 $2,930 $3,453 $3,795 $4,199
====== ====== ====== ====== ========
Allowance as a percentage of:
Total loans................................ 0.76% 0.78% 1.09% 1.19% 1.25%
Nonperforming assets....................... 86.89 30.67 121.03 76.10 56.29
Net charge-offs............................ 149.53 186.15 614.41 649.83 1,802.15
Net charge-offs to:
Average loans outstanding.................. 0.58 0.49 0.19 0.18 0.07
</TABLE>
BP-25
<PAGE> 124
DEPOSITS AND BORROWED FUNDS
Total deposits rose only slightly from year end 1995 to year end 1996,
from $399.9 million to $401.9 million. However, meaningful shifts took place
within the individual deposit categories.
Business checking deposits climbed 18.1% to $107.0 million at year end
1996 from $90.6 million at year end 1995. These relationships remain attractive
due to their positive effect on both net interest margin and fee income. At
26.6% of the deposit portfolio, this segment is now the second largest deposit
classification. Personal checking and savings, though smallest in absolute
dollars, grew 19.7% in 1996 and these accounts contribute to the benefit of
lower interest cost and fees as well.
Behind checking accounts, variable rate money market accounts are the
next most valuable deposit category and balances here grew 16.1%, climbing from
$120.8 million at year end 1995 to $140.2 million at year end 1996.
While business relationships have been and remain the primary focus in
recent years, more effective cross selling to this same group is producing
additional money market balances.
Higher cost certificates of deposit, jumbo and retail, declined. Less
aggressive pricing for these costly deposits resulted in a 22.7% reduction in
the jumbo certificate portfolio and a 17.3% reduction in retail certificates
from year end 1995 to 1996. A conscious decision to materially reduce the level
of municipal deposits was reached in 1996; competition for these deposits proved
too costly. In addition, contrary to original expectations, lower cost checking
accounts and money market savings from the municipal money managers were not
forthcoming.
Certificate account balances should continue to decline in 1997. A
large pool (approximately $8.0 million) of long term (10 year) 10.0%
certificates mature and it is likely the majority of these depositors will seek
investments with yields superior to today's certificate rates.
Ideally, and to the extent possible without taxing liquidity, replacing
certificates with lower cost demand deposits and money market balances would
vastly help bring the cost of funds in line with peer.
Short term borrowings are FHLB advances and repurchase agreements used
to supplement liquidity to meet loan demand. At December 31, 1996, of the total
$53.6 million in this category, $43.6 million matured in January 1997. The
remaining $10.0 million matures in May 1997. At year end 1995, total short term
borrowings were $45.3 million. Advances are collateralized by FHLB stock, first
mortgage loans under a specific lien arrangement and designated portfolio
securities. Repurchase agreements are collateralized by U.S. Government treasury
and agency securities.
BP-26
<PAGE> 125
The following tables set forth information regarding the Bank's
deposits.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------
1996 1995 1994
------------------ ------------------- -------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Business checking................... $106,977 23.5% $ 90,641 20.4% $ 59,818 15.5%
Money market savings................ 140,209 30.8 120,794 27.1 104,127 27.1
Personal checking and savings....... 12,021 2.6 10,044 2.3 8,226 2.1
Jumbo certificates.................. 68,786 15.1 89,034 20.0 87,471 22.8
Retail certificates................. 73,897 16.2 89,353 20.1 93,673 24.3
-------- ----- -------- ----- -------- -----
Total deposits...................... 401,890 88.2 399,866 89.9 353,315 91.8
-------- ----- -------- ----- -------- -----
Short-term borrowings............... 53,613 11.8 45,275 10.1 31,568 8.2
-------- ----- -------- ----- -------- -----
Total sources of funds.............. $455,503 100.0% $445,141 100.0% $384,883 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1996
-------------------------------------------
Less than $100,000 Greater than $100,000
------------------ ---------------------
(Dollars in Thousands)
<S> <C> <C>
Three months or less............................ $14,957 $41,877
Over three months to six months................. 15,170 19,134
Over six months to twelve months................ 17,839 13,080
Over twelve months.............................. 17,368 3,258
-------- -------
Total........................................... $65,334 $77,349
======= =======
</TABLE>
LIQUIDITY
Liquidity refers to readily available funds to meet the needs of
borrowers and depositors. Levels of liquidity are closely monitored in
conjunction with loan funding requirements and deposit outflows. Adequate
liquidity protects institutions from raising funds under duress at excessive
expense and provides a necessary cushion for occasional unpredictable
aberrations in demand. While adequate liquidity is imperative, excessive
liquidity in lower yielding cash investments or other easily marketable assets
reduces potential interest income. Thus, an appropriate balance must be
maintained to protect the institution and at the same time, prudently maximize
income opportunities.
Sources of liquidity from both assets and liabilities include deposits
at the FRB, securities available for sale, loan repayments and maturities, time
deposits at the FHLB, core deposits, FHLB advances, repurchase agreements and
subordinated capital notes.
Liquid assets at year end 1996 were $82.0 million compared to $120.7
million at year end 1995. Liability sources of liquidity were $455.5 million at
year end 1996 compared to $445.1 million at year end 1995.
BP-27
<PAGE> 126
The following table sets forth information regarding the Bank's
investment securities, all of which are classified by the Bank as available for
sale.
<TABLE>
<CAPTION>
At December 31, 1996
-------------------------------------------------------------------------------
Maturing
Within 1 Year 1-5 Years 5-10 Years + 10 Years
------------------ ----------------- ------------------- ----------------
Cost Yield Cost Yield Cost Yield Cost Yield
-------- -------- ------- -------- -------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities.................... $ 381 7.43% $10,964 6.68% $ --- ---% $ --- ---%
U.S. government and agency securities......... 1,332 6.65 33,721 6.01 --- --- --- ---
Municipal securities.......................... --- --- --- --- 1,969 7.44 $ 676 7.43
------ ------- ------ ----
Total......................................... $1,713 6.82% $44,685 6.17% $1,969 7.44% $ 676 7.43%
====== ======= ====== ====
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1996
------------------------------------------
Weighted
Amortized Fair Average
Cost Value Maturity (Years)
----------- --------- ----------------
<S> <C> <C> <C>
Mortgage-backed securities....................... $11,345 $11,405 2.32
U.S. government and agency securities............ 35,053 35,214 2.20
Municipal securities............................. 2,645 2,724 8.10
------- -------
Total............................................ $49,043 $49,343 2.54
======= =======
</TABLE>
BP-28
<PAGE> 127
CAPITAL
Shareholders' equity at year end 1996 was $30.3 million compared to
$30.9 million at year end 1995. An unrealized loss on securities available for
sale compared to an unrealized gain (net of tax), and cash and common stock
dividends insufficiently offset by net income in 1996 compared to 1995, were the
reasons for the slight decrease in shareholders' equity from 1995 to 1996.
Capital levels mandated by federal banking agencies are presented under
Regulatory Accepted Accounting Principles ("RAAP"). For determination of capital
adequacy, the accounting treatment of loan interest accruals, unrealized gains
and losses on securities, and other issues, are not identical under Generally
Accepted Accounting Principles ("GAAP") and RAAP. Under RAAP, shareholders'
equity was $29.5 million.
The Office of the Comptroller of the Currency ("OCC") measures three
separate levels of capital under RAAP: Total capital to risk weighted assets,
Tier 1 capital to risk weighted assets and Tier 1 capital to average assets. The
minimum accepted ratios for these three capital levels are 8.00%, 4.00% and
4.00%, respectively. Institutions with capital levels equal to 10.00%, 6.00% and
5.00%, respectively, for each of these measurements, are classified as "well
capitalized", the highest of five designations, by the OCC. At December 31,
1996, all three OCC capital levels for the "well capitalized" classification
were again exceeded.
Cash dividends at $0.24 for 1996 were consistent with recent years and
once again, a 5% common stock dividend was also awarded investors. Due to lower
net income resulting from the one time assessment to recapitalize the FDIC
insurance fund, the dividend payout ratio of 83.3% for 1996 is abnormally high.
Barring unforeseen occurrences, cash dividend payout ratios should return to the
range of 20.0% - 25.0% in 1997. Tangentially, a well-received dividend
reinvestment plan was installed in late 1996 allowing shareholders to cost
effectively increase their equity position. See Note 7 of Notes to Consolidated
Financial Statements herein.
The following table sets forth information regarding the Bank's
regulatory capital. See Note 7 of Notes to Consolidated Financial Statements
herein.
<TABLE>
<CAPTION>
At December 31,
-------------------------------
1996 1995 1994
---- ---- ----
(In Thousands)
TIER 1
<S> <C> <C> <C>
Common equity........................................ $29,480 $30,931 $25,935
Unrealized (gain)/loss on securities available
for sale, net of tax................................ (198) (976) 1,188
------- ------- -------
Adjusted common equity............................... 29,282 29,955 27,123
Less: Disallowed intangibles......................... (76) (87) (100)
------- ------- -------
Total tier 1 capital................................. 29,206 29,868 27,023
------- ------- -------
TIER 2
Qualifying subordinated capital notes................ 7,475 7,475 7,480
Eligible allowance for losses........................ 3,650 2,930 3,453
------- ------- -------
Total tier 2 capital................................. 11,125 10,405 10,933
------- ------- -------
Total risk-based capital............................. $40,331 $40,273 $37,956
======= ======= =======
</TABLE>
BP-29
<PAGE> 128
OTHER EARNING ASSETS
Short-term investments and interest-earning deposits held with the FHLB
of Indianapolis comprise the majority of other earning assets. Membership in the
FHLB has been maintained subsequent to the commercial bank conversion in
September 1991 and this membership has served both investment and borrowing
needs. Interest earning FHLB time deposits at year end 1996 were $3.6 million
compared to $37.3 million at year end 1995. Average yields on these deposits
were 4.74% and 5.39%, respectively.
Investing in FHLB stock is a membership requirement and at December 31,
1996, this investment totaled $5.2 million compared to $4.5 million at year end
1995. Due to also being a member of the FRB, $772,450 and $716,250 in FRB stock
was held at year end 1996 and 1995, respectively. The blended dividend yields on
the FHLB and FRB stock investments were 7.58% and 7.54% for 1996 and 1995,
respectively. Total dividends and interest received on these earning assets in
1996 were $1.1 million, compared to $1.0 million in 1995 and $1.1 million in
1994.
INTEREST RATE SENSITIVITY
As the predominant source of revenue, net interest income merits
protection and enhancement through active asset and liability management.
Interest rate risk is generally determined by the comparative levels of assets
and liabilities subject to repricing during the same time periods. Pre-payment
assumptions, competitive pressures, historical patterns and economic forecasts
should be viewed in tandem with any point in time analysis, thus adding to the
challenge of properly aligning both portfolios to not only protect, but maximize
future net interest income opportunities.
The current internal policy states that the difference between
repricing assets and liabilities within a cumulative twelve month time period
must be no greater than 10% of total assets. At December 31, 1996, this
difference, or "gap" was 8.8% in favor of liabilities; there was a cumulative
amount of $41.6 million more deposits and other borrowings maturing and
repricing within twelve months, than there were loans, securities and other
assets. The majority of both repricing liabilities and assets were within 0-3
months of December 31, 1996.
Loans which mature and renew in the first half of 1997 should do so at
rates consistent or slightly higher than previous terms. Conversely, a large
pool of long term (10 year), relatively high interest rate (10.0%) deposits
mature within the first six months of 1997. Those of this pool which renew will
reprice considerably lower than 10.0%. Net interest income should thus improve
further as loan yields maintain and deposit costs drop.
Beyond the benefit of this current portfolio dynamic, the majority of
both the asset and liability portfolios are either adjustable, tied to a widely
accepted market index, or relatively short term (five years or less). Thus,
significant pools are available for repricing to current market conditions on an
ongoing basis.
BP-30
<PAGE> 129
The Federal Financial Institutions Examination Council ("FFIEC")
revised the Uniform Financial Institutions Rating System ("UFIRS") to include a
sixth component specifically addressing sensitivity to market risk. Effective
January 1, 1997, federal bank examiners will review a bank's exposure to foreign
exchange risk, trading risk and interest rate risk as part of their evaluation.
Interest rate risk management will be the primary issue in the evaluation of
most banks' sensitivity to market risk, since foreign exchange and trading risk
exposure is generally inconsequential for the majority of institutions.
Examiners are expected to concentrate on the risk management process rather than
the actual level of interest rate risk. Specifically, an institution's grade on
this component will be based upon how well it can identify, measure, monitor and
control its interest rate risk.
The following table sets forth information regarding the Bank's
interest rate sensitivity.
<TABLE>
<CAPTION>
At December 31, 1996
----------------------------------------------------------------------------------
0-3 3-6 6-12 1-5 Over 5
Months Months Months Years Years Total
--------- -------- -------- ------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-bearing deposits $ 3,718 $ --- $ --- $ --- $ --- $ 3,718
Securities --- --- 1,712 44,902 2,429 49,043
Federal Home Loan Bank and
Federal Reserve Bank stock 5,926 --- --- --- --- 5,926
Loans 192,928 23,466 16,897 69,317 10,898 313,506
Lease financing 9,904 9,153 16,836 61,430 195 97,518
--------- -------- ------- ------- --------- --------
Total rate sensitive assets (RSA's) 212,476 32,619 35,445 175,649 13,522 469,711
--------- -------- ------- ------- --------- --------
LIABILITIES
Savings and time deposits 64,240 33,210 30,837 19,946 113,448 261,681
Money market deposits 140,209 --- --- --- --- 140,209
Short-term borrowings 53,613 --- --- --- --- 53,613
Long-term borrowings --- --- --- --- 7,475 7,475
--------- -------- ------- ------- --------- --------
Total rate sensitive liabilities (RSL's) 258,062 33,210 30,837 19,946 120,923 462,978
--------- -------- ------- ------- --------- --------
Interest sensitivity GAP (RSA's-RSL's) (45,586) (591) 4,608 155,703 (107,401) 6,733
--------- -------- ------- ------- --------- --------
Cumulative interest sensitivity GAP (45,586) (46,177) (41,569) 114,134 6,733 ---
--------- -------- ------- ------- --------- --------
Cumulative sensitivity GAP to
total rate sensitive assets (9.7)% (9.8)% (8.8)% 24.3% 1.4%
</TABLE>
NONACCRUAL LOANS AND REAL ESTATE OWNED
Nonaccrual loans and real estate owned decreased by 61.5% from year
end 1995 to year end 1996, falling from $9.6 million to $3.7 million. The
single largest nonaccrual loan present at year end 1995, a $2.35 million
apartment project, was sold. Charge-offs to the allowance for loan losses were
aggressive, particularly in the commercial non-real estate and lease financing
portfolios. A portion of one large commercial credit ($900,000) was transferred
from nonaccrual in 1995 to real estate owned in 1996 as was a significant
residential property ($440,000).
BP-31
<PAGE> 130
The following table sets forth information regarding the Bank's
nonaccrual loans and real estate owned.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
NONACCRUAL LOANS
Commercial real estate ........................ $ 309 $4,394 $ 266 $ 337 $1,073
Lease financing ............................... -- 360 879 155 2
Commercial .................................... 1,894 3,744 358 69 --
Residential mortgage .......................... -- 715 635 813 294
Consumer ...................................... -- 135 25 97 163
------ ------ ------ ------ ------
Total ......................................... 2,203 9,348 2,163 1,471 1,532
Restructured loans ............................ -- -- -- 1,407 2,814
------ ------ ------ ------ ------
Total nonaccrual loans ........................ 2,203 9,348 2,163 2,878 4,346
------ ------ ------ ------ ------
IN-SUBSTANCE FORECLOSURE
Commercial real estate ........................ -- -- -- -- 1,597
REAL ESTATE OWNED
Commercial real estate ........................ 929 -- 554 1,762 1,003
Residential mortgage .......................... 443 -- -- 123 508
------ ------ ------ ------ ------
Total in-substance foreclosure and real
estate owned ................................. 1,372 -- 554 1,885 3,108
Other repossessed assets ...................... 108 206 136 224 6
------ ------ ------ ------ ------
Total nonaccrual loans and real estate owned... $3,683 $9,554 $2,853 $4,987 $7,460
====== ====== ====== ====== ======
Total nonaccrual loans and real estate
owned as a percentage of:
Total assets ................................ 0.74% 1.96% 0.67% 1.28% 1.91%
Loans and real estate owned ................. 0.93 2.70 0.94 1.60 2.21
</TABLE>
BP-32
<PAGE> 131
BUSINESS
Franklin is a national bank headquartered in Southfield, Michigan. The
Bank conducts its business through a network of three regional banking offices
which generally offer traditional banking services and one business center
office catering exclusively to small and medium sized business customers. The
Bank was founded in 1983 as a savings institution and converted to a national
bank in 1991.
The Bank's deposit gathering and lending activities reflect the Bank's
business strategy of primarily serving the substantial number of small to
medium-sized businesses and affluent individual customers in its primary market
areas, Oakland County and the Grosse Pointe communities in Michigan. These areas
are, generally, among the more affluent areas of the Detroit metropolitan area.
The Bank attracts its target group of small to medium-sized businesses
and affluent individual customers through the promotion of select products and
services, including commercial checking accounts, business lines of credit, term
loans and equipment lease financing. The Bank competes aggressively for this
business through a systematic program of direct calling on both customers and
referral sources such as attorneys, accountants and business people. The Bank's
program is enhanced because of its well-established network of existing
relationships, which have been created over the years in the area's business
community and because of the years of banking experience of its senior
personnel.
The Bank's strategy is designed to reduce its overall cost of funds,
improve net interest margins, minimize risk, diversify its loan portfolio,
increase fee income and minimize branch related costs. Management believes that
its business strategy has been enhanced by recent bank mergers and acquisitions
in its market area which have reduced the level of competition. Further,
management believes that the resulting larger institutions are no longer as
focused on serving small to medium-sized businesses and that the Bank is
uniquely situated to serve these customers.
BP-33
<PAGE> 132
LENDING ACTIVITIES
Loan Portfolio Composition. The following table sets forth information
concerning the composition of the Bank's loan portfolio in dollar amounts and
percentages, by type of loan. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Earning Assets" for five year
historical information.
<TABLE>
At December 31,
At June 30, ----------------------------------------------------------------
1997 1996 1995 1994
-------------------- ----------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent
--------- -------- ---------- ------- --------- ------- --------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial real estate ................... $ 109,872 26.8% $ 139,499 33.2% $ 152,868 40.8% $ 167,283 53.0%
Lease financing .......................... 115,796 28.5 97,518 23.2 62,270 16.6 32,491 10.3
Commercial ............................... 81,229 20.0 82,480 19.7 69,859 18.7 39,296 12.4
Residential mortgage ..................... 50,247 12.4 48,031 11.4 45,832 12.3 42,597 13.5
Residential construction ................. 31,402 7.7 33,645 8.0 31,034 8.3 25,991 8.2
Consumer ................................. 18,544 4.6 18,688 4.5 12,422 3.3 8,299 2.6
--------- ----- --------- ----- --------- ----- --------- -----
Total loans .............................. 407,090 100.0% 419,861 100.0% 374,285 100.0% 315,957 100.0%
===== ===== ===== =====
Less
Undisbursed funds ...................... 3,992 8,837 10,598 6,737
Amounts due on underlying mortgages
on commercial real estate loans ...... 302 364 479 653
Unamortized discounts on purchased
loans ................................. 170 156 140 251
Unamortized discounts on lease
financing ............................. 16,415 14,338 9,196 4,544
Unamortized net loan expense ........... (17) 28 11 (99)
--------- --------- --------- ----------
Loans .................................... 386,228 396,138 353,861 303,871
Allowance for loan losses ................ 2,925 3,200 2,930 3,453
--------- --------- --------- ----------
Net loans ................................ $ 383,303 $ 392,938 $ 350,931 $ 300,418
========= ========= ========= =========
</TABLE>
BP-34
<PAGE> 133
Commercial Real Estate Lending. The Bank has historically originated
permanent loans secured by commercial real estate and, to a significantly lesser
extent, land development loans. Essentially all commercial real estate loans
originated by the Bank to date have been secured by real property located in
Michigan. See "Risk Factors--Risks Associated with Lending Generally."
The Bank's commercial real estate loans generally are for terms of five
to ten years with 25 year amortization periods, have loan-to-value ratios of up
to 75% of the appraised value of the security property, and are typically
secured by full or partial personal guarantees of the borrowers. At June 30,
1997, approximately 47% of the Bank's commercial real estate loan portfolio had
adjustable rates. Of these 41% are tied to prime and adjust daily and 59% are
tied to a treasury index and adjust semi-annually.
At June 30, 1997, the Bank's largest commercial real estate loan was a
$4.2 million loan secured by a multi-family project located in Ingham County,
Michigan. The Bank had only four other commercial real estate loans in excess of
$2.5 million at such date. At June 30, 1997, all of these loans were performing
in accordance with their payment terms.
The following table shows the composition of the Bank's commercial real
estate loans at June 30, 1997. See "Non-Performing Assets and Risk Elements."
<TABLE>
<CAPTION>
Loans Percentage Amount
Outstanding of Total Non-Performing
----------- ---------- --------------
(Dollars in thousands)
<S> <C> <C> <C>
Multifamily residential .............. $ 28,981 26.4% $ --
Retail (shopping center) ............. 24,595 22.4 --
Neighborhood office .................. 20,136 18.3 818
Light industrial ..................... 18,607 16.9 125
Mobile home parks and nursing homes .. 5,109 4.7 --
Other ................................ 12,444 11.3 309
-------- ----- --------
Total commercial real estate loans ... $109,872 100.0% $ 1,252
======== ===== ========
</TABLE>
Commercial real estate lending entails potential risks which are not
inherent in other types of lending. These potential risks include the
concentration of principal in a limited number of loans and borrowers, the
effects of a decline in commercial real estate values on property
collateralizing the loan, and the effects of a decline in general economic
conditions on income producing properties. Furthermore, the repayment of loans
secured by commercial real estate is typically dependent upon the successful
operation of the related real estate project. If the cash flow from the project
is reduced (for example, if leases are not obtained or renewed, or a bankruptcy
court modifies a lease term, or a major tenant is unable to fulfill its lease
obligations), the borrower's ability to repay the loan may be impaired. See also
"Risk Factors -- Risks Associated with Loans Generally."
Lease Financing. The Bank regularly purchases small-ticket lease loans
from over a dozen equipment lease dealers. Purchases occur on a loan by loan
basis or through the purchase of pools of lease loans. The leases are originated
by the various lease dealers to small businesses, municipalities and other
entities usually located in Southeastern Michigan and, to a lesser extent,
outside the state of Michigan. By dollar volume, 85% of the lease loans are
located in Michigan.
BP-35
<PAGE> 134
In recent years, the Bank has emphasized this type of lending and, as of June
30, 1997, the portfolio had grown to $115.8 million. The Bank does not originate
any lease loans on a direct basis.
Typically, the Bank's lease loans are for shorter durations (usually
less than 60 months) and higher yields than other commercial loans. The lease
loans are generally secured by the collateral financed and guaranteed by the
lessee and/or related third parties. The equipment securing the Bank's lease
financing includes such items as computer equipment, telephone systems, medical
equipment, transportation equipment, office equipment and machine tools. The
average size indirect lease loan is $25,000.
The lease financing done by the Bank is not to be confused with direct
leasing. Under a direct lease, the leasing company acts as lessor and actually
owns the equipment, leases it to a third party and takes back the equipment at
the end of the lease and assumes the accompanying residual risk. Under the
Bank's lease loans, the Bank will not be the lessor, but rather the Bank will be
a funding source to the leasing company ("Lessor"). The Bank will make a loan to
the Lessor based on the discounted value of the lease payment stream and will
take an assignment of the lease payments which will then be made directly to the
Bank. The Lessor continues to own the equipment and assumes the residual risk,
which means that the Bank is not dependent on the residual value of the
equipment at the end of the lease loan term to realize its expected rate of
return. The Bank simply discounts a stream of payments and services the loan.
Lease loans typically involve a higher degree of risk than other types
of commercial loans and are made based primarily on the perceived ability of the
business to repay the loan from operations, rather than on the value of the
collateral. See also "Risk Factors--Risks Associated with Lending Generally."
Commercial Lending. The Bank's commercial lending activities encompass
loans with a variety of purposes and security, including loans to finance
accounts receivable, inventory and equipment. At June 30, 1997, the Bank had 48
standby letters of credit outstanding, in an aggregate amount of $4.0 million.
Generally, the Bank's commercial business lending has been limited to borrowers
headquartered, or doing business, in the Bank's market area.
The Bank originates both secured and unsecured commercial loans to
small and medium-sized businesses located in Southeastern Michigan. The loans
include term loans, lines of credit, documentary and standby letters of credit
and a proprietary unsecured product known as "Express Cash" lines of credit. The
Bank does not purchase any commercial loans.
The term loans, lines of credit and letters of credit are generally
originated on a secured basis with interest rates tied to the prevailing prime
interest rate. Collateral consists of accounts receivable, inventory, specific
equipment and other designated business assets. All such loans typically are
wholly or partially personally guaranteed by the business owner or related
parties.
The "Express Cash" line of credit is available to the Bank's qualified
business checking account customers in amounts up to $150,000. These loans are
unsecured to borrowers at higher rates than are charged other types of business
borrowers. Each customer is guaranteed a 24 hour loan review process.
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Commercial loans involve significant risk and typically are made on the
basis of the borrower's ability to make repayment from the cash flow of the
borrower's business. As a result, the availability of funds for the repayment of
commercial business loans may be substantially dependent on the success of the
business itself. Further, the collateral securing the loans may depreciate over
time, may be difficult to appraise and may fluctuate in value based on the
success of the business. See also "Risk Factors--Risks Associated with Lending
Generally."
Residential Mortgage Lending. In May 1996, the Bank ceased soliciting
residential mortgage loan originations; however, from time to time the Bank will
make such loans to existing customers. Franklin's existing residential mortgage
loan portfolio, by dollar value, consists of approximately 50% fixed rate
mortgage loans and 50% adjustable rate mortgage ("ARM") loans. The Bank's ARM
loans generally amortize over 30 years with rate adjustments every year during
the term of the loan. The Bank's fixed-rate loans were typically originated with
a term of up to seven years with an amortization period of up to 30 years. Loan
to value ratios on residential mortgage loans originated by the Bank typically
did not exceed 80%.
Residential Construction Lending. Through its subsidiary, Franklin Home
Lending Group, Inc., the Bank makes construction loans to builders and
developers for the construction of one- to four-family residences in the Bank's
lending market area. To a lesser extent, the Bank also makes construction loans
on single-family residences to individuals who will ultimately be the
owner-occupier of the house. Substantially all of the Bank's construction loans
have been originated with adjustable rates of interest and have terms of
eighteen months or less. Construction loans generally have a maximum
loan-to-value ratio of 80%. The Bank obtains personal guarantees for all of its
construction loans.
The Bank's risk of loss on a construction loan is dependent largely
upon the accuracy of the initial estimate of the property's value upon
completion of the project and the estimated cost (including interest) of the
project. If the estimate of construction cost proves to be inaccurate, the Bank
may be required to advance funds beyond the amount originally committed in order
to permit completion of the project. If the estimate of value proves to be
inaccurate, the Bank may be confronted, at or prior to the maturity of the loan,
with a project having a value which is insufficient to assure full repayment.
When loan payments become due, borrowers may experience cash flow from the
property which is not adequate to service total debt. In such cases, the Bank
may be required to modify the terms of the loan. See "--Loan Delinquencies."
Consumer Lending. The Bank originates a limited amount of consumer
loans. Consumer loans originated by the Bank are offered at fixed and adjustable
rates of interest.
Consumer loans generally entail greater risk than do mortgage loans,
since many consumer loans are typically unsecured or secured by rapidly
depreciating assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not warrant
further substantial collection efforts against the borrower beyond obtaining a
deficiency judgment. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Furthermore, the
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application of various federal and state laws, including federal and state
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans.
LOANS TO ONE BORROWER
Under federal law, the aggregate amount of loans that the Bank is
permitted to make to any one borrower is generally limited to 15% of unimpaired
capital and surplus, plus an additional 10% for consumer installment loans. At
June 30, 1997, the Bank's loans to one borrower limit was approximately $6.2
million at the 15% level and $10.4 million including additional consumer
installment loans. See "Regulation". At June 30, 1997, the Bank had no loans to
one borrower in excess of its lending limit. The Bank's four largest loans to
one borrower or a group of related borrowers at June 30, 1997 totaled
$4.6 million, $4.4 million, $4.2 million and $4.0 million, and the Bank had
only two other loan concentrations in excess of $3.0 million at such date. At
June 30, 1997, all of the foregoing loans were performing in accordance with
their terms.
LOAN DELINQUENCIES
The following table sets forth information concerning delinquent loans
at June 30, 1997. The amounts presented represent the total remaining principal
balances of the related loans (before reserves for losses), rather than the
actual payment amounts which are overdue.
<TABLE>
<CAPTION>
Loans Delinquent for:
-----------------------------------------------------------------
30-59 Days 60-89 Days 90 Days and Over Total
----------------- ----------------- ----------------- -----------------
Number Amount Number Amount Number Amount Number Amount
------ ------ ------ ------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial real estate ..... 6 $ 1,886 2 $ 481 2 $ 943 10 $ 3,310
Lease financing ............ 130 2,094 54 803 27 591 211 3,488
Commercial ................. 21 1,205 5 565 14 3,878 40 5,648
Residential mortgage ....... 3 195 1 36 5 1,143 9 1,364
Residential construction ... 5 705 3 328 3 356 11 1,399
Consumer ................... 125 344 66 146 18 76 209 566
------- ------- ------- ------- ------- ------- ------- -------
Total ................... 290 $ 6,429 131 $ 2,359 69 $ 6,987 490 $15,775
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
NONPERFORMING ASSETS AND RISK ELEMENTS
Nonaccrual loans are loans where, in the opinion of management,
reasonable doubt exists as to the full, timely collection of interest or
principal. Generally loans are placed on nonaccrual status when either principal
or interest is 90 days or more past due. The Bank generally places these loans
on a nonaccrual status unless some payments on the loan are being made,
management believes the loan will be brought current in the near term and such
loans are well secured and in the process of collection. Interest on loans is
generally accrued daily based on the principal balance outstanding. However,
when a loan is placed on nonaccrual status, the accrual of interest income is
discontinued and uncollected accrued interest is charged against current income.
For the six months ended June 30, 1997 and the year ended December 31,
1996, the Bank would have recorded interest income of $324,000 and $291,000,
respectively, if nonaccrual and
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restructured loans had performed in accordance with their original terms. The
Bank recognized $4,000 and $108,000, respectively, of interest income on these
loans in the 1997 and 1996 periods.
The following table sets forth the amounts and categories of risk
elements in the Bank's loan portfolio:
<TABLE>
<CAPTION>
At December 31,
At June 30, ----------------------------------------------------
1997 1996 1995 1994 1993 1992
------- ------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
ACCRUING LOANS PAST DUE 90
DAYS OR MORE
Commercial real estate ........... $ 943 $ 6,387 $ 1,182 $ 3,398 $ 3,616 $ --
Lease financing .................. 591 1,240 120 250 146 --
Commercial ....................... 3,878 2,685 742 838 26 --
Residential mortgage ............. 1,499 929 141 194 233 667
Consumer ......................... 76 354 73 57 156 47
------- ------- ------- ------- ------- -------
Total ............................ 6,987 11,595 2,258 4,737 4,177 714
------- ------- ------- ------- ------- -------
NONACCRUAL LOANS
Commercial real estate ........... 309 309 4,394 266 337 1,073
Lease financing .................. -- -- 360 879 155 2
Commercial ....................... 1,295 1,894 3,744 358 69 --
Residential mortgage ............. -- -- 715 635 813 294
Consumer ......................... -- -- 135 25 97 163
------- ------- ------- ------- ------- -------
Total ............................ 1,604 2,203 9,348 2,163 1,471 1,532
Restructured loans ............... -- -- -- -- 1,407 2,814
------- ------- ------- ------- ------- -------
Total nonperforming loans ........ 8,591 13,798 11,606 6,900 7,055 5,060
------- ------- ------- ------- ------- -------
IN-SUBSTANCE FORECLOSURE
Commercial mortgage .............. -- -- -- -- -- 1,597
REAL ESTATE OWNED
Commercial real estate ........... 2,124 929 -- 554 1,762 1,003
Residential mortgage ............. -- 443 -- -- 123 508
------- ------- ------- ------- ------- -------
Total in-substance foreclosure
and real estate owned ........... 2,124 1,372 -- 554 1,885 3,108
Other repossessed assets ......... 337 108 206 136 224 6
------- ------- ------- ------- ------- -------
Total nonperforming assets ....... $11,052 $15,278 $11,812 $ 7,590 $ 9,164 $ 8,174
======= ======= ======= ======= ======= =======
Total nonperforming assets as
a percentage of:
Total assets ................... 2.27% 3.08% 2.42% 1.78% 2.35% 2.09%
Loans and real estate owned .... 2.70 3.63 3.16 2.40 2.86 2.41
Total nonaccrual loans and real
estate owned as a percentage of:
Total assets ................... 0.83% 0.74% 1.96% 0.67% 1.28% 1.91%
Loans and real estate owned .... 1.05 0.93 2.70 0.94 1.60 2.21
</TABLE>
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<PAGE> 138
Included in accruing loans delinquent 90 days or more are the following
loans: one commercial real estate loan totaling $813,000 which was paid in full
during July 1997; three commercial loans totaling $3.0 million; and one
residential mortgage loan totaling $950,000.
The three commercial loans had an outstanding balance as of June 30,
1997 of $1.4 million, $1.1 million and $600,000. The $1.4 million commercial
loan has been restructured and is currently performing in accordance with its
repayment terms. The commercial loan totaling $1.1 million had matured at June
30, 1997 and was in the process of being renewed by the Bank. Prior to renewal,
this loan had been fully performing in accordance with its payment terms. This
loan has subsequently been renewed and is fully performing. The third commercial
loan totaling $600,000 has been written down by the Bank to $300,000. The
borrower has filed for protection from creditors under the federal bankruptcy
statutes.
The Bank has commenced foreclosure proceedings on the residential
mortgage loan totaling $950,000. A 1993 appraisal valued the property securing
this loan at approximately $1.2 million and the borrower has received an offer
to purchase the property for approximately $1.5 million. There are subordinated
liens totaling in excess of $600,000 secured by this residence which are held
by other financial institutions.
OTHER REAL ESTATE OWNED
Other real estate owned totaled $2.1 million at June 30, 1997 compared
to $1.4 million at December 31, 1996. At June 30, 1997, other real estate owned
consisted of four loans secured by three properties (one industrial property,
one restaurant and one apartment complex).
At foreclosure, real estate is recorded at estimated fair value less
disposal costs. Any difference between estimated fair value and the loan balance
is charged to the allowance for loan losses.
OTHER LOANS OF CONCERN
At June 30, 1997, in addition to nonperforming assets, the Bank had
50 loans categorized as other loans of concern aggregating $9.5 million, which
are classified by management as "substandard" for regulatory classification
purposes. These are loans which are currently performing but which demonstrate
a specific weakness or weaknesses which, if not corrected, could cause failure
of the borrower and default. These loans are closely monitored by management.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established at levels considered
appropriate based on management's judgment of potential losses in the loan
portfolio. The loan portfolio is reviewed at least quarterly for changes in
performance, collateral value and overall quality. Allocated allowances are
established for problem loans with expected losses, and in addition, allowances
are established for unidentified potential losses. Regulatory agencies, as an
integral part of their examination process, periodically review the Bank's
allowance for loan losses. Such agencies may require the
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<PAGE> 139
Bank to recognize additions to the allowance based upon their judgment of the
information available to them at the time of their examination. A $1.70 million
provision for potential loan losses was made in the first six months of 1997,
compared to $2.41 million in fiscal 1996 and $1.05 million in fiscal 1995.
Management's judgment in determining the level of the allowance for loan losses
is influenced by several factors during the quarterly reviews. These factors
include, but are not limited to, past loan performance and loss experience,
current economic and market conditions, collateral location and market values,
and delinquency statistics and ratios. In addition, management considers the
level of nonperforming assets and classified assets, the level of lending
activity and the overall size of the loan portfolio. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Should actual circumstances and losses differ substantially from management's
assumptions or estimates, such allowance for loan losses may not be sufficient
to absorb all future losses, and net loans could be significantly and adversely
affected.
The following table sets forth an analysis of the Bank's allowance for
loan losses:
<TABLE>
<CAPTION>
For the
Six Months
Ended
June 30, For the Year Ended December 31,
---------- -------------------------------------------------
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period .. $3,200 $2,930 $3,453 $3,795 $4,199 $4,142
Provision for losses ............ 1,700 2,410 1,051 220 180 290
CHARGE-OFFS:
Commercial real estate ........ -- 42 172 -- -- 183
Lease financing ............... 1,177 877 1,126 438 273 --
Commercial .................... 625 953 218 119 45 --
Residential mortgage .......... 113 9 -- -- 126 15
Consumer ...................... 369 553 243 223 228 39
------ ------ ------ ------ ------ ------
Total charge-offs ............... 2,284 2,434 1,759 780 672 237
RECOVERIES:
Commercial real estate ........ -- 9 17 143 -- --
Lease financing ............... 137 163 20 2 85 --
Commercial .................... 77 60 37 45 -- --
Residential mortgage .......... 1 -- 1 1 1 --
Consumer ...................... 94 62 110 27 2 4
------ ------ ------ ------ ------ ------
Total recoveries ................ 309 294 185 218 88 4
------ ------ ------ ------ ------ ------
Net charge-offs ................. 1,975 2,140 1,574 562 584 233
------ ------ ------ ------ ------ ------
Balance at end of period ........ $2,925 $3,200 $2,930 $3,453 $3,795 $4,199
====== ====== ====== ====== ====== ======
ALLOWANCE AS A PERCENTAGE OF:
Total loans ................... 0.76% 0.76% 0.78% 1.09% 1.19% 1.25%
Nonperforming loans ........... 26.47 20.95 24.81 45.49 41.41 51.37
Net charge-offs ............... 148.10 149.53 186.15 614.41 649.83 1,802.15
Net charge-offs to average loans
outstanding ................... 1.01 0.58 0.49 0.19 0.18 0.07
</TABLE>
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<PAGE> 140
The following table summarizes the allocation of the allowance for loan
losses by major categories at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
At June 30, -------------------------------------------------------------------
1997 1996 1995 1994
------------------ -------------------------------------------------------------------
Percent of Percent of Percent of Percent of
Loans to Loans to Loans to Loans to
Amount Total Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial real estate .... $ 123 0.11% $ 180 0.12% $ 454 0.29% $ 784 0.46%
Lease financing ........... 932 0.94 1,177 1.42 1,308 2.60 1,539 4.53
Commercial ................ 1,766 2.16 1,622 2.09 910 1.63 611 1.72
Residential mortgage ...... 3 -- 50 0.07 78 0.12 118 0.23
Residential construction .. -- -- -- -- -- -- -- --
Consumer .................. 101 0.56 171 0.91 180 1.21 401 5.65
------ ------ ------ ------
Total ................. $2,925 0.76% $3,200 0.81% $2,930 0.85% $3,453 1.15%
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------
1993 1992
-----------------------------------------------
Percent of Percent of
Loans to Loans to
Amount Total Amount Total
------ ----- ------ -----
<S> <C> <C> <C> <C>
Commercial real estate .... $3,435 1.79% $3,973 1.85%
Lease financing ........... 225 1.40 148 1.51
Commercial ................ 48 0.18 32 0.30
Residential mortgage ...... 47 0.07 20 0.02
Residential construction .. -- -- -- --
Consumer .................. 40 0.67 26 0.41
------ ------
Total ................. $3,795 1.22% $4,199 1.26%
====== ======
</TABLE>
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<PAGE> 141
INVESTMENT ACTIVITIES
The Bank has invested in various securities which are acquired in the
capital markets. These investments consist of mortgage, government, agency,
municipal, and corporate debt securities.
The following table presents information concerning the type and fair
value of the Bank's investment securities at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
At June 30, ----------------------------------
1997 1996 1995 1994
---- ---- ---- ------
(In Thousands)
<S> <C> <C> <C> <C>
U.S. treasury and agency obligations .. $28,533 $35,214 $33,971 $44,314
Municipal securities .................. 2,711 2,724 3,158 2,703
Mortgage securities ................... 10,336 11,405 15,280 19,110
------- ------- ------- -------
Total ............................ $41,580 $49,343 $52,409 $66,127
======= ======= ======= =======
</TABLE>
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Earning Assets," "--Liquidity" and Note 3 of Notes to
Consolidated Financial Statements for additional information regarding the
Bank's investment securities.
SOURCE OF FUNDS
Deposits are the primary source of the Bank's funds for use in lending
and for other general business purposes. In addition to deposits, the Bank
derives funds from loan repayments, advances from the FHLB of Indianapolis and
other borrowings, and at times has derived funds from reverse repurchase
agreements and loan and securities sales. Scheduled loan repayments are a
relatively stable source of funds, while loan prepayments and interest-bearing
deposit inflows and outflows are significantly influenced by general interest
rates and money market conditions. Borrowings may be used to compensate for
reductions in normal sources of funds, such as deposit inflows at less than
projected levels or deposit outflows, or to support expanded activities.
Historically, the Bank has borrowed primarily from the FHLB of Indianapolis and
through institutional reverse repurchase agreements. For additional information
on the Bank's deposits and borrowings, see Notes 4 and 6 of Notes to
Consolidated Financial Statements for the year ended December 31, 1996 and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Since 1992 the Bank has emphasized its no interest business checking
and money market savings accounts in order to reduce its cost of funds and
provide a more stable, long-term source of deposits than would be available from
certificate of deposits. The ability of the Bank to attract and maintain
deposits, and its cost of funds, have been, and will continue to be,
significantly affected by general economic and business conditions.
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<PAGE> 142
COMPETITION
Franklin competes aggressively for its business through a systematic
program of direct calling on both customers and referral sources such as
attorneys, accountants and business people. The Bank's program is enhanced
because of its well-established network of existing relationships, which have
been created over the years in the area's business community and because of the
years of banking experience and community involvement of its senior personnel.
The Bank's programs and services are further enhanced by its distinctive
marketing focus, including its radio advertising campaign and by referrals from
the growing base of existing business customers. Generally, the Bank believes
that it should attempt to compete in areas in which it can truly develop niche
products and services so as to avoid direct face-to-face competition with larger
financial institutions.
Direct competition for deposits comes from other commercial banks,
credit unions and savings institutions. Additional significant competition for
deposits comes from money market mutual funds and corporate and government
securities. The primary factors in competing for loans are interest rates and
the range of services offered. Competition for origination of real estate loans
and business loans normally comes from other commercial banks and insurance
companies.
EMPLOYEES
At June 30, 1997, the Bank had 202 employees, including 20 part-time
employees. Management considers its relations with its employees to be
satisfactory. The Bank's employees are not represented by any collective
bargaining group.
The Bank currently maintains a comprehensive employee benefit program
providing, among other benefits, a 401(k) plan and an Employee Stock Ownership
Program, hospitalization and major medical insurance, paid sick leave, long-term
disability insurance and life insurance.
REGULATION
GENERAL
The Bank is a national bank, the deposits of which are federally
insured and backed by the full faith and credit of the United States Government.
Accordingly, the Bank is subject to broad federal regulation and oversight
extending to all its operations by the OCC and the FDIC. The Bank is also a
member of the FHLB of Indianapolis. The deposits of the Bank are insured by the
SAIF, which is administered by the FDIC.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
FEDERAL REGULATION OF NATIONAL BANKS
The OCC has extensive authority over the operations of national banks.
As part of this authority, the Bank is required to file periodic reports with
the OCC and is subject to periodic
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<PAGE> 143
examinations by the OCC. All national banks are subject to a semi-annual
assessment, based upon the bank's total assets, to fund the operations of the
OCC.
The OCC also has extensive enforcement authority over all national
banks, including the Bank. This enforcement authority includes, among other
things, the ability to assess civil money penalties, to issue cease-and-desist
or removal orders and to initiate injunctive actions. In general, these
enforcement actions may be initiated for violations of laws and regulations and
unsafe or unsound practices. Other actions or inactions may provide the basis
for enforcement action, including misleading or untimely reports filed with the
OCC. Except under certain circumstances, public disclosure of final enforcement
actions by the OCC is required.
The OCC, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits. Any institution
which fails to comply with these standards must submit a compliance plan. A
failure to submit a plan or to comply with an approved plan will subject the
institution to further enforcement action. The OCC and the other federal banking
agencies have also proposed additional guidelines on asset quality and earnings
standards. No assurance can be given as to whether or in what form the proposed
regulations will be adopted.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC
As insurer, the FDIC is authorized to impose deposit insurance premiums
and to conduct examinations of and require reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious risk
to the FDIC. The FDIC also has the authority to initiate enforcement actions
against national banks, after giving the OCC an opportunity to take such action,
and may terminate deposit insurance if it determines that the institution has
engaged in unsafe or unsound practices or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions will be made by the FDIC semi-annually.
In order to equalize the deposit insurance premium schedules for BIF
and SAIF insured institutions, the FDIC imposed a one-time special assessment on
all SAIF-assessable deposits pursuant to federal legislation passed on September
30, 1996. The Bank's special assessment, which was $1.6 million net of income
tax, was paid in November 1996. Effective January 1, 1997, the
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<PAGE> 144
premium schedule for BIF and SAIF insured institutions ranged from 0 to 27 basis
points. However, SAIF-insured institutions such as the Bank are required to pay
a Financing Corporation (FICO) assessment, in order to fund the interest on
bonds issued to resolve thrift failures in the 1980s, equal to 6.48 basis points
for each $100 in domestic deposits, while BIF-insured institutions pay an
assessment equal to 1.52 basis points for each $100 in domestic deposits. The
assessment is expected to be reduced to 2.43 basis points no later than January
1, 2000, when BIF insured institutions fully participate in the assessment.
These assessments, which may be revised based upon the level of BIF and SAIF
deposits, will continue until the bonds mature in the year 2017.
National Banks. The Bank is subject to the capital regulations of the
OCC. The OCC's regulations establish two capital standards for national banks: a
leverage requirement and a risk-based capital requirement. In addition, the OCC
may, on a case-by-case basis, establish individual minimum capital requirements
for a national bank that vary from the requirements which would otherwise apply
under OCC regulations. A national bank that fails to satisfy the capital
requirements established under the OCC's regulations will be subject to such
administrative action or sanctions as the OCC deems appropriate.
The leverage ratio adopted by the OCC requires a minimum ratio of "Tier
1 capital" to adjusted total assets of 3% for national banks rated composite 1
under the CAMEL rating system for banks. National banks not rated composite 1
under the CAMEL rating system for banks are required to maintain a minimum ratio
of Tier 1 capital to adjusted total assets of 4% to 5%, depending upon the level
and nature of risks of their operations. For purposes of the OCC's leverage
requirement, Tier 1 capital generally consists of common stockholders' equity
and retained income and certain non-cumulative perpetual preferred stock and
related income, except that no intangibles and certain purchased mortgage
servicing rights and purchased credit card relationships may be included in
capital.
The risk-based capital requirements established by the OCC's
regulations require national banks to maintain "total capital" equal to at least
8% of total risk-weighted assets. For purposes of the risk-based capital
requirement, "total capital" means Tier 1 capital (as described above) plus
"Tier 2 capital," provided that the amount of Tier 2 capital may not exceed the
amount of Tier 1 capital, less certain assets. The components of Tier 2 capital
include certain permanent and maturing capital instruments that do not qualify
as core capital and general valuation loan and lease loss allowances up to a
maximum of 1.25% of risk-weighted assets.
The OCC has revised its risk-based capital requirements to permit the
OCC to require higher levels of capital for an institution in light of its
interest rate risk. In addition, the OCC has proposed that a bank's interest
rate risk exposure would be quantified using either the measurement system set
forth in the proposal or the institution's internal model for measuring such
exposure, if such model is determined to be adequate by the institution's
examiner. Small institutions that are highly capitalized and have minimal
interest rate risk, would be exempt from the rule unless otherwise determined by
the OCC. Management of the Bank does not believe the OCC's proposed interest
rate risk component regulations would have any material impact on the Bank's
capital, if adopted as proposed.
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<PAGE> 145
Prompt Corrective Action. The OCC is authorized and, under certain
circumstances required, to take certain actions against national banks that fail
to meet their capital requirements. The OCC is generally required to take action
to restrict the activities of an "undercapitalized association" (generally
defined to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OCC may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OCC is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
Any national banking association that fails to comply with its capital
plan or is "significantly undercapitalized" (i.e., Tier 1 risk-based or core
capital ratios of less than 3% or a risk-based capital ratio of less than 6%)
must be made subject to one or more of additional specified actions and
operating restrictions which may cover all aspects of its operations and include
a forced merger or acquisition of the bank. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OCC
must appoint a receiver (or conservator with the concurrence of the FDIC) for an
association, with certain limited exceptions, within 90 days after it becomes
critically undercapitalized. Any undercapitalized association is also subject to
the general enforcement authority of the OCC, including the appointment of a
conservator or a receiver.
The OCC is also generally authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OCC of any of these measures on the Bank may have
a substantial adverse effect on the Bank's operations and profitability and the
value of its common stock.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS
The Bank's ability to pay dividends is governed by the National Bank
Act and OCC regulations. Under such statute and regulations, all dividends by a
national bank must be paid out of current or retained net profits, after
deducting reserves for losses and bad debts. The National Bank Act further
restricts the payment of dividends out of net profits by prohibiting a national
bank from declaring a cash dividend on its shares of common stock until the
surplus fund equals the amount of capital stock or, if the surplus fund does not
equal the amount of capital stock, until one-tenth of the Bank's net profits for
the preceding half year in the case of quarterly or semi-annual dividends, or
the preceding two half-year periods in the case of annual dividends, are
transferred to the surplus fund. In addition, the prior approval of the OCC is
required for the payment of a dividend if the total of all dividends declared by
a national bank in any calendar year would exceed the total of its net profits
for the year combined with its net profits for the two preceding years, less any
required transfers to surplus or a fund for the retirement of any preferred
stock.
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<PAGE> 146
The OCC has the authority to prohibit the payment of dividends by a
national bank when it determines such payment to be an unsafe and unsound
banking practice. In addition, the Bank would be prohibited by federal statute
and the OCC's prompt corrective action regulations from making any capital
distribution if, after giving effect to the distribution, the Bank would be
classified as "undercapitalized" under the OCC's regulations. See "-- Prompt
Corrective Action."
COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OCC, in connection with the examination of the
Bank, to assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by the Bank. An
unsatisfactory rating may be used as the basis for the denial of an application
by the OCC.
The federal banking agencies, including the OCC, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Bank may be required to devote additional funds for
investment and lending in its local community. The Bank was examined for CRA
compliance in March 1997 and received a rating of satisfactory.
FEDERAL RESERVE SYSTEM
The FRB requires all depository institutions to maintain non-interest
bearing reserves at specified levels against their transaction accounts
(primarily checking, NOW and Super NOW checking accounts). At June 30, 1997, the
Bank had $825,150 of FRB stock, which was in compliance with these reserve
requirements.
National banks are authorized to borrow from the Federal Reserve Bank
"discount window," but FRB regulations require associations to exhaust other
reasonable alternative sources of funds, including FHLB borrowings, before
borrowing from the Federal Reserve Bank.
The Bank is a member of the Federal Reserve System.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB of Indianapolis, which is one of 12
regional FHLBs that administer the home financing credit function of savings
associations and member banks. Each FHLB serves as a reserve or central bank for
its members within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
loans to members (i.e., advances) in accordance with policies and procedures,
established by
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the board of directors of the FHLB, which are subject to the oversight of the
Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In addition,
all long-term advances are required to provide funds for residential home
financing.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Indianapolis. At June 30, 1997, the Bank had $5.87 million in FHLB
stock, which was in compliance with this requirement. In past years, the Bank
has received dividends on its FHLB stock. Over the past five calendar years such
dividends have averaged 8.22% and were 7.83% for calendar year 1996.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of The Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.
FEDERAL AND STATE TAXATION
Federal Taxation. In addition to the regular income tax, the Bank is
generally subject to a minimum tax. An alternative minimum tax is imposed at a
minimum tax rate of 20% on alternative minimum taxable income, which is the sum
of a bank's regular taxable income (with certain adjustments) and tax preference
items, less any available exemption. The alternative minimum tax is imposed to
the extent it exceeds the bank's regular income tax and net operating losses can
offset no more than 90% of alternative minimum taxable income. For taxable years
beginning after 1986 and before 1996, the Bank was also subject to an
environmental tax equal to 0.12% of the excess of alternative minimum taxable
income for the taxable year (determined without regard to net operating losses
and the deduction for the environmental tax) over $2 million.
The Bank files federal income tax returns on a fiscal year basis using
the accrual method of accounting. The Bank's federal income tax returns for the
last three years are open to possible audit by the IRS. No returns are being
audited by the IRS at the current time. In the opinion of management, any
examination of open returns would not result in a deficiency which could have a
material adverse effect on the financial condition of the Bank.
Michigan Taxation. The State of Michigan imposes a tax on intangible
personal property in the amount of $.20 per $1,000 of deposits of a bank less
deposits owed to the federal or Michigan state governments, their agencies or
certain other financial institutions. The Michigan intangibles tax is being
phased out over four years until the tax is fully repealed effective January 1,
1998. The State of Michigan also imposes a "Single Business Tax." The Single
Business Tax is a value-added type of tax for the privilege of doing business in
the State of Michigan. The major components of the Single Business Tax are
federal taxable income, compensation and depreciation as increased by net
operating loss carryforwards, if any, utilized in arriving at federal taxable
income, and decreased
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by the cost of acquisition of tangible assets during the year. The tax rate is
2.30% of the Michigan adjusted tax base.
PROPERTIES
Offices. The following table sets forth information with respect to the
Bank's offices as of June 30, 1997.
<TABLE>
<CAPTION>
Owned
or
Office Locations Leased Lease Expiration Date
- ---------------- ------ ---------------------
<S> <C> <C>
EXECUTIVE OFFICE AND BUSINESS
CENTER OFFICE:
24725 West Twelve Mile Road
Southfield, Michigan.................... Leased January 2003;
One 5 year option
REGIONAL OFFICES:
26336 West Twelve Mile Road
Southfield, Michigan.................... Leased March 31, 2008;
Four 5 year options
20247 Mack Avenue
Grosse Pointe Woods, Michigan.......... Owned --
479 South Woodward Avenue
Birmingham, Michigan.................... Leased May 2007;
One 20 year option
</TABLE>
The Bank believes its current facilities are adequate to meet its
needs.
LEGAL PROCEEDINGS
From time to time the Bank is a party to routine legal proceedings
arising out of its general lending activities and other operations. There are no
material pending legal proceedings to which the Bank or its subsidiary is a
party, or to which any of their property is subject, which, if determined
adversely to the Bank or its subsidiary, would individually or in the aggregate
have a material adverse effect on the Bank's consolidated financial position.
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MANAGEMENT
DIRECTORS
All of the members of the Bank's Board of Directors are elected
annually. The Bank has appointed one Advisory Director, Mr. Joseph A. Pick, a
retired Bank director, to serve until the 1998 annual meeting of shareholders.
Advisory directors participate in all meetings of the Board of Directors but
have no voting privileges.
INFORMATION REGARDING DIRECTORS
The table below sets forth certain information, at December 31, 1996,
regarding the composition of the Bank's Board of Directors, including terms of
office.
<TABLE>
<CAPTION>
Director of
Bank
Name Age Positions Held in the Bank Since
- ------------------------------- --- ------------------------------------------------ -----------
<S> <C> <C> <C>
Read P. Dunn 51 Director, President and Chief Executive Officer 1984
David F. Simon 50 Chairman of the Board 1983
Edgar M. Fenton 75 Director 1983
Dean A. Friedman 46 Director and Secretary 1983
Herbert N. Glass 49 Director 1983
William E. Murcko 50 Director 1983
George M. Nyman 50 Director 1983
James R. Wechsler 47 Director 1983
</TABLE>
The business experience of each of the directors during the last five
years is as follows:
Read P. Dunn. Mr. Dunn is President and Chief Executive Officer of
Franklin and has held these positions since its inception. Mr. Dunn is a member
of Franklin's Loan, Securities, CRA Compliance and Marketing Committees. He is a
certified public accountant and was the former President and senior officer at
another financial institution, where he was employed for 14 years.
David F. Simon. Mr. Simon is Chairman of the Board of Franklin and has
held this position since its inception. Mr. Simon is a member of Franklin's
Loan, Securities, CRA Compliance and Marketing Committees. He formerly was an
attorney in private practice specializing in securities and financial
institutions law from 1971 to 1991. Mr. Simon is the son-in-law of Edgar M.
Fenton, a Director of Franklin.
Edgar M. Fenton. Mr. Fenton is a member of the Loan and CRA Compliance
Committees of Franklin. He is Chairman of the Board and Chief Executive Officer
of Cadroy Management Company and the Fenton Company, each located in Southfield,
Michigan (real estate development, investment and management), affiliated with
both companies since 1952. Mr. Fenton served four
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terms as President of the Apartment Association of Michigan (1985-1989). Mr.
Fenton is the father-in-law of David F. Simon, Chairman of the Board of
Franklin.
Herbert N. Glass. Mr. Glass is a member of the ESOP, Securities, Audit,
Compensation and Marketing Committees of Franklin. Since 1976 Mr. Glass has
served as President of The Glass Freedman Company, a registered investment
advisor, located in Bingham Farms, Michigan (pension, life insurance and
investment consulting, actuarial and administrative services provided to
corporations and retirement programs). Mr. Glass is a Certified Pension
Consultant, a Certified Financial Planner, a Chartered Life Underwriter, a
Chartered Financial Consultant and a Licensed Insurance Counselor.
William E. Murcko. Mr. Murcko is a member of the Audit, ESOP, CRA
Compliance, Compensation and Marketing Committees of Franklin. Since 1990 Mr.
Murcko has served as President and Chief Operating Officer of Communication
Associates, Inc., an advertising agency located in Birmingham, Michigan.
George M. Nyman. Mr. Nyman is a member of the Audit and Loan Committees
of Franklin. Since 1975 Mr. Nyman has served as President of Professional
Property Management Co. of Michigan, Inc., located in Troy, Michigan (real
estate management firm) and as a Vice President of the Apartment Association of
Michigan since 1990.
James R. Wechsler. Mr. Wechsler is a member of the Audit, ESOP and Loan
Committees of Franklin. He is currently President of Wechsler Financial Group,
Inc. of Farmington Hills, Michigan, a financial management, investment and
consulting firm, a position he has held since 1989. In addition, since January
1992 he has served as Chairman of Advance Mortgage Corporation, a mortgage
lender located in Farmington Hills, Michigan. He is also a licensed real estate
broker in the State of Michigan.
EXECUTIVE OFFICERS
The following information as to the business experience during the past
five years is supplied with respect to executive officers of the Bank who do not
serve on the Bank's Board of Directors at December 31, 1996. Executive officers
are elected annually to serve until their successors are elected or until they
resign or are removed by the Board of Directors. There are no arrangements or
understandings between the persons named and any other person pursuant to which
such officers were elected.
Rebecca Christian, age 43, is Senior Vice President, Marketing, a
position she has held since 1991. Ms. Christian is a member of Franklin's
Securities, ESOP and Marketing Committees.
David L. Shelp, age 50, has been the Treasurer of Franklin since its
inception in 1983. Mr. Shelp was an Assistant Treasurer of another financial
institution in Lansing, Michigan, from 1975 to 1981 and its Controller from 1981
to 1983.
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Edward J. Shehab, age 37, joined Franklin in 1985 as a financial
analyst. Prior to that time, Mr. Shehab was an assistant secondary trader at
another financial institution. Since 1991, Mr. Shehab has been Vice President of
Finance.
MEETINGS AND COMMITTEES OF THE BOARD
The Board of Directors has established the following Committees: (a)
Audit; (b) Loan; (c) Securities; (d) CRA Compliance; (e) Marketing; (f)
Compensation and (g) ESOP.
The Audit Committee, which meets quarterly, is responsible for, among
other things, establishing standards for financial reporting, establishing
standards for internal systems control, reviewing all audit reports and
interfacing with the independent auditors.
The Loan Committee, which meets as necessary, is responsible for, among
other things, reviewing and acting upon loan applications, reviewing loan
quality reports, and reviewing troubled loan restructurings or sales.
The Securities Committee, which meets quarterly, is responsible for
oversight of Franklin's sale of investment and insurance products.
The CRA Compliance Committee, which meets quarterly, is responsible for
development of Franklin's CRA plans and monitoring progress and policies in
connection therewith.
The Marketing Committee, which meets as necessary, is responsible for
developing new products and monitoring Franklin's advertising and overall
marketing activities.
The Compensation Committee meets as necessary and is responsible for
reviewing the Bank's compensation philosophy, retirement planning, determining
compensation for the Bank's top senior management and reviewing stock option
plans.
The ESOP Committee meets semi-annually and is responsible for
overseeing Franklin's Employee Stock Ownership Plan and administering the Plan
functions.
The Board of Directors, acting as a Nominating Committee, selects the
management nominees to the Board. No nominations for Directors, except those by
the nominating committee, shall be voted upon at an annual meeting unless other
nominations by shareholders are made in writing and submitted to the President
of Franklin at 24725 West Twelve Mile Road, Southfield, Michigan 48034 not less
than 14 days or more than 50 days before the applicable annual meeting to which
the nomination relates. Nominations by shareholders should include: (1) the name
and address of each proposed nominee; (2) the principal occupation of each
proposed nominee; (3) the name and residence address of the notifying
shareholder; and (4) the number of shares of capital stock of the Bank owned by
the notifying shareholder.
The Audit Committee was established in July 1991; the ESOP Committee in
September 1991; and the Loan and Marketing Committees in December 1991; the
Securities Committee in May
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<PAGE> 152
1993; the CRA Compliance Committee in May 1993; and the Compensation Committee
in December 1993.
During the year ended December 31, 1996, there were 13 meetings of the
Board of Directors, six meetings of the Audit Committee, two meetings of the
Securities Committee; four meetings of the CRA Compliance Committee; one meeting
of the ESOP Committee, 38 meetings of the Loan Committee, four meetings of the
Compensation Committee and three meetings of the Marketing Committee. All of the
Directors attended in excess of 75% of the aggregate of the total number of
meetings of the Board of Directors and the total number of meetings held by all
Committees of the Board on which they served.
COMPENSATION OF DIRECTORS
Under Franklin's Bylaws, Directors are entitled to receive a stated
salary for their services and a reasonable fixed sum, as well as reasonable
expenses, for actual attendance at meetings of the Board and Committees of the
Board. During 1996, the annual retainer amount was $12,000 and the Board and
Committee fees were $1,000 and $600 per meeting, respectively. In order to
retain qualified individuals who are willing to serve as Directors and in order
to promote a close identity of interests between Directors and shareholders, the
non-employee directors participate in director stock option plans. Non-employee
Directors also receive certain health care benefits under a Bank-sponsored
health care plan. Directors who are also employees of the Bank are excluded from
receiving additional compensation for their service on the Board of Directors
and its Committees.
Franklin has also entered into severance agreements with its
non-employee directors to provide compensation solely in the event of any change
in control of Franklin and subsequent failure to nominate, re-elect or
termination of the designated director within three years thereafter. Under the
agreements, as amended, each such terminated director would receive compensation
equal to $15,000 per year of service as a director of Franklin for each full
year, in addition to the continuation for three years of any benefit plans. In
addition, a Director may elect to surrender his rights in any outstanding stock
options (whether or not currently exercisable) and receive a cash payment in an
amount generally equal to the difference between the option price of the shares
and the greater of (i) the price paid for the control shares, (ii) the tender
offer price paid for the shares leading to control or (iii) the mean between the
low and high selling price of the shares of common stock on the date of
termination. Also, Franklin will maintain all benefit plans in which the
Director was entitled to participate for three years. All severance agreements
provide for the creation of a separate trust in the event of a change in control
or potential change of control as determined by the Board. The aggregate amounts
due the directors will be funded into the trust and paid as appropriate. All
unexpended funds will revert to Franklin.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth information concerning the compensation
paid or granted to the Bank's Chief Executive Officer and to each of the three
other most highly compensated executive officers of the Bank whose total salary
and bonus compensation was in excess of $100,000 in 1996.
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<PAGE> 153
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation Awards
-------------------
Annual Compensation Securities
---------------------------------- Restricted Underlying
Other Annual Stock Options/ All Other
Name and Principal Salary Bonus Compensation Award(s) SARs Compensation
Position Year ($) ($) ($) ($) (#)(1) ($)
- ------------------------ ---- -------- -------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Read P. Dunn 1996 $275,000 $ 35,543 $--- $--- -- $ 5,697(2)
President and Chief 1995 250,620 54,410 -- -- 12,127 9,051
Executive Officer 1994 250,000 93,982 -- -- 27,562 6,155
David F. Simon 1996 $250,000 $ 32,312 $--- $--- -- $ 4,962(2)
Chairman of the Board 1995 205,800 44,679 -- -- 5,512 8,496
1994 205,800 77,175 -- -- 27,562 5,820
David L. Shelp 1996 $104,147 $ 9,100 $--- $--- -- $ 3,622(2)
Treasurer 1995 97,600 14,865 -- -- 2,756 6,626
1994 97,600 24,302 -- -- 7,717 4,219
Rebecca Christian 1996 $ 95,514 $ 7,611 $--- $--- -- $ 3,113(2)
Senior Vice President 1995 86,400 15,064 -- -- 2,756 5,780
1994 86,400 23,051 -- -- 7,717 3,568
</TABLE>
- ------------------------
(1) As adjusted for 5% stock dividends declared in December 1994 and
January 1996 and 1997.
(2) Represents $3,652, $3,652, $3,021, and $2,793 contributed by Franklin
in 1996 to its ESOP, plus $2,045, $1,310, $601, and $320 paid by
Franklin as premiums with respect to term life insurance for Messrs.
Dunn, Simon, Shelp and Ms. Christian, respectively.
The following table sets forth certain information concerning the
number of options exercised in the past fiscal year, as well as the value of the
options held, by the executive officers named in the Summary Compensation Table
above at December 31, 1996. To date, the Bank has not awarded any stock
appreciation rights.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Value of
Underlying Unexercised
Unexercised In-the-money
Options at Options at
Shares FY-End(#) FY-End($)(2)
Acquired On Value ----------------------------------------------------------------
Name Exercise(#) Realized($)(1) Exercisable Unexercisable Exercisable Unexercisable
- ----------------- ----------- -------------- ----------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Dunn............. --- --- 32,540 16,069 $97,688 $48,272
Simon............ --- --- 24,618 14,884 78,476 37,076
Shelp............ --- --- 8,850 5,559 37,410 16,656
Christian........ 2,483 $19,540 5,587 5,268 14,363 15,465
</TABLE>
- --------------------------------
(1) Value based on market value of the Bank's common stock on exercise minus the
exercise price.
(2) Value based on market value of the Bank's common stock on December 31, 1996
minus the exercise price.
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<PAGE> 154
EMPLOYMENT AGREEMENTS
Franklin has entered into employment agreements with Read P. Dunn,
President and Chief Executive Officer, and David F. Simon, Chairman. Except, in
the event of a change in control, both employment agreements are automatically
renewed for successive one-year terms each year unless either party gives notice
sixty days before the expiration of any one-year period. In 1996, both
agreements provided for a base salary, an annual bonus and various benefits;
such as term life insurance, a long term disability policy and club dues.
Generally, termination of either Mr. Dunn's or Mr. Simon's employment, other
than for cause, death or disability would not prejudice their right to
compensation or other benefits for the remainder of the term of their respective
agreements. Both employment agreements contain non-compete and confidentiality
provisions.
Franklin has entered into severance agreements with certain senior
officers (presently consisting of 15 persons). The severance agreements provide
compensation solely in the event of a defined change in control of Franklin and
subsequent termination of the designated officer within three years thereafter.
Franklin's primary purpose in entering into the severance agreements
with the senior officers selected is to provide an inducement for such officers
to remain employed by Franklin during the transition period involving a change
in control. With continuation of these officer's employment reasonably assured,
Franklin and its shareholders should be more assured that these officers will
act, with respect to a possible change in control, for the sole benefit of
Franklin and the shareholders, and without undue concern for their own financial
security.
Generally, under the agreements, as amended, the President/Chief
Executive Officer and Chairman are each entitled to receive severance
compensation equal to 2.99 times gross compensation, as defined. The Senior Vice
Presidents and Treasurer are each entitled to receive severance compensation
equal to 1.5 times gross compensation, as defined. The Vice Presidents are
entitled to receive severance compensation equal to six months gross
compensation, as defined. In addition, an officer may elect to surrender his
rights in any outstanding stock options (whether or not currently exercisable)
and receive a cash payment in an amount generally equal to the difference
between the option price of the shares and the greater of (i) the price paid for
the control shares, (ii) the tender offer price paid for the shares leading to
control or (iii) the mean between the low and high selling price of the shares
of common stock on the date of termination. Also, Franklin will maintain all
benefit plans in which an officer was entitled to participate for three years.
All severance agreements provide for the creation of a separate trust
in the event of a change in control or potential change in control as defined by
the Board of Directors. The aggregate amounts due all covered senior officers
will be funded into the trust and paid as appropriate. All unexpended funds will
revert to Franklin.
CERTAIN TRANSACTIONS
During the year ended December 31, 1996, Franklin engaged Communication
Associates, Inc. to provide advertising and printing services for Franklin.
William E. Murcko, a Director, is
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<PAGE> 155
President, Chief Operating Officer and a minority shareholder of Communication
Associates, Inc. For the year ended December 31, 1996, Franklin paid
Communication Associates, Inc. for such services $207,319. Of this amount,
$60,000 was paid as media placement and radio production fees to Solomon
Friedman Advertising, an advertising agency part owned by another director, Dean
A. Friedman, which provides creative services to Communications Associates on
behalf of the Bank. An additional $141,911 was paid directly to Solomon Friedman
Advertising in 1996 for creative services. Management believes that the terms
and conditions of the engagement are fair and comparable to those which could
have been obtained from an independent party.
DESCRIPTION OF THE SERIES A PREFERRED SHARES
The following summary sets forth the material terms and provisions of
the Series A Preferred Shares, and is qualified in its entirety by reference to
the terms and provisions of the Certificate of Designation establishing the
Series A Preferred Shares and the Bank's Articles of Association, as amended,
the forms of which have been filed with the OCC as exhibits to the registration
statement of which this Prospectus forms a part.
GENERAL
The Series A Preferred Shares form an initial series of preferred stock
of the Bank, which preferred stock may be issued from time to time in one or
more series with such rights, preferences and limitations as are determined by
the Bank's Board of Directors or, if then constituted, a duly authorized
committee thereof. The Board of Directors has authorized the Bank to issue the
Series A Preferred Shares.
When issued, the Series A Preferred Shares will be validly issued,
fully paid and nonassessable. The holders of the Series A Preferred Shares will
have no preemptive rights with respect to any shares of the capital stock of the
Bank or any other securities of the Bank convertible into or carrying rights or
options to purchase any such shares. The Series A Preferred Shares will not be
convertible into shares of Common Stock or any other class or series of capital
stock of the Bank and will not be subject to any sinking fund or other
obligation of the Bank for their repurchase or retirement.
The transfer agent, registrar and dividend disbursement agent for the
Series A Preferred Shares will be Boston Equiserve Limited Partnership. The
registrar for the Series A Preferred Shares will send notices to shareholders of
any meetings at which holders of such shares have the right to elect directors
of the Bank or to vote on any other matter.
DIVIDENDS
Holders of Series A Preferred Shares shall be entitled to receive, if,
when, and, as declared by the Board of Directors of the Bank out of assets of
the Bank legally available therefor, cash dividends at the rate of [__]% per
annum of the initial liquidation preference (equivalent to $[______] per share
per annum). If declared, dividends on the Series A Preferred Shares shall be
payable quarterly in arrears on the last day of March, June, September, and
December of each year,
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<PAGE> 156
or, if such day is not a business day, on the next business day, at such annual
rate. Dividends in each quarterly period will accrue from the first day of such
period. Each declared dividend shall be payable to holders of record as they
appear at the close of business on the stock register of the Bank on such record
dates, not exceeding 45 days preceding the payment dates thereof, as shall be
fixed by the Board of Directors of the Bank or a duly authorized committee
thereof. Upon the exchange of Preferred Capital Shares for Series A Preferred
Shares, any accrued and unpaid dividends for the most recent quarter of the
Preferred Capital Shares at the time of the conversion will be deemed to be
accrued and unpaid dividends for the most recent quarter on the Series A
Preferred Shares.
The right of holders of Series A Preferred Shares to receive dividends
is noncumulative. Accordingly, if the Board of Directors fails to declare a
dividend on the Series A Preferred Shares for a quarterly dividend period, then
holders of the Series A Preferred Shares will have no right to receive a
dividend for that period, and the Bank will have no obligation to pay a dividend
for that period, whether or not dividends are declared and paid for any future
period with respect to either the preferred stock or the Common Stock. If the
Bank fails to declare and pay or declare and set aside for payment a quarterly
dividend on the Series A Preferred Shares, holders of the preferred stock of the
Bank, including the Series A Preferred Shares, will be entitled to elect two
directors. See " --Voting Rights."
If full dividends on the Series A Preferred Shares for any dividend
period shall not have been declared and paid, or declared and a sum sufficient
for the payment thereof shall not have been set apart for such payments, no
dividends shall be declared and paid or set aside for payment and no other
distribution shall be declared or made or set aside for payment upon the Common
Stock or any other capital stock of the Bank ranking junior to or on a parity
with the Series A Preferred Shares as to dividends or amounts upon liquidation,
nor shall any Common Stock or any other capital stock of the Bank ranking junior
to or on a parity with the Series A Preferred Shares as to dividends or amounts
upon liquidation be redeemed, purchased or otherwise acquired for any
consideration (or any monies to be paid to or made available for a sinking fund
for the redemption of any such stock) by the Bank, except by conversion into, or
exchange for, other capital stock of the Bank ranking junior to the Series A
Preferred Shares as to dividends and amounts upon liquidation), until such time
as dividends on all outstanding Series A Preferred Shares have been (i) declared
and paid or declared and a sum sufficient for the payment thereof has been set
apart for payment for three consecutive dividend periods and (ii) declared and
paid or declared and a sum sufficient for the payment thereof has been set apart
for payment for the fourth consecutive dividend period.
If any Series A Preferred Shares are outstanding, no full dividends
shall be declared and paid or set apart for payment and no other distribution
shall be declared and made or set aside for payment on any series of capital
stock of the Bank ranking, as to dividends, on a parity with or junior to the
Series A Preferred Shares for any dividend period unless full dividends have
been or contemporaneously are declared and paid, or declared and a sum
sufficient for the payment thereof is set apart for such payments on the Series
A Preferred Shares, for the then-current dividend period. When dividends are not
paid in full (or a sum sufficient for such full payment is not set apart) upon
the Series A Preferred Shares and the shares of any other series of capital
stock ranking on a parity as to dividends with the Series A Preferred Shares,
all dividends declared upon Series A Preferred Shares and any other series of
capital stock ranking on a parity as to dividends with the Series A
BP-58
<PAGE> 157
Preferred Shares shall be declared pro rata so that the amount of dividends
declared per share on the Series A Preferred Shares and such other series of
capital stock shall in all cases bear to each other the same ratio that full
dividends, for the then-current dividend period, per share on the Series A
Preferred Shares, which shall not include any accumulation in respect of unpaid
dividends for prior dividend periods, and full dividends, including required or
permitted accumulations, if any, on such other series of capital stock bear to
each other.
REDEMPTION
The Series A Preferred Shares will not be redeemable prior to
[_______], 2002. On or after such date, the Series A Preferred Shares will be
redeemable at the option of the Bank, in whole or in part, at any time or from
time to time on not less than 30 nor more than 60 days' notice by mail, at a
redemption price of $10.00 per share, plus the accrued and unpaid dividends for
the most recent quarter to the date of redemption, if any, thereon.
Any such redemption must comply with the prompt corrective action
regulations of the OCC, which may prohibit a redemption or require the OCC's
prior approval of a redemption. Unless full dividends on the Series A Preferred
Shares have been, or contemporaneously are, declared and paid or declared and a
sum sufficient for the payment thereof has been set apart for payment for the
then current dividend period, no Series A Preferred Shares shall be redeemed
unless all outstanding Series A Preferred Shares are redeemed and the Bank shall
not purchase or otherwise acquire any Series A Preferred Shares; provided,
however, that the Bank may purchase or acquire Series A Preferred Shares
pursuant to a purchase or exchange offer made on the same terms to holders of
all outstanding Series A Preferred Shares.
VOTING RIGHTS
Except as expressly required by applicable law, or except as indicated
below, the holders of the Series A Preferred Shares will not be entitled to
vote. In the event the holders of Series A Preferred Shares are entitled to vote
as indicated below, each Series A Preferred Share will be entitled to one vote
on matters on which holders of the Series A Preferred Shares are entitled to
vote.
If at the time of any annual meeting of the Bank's stockholders, the
Bank has declared and failed to pay or declared and failed to set aside for
payment a quarterly dividend during any of the four preceding quarterly dividend
periods on any series of preferred stock of the Bank, including the Series A
Preferred Shares, the number of directors then constituting the Board of
Directors of the Bank will be increased by two (if not already increased by two
due to a default in preference dividends), and the holders of the Series A
Preferred Shares, voting together as a single class with the holders of all
other series of preferred stock as a single class will be entitled to elect such
two additional directors to serve on the Bank's Board of Directors at each such
annual meeting. Each director elected by the holders of shares of the preferred
stock shall continue to serve as such director until the later of (i) the
expiration of the term of such director or (ii) the payment of four consecutive
quarterly dividends on the Series A Preferred Shares.
BP-59
<PAGE> 158
The affirmative vote or consent of the holders of at least 66-2/3% of
the outstanding shares of each series of preferred stock of the Bank, including
the Series A Preferred Shares, voting as a single class without regard to
series, will be required (a) to create any class or series of stock which shall
have preference as to dividends or distribution of assets over any outstanding
series of preferred stock of the Bank other than a series which shall not have
any right to object to such creation or (b) to alter or change the provisions of
the Bank's Articles of Association (including the Certificate of Designation
establishing the Series A Preferred Shares) so as to adversely affect the voting
powers, preferences or special rights of the holders of a series of preferred
stock of the Bank; provided that if such amendment shall not adversely affect
all series of preferred stock of the Bank, such amendment need only be approved
by at least 66-2/3% of the holders of shares of all series of preferred stock
adversely affected thereby.
RIGHTS UPON LIQUIDATION
In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Bank, the holders of the Series A Preferred Shares at the
time outstanding will be entitled to receive or have funds set aside for such
payments out of assets of the Bank available for distribution to stockholders,
before any payment or distribution of assets is made to holders of Common Stock
or any other class of stock ranking junior to the Series A Preferred Shares upon
liquidation, liquidating distributions in the amount of $10.00 per share, plus
the accrued and unpaid dividends for the most recent quarter thereon, if any, to
the date of liquidation.
After receipt of payment of the full amount of the liquidating
distributions to which they are entitled, the holders of Series A Preferred
Shares will have no right or claim to any of the remaining assets of the Bank.
In the event that, upon any such voluntary or involuntary liquidation,
dissolution or winding up, the available assets of the Bank are insufficient to
pay the amount of the liquidation distributions on all outstanding Series A
Preferred Shares and the corresponding amounts payable on all shares of other
classes or series of capital stock of the Bank ranking on a parity with the
Series A Preferred Shares in the distribution of assets upon any liquidation,
dissolution or winding up of the affairs of the Bank, then the holders of the
Series A Preferred Shares and such other classes or series of capital stock
shall share ratably in any such distribution of assets in proportion to the full
liquidating distributions to which they would otherwise be respectively
entitled.
For such purposes, the consolidation or merger of the Bank with or into
any other entity or the sale, lease or conveyance of all or substantially all of
the property or business of the Bank, shall not be deemed to constitute
liquidation, dissolution or winding up of the Bank.
APPROVAL OF INDEPENDENT DIRECTORS
The Bank's Certificate of Designation establishing the Series A
Preferred Shares requires that, so long as any Series A Preferred Shares are
outstanding, certain actions by the Bank be approved by a majority of the
Independent Directors of the Bank. At any time that there are only two
Independent Directors, any action that requires the approval of a majority of
Independent Directors must be approved by both Independent Directors.
"Independent Director" means any director of the Bank who (i) is not a current
director, officer or employee of the Bank, of Franklin Finance
BP-60
<PAGE> 159
Corporation or of any affiliate of the Bank; and (ii) is not a person or persons
that, in the aggregate, own more than one percent of the Common Stock of the
Bank. In addition, any members of the Board of Directors of the Bank elected by
holders of preferred stock, including the Series A Preferred Shares, will be
deemed to be independent directors for purposes of approving actions requiring
the approval of a majority of the Independent Directors. The actions which
require the prior approval of a majority of the Independent Directors include:
(i) the issuance of a series of preferred stock on a
parity with the Series A Preferred Shares; and
(ii) the redemption of any shares of Common Stock.
In assessing the benefits to the Bank of any proposed action requiring their
consent, the Independent Directors shall take into account the interests of
holders of both the Common Stock and the preferred stock, including, without
limitation, the holders of the Series A Preferred Shares. In considering the
interests of the holders of the preferred stock, including without limitation
holders of the Series A Preferred Shares, the Independent Directors shall owe
the same duties which the Independent Directors owe to holders of Common Stock.
CERTAIN DEFINITIONS
"BIF" means the Bank Insurance Fund or any successor thereto.
"FDIC" means the Federal Deposit Insurance Corporation or any successor
thereto.
"FHLB" means any of the regional Federal Home Loan Banks.
"FRB" means the Federal Reserve Board or any successor thereto.
"OCC" means the Office of the Comptroller of the Currency or any
successor thereto.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political
subdivisions thereof.
"Regulatory Capital Requirements" means the minimum amount of capital
required to meet each of the industry-wide regulatory capital requirements
applicable to the Bank pursuant to 12 U.S.C. Section 1464(t) and 12 C.F.R.
Section 567 (and any amendment to either thereof) or any successor law or
regulation, or such higher amount of capital as the Bank, individually, is
required to maintain in order to meet any individual minimum capital standard
applicable to the Bank pursuant to 12 U.S.C. Section 1464(s) and 12 C.F.R.
Section 567.3 (and any amendment to either such Section) or any successor law or
regulation.
"SAIF" means the Savings Association Insurance Fund or any successor
thereto.
BP-61
<PAGE> 160
"Series A Preferred Shares" means the 1,800,000 Shares of the [___]%
Noncumulative Series A Preferred Shares of the Bank.
EXCHANGE
The Series A Preferred Shares are to be issued, if ever, in connection
with an exchange of the Preferred Capital Shares. The Preferred Capital Shares
are subject to an automatic exchange in whole and not in part, on a
share-for-share basis, into Series A Preferred Shares if the appropriate
regulatory agency directs in writing an exchange of the Preferred Capital Shares
for Series A Preferred Shares because (i) the Bank becomes "undercapitalized"
under prompt corrective action regulations established pursuant to FDICIA, (ii)
the Bank is placed into conservatorship or receivership or (iii) the appropriate
regulatory agency, in its sole discretion, anticipates the Bank's becoming
"undercapitalized" in the near term (an "Exchange Event"). The Bank has
registered with the OCC a total of 2,070,000 Series A Preferred Shares to cover
an Exchange Event, if necessary, of the 1,800,000 Preferred Capital Shares
offered by Franklin Finance Corporation and the 270,000 share over-allotment
option granted to the underwriters of the Preferred Capital Shares.
EXPERTS
The Consolidated Financial Statements of the Bank and subsidiary as of
December 31, 1996 and for the year ended December 31, 1996, have been audited by
Grant Thornton LLP, independent certified public accountants, as indicated in
their report with respect thereto and are included herein in reliance upon the
authority of said firm as experts in auditing and accounting. The Consolidated
Financial Statements of the Bank and subsidiary as of December 31, 1995, and for
each of the two years in the period ended December 31, 1995, have been audited
by Crowe, Chizek and Company LLP, independent certified public accountants, as
indicated in their report with respect thereto and are included herein in
reliance upon the authority of said firm as experts in auditing and accounting.
LEGAL MATTERS
The legality of the securities offered by this Prospectus has been
passed upon for the Bank by Silver, Freedman & Taff, L.L.P., Washington, D.C., a
partnership including professional corporations, and for the underwriters by
Honigman Miller Schwartz and Cohn, Detroit, Michigan.
BP-62
<PAGE> 161
FRANKLIN BANK, N.A.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Reports of Independent Certified Public Accountants....................................................... F-2
Consolidated Financial Statements for the Years Ended December 31, 1996, 1995 and 1994:
Consolidated Statements of Condition at December 31, 1996 and 1995........................................ F-4
Consolidated Statements of Income for the Years Ended
December 31, 1996, 1995 and 1994......................................................................... F-5
Consolidated Statements of Shareholder's Equity for the
Years Ended December 31, 1996, 1995 and 1994............................................................ F-6
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1996, 1995 and 1994............................................................ F-7
Notes to Consolidated Financial Statements................................................................ F-8
Consolidated Financial Statements for the Quarterly Period Ended June 30, 1997:
Consolidated Statements of Condition at June 30, 1997..................................................... F-28
Consolidated Statement of Operations for the Six Months Ended
June 30, 1997 and 1996................................................................................... F-29
Consolidated Statements of Shareholder's Equity for the
Six Months Ended June 30, 1997................................................................................F-30
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1997 and 1996...................................................................... F-31
Notes to Consolidated Financial Statements................................................................ F-32
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................................ F-36
</TABLE>
F-1
<PAGE> 162
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Franklin Bank, N.A.
We have audited the accompanying consolidated statements of financial condition
of Franklin Bank, N.A. as of December 31, 1996, and the related consolidated
statements of income, shareholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1996 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Franklin Bank,
N.A. as of December 31, 1996, and the consolidated results of its operations and
its consolidated cash flows for the year then ended in conformity with generally
accepted accounting principles.
Southfield, Michigan
January 31, 1997
F-2
<PAGE> 163
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Franklin Bank, N.A.
Southfield, Michigan
We have audited the accompanying consolidated statements of financial condition
of Franklin Bank, N.A. as of December 31, 1995, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the two
years in the period ended December 31, 1995. These financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Franklin Bank, N.A.
at December 31, 1995, and the results of its operations and its cash flows for
reach of the two years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Bank
changed its method of accounting for impaired loans in 1995 to conform to new
accounting guidance.
/s/ Crow, Chizek and Company LLP
--------------------------------
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
March 22, 1996
F-3
<PAGE> 164
FRANKLIN BANK, N.A.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
At December 31,
--------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks ............................................... $ 28,921,009 $ 30,885,733
Interest-earning deposits ............................................. 113,276 106,976
Time deposits with Federal Home Loan Bank ............................. 3,604,559 37,299,960
------------- -------------
Cash and cash equivalents ............................................. 32,638,844 68,292,669
Securities available for sale(3) ...................................... 49,343,125 52,408,622
Federal Home Loan Bank stock, at cost ................................. 5,153,200 4,486,100
Federal Reserve Bank stock, at cost ................................... 772,450 716,250
Loans ................................................................. 396,137,334 353,861,434
Allowance for loan losses ............................................. (3,199,549) (2,930,392)
------------- -------------
Net loans(2)(6)(12) ................................................... 392,937,785 350,931,042
Accrued interest receivable ........................................... 4,008,474 3,329,053
Real estate owned ..................................................... 1,371,569 --
Premises and equipment, net(8) ........................................ 5,129,246 4,487,427
Prepaid expenses and other assets(10) ................................. 4,438,155 2,485,787
------------- -------------
Total assets .......................................................... $ 495,792,848 $ 487,136,950
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits(4) ........................................................... $ 401,889,982 $ 399,866,440
Advances from Federal Home Loan Bank(6) ............................... 24,000,000 35,000,000
Repurchase agreements(6) .............................................. 29,612,500 10,275,000
Subordinated capital notes(9) ......................................... 7,475,000 7,475,000
Advance payments by borrowers for taxes and insurance ................. 172,502 278,339
Accrued interest payable .............................................. 689,523 851,048
Other liabilities ..................................................... 1,617,824 2,459,706
------------- -------------
Total liabilities ..................................................... 465,457,331 456,205,533
Commitments and contingencies(14) ..................................... -- --
Shareholders' Equity:(7)(9)(11)
Common stock - par value $1.00; authorized 6,000,000 shares, issued and
outstanding 3,315,545 and 3,307,082 shares at
December 31,1996 and 1995, respectively ............................. 3,315,545 3,307,082
Additional paid-in capital ............................................ 24,179,756 22,420,752
Unrealized gain on securities available for sale, net of tax
of $101,976 in 1996 and $502,708 in 1995 ............................ 197,956 975,846
Retained earnings ..................................................... 2,642,260 4,227,737
------------- -------------
Total shareholders' equity ............................................ 30,335,517 30,931,417
------------- -------------
Total liabilities and shareholders' equity ............................ $ 495,792,848 $ 487,136,950
============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 165
FRANKLIN BANK, N.A.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME
Interest on loans ............................................ $35,492,621 $31,089,479 $25,162,754
Interest on securities ....................................... 3,111,971 4,392,861 3,124,457
Other interest and dividends ................................. 1,102,820 1,173,917 1,109,735
----------- ----------- -----------
Total interest income ........................................ 39,707,412 36,656,257 29,396,946
----------- ----------- -----------
INTEREST EXPENSE
Interest on deposits(5) ...................................... 16,161,791 15,843,347 12,469,196
Interest on other borrowings(6) .............................. 1,950,984 2,447,461 1,561,398
----------- ----------- -----------
Total interest expense ....................................... 18,112,775 18,290,808 14,030,594
----------- ----------- -----------
Net interest income .......................................... 21,594,637 18,365,449 15,366,352
Provision for loan losses(2) ................................. 2,409,614 1,051,191 220,000
----------- ----------- -----------
Net interest income after provision for loan losses .......... 19,185,023 17,314,258 15,146,352
OTHER INCOME
Deposit account service charges .............................. 2,199,882 1,638,823 1,326,954
Loan fees .................................................... 795,831 905,728 805,171
Net gain on sales of securities(3) ........................... 414,632 553,378 19,804
Net gain on sale of loans .................................... -- -- 592,048
Other ........................................................ 310,379 238,875 366,562
----------- ----------- -----------
Total other income ........................................... 3,720,724 3,336,804 3,110,539
----------- ----------- -----------
OTHER EXPENSES
Compensation and benefits .................................... 8,739,951 7,339,647 6,891,819
Occupancy and equipment ...................................... 2,530,034 1,844,198 1,507,985
Advertising .................................................. 1,049,785 662,735 865,855
Federal insurance premiums ................................... 3,116,341 909,713 795,253
Defaulted loan expense ....................................... 579,487 527,576 941,045
Communication expense ........................................ 591,034 452,525 431,042
Outside services ............................................. 1,936,540 1,544,960 1,218,102
Other ........................................................ 3,066,177 2,575,080 2,230,790
----------- ----------- -----------
Total other expenses ......................................... 21,609,349 15,856,434 14,881,891
----------- ----------- -----------
Income before provision for federal income taxes ............. 1,296,398 4,794,628 3,375,000
Provision for federal income taxes(10) ....................... 390,749 1,438,389 978,750
----------- ----------- -----------
Net income ................................................... $ 905,649 $ 3,356,239 $ 2,396,250
=========== =========== ===========
Preferred stock dividend ..................................... -- --- 396,830
----------- ----------- -----------
Net income applicable to common stock after
preferred stock dividend ................................... $ 905,649 $ 3,356,239 $ 1,999,420
=========== =========== ===========
INCOME PER COMMON SHARE
Preliminary ................................................ $ 0.27 $ 1.00 $ 0.80
Fully diluted .............................................. $ 0.27 $ 0.99 $ 0.74
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 166
FRANKLIN BANK, N.A.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
Preferred Common Additional Gain/(Loss) Retained
Stock Stock Paid-in Capital on Securities Earnings
----- ----- --------------- ------------- --------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994 ................................. $ 9,080,000 $1,450,208 $11,257,301 $ 65,481 $ 3,124,416
Net income ................................................. -- -- -- -- 2,396,250
Cash dividends:
Preferred ($0.90 per share) .............................. -- -- -- -- (396,830)
Common ($0.23 per share) ................................. -- -- -- -- (571,383)
Common stock dividend ...................................... -- 142,279 1,031,522 -- (1,176,281)
Common stock dividend on preferred stock converted to
common stock ............................................. -- 11,509 92,048 -- (103,557)
Conversion of preferred stock into common .................. (8,427,687) 1,135,859 7,291,828 -- --
Redemption and payment of fractional shares on conversion
of preferred stock into common ........................... (652,313) -- -- -- (24,278)
Exercise of options ........................................ -- 44,522 252,595 -- --
Exercise of warrants ....................................... -- 209,494 955,243 -- --
Change in unrealized gain (loss) on securities available for
sale, net of tax ......................................... -- -- -- (1,253,447) --
----------- ---------- ----------- ----------- -----------
Balance at December 31, 1994 ............................... -- 2,993,871 20,880,537 (1,187,966) 3,248,337
Net income ................................................. -- -- -- -- 3,356,239
Cash dividends on common stock ($0.17 per share) ........... -- -- -- -- (539,284)
Common stock dividend ...................................... -- 149,641 1,683,461 -- (1,837,555)
Exercise of options ........................................ -- 6,090 14,234 -- --
Change in unrealized gain (loss) on securities available for
sale, net of tax ......................................... -- -- -- 2,163,812 --
----------- ---------- ----------- ----------- -----------
Balance at December 31, 1995 ............................... -- 3,149,602 22,578,232 975,846 4,227,737
Net income ................................................. -- -- -- -- 905,649
Cash dividends on common stock ($0.24 per share) ........... -- -- -- -- (754,274)
Common stock dividends ..................................... -- 157,643 1,576,430 -- (1,736,852)
Exercise of options ........................................ -- 8,300 25,094 -- --
Change in unrealized gain (loss) on securities available
for sale, net of tax ..................................... -- -- -- (777,890) --
----------- ---------- ----------- ----------- -----------
Balance at December 31, 1996 ............................... $ -- $3,315,545 $24,179,756 $ 197,956 $ 2,642,260
=========== ========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Total
Shareholders'
Equity
------
<S> <C>
Balance at January 1, 1994 ................................. $ 24,977,406
Net income ................................................. 2,396,250
Cash dividends:
Preferred ($0.90 per share) .............................. (396,830)
Common ($0.23 per share) ................................. (571,383)
Common stock dividend ...................................... (2,480)
Common stock dividend on preferred stock converted to
common stock ............................................. --
Conversion of preferred stock into common .................. --
Redemption and payment of fractional shares on conversion
of preferred stock into common ........................... (676,591)
Exercise of options ........................................ 297,117
Exercise of warrants ....................................... 1,164,737
Change in unrealized gain (loss) on securities available for
sale, net of tax ......................................... (1,253,447)
------------
Balance at December 31, 1994 ............................... 25,934,779
Net income ................................................. 3,356,239
Cash dividends on common stock ($0.17 per share) ........... (539,284)
Common stock dividend ...................................... (4,453)
Exercise of options ........................................ 20,324
Change in unrealized gain (loss) on securities available for
sale, net of tax ......................................... 2,163,812
------------
Balance at December 31, 1995 ............................... 30,931,417
Net income ................................................. 905,649
Cash dividends on common stock ($0.24 per share) ........... (754,274)
Common stock dividends ..................................... (2,779)
Exercise of options ........................................ 33,394
Change in unrealized gain (loss) on securities available
for sale, net of tax ..................................... (777,890)
------------
Balance at December 31, 1996 ............................... $ 30,335,517
============
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE> 167
FRANKLIN BANK, N.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income ............................................................................ $ 905,649 $ 3,356,239 $ 2,396,250
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Provision for loan losses ......................................................... 2,409,614 1,051,191 220,000
Depreciation and amortization ..................................................... 1,140,948 702,963 587,653
Gain on sale of assets ............................................................ (560,315) (553,378) (611,852)
Net deferral of loan origination fees ............................................. 18,309 109,379 385,294
(Accretion) amortization on securities ............................................ 368,388 -- --
(Increase) in accrued interest receivable ......................................... (679,421) (191,580) (610,839)
(Increase)/decrease prepaid expenses and other assets ............................. (1,558,625) 737,389 (478,471)
Increase/(decrease) accrued interest payable, deferred taxes and other liabilities (1,006,186) (5,626,216) 4,576,837
------------ ------------ ------------
Total adjustments ..................................................................... 132,712 (3,770,252) 4,068,622
------------ ------------ ------------
Net cash provided by (used in) operating activities ................................... 1,038,361 (414,013) 6,464,872
INVESTING ACTIVITIES
Purchases of securities held to maturity .............................................. -- -- (41,501,702)
Proceeds from maturities and paydowns of securities held to maturity .................. -- -- 973,222
Purchases of securities available for sale ............................................ (26,393,344) (4,552,926) (22,314,465)
Proceeds from sales of securities available for sale .................................. 25,908,461 19,569,371 13,953,125
Proceeds from maturities and paydowns of securities available for sale ................ 2,418,003 4,003,278 6,743,113
Proceeds from the sale of loans ....................................................... -- -- 16,030,306
Net (increase) in loans ............................................................... (45,954,459) (51,673,101) (10,793,746)
Proceeds from the sale of real estate owned ........................................... 293,906 553,588 4,311,011
Capital expenditures .................................................................. (1,775,778) (1,077,659) (837,842)
Purchase of Federal Home Loan Bank stock .............................................. (667,100) (962,500) (60,100)
Purchase of Federal Reserve Bank stock ................................................ (56,200) (59,150) (24,050)
------------ ------------ ------------
Net cash used in investing activities ................................................. (46,226,511) (34,199,099) (33,521,128)
FINANCING ACTIVITIES
Net increase in deposits .............................................................. 2,023,542 46,551,830 20,634,413
Increase/(decrease) in FHLB advances .................................................. (11,000,000) 20,000,000 (5,300,000)
Proceeds from repayment of repurchase agreements ...................................... 19,337,500 (6,292,500) 16,567,500
Prepayments of subordinated capital notes ............................................. -- (5,000) (10,000)
Net (decrease) in advance payments for taxes and insurance ............................ (105,837) (243,116) (222,485)
Redemption and payment of fractional shares on preferred stock conversion ............. -- -- (676,591)
Cash dividends on common stock ........................................................ (754,274) (712,861) (480,805)
Exercise of common stock options and warrants ......................................... 33,394 20,324 1,461,854
Payment of preferred stock dividends .............................................. -- -- (396,830)
----------- ----------- ------------
Net cash from financing activities ................................................ 9,534,325 59,318,677 31,577,056
------------ ----------- ------------
Net increase/(decrease) in cash and cash equivalents .............................. (35,653,825) 24,705,565 4,520,800
------------ ----------- ------------
Beginning cash and cash equivalents ............................................... 68,292,669 43,587,104 39,066,304
------------ ----------- ------------
Ending cash and cash equivalents .................................................. $ 32,638,844 $68,292,669 $ 43,587,104
============ =========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest ........................................................................ $ 18,273,852 $18,137,953 $ 13,944,430
Federal income taxes ............................................................ 969,057 1,562,291 650,000
Non-cash investing and financing activities:
Transfer of securities from held to maturity to available for sale(3) ........... -- 43,451,341 --
Transfer from loans to real estate owned (net) .................................. 1,519,792 -- 2,979,675
Transfer of loans from held for sale to held to maturity ........................ -- -- 3,497,022
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE> 168
FRANKLIN BANK, N.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - Franklin Bank, N.A. ("the Bank") is a nationally
chartered commercial bank, and a member of the Federal Reserve Bank ("FRB")
System and the Federal Home Loan Bank ("FHLB") System. As a member of these
systems, the Bank maintains a required investment in capital stock of the FRB of
Chicago and the FHLB of Indianapolis.
Deposits are insured by the Savings Association Insurance Fund ("SAIF")
within certain limitations, as administered by the Federal Deposit Insurance
Corporation ("FDIC"). The Bank operates three branches along with its main
office branch in the communities of Southfield, Birmingham, and Grosse Pointe
Woods, Michigan. The Bank is engaged in the business of commercial and retail
banking. The majority of the Bank's income is derived from commercial and to a
lesser extent retail business lending activities and investments.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
consist of the accounts of Franklin Bank, N.A. and its wholly owned subsidiary.
Significant intercompany balances and transactions have been eliminated.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS - The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Estimates that are more susceptible to change in the near term include
the allowance for loan loss, fair value of certain financial instruments and the
determination and carrying value of impaired loans.
SECURITIES - The Bank classifies securities into held to maturity,
available for sale and trading categories. Held to maturity securities are those
which management has the positive intent and the Bank has the ability to hold to
maturity, and are reported at amortized cost. Available for sale securities are
those which the Bank may decide to sell if needed for liquidity, asset/liability
management or other reasons. Available for sale securities are reported at fair
value, with unrealized gains or losses included as a separate component of
equity, net of income taxes. Trading securities are bought principally for sale
in the near term, and are reported at fair value with unrealized gains or losses
included in earnings. There were no securities classified as trading or held to
maturity at December 31, 1996 or 1995.
F-8
<PAGE> 169
FRANKLIN BANK, N.A.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Realized gains or losses are determined based on the amortized cost of
the specific security sold. Interest and dividend income adjusted by
amortization of purchase premium or discount, are included in earnings.
LOANS - Loans, for which management has the intent and the Bank has the
ability to hold for the foreseeable future, until maturity or payoff, are
reported at their outstanding, unpaid principal balances, reduced by any
charge-offs or specific valuation accounts and net of any deferred fees or costs
on originated loans, unamortized premiums or discounts on purchased loans.
The allowance for loan losses is maintained at a level believed
adequate by Management to absorb potential losses in the loan portfolio.
Management's determination of the adequacy of the allowance is based on an
evaluation of the portfolio, past loan loss experience, current economic
conditions, volume, amount and composition of the loan portfolio, and other
factors. The allowance is increased by provisions for loan losses charged to
income and reduced by net charge-offs.
The Bank adopted Financial Accounting Standards Board Statement of
Financial Accounting Standards "SFAS" No. 114, "Accounting by Creditors for
Impairment of a Loan" (as amended by "SFAS" No. 118) on January 1, 1995. Under
this standard, the carrying value of loans considered impaired is reduced to the
present value of expected future cash flows or, as a practical expedient, to the
fair value of the collateral by allocating a portion of the allowance for loan
losses to such loans. If these allocations cause the allowance for loan losses
to require increase, such increase is reported in the provision for loan losses.
There was no increase in the allowance for loan losses resulting from the
adoption of "SFAS" No. 114 at January 1, 1995.
A loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect all principal and
interest amounts due according to the contractual terms of the loan agreement.
Smaller balance homogeneous loans are collectively evaluated for impairment.
Impaired loans, or portions thereof, are charged off when deemed uncollectible.
Interest on impaired loans is accrued and recognized as income based
upon the principal amount outstanding. The carrying value of impaired loans is
periodically adjusted to reflect cash payments, revised estimates of future cash
flows, and increases in the present value of expected cash flows due to the
passage of time. Cash payments representing interest income are reported as such
and other cash payments are reported as reductions in carrying value. Increases
or decreases in carrying value due to changes in estimates of future payments or
the passage of time are reported as reductions or increases in the provision for
loan losses.
F-9
<PAGE> 170
FRANKLIN BANK, N.A.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Discounts and premiums on purchased residential real estate loans are
amortized to income using the interest method over the remaining period to
contractual maturity, adjusted for anticipated prepayments. Discounts and
premiums on purchased consumer loans are recognized over the expected lives of
the loans using methods that approximate the interest method.
Loan origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield of the related loan.
Fees received for originating loans for other institutions are recognized as
income when the services are performed.
REAL ESTATE OWNED - Real estate properties acquired through, or in
lieu of, loan foreclosure are initially recorded at the lesser of original
recorded investment or fair value minus estimated costs to sell at the date of
foreclosure, establishing a new cost basis. After foreclosure, valuations are
periodically performed by management, and the real estate is carried at the
lower of the (1) new cost basis or (2) fair value minus estimated costs to sell.
Revenue and expenses from operations are included in defaulted loan expense, and
additions to the valuation allowance are included in other expense.
PREMISES AND EQUIPMENT - Premises and equipment, including leasehold
improvements, are carried at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed on a straight-line
basis over the estimated lives of the assets.
STATEMENTS OF CASH FLOWS - For the purpose of presentation in the
consolidated statements of cash flows, cash and cash equivalents are defined as
those amounts included in the consolidated statements of financial condition
caption "Cash and cash equivalents." These items have original maturities of
ninety days or less.
DIVIDENDS - The payment of dividends on the Bank's common shares (if
any) is limited by applicable law and regulations promulgated by the Office of
the Comptroller of the Currency ("OCC"). The indenture relating to the Bank's
subordinated capital notes also contains certain limitations on the payment of
dividends in the event of default.
INCOME TAXES - The Bank records income tax expense based on the amount
of taxes due on its return plus changes in deferred taxes, computed based on the
expected future tax consequences of temporary differences between the carrying
amounts and tax bases of assets and liabilities, using enacted tax rates.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.
STOCK DIVIDENDS - The Bank accounts for stock dividends by capitalizing
retained earnings in an amount equal to the fair value of the additional shares
issued. All per share amounts are retroactively adjusted for stock dividends.
F-10
<PAGE> 171
FRANKLIN BANK, N.A.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
RECLASSIFICATIONS - Certain reclassifications have been made in the
consolidated financial statements to conform to the 1996 presentation.
ISSUED BUT NOT YET ADOPTED ACCOUNTING STANDARDS - The Financial
Accounting Standards Board has issued Statement of Financial Accounting
Standards "SFAS" No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities", as amended by "SFAS" No. 127. The
Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that focuses on
control. The Statement is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996,
except for certain transactions such as repurchase agreements and securities
lending, which are effective after December 31, 1997. This pronouncement is to
be applied prospectively. Management does not expect the Statement to have a
significant impact on the consolidated financial condition or results of
operations of the Bank.
2. LOANS
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
<S> <C> <C>
Real Estate
Single family mortgage ......................................................... $ 39,323,446 $ 38,317,145
Home equity .................................................................... 8,689,435 7,489,674
Commercial mortgage ............................................................ 139,499,287 152,868,239
Construction ................................................................... 33,644,580 31,034,492
Lease financing .................................................................. 97,518,144 62,270,137
Commercial ....................................................................... 82,479,849 69,859,366
Land contracts ................................................................... 18,623 24,412
Consumer ......................................................................... 18,687,898 12,421,817
------------ ------------
Total loans ...................................................................... 419,861,262 374,285,282
Less
Undisbursed funds .............................................................. 8,837,330 10,597,770
Amounts due on underlying mortgages on commercial real
estate loans ................................................................ 363,591 479,423
Unamortized discounts on purchased loans ....................................... 156,172 139,746
Unamortized discounts on lease financing ....................................... 14,337,932 9,196,317
Unamortized net loan expenses .................................................. 28,903 10,592
------------ ------------
Loans ............................................................................ 396,137,334 353,861,434
Allowance for loan losses ........................................................ 3,199,549 2,930,392
------------ ------------
Net loans ........................................................................ $392,937,785 $350,931,042
============ ============
</TABLE>
F-11
<PAGE> 172
FRANKLIN BANK, N.A.
2. LOANS (CONT.)
ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period .......................... $2,930,392 $3,452,583 $3,794,661
Provision for loan losses ............................... 2,409,614 1,051,191 220,000
CHARGE-OFFS
Commercial .............................................. 953,199 217,471 118,997
Commercial mortgage ..................................... 42,075 172,078 --
Residential ............................................. 9,293 -- --
Consumer ................................................ 552,937 243,362 222,648
Lease financing ......................................... 876,513 1,125,961 438,329
---------- ---------- ----------
Total charge-offs ....................................... 2,434,017 1,758,872 779,974
---------- ---------- ----------
RECOVERIES
Commercial .............................................. 59,895 37,095 44,699
Commercial mortgage ..................................... 9,105 16,900 143,300
Residential ............................................. -- 1,000 700
Consumer ................................................ 62,207 110,470 26,870
Lease financing ......................................... 162,353 20,025 2,327
---------- ---------- ----------
Total recoveries ........................................ 293,560 185,490 217,896
---------- ---------- ----------
Net charge-offs ......................................... 2,140,457 1,573,382 562,078
---------- ---------- ----------
Balance at end of period ................................ $3,199,549 $2,930,392 $3,452,583
========== ========== ==========
</TABLE>
At December 31, 1996 and 1995, the balance of impaired loans was
$6,818,048 and $9,347,870, respectively. Of this amount, $1,789,767 and
$7,929,182 in impaired loans required no allowance for loan loss allocation for
the years ended December 31, 1996 and 1995, respectively. At December 31, 1996
and 1995 the remaining impaired loans of $5,028,281 and $1,418,688 had
$1,104,372 and $400,320 of the allowance for loan losses allocated to them,
respectively, although the entire allowance remains available for charge-offs of
any loan.
The average balance of impaired loans for 1996 and 1995 was $7,224,030
and $5,085,528, respectively. Interest income recognized on impaired loans
during 1996 and 1995 was $190,315 and $97,289, respectively. All of the interest
income was recognized on a cash basis.
Non-accrual loans at December 31, 1996 and 1995, which amounted to
$2,203,598 and $9,347,870, respectively, are loans which were on non-accrual
status prior to the adoption of "SFAS" No. 114, "Accounting by Creditors for
Impairment of a Loan."
At December 31, 1996 and 1995, the Bank serviced whole loans and
participations sold amounting to approximately $7,899,253 and $12,575,000,
respectively.
F-12
<PAGE> 173
FRANKLIN BANK, N.A.
A large percentage of the Bank's portfolio of loans is comprised of
loans collateralized by commercial or residential real estate, substantially all
of which were located in southeastern Michigan.
3. DEBT AND EQUITY SECURITIES
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---- ----- ------ ----------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
December 31, 1996:
Mortgage-backed securities ............................ $11,344,468 $ 82,242 $21,452 $11,405,258
U.S. government and agency securities ................. 35,052,990 169,271 7,948 35,214,313
Municipal securities .................................. 2,645,737 79,507 1,690 2,723,554
----------- ---------- ------- -----------
Total ................................................... $49,043,195 $ 331,020 $31,090 $49,343,125
=========== ========== ======= ===========
December 31, 1995:
Mortgage-backed securities ............................ $15,228,752 $ 80,095 $29,369 $15,279,478
U.S. government and agency securities ................. 32,642,392 1,328,923 -- 33,971,315
Municipal securities .................................. 3,058,926 99,583 680 3,157,829
----------- ---------- ------- -----------
Total ................................................... $50,930,070 $1,508,601 $30,049 $52,408,622
=========== ========== ======= ===========
</TABLE>
Gross realized gains, losses and proceeds on sales of securities available for
sale were:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Gross realized gains on U.S. government and agency
securities.......................................................... $ 401,029 $ 620,042 $ 75,995
Gross realized gains on mortgage-backed securities.................... 10,525 --- ---
Gross realized gains on municipal securities.......................... 3,075 --- ---
Gross realized losses on U.S. government and agency
securities.......................................................... --- 66,664 56,191
Gross proceeds from the sale of available for sale
securities.......................................................... 25,908,461 19,569,371 13,953,125
</TABLE>
The scheduled maturities of available for sale securities at December 31, 1996
were as follows:
<TABLE>
<CAPTION>
Amortized
Cost Fair Value
---- ----------
<S> <C> <C>
Mortgage-backed securities ..................................................... $11,344,468 $11,405,258
U.S. government and agency securities due after one
through five years ........................................................... 35,052,990 35,214,313
Municipal bonds due after five through ten years ............................... 1,969,455 2,041,390
Municipal bonds due after 10 through 15 years .................................. 676,282 682,164
----------- -----------
Total .......................................................................... $49,043,195 $49,343,125
=========== ===========
</TABLE>
Pledged securities carried at fair value at December 31, 1996 equaled
$46,619,570.
F-13
<PAGE> 174
FRANKLIN BANK, N.A.
3. DEBT AND EQUITY SECURITIES (CONT.)
In accordance with the FASB Special Report, A Guide to Implementation of
Statement No. 115 on Accounting for Certain Investments in Debt and Equity
Securities, securities held to maturity with an amortized cost of $41,772,215
and a fair value of $43,451,341, were transferred to the available for sale
classification on December 12, 1995. The transfer increased shareholders' equity
by $1,108,223 , which is net of the related deferred tax asset of $570,903. The
classification was made to provide greater flexibility in managing liquidity and
interest rate risk.
4. DEPOSITS
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
<S> <C> <C>
Business checking ........................................................ $106,976,511 $ 90,640,821
Personal checking ........................................................ 5,800,735 3,670,555
Statement savings ........................................................ 344,106 403,012
Variable-rate accounts:
Money funds ............................................................ 94,824,064 79,700,272
Money market ........................................................... 45,385,107 41,094,111
Negotiable order of withdrawal accounts .................................. 5,876,495 5,970,920
Fixed rate certificates .................................................. 142,682,964 178,386,749
------------ ------------
Total .................................................................... $401,889,982 $399,866,440
============ ============
</TABLE>
Time deposits issued in denominations of $100,000 or more at December
31, 1996 and 1995 were $77,348,778 and $97,558,493, respectively.
Certificate accounts at December 31, 1996 mature as follows:
<TABLE>
<S> <C>
1997.................................................................. $122,057,420
1998.................................................................. 10,906,559
1999.................................................................. 3,369,541
2000.................................................................. 2,931,546
2001.................................................................. 2,747,948
2002 and thereafter................................................... 669,950
------------
Total................................................................. $142,682,964
============
</TABLE>
F-14
<PAGE> 175
FRANKLIN BANK, N.A.
5. INTEREST EXPENSE ON DEPOSITS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statement savings................................. $ 9,027 $ 10,034 $ 12,846
Variable-rate accounts:
Money funds..................................... 3,954,804 3,252,376 2,390,371
Money markets................................... 1,576,301 1,442,733 1,191,175
Negotiable order of withdrawal accounts........... 49,561 48,615 51,639
Fixed-rate certificates........................... 10,572,098 11,089,589 8,823,165
------------ ------------ ------------
Total............................................. $ 16,161,791 $ 15,843,347 $ 12,469,196
============ ============ ===========
</TABLE>
6. OTHER BORROWED FUNDS
At December 31, 1996, FHLB advances incurred interest and were
repayable as follows:
<TABLE>
<CAPTION>
Date of Maturity Interest Rate Amount
- ---------------- ------------- ------
<S> <C> <C>
May 14, 1997.................................................. 5.62% $10,000,000
January 21, 1997.............................................. 5.62 7,000,000
January 30, 1997.............................................. 5.62 7,000,000
---- -----------
Total......................................................... 5.62% $24,000,000
==== ===========
</TABLE>
At December 31, 1996, repurchase agreements incurred interest and were repayable
as follows:
<TABLE>
<CAPTION>
Date of Maturity Interest Rate Amount
- ---------------- ------------- ------
<S> <C> <C>
January 7, 1997............................................... 5.90% $ 5,187,500
January 7, 1997............................................... 5.90 7,385,000
January 7, 1997............................................... 5.90 8,690,000
January 7, 1997............................................... 5.92 4,220,000
January 7, 1997............................................... 5.90 4,130,000
---- -----------
Total......................................................... 5.90% $29,612,500
==== ===========
</TABLE>
At December 31, 1995, FHLB advances incurred interest and were
repayable as follows:
<TABLE>
<CAPTION>
Date of Maturity Interest Rate Amount
- ---------------- ------------- ------
<S> <C> <C>
January 20, 1996 ................................................... 5.96% $30,000,000
January 28, 1996 ................................................... 5.79 5,000,000
---- -----------
Total .............................................................. 5.94% $35,000,000
==== ===========
</TABLE>
F-15
<PAGE> 176
FRANKLIN BANK, N.A.
6. OTHER BORROWED FUNDS (CONT.)
At December 31, 1995, repurchase agreements incurred interest and were
repayable as follows:
<TABLE>
<S> <C> <C>
Date of Maturity Interest Rate Amount
January 4, 1996 .................................................... 5.81% $ 5,175,000
January 4, 1996 .................................................... 5.94 5,100,000
---- -----------
Total .............................................................. 5.88% $10,275,000
==== ===========
</TABLE>
FHLB advances are collateralized by the Bank's first mortgage loans
under a specific lien arrangement and by the designated securities. The maximum
borrowings allowed under this arrangement are approximately $46 million at
December 31, 1996. At December 31, 1996, first mortgage loans pledged as
collateral totaled approximately $39 million and securities pledged totaled
approximately $15 million. At December 31, 1996 there was approximately $29
million of pledged securities as collateral for the outstanding repurchase
agreements. These securities were held in safekeeping by the originators of the
repurchase agreements.
The following table sets forth the maximum month-end balance, average
daily balance and weighted average interest rate of FHLB advances for the
periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Maximum balance ......................................... $36,000,000 $35,000,000 $31,600,000
Average balance ......................................... 6,512,372 11,805,869 16,145,000
Weighted average interest rate .......................... 5.84% 6.32% 4.48%
</TABLE>
The following table sets forth the maximum month-end balance, average
daily balance and weighted average interest rate of repurchase agreements for
the periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Maximum balance................................ $29,612,500 $24,760,000 $16,567,500
Average balance................................ 16,129,323 16,689,536 2,710,323
Weighted average interest rate................. 5.44% 6.04% 5.28%
</TABLE>
F-16
<PAGE> 177
FRANKLIN BANK, N.A.
7. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1996, that the Bank
meets its capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification 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 risk- based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the Bank's category.
<TABLE>
<CAPTION>
Well Capitalized
For Capital Under Prompt
Actual Adequacy Purposes Corrective Provisions
------ ----------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total capital (to risk weighted assets) ............ $40,331,000 10.04% $32,147,360 8.00% $40,184,200 10.00%
Tier 1 capital (to risk weighted assets) ........... 29,206,000 7.27 16,073,680 4.00 24,110,520 6.00
Tier 1 capital (to average assets) ................. 29,206,000 5.99 19,514,000 4.00 24,392,500 5.00
As of December 31, 1995:
Total capital (to risk weighted assets) ............ 40,272,771 10.59 30,421,280 8.00 38,026,600 10.00
Tier 1 capital (to risk weighted assets) ........... 29,867,379 7.85 15,210,640 4.00 22,815,960 6.00
Tier 1 capital (to average assets) ................. 29,867,379 6.58 18,150,459 4.00 22,688,050 5.00
</TABLE>
F-17
<PAGE> 178
FRANKLIN BANK, N.A.
8. PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
At December 31,
---------------
1996 1995
---- ----
<S> <C> <C>
Land and land improvements ................................................. $ 200,000 $ 200,000
Building ................................................................... 583,337 583,337
Furniture, fixtures and equipment .......................................... 5,374,302 4,063,372
Leasehold improvements ..................................................... 1,962,706 1,795,090
----------- -----------
Total ...................................................................... 8,120,345 6,641,799
Less accumulated depreciated and amortization .............................. (2,991,099) (2,154,372)
----------- -----------
Premises and equipment, net ................................................ $ 5,129,246 $ 4,487,427
=========== ===========
</TABLE>
9. SUBORDINATED NOTES AND WARRANTS
At December 31, 1996 and 1995, the Bank has outstanding $7,475,000 of
8.50% subordinated capital notes due January 15, 2003 (the "Notes").
The Notes, including principal and interest payments thereon, are
subordinated at all times to the prior payment of senior indebtedness due and
owing, including deposit accounts. The Notes may be redeemed at the Bank's
option on or after January 15, 1996, subject to certain conditions. The Notes
are considered regulatory capital for purposes of determining risk-based
capital.
10. FEDERAL INCOME TAXES
The following is a summary of the provision for federal income taxes.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current ..................................... $342,567 $1,396,641 $ 1,031,973
Deferred .................................... 48,182 41,748 (53,223)
-------- ---------- -----------
Total ....................................... $390,749 $1,438,389 $ 978,750
======== ========== ===========
</TABLE>
A reconciliation of the statutory rate to the effective rate is shown
below:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Provision computed at statutory rate ...................... $ 440,775 $ 1,630,174 $ 1,147,500
Tax exempt interest ....................................... (103,366) (104,345) (77,402)
Other, net ................................................ 53,340 (87,440) (91,348)
--------- ----------- -----------
Total ..................................................... $ 390,749 $ 1,438,389 $ 978,750
========= =========== ===========
</TABLE>
F-18
<PAGE> 179
10. FEDERAL INCOME TAXES (CONT.)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities are presented
below:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1996 1995
---- ----
<S> <C> <C>
DEFERRED TAX ASSETS
Allowance for loan losses.......................... $303,934 $ 212,420
Nonaccrual loan interest........................... 97,960 199,989
Net deferred loan fees............................. 9,827 3,602
Other.............................................. 23,257 36,131
---------- ----------
Total deferred tax assets............................ 434,978 452,142
DEFERRED TAX LIABILITIES
Premises and equipment............................. 218,873 197,922
Unrealized gain on securities...................... 101,976 502,708
Other.............................................. 33,726 23,659
---------- ----------
Total deferred tax liabilities....................... 354,575 724,289
---------- ----------
Net deferred tax assets/(liabilities)................ $ 80,403 $ (272,147)
========== ==========
</TABLE>
11. STOCK OPTIONS AND EMPLOYEE STOCK OWNERSHIP PLAN
In 1994, shareholders approved the adoption of two separate stock
option plans for certain key executives and non-employee directors of the Bank.
Under the Key Executive Plan, up to 140,000 common shares may be
granted and up to 50,000 common shares under the Director's Plan. Grants made
under the plans are subject to certain anti-dilution provisions. If an option
expires or terminates for any reason without having been fully exercised,
unexercised portions of the options are available for further grant under the
Plans.
The Plans are administered by Committees selected by the Board of
Directors. Subject to the eligibility and other limitations of the Directors
Plan, the Committees are authorized to make grants under the Plans and otherwise
administer the Plans. The Committees may determine the term of each option (not
to exceed 10 years from the date of grant), the date on which each option shall
be granted and the other relevant provisions of each option agreement.
F-19
<PAGE> 180
FRANKLIN BANK, N.A.
11. STOCK OPTIONS AND EMPLOYEE STOCK OWNERSHIP PLAN (CONT.)
The Financial Accounting Standards Board issued statement No. 123,
"Accounting for Stock Based Compensation" ("SFAS No. 123") for transactions
entered into during 1996 and thereafter. The Statement establishes a fair value
method of accounting for employee stock options and similar equity instruments
such as warrants, and encourages all companies to adopt that method of
accounting for all of their employee stock compensation plans. However, the
Statement allows companies to continue measuring compensation cost for such
plans using accounting guidance in place prior to SFAS No. 123. Companies that
elect to remain with the former method of accounting must make pro-forma
disclosures of net income and earnings per share as if the fair value method
provided for in SFAS No. 123 had been adopted. Additionally pro-forma
disclosures for awards granted in 1995 are to be presented for comparative
purposes.
The Bank has not adopted the fair value accounting provisions of SFAS
No. 123 and will continue to apply its current method of accounting.
Accordingly, SFAS No. 123 has no impact on the Bank's consolidated financial
position or results of operation.
The Bank accounts for the stock option plans under APB Opinion No. 25,
"Accounting for Stock Issued to Employees." No compensation costs have been
recognized for the plans. Had compensation cost for the plans been determined
based on the fair value of the options at the grant dates consistent with the
method of SFAS No. 123, the Bank's net income and income per share would have
been as follows for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net income
As reported ........................................................ $ 905,649 $ 3,356,239
Pro forma .......................................................... 948,526 3,142,341
Primary income per share
As reported ........................................................ $ 0.27 $ 1.00
Pro forma .......................................................... 0.28 0.94
Fully diluted income per share
As reported ........................................................ $ 0.27 $ 0.99
Pro forma .......................................................... 0.28 0.93
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes options-pricing model with the following
weighted-average assumptions used for grants in 1996 and 1995, respectively:
dividend yield of 1.94 percent for each year; expected volatility of 37.57 and
39.52 percent; risk-free interest rates of 6.56 and 5.90 percent; and expected
lives of 10 years.
The Bank also has options outstanding under previous plans. The
weighted-average remaining contractual life of shares outstanding at December
31, 1996 is 7.2 years.
F-20
<PAGE> 181
FRANKLIN BANK, N.A.
11. STOCK OPTIONS AND EMPLOYEE STOCK OWNERSHIP PLAN (CONT.)
The following table summarizes outstanding stock options by plan at
December 31, 1996. All information presented in this footnote with respect to
stock options has been adjusted for the effects of all stock dividends.
<TABLE>
<CAPTION>
Exercise Price Per Share
------------------------
Number of Weighted
Shares Range Average
------ ----- -------
<S> <C> <C> <C>
Key executives' 1986 plan....................... 27,410 $ 2.03-9.22 $3.39
Director's 1986 plan............................ 39,003 3.08-9.22 7.15
Key executives' 1994 plan....................... 151,019 8.55-11.74 9.43
Directors' 1994 plan............................ 22,587 7.34-7.71 7.52
-------- ------------- ------
Balance at December 31, 1996.................... 240,019 $2.30-11.74 $8.19
======= =========== =====
</TABLE>
The following is a summary of stock option activity for each of the
three years in the period ended December 31, 1996.
<TABLE>
<CAPTION>
Weighted
Average Price Per Number of
Exercise Price Share Options
-------------- ----- -------
<S> <C> <C> <C>
Outstanding - January 1, 1994.................... $ 5.33 $ 2.03-9.22 136,590
New plans........................................ 8.44 7.34-8.55 127,331
Exercised in 1994................................ 5.78 2.30-5.96 (51,550)
Expired/cancelled in 1994........................ 5.96 5.96 (2,261)
------ ------------ --------
Outstanding - December 31, 1994.................. 7.46 2.30-9.22 210,110
Additions of options 1994 executives' plan....... 11.74 11.74 44,100
Addition of options 1994 directors' plan......... 7.71 7.71 11,018
Exercised in 1995................................ 3.02 2.30-3.08 (6,715)
------ ------------ --------
Outstanding - December 31, 1995.................. 8.13 2.30-11.74 258,513
Exercised in 1996................................ 3.83 2.30-9.22 (8,715)
Cancelled in 1996................................ 7.81 2.30-11.74 (9,779)
------ ------------ --------
Outstanding - December 31, 1996.................. $ 8.19 $ 2.30-11.74 240,019
====== ============ ========
</TABLE>
The weighted average fair value of options granted in 1995 was $10.93.
Of the 240,019 options outstanding at December 31, 1996, options for
169,285 shares were exercisable, at a weighted average exercise price of $7.86.
The Bank also has an Employee Stock Ownership Plan ("ESOP").
Contributions to the ESOP may be invested in either common or preferred stock of
the Bank, purchased in the open market. For the years ended December 31, 1996,
1995 and 1994, contributions of $122,200, $200,200 and $150,500, respectively,
were made to the ESOP. The Bank is not committed to predetermined ESOP
contributions. Any future contributions to the ESOP, as recommended by the ESOP
Committee, must be approved by the Board of Directors.
F-21
<PAGE> 182
FRANKLIN BANK, N.A.
12. TRANSACTIONS WITH RELATED PARTIES
The Bank has engaged two advertising agencies each partially-owned
separately by two members of the Board of Directors. The Bank paid $349,230,
$145,072 and $204,212 for the years ended December 31, 1996, 1995 and 1994,
respectively.
Loan activity to officers and their associates is summarized as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year ....................................... $619,104 $691,413 $684,006
Additions - new loans ............................................ 48,692 68,993 178,698
Less - principal payments and loans sold ......................... 443,714 141,302 171,291
-------- -------- --------
Balance, end of year ............................................. $224,082 $619,104 $691,413
======== ======== ========
</TABLE>
As of December 31, 1996, and 1995 there were no loans outstanding to
Directors of the Bank or their associates. Also effective March 1, 1995 all
employee checking accounts moved to other banks and no new loans were made to
any employee after this date with the exception of draws on existing home equity
lines of credit.
F-22
<PAGE> 183
FRANKLIN BANK, N.A.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of the fair value of financial instruments is
made in accordance with the requirements of Statement of Financial Accounting
Standards No. 107, Disclosures about Fair Value of Financial Instruments. The
fair value amounts have been determined by the Bank using available market
information and appropriate valuation methodologies. However, considerable
judgment is necessarily required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Bank could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the fair value amounts.
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
------------------------ -------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents ... $ 32,639 $ 32,639 $ 68,293 $ 68,293
Securities available for sale 49,343 49,343 52,409 52,409
Net loans ................... 392,938 391,972 350,931 352,161
Accrued interest receivable . 4,008 4,008 3,329 3,329
FHLB and FRB stock .......... 5,926 5,926 5,202 5,202
Excess servicing ............ 40 40 47 47
LIABILITIES
Demand deposits ............. 259,207 259,207 221,480 221,480
Time deposits ............... 142,683 143,453 178,387 179,522
Short term debt ............. 53,613 53,613 45,275 45,275
Long term debt .............. 7,475 8,434 7,475 7,802
Accrued interest payable .... 690 690 851 851
</TABLE>
Fair values were determined using the following assumptions:
CASH AND CASH EQUIVALENTS - For cash and cash equivalents, the carrying
amount is a reasonable estimate of fair value.
SECURITIES AVAILABLE FOR SALE - For securities available for sale, fair
values are based on quoted market prices or dealer quotes.
NET LOANS - For certain homogeneous categories of loans, such as some
residential mortgages, consumer loans, commercial real estate loans, etc., fair
value is estimated by discounting the future cash flows over the life to
maturity using the current rates at which similar loans would be made to
borrowers with similar credit ratings. For those loans tied to a prime rate
index, fair values approximate carrying values. Both the carrying value and fair
value of loans receivable are shown net of the allowance for loan losses.
F-23
<PAGE> 184
FRANKLIN BANK, N.A.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONT.)
ACCRUED INTEREST RECEIVABLE AND PAYABLE - The carrying values of
accrued interest receivable and payable approximate their fair values.
FHLB STOCK AND FRB STOCK - The carrying values of the FHLB and FRB
stock approximate fair value.
DEMAND DEPOSITS AND TIME DEPOSITS - The fair values of demand deposits,
savings accounts, and certain money market deposits are the amount payable on
demand at the reporting date. The fair value of fixed-maturity certificates of
deposit is estimated using the current rates for deposits of similar remaining
maturities.
LONG-TERM DEBT - Rates currently available to the Bank for debt with
similar terms and remaining maturities are used to estimate fair value. For that
debt which has repriced within the last six months, its fair market value would
approximate its carrying value.
SHORT-TERM DEBT - The carrying value of the short-term debt
approximates its fair value.
14. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF CREDIT RISK
At December 31, 1996, 1995 and 1994, the Bank had outstanding loan
commitments for loans that have either not been accepted by the borrower or not
closed of approximately $3.3 million, $6.1 million and $7.5 million,
respectively. These include commitments for commercial business loans,
residential mortgages and home equity loans.
Under loan agreements for transactions which had closed, the Bank had
commitments to fund commercial lines of credit, construction and home equity
loans of approximately $40.7 million, $36.0 million and $15.2 million at
December 31, 1996, 1995 and 1994, respectively. The Bank had commitments to fund
construction loans of approximately $9.4 million, $12.1 million and $6.5 million
at December 31, 1996, 1995 and 1994, respectively. The Bank had commitments to
fund home equity loans of approximately $12.2 million, $13.6 million and $15.8
million at December 31, 1996, 1995 and 1994, respectively. As certain
commitments to make loans and fund lines of credit expire without being used,
the amount does not necessarily represent future cash commitments.
F-24
<PAGE> 185
FRANKLIN BANK, N.A.
14. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF CREDIT RISK
(CONT.)
The Bank leases three of its offices from nonaffiliated entities for
its headquarters in Southfield and two branch offices in Birmingham and
Southfield. Minimum rents under all non-cancelable leases are summarized as
follows:
<TABLE>
<CAPTION>
At
December 31, 1996
-----------------
<S> <C>
1997...................................................... $ 790,081
1998...................................................... 782,328
1999...................................................... 753,828
2000...................................................... 753,828
2001...................................................... 753,828
Thereafter................................................ 4,542,408
----------
Total..................................................... $8,376,301
==========
</TABLE>
Rental expense for the years ended December 31, 1996, 1995 and 1994 was
$751,699, $698,784 and $567,789, respectively.
The Bank is a defendant in lawsuits arising in the normal course of
business. In the opinion of management the results of these lawsuits will not
have a significant adverse effect on the Bank's consolidated financial
statements.
The Bank had non-interest bearing deposits of $25.4 million with
Detroit Branch of Chicago Federal Reserve Bank at December 31, 1996.
F-25
<PAGE> 186
FRANKLIN BANK, N.A.
15. COMPUTATION OF PRIMARY AND FULLY DILUTED INCOME PER SHARE
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1996 1995 1994
---------- ---------- -----------
<S> <C> <C> <C>
PRIMARY INCOME PER SHARE
Net income ............................................... $ 905,649 $3,356,239 $ 2,396,250
Preferred stock dividends ................................ -- -- (396,830)
---------- ---------- -----------
Net income applicable to common stock after preferred
stock dividend ......................................... $ 905,649 $3,356,239 $ 1,999,420
---------- ---------- -----------
Weighted average shares outstanding:
Common stock ........................................... 3,308,945 3,302,316 2,398,747
Common stock equivalents: from assumed exercise of
Stock options and warrants ........................... 76,281 54,276 87,849
---------- ---------- -----------
Average shares outstanding, primary ...................... 3,385,226 3,356,592 2,486,596
---------- ---------- -----------
Primary income per share ................................. $ 0.27 $ 1.00 $ 0.80
========== ========== ===========
FULLY DILUTED INCOME PER SHARE
Net income ............................................... $ 905,649 $3,356,239 $ 2,396,250
---------- ---------- -----------
Weighted average shares outstanding:
Common stock ........................................... 3,308,945 3,302,316 2,398,747
Series A $0.90 noncumulative convertible preferred stock
assumed conversion (at rate of $6.66 per share) ...... -- -- 737,037
---------- ---------- -----------
Common stock equivalents: from assumed exercise of
stock options and warrants ........................... 79,993 92,519 87,849
---------- ---------- -----------
Average shares outstanding, fully diluted ................ 3,388,938 3,394,835 3,223,633
---------- ---------- -----------
Fully diluted income per share ........................... $ 0.27 $ 0.99 $ 0.74
========== ========== ===========
</TABLE>
Primary income per share is computed by dividing net income, after
deducting dividends declared on the Series A $0.90 noncumulative convertible
preferred stock, by the weighted average number of common shares and common
stock equivalents which would arise from considering exercisable dilutive stock
options and warrants. Fully diluted income per share is computed by dividing net
income by the common shares and common stock equivalents above and assumes the
conversion of the Series A $0.90 noncumulative convertible preferred stock, if
dilutive.
All per share amounts presented in the Consolidated Statements of
Income and the weighted average share amounts have been adjusted for the 5%
common stock dividends declared in December 1996, 1995 and 1994. During 1994,
1,264,974 common shares were issued upon conversion of $8,427,687 of the Series
A $0.90 noncumulative convertible preferred stock, and 230,967 common shares
were issued upon exercise of warrants which were issued with subordinated
capital notes on August 2, 1990. The exercise option period of the warrants
expired on September 15, 1994. Had the conversion of the preferred stock and the
exercise of the common stock purchase warrants occurred on January 1, 1994
primary income per share for 1994 would have been $0.74.
F-26
<PAGE> 187
FRANKLIN BANK, N.A.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED
JUNE 30, 1997
F-27
<PAGE> 188
FRANKLIN BANK, N.A.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
At June 30, At December 31,
1997 1996
------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks ................................................ $ 41,428,000 $ 28,921,009
Interest earning deposits .............................................. 118,639 113,276
Time deposits with Federal Home Loan Bank .............................. 69,087 3,604,559
------------- -------------
Cash and cash equivalents .............................................. 41,615,726 32,638,844
Securities available for sale .......................................... 41,580,180 49,343,125
Federal Home Loan Bank stock, at cost .................................. 5,868,900 5,153,200
Federal Reserve Bank stock, at cost .................................... 825,150 772,450
------------- -------------
Loans .................................................................. 386,227,933 396,137,334
Allowance for loan losses .............................................. (2,925,262) (3,199,549)
------------- -------------
Net loans .............................................................. 383,302,671 392,937,785
Accrued interest receivable ............................................ 3,490,783 4,008,474
Real estate owned ...................................................... 2,124,268 1,371,569
Premises and equipment, net ............................................ 4,957,443 5,129,246
Prepaid expenses and other assets ...................................... 4,049,460 4,438,155
------------- -------------
Total assets ........................................................... $ 487,814,581 $ 495,792,848
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits ............................................................... $ 417,275,518 $ 401,889,982
Advances from Federal Home Loan Bank ................................... -- 24,000,000
Repurchase agreements .................................................. 25,880,000 29,612,500
Subordinated capital notes ............................................. 7,475,000 7,475,000
Advance payments by borrowers for taxes and insurance .................. 1,001,033 172,502
Accrued interest payable ............................................... 590,547 689,523
Other liabilities ...................................................... 3,638,919 1,617,824
------------- -------------
Total liabilities ...................................................... 455,861,017 465,457,331
Shareholders' equity
Common stock - Par value $1.00; authorized 6,000,000 shares issued and
outstanding 3,319,625 shares at June 30, 1997 and
3,315,545 at December 31, 1996 ...................................... 3,319,625 3,315,545
Additional paid-in capital ............................................. 24,185,101 24,179,756
Unrealized gain on securities available for sale, net of tax........... 144,908 197,956
Retained earnings...................................................... 4,303,930 2,642,260
------------- -------------
Total shareholders equity.............................................. 31,953,564 30,335,517
------------- -------------
Total liabilities and shareholders' equity............................. $ 487,814,581 $ 495,792,848
============= =============
</TABLE>
See Notes to Consolidated Financial Statements
F-28
<PAGE> 189
FRANKLIN BANK, N.A.
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
----------------------------- ----------------------------
1997 1996 1997 1996
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest on loans ................................. $18,434,630 $17,159,023 $ 9,141,137 $8,753,335
Interest on securities ............................ 1,453,526 1,570,309 745,602 775,390
Other interest and dividends ...................... 529,600 639,369 280,989 310,846
----------- ----------- ----------- ----------
Total interest income ............................. 20,417,756 19,368,701 10,167,728 9,839,571
INTEREST EXPENSE
Interest on deposits .............................. 6,805,839 8,318,023 3,369,406 4,142,389
Interest on Federal Home Loan Bank advances
and other borrowings ............................. 1,598,803 758,587 663,716 343,852
----------- ----------- ----------- ----------
Total interest expense ............................ 8,404,642 9,076,610 4,033,122 4,486,241
----------- ----------- ----------- ----------
Net interest income ............................... 12,013,114 10,292,091 6,134,606 5,353,330
Provision for loan losses ......................... 1,700,000 750,000 850,000 375,000
----------- ----------- ----------- ----------
Net interest income after provision for loan losses 10,313,114 9,542,091 5,284,606 4,978,330
----------- ----------- ----------- ----------
OTHER INCOME
Deposit account service charges ................... 1,266,295 1,027,577 657,334 524,482
Loan fees ......................................... 381,532 540,602 173,001 271,785
Net gain on sale of securities .................... 150,313 302,892 77,594 93,700
Investment Products ............................... 32,195 29,886 16,459 19,289
Other ............................................. 148,155 136,770 68,644 86,684
----------- ----------- ----------- ----------
Total other income ................................ 1,978,490 2,037,727 993,032 995,940
----------- ----------- ----------- ----------
OTHER EXPENSES
Compensation and benefits ......................... 4,719,180 4,347,642 2,347,912 2,109,177
Occupancy and equipment ........................... 1,374,606 1,174,237 713,474 607,943
Advertising ....................................... 298,207 730,368 213,919 472,021
Federal insurance premiums ........................ 185,384 482,886 90,835 249,960
Defaulted loan expense ............................ 276,929 122,997 165,549 136,965
Communication expense ............................. 331,581 277,058 184,483 143,875
Outside service expenses .......................... 887,136 834,452 444,785 457,126
Other ............................................. 1,339,705 1,428,722 648,568 783,392
----------- ----------- ----------- ----------
Total other expenses .............................. 9,412,728 9,398,362 4,809,525 4,960,459
----------- ----------- ----------- ----------
Income before provision for federal
income taxes ..................................... 2,878,876 2,181,456 1,468,113 1,013,811
Provision for federal income taxes ................ 819,089 695,534 409,370 316,334
----------- ----------- ----------- ----------
Net income ........................................ $ 2,059,787 $ 1,485,922 $ 1,058,743 $ 697,477
=========== =========== =========== ==========
EARNINGS PER SHARE
Shares outstanding
Primary ......................................... 3,406,337 3,383,483 3,414,804 3,379,238
Fully diluted ................................... 3,427,211 3,383,483 3,428,618 3,379,238
Net income
Primary ......................................... $ 0.60 $ 0.44 $ 0.31 $ 0.21
Fully diluted ................................... $ 0.60 $ 0.44 $ 0.31 $ 0.21
</TABLE>
See Notes to Consolidated Financial Statements
F-29
<PAGE> 190
FRANKLIN BANK, N.A.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (unaudited)
<TABLE>
<CAPTION>
Additional Unrealized Total
Common Paid-in Gain/(Loss) Retained Shareholders'
Stock Capital on Securities Earnings Equity
---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996 ................... 3,149,602 22,578,232 975,846 4,227,737 30,931,417
Net income ................................... -- -- -- 905,649 905,649
Cash dividends on common stock ($0.24 per
share) ...................................... -- -- -- (754,274) (754,274)
Common stock dividend ........................ 157,643 1,576,430 -- (1,736,852) (2,779)
Exercise of options .......................... 8,300 25,094 -- -- 33,394
Change in unrealized gain (loss) on securities
available for sale, net of tax .............. -- -- (777,890) -- (777,890)
---------- ----------- --------- ----------- ------------
BALANCE AT DECEMBER 31, 1996 ................. 3,315,545 24,179,756 197,956 2,642,260 30,335,517
Net income ................................... -- -- -- 2,059,787 2,059,787
Cash dividends on common stock ($0.12 per
share) ...................................... -- -- -- (398,117) (398,117)
Exercise of options .......................... 4,080 5,345 -- -- 9,425
Change in unrealized gain (loss) on securities
available for sale, net of tax .............. -- -- (53,048) -- (53,048)
---------- ----------- --------- ----------- ------------
BALANCE AT JUNE 30, 1997 ..................... $3,319,625 $24,185,101 $ 144,908 $ 4,303,930 $ 31,953,564
========== =========== ========= =========== ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-30
<PAGE> 191
FRANKLIN BANK, N.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------------
1997 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income ............................................. $ 2,059,787 $ 1,485,922
Adjustments to reconcile net income to cash provided by
operating activities:
Provision for loan losses ............................ 1,700,000 750,000
Depreciation and amortization ........................ 665,886 518,591
Gain on sale of assets ............................... (155,126) (302,892)
Net deferral of loan origination fees ................ (45,704) (15,957)
Increase/(decrease) in accrued interest receivable ..... 517,691 (356,513)
Amortization on securities ............................. 227,146 --
Increase/(decrease) in prepaid expenses and other assets 413,606 (2,189,552)
Increase in accrued interest payable; deferred taxes and
other liabilities ..................................... 1,922,119 308,860
------------ ------------
Total adjustments ...................................... 5,245,618 (1,287,463)
------------ ------------
Net cash from operating activities ..................... 7,305,405 198,459
INVESTING ACTIVITIES
Purchase of securities available for sale .............. (18,652,083) (14,084,840)
proceeds from sales of securities available for sale ... 25,325,699 17,578,734
Proceeds from maturities and paydowns of securities
available for sale .................................... 924,677 1,525,645
Net (increase)/decrease in loans ....................... 7,232,710 (25,106,163)
Proceeds from the sale of real estate owned ............ 7,667 757,486
Capital expenditures ................................... (491,668) (943,578)
Purchase of Federal Home Loan Bank stock ............... (715,700) (667,100)
Purchase of Federal Reserve Bank stock ................. (52,700) (55,600)
------------ ------------
Net cash from investing activities ..................... 13,578,602 (20,995,416)
FINANCING ACTIVITIES
Net increase in deposits ............................... 15,385,536 21,708,395
(Decrease)/increase in FHLB advances ................... (24,000,000) 1,000,000
Increase (decrease) in repurchase agreements ........... (3,732,500) 2,252,500
Net increase in advance payments for taxes and insurance 828,531 1,197,026
Exercise of common stock options ....................... 9,425 2,113
Cash dividends on common stock ......................... (398,117) (378,058)
------------ ------------
Net cash from financing activities ..................... (11,907,125) 25,781,976
Net increase in cash and cash equivalents .............. 8,976,882 4,985,019
Beginning cash and cash equivalents .................... 32,638,844 68,292,669
------------ ------------
Ending cash and cash equivalents ....................... $ 41,615,726 $ 73,277,688
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest ............................................. $ 8,503,649 $ 9,218,186
Federal income taxes ................................. 326,820 584,122
Non-cash investing and financing activities
Transfer from loans to real estate owned ............. 795,016 773,162
</TABLE>
See Notes to Consolidated Financial Statements
F-31
<PAGE> 192
FRANKLIN BANK, N.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Significant Accounting Policies:
The accompanying consolidated financial statements of Franklin Bank
N.A. and its subsidiary ("Franklin" or the "Bank") have been prepared in
accordance with the instructions for Form 10-Q. Accordingly, they do not include
all information and footnotes necessary for a fair presentation of consolidated
financial condition, results of operations and cash flows in conformity with
generally accepted accounting principles. The statements do, however, include
all adjustments (consisting of normal recurring accruals) which Management
considers necessary for a fair presentation of the interim periods.
This 10-Q is written with the presumption that the users of the interim
financial statements have read or have access to the Bank's Annual Report on
Form 10-K, which contains the latest audited financial statements and notes
thereto, together with Management's Discussion and Analysis of Financial
Condition and Results of Operations as of December 31, 1996 and for the year
then ended. Therefore, only material changes in financial condition and results
of operations are discussed in the remainder of Part I.
The results of operations for the six month period ended June 30, 1997
are not necessarily indicative of the results to be expected for the year ended
December 31, 1997.
The Consolidated Statement of Financial Condition as of December 31,
1996 has been derived from the audited Consolidated Statement of Financial
Condition as of that date.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs, net of recoveries. Management's periodic evaluation of
the adequacy of the allowance is based on the Bank's past loan loss experience,
known and inherent risks in the loan portfolio, adverse situations that may
affect a borrower's ability to repay, the estimated value of any underlying
collateral and current economic conditions.
FASB Standard No. 114 was adopted at January 1, 1995. Under this
standard, loans considered to be impaired are reduced to the present value of
expected future cash flows or the fair value of collateral, by allocating a
portion of the allowance for loan losses to such loans. If these allocations
cause the allowance for loan losses to require an increase, such an increase is
reported as bad debt expense. The effect of adopting this standard would be
reported as bad debt expense. No additional allocations to bad debt expense were
required upon adoption of FASB Standard No. 114, or during the periods reported
herein.
F-32
<PAGE> 193
FRANKLIN BANK, N.A.
1. Basis of Presentation and Significant Accounting Policies (continued):
The carrying values of impaired loans are periodically adjusted to
reflect cash payments, revised estimates of future cash flows, and increases in
the present value of expected cash flows due to the passage of time. Cash
payments representing interest income are reported as such. Other cash payments
are reported as reductions in carrying value, while increases or decreases due
to changes in estimates of future payments and due to the passage of time are
reported as bad debt expense, if reductions, or otherwise as reductions in bad
debt expense.
In March 1997, the FASB issued Standard No. 128, "Earnings Per Share".
This standard supersedes Accounting Principles Board ("APB") Statement 15,
"Earnings Per Share", and simplifies the computation of earnings per share
("EPS") by replacing the "primary" EPS requirements of APB Statement 15 with a
"basic" EPS computation based upon weighted shares outstanding. The new standard
requires a dual presentation of basic and diluted EPS. Diluted EPS is similar to
"fully diluted" EPS.
2. Earnings Per Share:
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
--------------------------- ---------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income ........................... $2,059,787 $1,485,922 $1,058,743 $ 697,477
========== ========== ========== ==========
Average common shares outstanding(1) . 3,317,294 3,307,606 3,319,625 3,307,999
Common share equivalents(1) .......... 89,043 75,877 95,179 71,239
---------- ---------- ---------- ----------
Weighted average shares outstanding(1) 3,406,337 3,383,483 3,414,804 3,379,238
========== ========== ========== ==========
Earnings per share ................... $ 0.60 $ 0.44 $ 0.31 $ 0.21
Average shares outstanding, fully
diluted(1) .......................... 3,427,211 3,383,483 3,428,618 3,379,238
Earnings per share, fully diluted .... $ 0.60 $ 0.44 $ 0.31 $ 0.21
</TABLE>
(1) Adjusted for the 5% common stock dividend declared on December 19, 1996
and paid on January 16, 1997.
F-33
<PAGE> 194
FRANKLIN BANK, N.A.
3. Nonaccrual Loans, Real Estate Owned and Allowance for Loan Losses:
The following table summarizes non-performing loans and assets at the
dates indicated:
<TABLE>
<CAPTION>
At June 30, At December 31,
1997 1996
----------- ---------------
<S> <C> <C>
NONACCRUAL LOANS
Commercial .................................................. $1,294,623 $ 1,894,352
Commercial mortgage ......................................... 309,246 309,246
---------- -----------
Total nonaccrual loans ...................................... 1,603,869 2,203,598
REAL ESTATE OWNED
Commercial mortgage ......................................... 2,124,268 929,063
Residential mortgage ........................................ -- 442,506
---------- -----------
Total real estate owned ..................................... 2,124,268 1,371,569
Other repossessed assets .................................... 337,144 107,743
---------- -----------
Total nonaccrual loans and real estate owned ................ $4,065,281 $ 3,682,910
========== ===========
As a percentage of total assets
Total nonaccrual loans and real estate owned .............. 0.83% 0.74%
Total nonaccrual loans .................................... 0.33 0.44
As a percentage of total loans and real estate owned:
Total nonaccrual loans and real estate owned .............. 1.05 0.93
Total nonaccrual loans .................................... 0.41 0.55
Loans delinquent 90 days or more (not included in nonaccrual) $6,987,225 $11,595,274
</TABLE>
F-34
<PAGE> 195
FRANKLIN BANK, N.A.
3. Nonaccrual Loans, Real Estate Owned and Allowance for Loan Losses
(continued):
The following table summarizes changes in the allowance for loan losses
arising from loans charged off, recoveries of loans previously charged off and
additions to the allowance which have been charged to expense:
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
Balance at beginning of period .......................... $3,199,549 $2,930,392
Provision for possible losses ........................... 1,700,000 750,000
CHARGE-OFFS
Commercial .............................................. 624,184 321,137
Commercial mortgage ..................................... -- 20,426
Consumer ................................................ 112,893 54,387
Overdraft ............................................... 368,822 206,432
Lease financing ......................................... 1,177,188 275,230
---------- ----------
Total charge-offs ....................................... 2,283,087 877,612
RECOVERIES
Commercial .............................................. 76,813 7,232
Commercial mortgage ..................................... -- 2,400
Residential mortgage .................................... 650 --
Consumer ................................................ 30,805 9,217
Overdraft ............................................... 63,784 17,170
Lease financing ......................................... 136,748 75,420
---------- ----------
Total recoveries ........................................ 308,800 111,439
---------- ----------
Net charge-offs ......................................... 1,974,287 766,173
---------- ----------
Balance at end of period ................................ $2,925,262 $2,914,219
========== ==========
Allowance as a percentage of:
Total loans ........................................... 0.76% 0.77%
Nonaccrual loans ...................................... 182.39 132.25
Net charge-offs (annualized) .......................... 74.08 190.18
Net charge-offs to average loans outstanding (annualized) 1.01 0.43
</TABLE>
Information regarding impaired loans is as follows:
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
Average investment in impaired loans ..................... $6,101,028 $7,881,540
Provision for possible losses ............................ 122,897 123,136
</TABLE>
F-35
<PAGE> 196
FRANKLIN BANK, N.A.
3. Nonaccrual Loans, Real Estate Owned and Allowance for Loan Losses
(continued):
<TABLE>
<CAPTION>
At At
June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
Balance of impaired loans ...................................... $5,331,702 $8,073,827
Less portion of which no allowance for loans losses is allocated 349,882 5,787,934
Portion of impaired loan balance for which an allowance
for credit losses is allocated ................................ 4,981,820 2,285,893
Portion of allowance for loan losses allocated to the impaired
loan balance .................................................. 779,872 439,476
</TABLE>
SFAS No. 114 "Accounting by creditors for impairment of a loan", does
not apply to large groups of smaller balance homogeneous loans that are
collectively evaluated for impairment, except for loans restructured under a
troubled debt restructuring. Loans collectively evaluated for impairment include
residential real estate and consumer loans, and are included in the above
summary of impaired loans, only if restructured.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1997 TO SIX MONTHS ENDED JUNE 30, 1996:
Interest income increased by $1,049,055, while interest expense
decreased by $671,968, thus increasing the net interest margin by $1,721,023 for
the six months ended June 30, 1997 compared to June 30, 1996. Interest income
increases were principally due to an increase in average outstanding loan and
investment balances. The decrease in interest expense was due to a decrease in
the average outstanding balance of interest bearing liabilities as well as a
drop in the weighted average rate being paid on the liabilities. For the six
months ended June 30, 1997 compared to the six months ended June 30, 1996, there
was an increase of $23.1 million in the average balance of interest earning
assets, and a decrease of $4.9 million in average balances of interest bearing
liabilities. The weighted average yield on earning assets increased to 9.03% for
the six months ended June 30, 1997 from 8.97% for the six months ended June 30,
1996. The weighted average rate paid on interest bearing liabilities decreased
from 5.28% for the six months ended June 30, 1996 to 4.98% for the six months
ended June 30, 1997. This decrease in the average rate was the result of lower
rates being paid on certificates over $100,000, and other borrowings which
included Federal Home Loan Bank advances and repurchase agreements. The weighted
average rate paid on these liabilities for the period ended June 30, 1997 was
5.6% compared to 5.7% for the period ended June 30, 1996.
The net interest margin was 5.32% and 4.76% respectively, for the six
months ended June 30, 1997 and 1996. Management's continuing focus on increasing
non-interest bearing business account balances and growth in the lease financing
and non-real estate commercial loan areas are the principal reasons for the
improved net interest margin in 1997. The average balance in Money
F-36
<PAGE> 197
Market Demand Accounts at June 30, 1997 was 139.5 million. The average balances
of business and personal checking accounts have increased by $30.0 million
during the six months ended June 30, 1997 compared to the six months ended June
30, 1996 to an average balance of $119.9 million.. Another contributing factor
toward improved margin is the decrease in Money Market Demand Accounts rates
from 4.2% to 3.91% for the six month periods ending June 30, 1996 and June 30,
1997, respectively.
On the lending side, Franklin's growth was primarily in business loans.
The average balances of higher yielding non-real estate indirect lease financing
loans increased by $10.2 million during the six months ended June 30, 1997 to an
average balance of $93.6 million. For the six months ended June 30, 1997 these
loans yielded a weighted average rate of 9.78%. The average outstanding balances
of non real estate commercial loan products; such as small business loans, lines
of credit, loans secured by equipment, accounts receivables and inventory, have
increased by $4.0 million during the six months ended June 30, 1997 to an
average balance of $81.0 million. These loans were yielding a weighted average
rate of 9.0% for the six months ended June 30, 1997.
Franklin currently has approximately $146.8 million in loan balances
outstanding which reprice with a change in the rate during the three month
period ending September 30, 1997, and approximately $44.8 million in loans which
reprice during the period beginning September 30, 1997 and ending June 30, 1998.
The bank also has $10.1 million in other securities which will mature during the
twelve month period ending June 30, 1998. Also, $112.9 million of the
certificate of deposit accounts and all of the $142.5 million money market
accounts outstanding at June 30, 1997 would be subject to repricing in an
interest rate move, thus helping to offset any loss in the interest margin due
to declining yields on assets which reprice with a change in the prime rate or
the one year Treasury bill rate.
Total other income for the six months ended June 30, 1997 was
$1,978,490 compared to $2,037,727 for the same period ended June 30, 1996. Total
other income in 1997 consisted primarily of deposit service fees and loan
origination fees. Deposit service fees increased $238,718 and is directly
associated with the increase in the number of business checking accounts along
with an increase in charges for NSF items during the third quarter 1996. Loan
fees decreased by $159,070 primarily due to a decrease in late charges assessed.
Revenues associated with the sale of investment products (such as mutual funds
and annuities) have increased slightly. In an effort to take advantage of
securities price movements, the Bank sold $25.3 million of securities held in
its available for sale security portfolio in the first half of 1997. This sale
resulted in a net gain being recognized of $150,313 for the six months ended
June 30, 1997.
The $14,366 net increase in operating expenses during the six months
ended June 30, 1997 compared to the six months ended June 30, 1996 is comprised
primarily of an increase in compensation and benefits of $371,538, an increase
in occupancy and equipment of $200,369, a decrease in Federal Deposit Insurance
Assessment of $297,502, a decrease in advertising of $432,161 and an increase in
other expenses of $172,122. The increase in compensation, benefits and payroll
taxes of $371,538 was attributed to an average salary increase for existing
employees of 3.5% and an increase in the average number of full time equivalent
staffing of 30 employees when comparing the six months ended June 30, 1997 to
June 30, 1996. Also, the costs associated with acquiring new employees to fill
both vacated positions and newly created positions, along with the
F-37
<PAGE> 198
costs to employ temporary employees rose by $109,332 in year to year
comparisons. The increase in occupancy and equipment expenses were due to
increases in rent of $21,983 due to additional space being occupied in the main
office and expanded records storage space. Also, furniture and fixtures
depreciation expense increased by $135,484 due to purchases of additional
computer hardware and software applications. During the last quarter of 1996 and
into the first half of 1997 the Bank has embarked on an aggressive program of
upgrading the personal computer environment and Windows-based system. This
process also included upgrading the local area network. The Bank also began to
handle and process its customers deposit and inclearing check activity at its
own processing facility during the last quarter of 1996. This resulted in
expenditures for equipment and additional space. These expenditures in computer
hardware, and software programs assist the Bank in continuing to process
additional interest free checking accounts, which help to improve both the
margin and fee income components of the Bank's total income. The increase in
other operating expenses is attributed to increases in expenses for ATM
interchange charges of $28,856 and an increase in courier expenses of $100,643,
along with decreases in employee training costs of $39,085 and supplies and
printing cost decreases of $66,261.
In year to date comparisons, total defaulted loan expense increased by
$153,932, 125.2% for the period ended June 30, 1997 compared to June 30, 1996.
During the six months ended June 30, 1997 gains on the sale of OREO property
were booked in the amount of $4,812. Actual expenses associated with OREO
property totaling$276,929. These gains less the expenses resulted in a net
defaulted loan expense of $272,117 for the six months ended June 30, 1997. There
were $144,693 in gains on the sale of OREO property during the six months ended
June 30, 1996 and $73,788 in rental income. There was no rental income on OREO
properties booked during the six months ended June 30, 1997. Management
continues to focus on controlling defaulted loan expense, but does not
anticipate further gains on the sale of OREO properties or rental income for the
remainder of 1997.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1997 TO THREE MONTHS ENDED JUNE 30,
1996
Interest income increased by $328,157, while interest expense decreased
by $453,119, increasing the net interest margin by$781,276. Interest income
increases were due to an increase in average outstanding balances of higher
earning assets such as lease financing and non-real estate commercial loans. The
decrease in interest expense was the result of lower rates being paid on Money
Market Demand Accounts from 4.29% at June 30, 1996 to 3.91% at June 30, 1997.
The net interest margin was 5.46% and 4.86% respectively, for the quarters ended
June 30, 1997 and 1996. See "Comparison of six months ended June 30, 1997 to six
months ended June 30, 1996" for further discussion of the increase in net
interest income and interest margin.
Total other income for the quarter ended June 30, 1997 was $993,032
compared to $995,940 for the quarter ended June 30, 1996. There was an increase
in deposit service fees of $132,852 or 25.3% for the quarter ended June 30, 1997
compared to the same period ended June 30, 1996. This increase in deposit
service fees was primarily due to the increase in the number of business
checking accounts. See "Comparison of six months ended June 30, 1997 to six
months ended June 30, 1996" for further discussion of the increase in other
income.
The net decrease of $150,934 in operating expenses during the quarter
ended June 30, 1997 is comprised primarily of an increase in compensation and
benefits of $238,735, an increase in
F-38
<PAGE> 199
occupancy and equipment of $105,531, a decrease in advertising of $258,102, a
decrease in FDIC insurance of $159,125 and a decrease in other expense of
$77,973 compared to the quarter ended June 30, 1996. See "Comparison of six
months ended June 30, 1997 to six months ended June 30, 1996" for further
discussion of the increases in operating expenses.
FINANCIAL CONDITION
Total assets were $487.8 million at June 30, 1997 compared to $495.8
million at December 31, 1996. At June 30, 1997 and December 31, 1996, cash and
cash equivalents plus interest earning securities represented 17.1% and 16.5%,
respectively, of total assets. Loan balances decreased $9.6 million or 2.5% from
December 31, 1996 to June 30, 1997. This decrease in loan balances was due
primarily to commercial loan sales of $21.1 million during March 1997. Balances
in Federal Home Loan Bank advances and repurchase agreements have decreased by
$27.7 million or 51.7% during the six months ended June 30, 1997.
At June 30, 1997 and 1996 the Bank had outstanding loan commitments for
loans that have not been accepted by the borrower or closed of approximately
$13.3 million, and $11.3 million, respectively. These include commitments for
commercial business loans, residential mortgages and home equity loans.
Approximately $5.8 million of the commitments at June 30, 1997 were for fixed
rate loans with maturities of approximately 74 months and a weighted average
rate of 10.0%, with the remainder being adjustable rate loans.
Under loan agreements for transactions which had closed, the Bank had
commitments to fund commercial lines of credit of approximately $46.9 million
and $39.7 million at June 30, 1997 and 1996 respectively. The Bank had
commitments to fund construction loans of approximately $7.6 million and $7.1
million at June 30, 1997 and 1996 respectively. The Bank had commitments to fund
home equity loans of approximately $11.6 million and $12.2 million at June 30,
1997 and 1996 respectively. As certain commitments to make loans and fund full
lines of credit expire without being used, the amount does not necessarily
represent future cash commitments.
The level of non-performing assets increased from $3,682,910 at
December 31, 1996 to $4,065,281 at June 30, 1997. This was an increase of 10.4%.
Total non-accruing loans decreased from $2,203,598 at December 31, 1996 to
$1,603,869 at June 30, 1997, a 27.2% decrease. Total non-performing assets to
total assets for the period ended June 30, 1997 was .83%, compared to .74% at
December 31, 1996. At June 30, 1997 there were four commercial real estate
property with a principal balance of $2,124,268 and no residential loans
classified as OREO. In January, 1995, the Bank changed it's policy for
classifying residential real estate and consumer installment loans that are
past- due 90 days or more as non-accruing. These loans are now reported under
the Loans Delinquent 90 days or more (not included in non accrual). At June 30,
1997, $1,499,841 and $76,102 of the total 90 days or more past due and still
accruing amount of $6,987,225 pertained to residential real estate loans and
consumer installment loans respectively. At December 31, 1996, these amounts
were $10,962 and $114,643 for residential real estate loans and consumer
installment loans respectively. It is the Bank's intent to continue to account
for these types of loans in this manner in the future. These loans are now
evaluated per FASB No. 114, "Accounting by Creditors for Impairment of Loan -
Income Recognition and Disclosures".
F-39
<PAGE> 200
The change in status of a relatively few loans can impact the
non-performing assets ratio. Management continues to closely monitor its
commercial loan portfolio. The net charge-offs to total loans ratio was 0.76%
for the June 30, 1997 quarter and 0.77% for the year ended December 31, 1996.
During the six months ended June 30, 1997, Franklin's allowance for
loan and lease losses (ALLL) decreased slightly to 0.76% of loans receivable.
Franklin increased its provision for the six months ended June 30, 1997 to
$1,700,000 compared to $750,000 for the six months ended June 30, 1996.
Management regularly reviews the ALLL and considers Franklin's ALLL adequate
under the circumstances. However, management may consider making additional
provisions to its ALLL during the rest of 1997 in an effort to increase its
allowance percentage more in line with its longer term goals and peer ratios.
Franklin competes aggressively for business, consumer and municipal
deposits in southeastern Michigan and also offers a limited number of
non-affiliated non-deposit investment products. Historically, Franklin's
principal sources of funds for its lending and investment activities have
consisted of deposits, principal repayment on loans, Federal Home Loan Bank
advances and repurchase agreements. Principal uses of funds for Franklin include
the origination of loans and the repayment of maturing deposit accounts and
other borrowings.
During the six month period ended June 30, 1997, Franklin had a $12.3
million decrease in deposits and other borrowings, including interest credited,
with an decrease of $9.6 million in loans and an increase of $1.2 million in
cash and securities. Notwithstanding this decline in deposits and borrowings,
business checking balances increased by $15.9 million from $107.0 million at
December 31, 1996 to $122.9 million at June 31, 1997.
F-40
<PAGE> 201
The following table compares the Bank's capital ratios at June 30, 1997
with current regulatory guidelines and December 31, 1996 figures:
<TABLE>
<CAPTION>
Tier 1 Leverage Tier 1 Risk-based Total Risk-based
(In thousands) Ratio Ratio Ratio
--------------- ----------------- ----------------
<S> <C> <C> <C>
Regulatory capital balances at June 30, 1997 ..... $ 30,698 $ 30,698 $ 41,706
Required regulatory capital (well capitalized) ... 24,402 23,139 38,581
---------- ---------- ----------
Capital in excess of well capitalized ............ $ 6,296 $ 7,559 $ 3,125
========== ========== ==========
Capital ratios at June 30, 1997 .................. 6.29% 7.96% 10.81%
Capital ratios at December 31, 1996 .............. 5.99 7.27 10.04
Regulatory capital ratios -- "well capitalized"
definition ...................................... 5.00 6.00 10.00
</TABLE>
COMPUTATION OF PRIMARY AND FULLY DILUTED EARNINGS PER SHARE (unaudited)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
--------------------------- ---------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE(1)
Net income ......................... $2,059,787 $1,485,922 $1,058,743 $ 697,477
Average common shares outstanding:
Common stock ..................... 3,317,294 3,307,606 3,319,625 3,307,999
Common stock equivalents:
Assumed exercise of stock options 89,043 75,877 95,179 71,239
---------- ---------- ---------- ----------
Primary common stock and equivalents 3,406,337 3,383,483 3,414,804 3,379,238
---------- ---------- ---------- ----------
Primary earnings per share ......... $ 0.60 $ 0.44 $ 0.31 $ 0.21
========== ========== ========== ==========
FULLY DILUTED EARNINGS PER SHARE( 1)
Net income ......................... $2,059,787 $1,485,922 $1,058,743 $ 697,477
Average common shares outstanding:
Common stock ..................... 3,317,294 3,307,606 3,319,625 3,307,999
Common stock equivalents:
Assumed exercise of stock options 109,917 75,877 108,993 71,239
---------- ---------- ---------- ----------
Primary common stock and equivalents 3,427,211 3,383,483 3,428,618 3,379,238
---------- ---------- ---------- ----------
Primary earnings per share ......... $ 0.60 $ 0.44 $ 0.31 $ 0.21
========== ========== ========== ==========
</TABLE>
- --------------
(1) Adjusted for the 5% common stock dividend declared on December 19, 1996
and paid on January 16, 1997.
F-41
<PAGE> 202
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<CAPTION>
<S> <C>
Registration Fee.............................................. $ 6,273
Printing and Out of Pocket Expenses........................... 100,000
Legal Fees and Expenses (includes issuer's
counsel counsel and tax counsel).............................. 135,000
Accounting Fees and Expenses.................................. 40,000
Blue Sky Fees and Expenses.................................... 5,000
Other 1,227
---------
Total............................................... $287,500
========
</TABLE>
ITEM 32. SALES TO SPECIAL PARTIES.
See response to Item 33 below.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES
In connection with the formation of Franklin Finance Corporation (the
"Company" or the "Registrant"), the Company issued 1000 shares of Common Stock,
par value $1.00 per share, to Franklin Bank, N.A. (the "Bank"). Prior to the
consummation of the Offering, the Company will amend its Articles of
Incorporation to change the par value of its Common Stock to $300.00 per share.
Simultaneously with the consummation of the Offering, the Company will issue an
aggregate of 19,045 shares of Common Stock to the Bank. The description of
these transactions in the Prospectus under the heading "Certain Transactions
Constituting The Formation" is incorporated herein by reference. These shares of
Common Stock will be issued in reliance upon the exemption from registration
under Section 4(2) of the Securities Act of 1933 (the "Securities Act").
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Michigan Business Corporation Act, as amended ("MBCA"), provides
that a Michigan corporation, such as the Registrant, may indemnify a director,
officer, employee or agent of the corporation (an "Indemnitee") against the
Indemnitee's expenses and judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with any threatened, pending or
completed action, suit or proceeding (other than an action by or in the right of
the corporation) involving the Indemnitee by reason of the fact that the
Indemnitee is or was a director, officer,
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<PAGE> 203
employee or agent of the corporation, if the Indemnitee acted in good faith and
in a manner the Indemnitee reasonably believed to be in or not opposed to the
best interest of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful.
The MBCA also provides that in derivative actions, a corporation may indemnify a
director, officer, employee or agent of the corporation against expenses
actually and reasonably incurred by the Indemnitee to the extent that the
Indemnitee is successful on the merits or otherwise in any such action, suit or
proceeding or in the defense of any claim, issue or matter therein. Under the
MBCA, no indemnification shall be made with respect to any claim, issue or
matter as to which an Indemnitee shall have been adjudged to be liable to the
corporation unless and only to the extent that the court shall determine upon
application that, despite the adjudication of liability but in view of all of
the circumstances of the case, the Indemnitee is fairly and reasonably entitled
to indemnity for such expenses which the court shall deem proper. The MBCA also
generally permits the advancement of reasonable expenses and empowers the
corporation to purchase and maintain directors' and officers' insurance.
Section 209 of the MBCA provides that the articles of incorporation of
a corporation may contain a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such provision
shall not eliminate or limit the liability of a director (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
knowing violation of law, (iii) under Section 551(1) (relating to liability for
unauthorized acquisitions or redemptions of, or dividends on, capital stock and
loans to a director, officer, or employee the corporation or of a subsidiary of
the corporation) of the MBCA, (iv) for any transaction from which the director
derived an improper personal benefit or (v) for an act or omission occurring
prior to the date such a provision becomes effective.
The Amended and Restated Articles of Incorporation of the Registrant
provides that, to the fullest extent that the MBCA as from time to time in
effect permits the limitation or elimination of the liability of directors, no
director of the Registrant shall be personally liable to the Registrant or its
stockholders for monetary damages for breach of fiduciary duty as a director.
The Amended and Restated Articles of Incorporation empowers the
Registrant to indemnify any director, officer, employee or agent of the
Registrant or any other person who is serving at the Registrant's request in any
such capacity with another corporation, partnership, joint venture, trust or
other enterprise (including, without limitation, an employee benefit plan) to
the fullest extent permitted under the MBCA as from time to time in effect, and
any such indemnification may continue as to any person who has ceased to be a
director, officer, employee or agent and may inure to the benefit of the heirs,
executors and administrators of such a person.
The Amended and Restated Articles of Incorporation also empowers the
Registrant by action of its Board of Directors, notwithstanding any interest of
the directors in the action, to purchase and maintain insurance in such amounts
as the Board of Directors deems appropriate to protect any director, officer,
employee or agent of the Registrant or any other person who is serving at the
Registrant's request in any such capacity with another corporation, partnership,
joint venture, trust or other enterprise (including, without limitation, an
employee benefit plan) against any liability asserted against such individual or
incurred by such individual in any such capacity arising out of
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<PAGE> 204
such individual's status as such (including, without limitation, expenses,
judgments, fines (including any excise taxes assessed on a person with respect
to any employee benefit plan) and amounts paid in settlement) to the fullest
extent permitted under the MBCA as from time to time in effect, whether or not
the Registrant would have the power or be required to indemnify any such
individual under the terms of any agreement or by-law or the MBCA.
In addition, the Registrant's By-laws require indemnification to the
fullest extent permitted under applicable law, as from time to time in effect.
The By-laws provide a clear and unconditional right to indemnification for
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by any person in connection with any
threatened, pending or completed investigation, claim, action, suit or
proceeding, whether civil, administrative or investigative (including, to the
extent permitted by law, any derivative action) by reason of the fact that such
person is or was serving as a director, officer, employee or agent of the
Registrant or, at the request of the Registrant, of another corporation,
partnership, joint venture, trust or other enterprise (including, without
limitation, an employee benefit plan). The By-laws specify that the right to
indemnification so provided is a contract right, set forth certain procedural
and evidentiary standards applicable to the enforcement of a claim under the
By-laws, entitle the persons to be indemnified to be reimbursed for the expenses
of prosecuting any such claim against the Registrant and entitle them to have
all expenses incurred in advance of the final disposition of a proceeding paid
by the Registrant. Such provisions, however, are intended to be in furtherance
and not in limitation of the general right to indemnification provided in the
By-laws, which right of indemnification and of advancement of expenses is not
exclusive.
The Registrant's By-laws also provide that the Registrant may enter
into contracts with any director, officer, employee or agent of the Registrant
in furtherance of the indemnification provisions in the By-laws, as well as
create a trust fund, grant a security interest or use other means (including,
without limitation, a letter of credit) to ensure payment of amounts
indemnified.
ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
Not applicable.
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements
See F-1 of the Prospectus for an index to financial statements included
as part of the Prospectus.
(b) Exhibits
See Index to Exhibits.
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<PAGE> 205
ITEM 37. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the
Underwriters, at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions described under Item 34 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding), is asserted by such director, officer, or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(i) For the purpose of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time it was
declared effective.
(ii) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
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<PAGE> 206
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-11 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Southfield, Michigan, on the 8th day of October, 1997.
FRANKLIN FINANCE CORPORATION
By: /s/ Read P. Dunn
-------------------------------------------
Read P. Dunn, President and Chief Executive
Officer (Authorized Officer)
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
/s/David F. Simon Dated: October 8, 1997
- --------------------------------------------------
David F. Simon
Director and Secretary
/s/David L. Shelp Dated: October 8, 1997
- --------------------------------------------------
David L. Shelp
Director, Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/Edward J. Shehab Dated: October 8, 1997
- --------------------------------------------------
Edward J. Shehab
Director and Senior Vice President
/s/Read P. Dunn Dated: October 8, 1997
- --------------------------------------------------
Read P. Dunn
President and Chief Executive Officer
(Principal Executive Officer)
- -------------------------------------------------- Dated:
- -------------------------------------------------- Dated:
<PAGE> 207
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- ----------------------------------------------------------------------------------
<S> <C>
1 Form of Underwriting Agreement between the Company, the Bank and the
Underwriters
3(a)(i) Articles of Incorporation of the Company
3(a)(ii) Form of Certificate of Designation establishing the Series A Preferred Shares
3(a)(iii) Form of Restated Articles of Incorporation
3(b) Bylaws of the Company
4.1 Specimen of certificate representing Noncumulative, Exchangeable Preferred
Stock, Series A, of the Company
4.2 Specimen of certificate representing Noncumulative Preferred Stock, Series A, of
the Bank
5.1 Form of Opinion of Silver, Freedman & Taff, L.L.P., special
counsel to the Company, relating to Noncumulative, Exchangeable
Preferred Stock, Series A
5.2 Form of Opinion of Silver, Freedman & Taff, L.L.P., special counsel to the Bank,
relating to Noncumulative Preferred Stock, Series A
8 Opinion of Tax Adviser to the Company relating to certain tax matters
10.1 Form of Residential Mortgage Loan Purchase and Warranties Agreement between
the Company and the Bank
10.2 Form of Commercial Mortgage Loan Purchase and Warranties Agreement between
the Company and the Bank
10.3 Form of Residential Mortgage Loan Servicing Agreement between the Company
and the Bank
10.4 Form of Commercial Mortgage Loan Servicing Agreement between the Company
and the Bank
10.5 Form of Advisory Agreement between the Company and the Bank
23.1 Consent of Grant Thornton LLP
23.2 Consent of Crowe, Chizek and Company LLP
23.3 Consent of Tax Advisor (included in Exhibit 8)
23.4 Consent of Silver, Freedman & Taff, L.L.P.
23.5 Consent of Honigman Miller Schwartz and Cohn
24 Powers of Attorney
</TABLE>
<PAGE> 1
EXHIBIT 1
FRANKLIN FINANCE CORPORATION
_____% NONCUMULATIVE PREFERRED STOCK, SERIES A
(LIQUIDATION PREFERENCE $10.00 PER SHARE)
EXCHANGEABLE INTO PREFERRED STOCK OF
FRANKLIN BANK, N.A.
UNDERWRITING AGREEMENT
__________, 1997
Roney & Co., L.L.C.
Principal Financial Securities, Inc.
c/o Roney & Co., L.L.C.,
One Griswold
Detroit, Michigan 48226
Ladies and Gentlemen:
Franklin Finance Corporation, a Michigan corporation (the "Company"),
proposes, subject to the terms and conditions stated herein, to issue and sell
to the Underwriters named in Schedule I hereto (the "Underwriters") an
aggregate of 1,800,000 shares (the "Firm Shares") of ____% Noncumulative
Preferred Stock, Series A (the "Preferred Stock") of the Company and up to an
aggregate of 270,000 shares (the "Optional Shares") of Preferred Stock (the
Firm Shares and the Optional Shares that the Underwriters elect to purchase
pursuant to Section 2 hereof being collectively referred to as the "Shares").
Franklin Bank, a federally chartered and federally insured stock
savings bank and the parent of the Company (the "Bank"), has prepared and filed
on ________, 1997 with the Office of the Comptroller of the Currency (the
"OCC") a preliminary prospectus under cover of Form S-11 (Docket No. ______),
also filed with the Securities and Exchange Commission (the "Commission") as an
attachment to the Registration Statement (as defined below), for the
registration of the preferred stock of the Bank for which the Preferred Stock
will be exchanged automatically under certain conditions (the "Bank Preferred
Shares") pursuant to the rules and regulations of the Commission made
applicable to the offering circular by the rules and regulations of the OCC,
(hereinafter collectively referred to as the "OCC Rules and Regulations"). The
Bank will promptly prepare and file a preliminary prospectus, which includes
the information (the "Pricing Information") excluded from the preliminary
prospectus in reliance upon the OCC Rules and Regulations and 17 C.F.R. Section
230-430A, in accordance with the provisions of Rule 424(b). Each prospectus
used before the time such prospectus is declared effective by the OCC and any
prospectus that omits the Pricing Information that is used after such
effectiveness and prior to the date hereof is herein called a "Bank Preliminary
Prospectus." Such filing under the
<PAGE> 2
Form S-11, and the prospectus constituting a part thereof, as amended at the
time the prospectus becomes effective under the OCC Rules and Regulations (and
including the Pricing Information), including all documents incorporated by
reference therein, are hereinafter referred to as the "Bank Registration
Statement" and the "Bank Prospectus," respectively, except that if any amended
or supplemented prospectus shall be provided to the Underwriters by the Bank
for use in connection with the offering of the Bank Preferred Shares which
differs from the Bank Prospectus at the time it becomes effective, the term
"Bank Prospectus" shall refer to such newly amended or supplemented prospectus
from and after the time it is first provided to the Underwriters for such use.
1. (a) The Company represents and warrants to, and agrees
with, each of the Underwriters that:
(i) A registration statement on Form S-11 (File No.
333-______) as amended by any pre-effective amendment thereto in
respect of the Shares (the "Initial Registration Statement") has been
filed with the Commission; the Initial Registration Statement and any
post-effective amendment thereto, each in the form heretofore
delivered to you, and, excluding exhibits thereto, as the same may
have been amended from time to time, to each of the other
Underwriters, have been declared effective by the Commission in such
form; other than a registration statement, if any, increasing the size
of the offering (a "Rule 462(b) Registration Statement"), filed
pursuant to Rule 462(b) under the Securities Act of 1933, as amended
(the "Act"), which became effective upon filing, no other document
with respect to the Initial Registration Statement has heretofore been
filed with the Commission; and no stop order suspending the
effectiveness of the Initial Registration Statement, any
post-effective amendment thereto or the Rule 462(b) Registration
Statement, if any, has been issued and no proceeding for that purpose
has been initiated or threatened by the Commission (any preliminary
prospectus included in the Initial Registration Statement or filed
with the Commission pursuant to Rule 424(a) of the rules and
regulations of the Commission under the Act, as amended, is
hereinafter called a "Preliminary Prospectus;" the various parts of
the Initial Registration Statement and the Rule 462(b) Registration
Statement, if any, including all exhibits thereto and including the
information contained in the form of final prospectus filed with the
Commission pursuant to Rule 424(b) under the Act in accordance with
Section 5(a) hereof and deemed by virtue of Rule 430A under the Act to
be part of the Initial Registration Statement at the time it was
declared effective or such part of the Rule 462(b) Registration
Statement, if any, became or hereafter becomes effective, each as
amended at the time such part of the registration statement became
effective, is hereinafter collectively called the "Registration
Statement;" and such final prospectus, in the form first filed
pursuant to Rule 424(b) under the Act, is hereinafter called the
"Prospectus");
(ii) No order preventing or suspending the use of any
Preliminary Prospectus has been issued by the Commission, and each
Preliminary Prospectus, at the time of filing thereof, conformed in
all material respects to the requirements of the Act and the rules and
regulations of the Commission thereunder, and did not contain an
untrue statement
2
<PAGE> 3
of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
provided, however, that this representation and warranty shall not
apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by an
Underwriter expressly for use therein; and
(iii) The Registration Statement conforms, and the
Prospectus and any further amendments or supplements to the
Registration Statement or the Prospectus will conform, in all material
respects to the requirements of the Act and the rules and regulations
of the Commission thereunder and do not and will not, as of the
applicable effective date of the Registration Statement and any
amendment thereto, and as of the applicable filing date of the
Prospectus and any amendment or supplement thereto, contain an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon
and in conformity with information furnished in writing to the Company
by an Underwriter expressly for use therein;
(b) The Company represents and warrants to, and agrees with, each
of the Underwriters that:
(i) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, there has not
been any material adverse change in or affecting the general affairs,
management, financial position, stockholders' equity, results of
operations or prospects of the Company, otherwise than as set forth or
contemplated in the Prospectus;
(ii) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Michigan, with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus,
and has been duly qualified as a foreign corporation for the
transaction of business and is in good standing under the laws of each
other jurisdiction in which it owns or leases properties, or conducts
any business so as to require such qualification or is subject to no
material liability or disability by reason of the failure to be so
qualified in any such jurisdiction;
(iii) The Company has an authorized capitalization as set
forth in the Prospectus, and all of the issued shares of capital stock
of the Company have been duly and validly authorized and issued and
are fully paid and nonassessable;
(iv) The Shares have been duly and validly authorized and,
when issued and delivered against payment therefor as provided herein,
will be duly and validly issued and
3
<PAGE> 4
fully paid and nonassessable and will conform in all material respects
to the description of the Preferred Stock contained in the Prospectus;
(v) The issue and sale of the Shares by the Company and
the compliance by the Company with all of the provisions of this
Agreement and the consummation of the transactions herein contemplated
will not conflict with or result in a breach or violation of any of
the terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement or other agreement
or instrument to which the Company is a party or by which the Company
is bound or to which any of the property or assets of the Company is
subject, nor will such action result in any violation of the
provisions of the Articles of Incorporation (or other charter
document) or By-laws of the Company or any statute or any order, rule
or regulation of any court or governmental agency or body having
jurisdiction over the Company or any of its properties; and no
consent, approval, authorization, order, registration or qualification
of or with any such court or governmental agency or body is required
for the issue and sale of the Shares or the consummation by the
Company of the transactions contemplated by this Agreement and the
agreements listed in Annex II hereto, except the registration under
the Act and such consents, approvals, authorizations, registrations or
qualifications as may be required under state securities or Blue Sky
laws in connection with the purchase and distribution of the Shares by
the Underwriters;
(vi) The Company is not in violation of its Articles of
Incorporation or By-laws or in default in the performance or
observance of any material obligation, agreement, covenant or
condition contained in any indenture, mortgage, deed of trust, loan
agreement, lease or other agreement or instrument to which it is a
party or by which it or any of its properties may be bound;
(vii) The statements set forth in the Prospectus under the
captions "Description of Series A Preferred Shares," insofar as they
purport to constitute a summary of the terms of the Preferred Stock,
"Description of Capital Stock," insofar as they purport to constitute
a summary of the terms of the capital stock of the Company, and under
the captions "Federal Income Tax Considerations," "ERISA
Considerations," "Business and Strategy -- Acquisition of Initial
Portfolio," "Business and Strategy -- Servicing," "Management -- The
Advisor," and "Underwriting," insofar as they purport to describe the
provisions of the laws and documents referred to therein, are
accurate, complete in all material respects and fair;
(viii) Other than as set forth in the Prospectus, there are
no legal or governmental proceedings pending to which the Company is a
party or of which any property of the Company is the subject which, if
determined adversely to the Company would individually or in the
aggregate have a material adverse effect on the financial position,
stockholders' equity or results of operations of the Company; and, to
the best of the Company's knowledge, no such proceedings are
threatened or contemplated by any governmental authorities or
threatened by others;
4
<PAGE> 5
(ix) Each of the agreements listed in Annex II hereto has
been duly authorized, executed and delivered by the Company and
constitutes the valid and legally binding obligation of the Company
and is enforceable in accordance with its terms, subject to
bankruptcy, insolvency, reorganization, moratorium and similar laws of
general applicability relating to or affecting creditors' rights;
(x) The Company is not and, after giving effect to the
offering and sale of the Shares, will not be an "investment company"
or an entity "controlled" by an "investment company," as such terms
are defined in the Investment Company Act of 1940, as Amended (the
"Investment Company Act");
(xi) The Company does not do business with the government
of Cuba or with any person or affiliate located in Cuba within the
meaning of Section 517.075, Florida Statutes;
(xii) Grant Thornton LLP, who have certified certain
financial statements of the Company, are independent public
accountants as required by the Act and the rules and regulations of
the Commission thereunder;
(xiii) This Agreement has been duly authorized, executed and
delivered by the Company;
(xiv) There are no contracts or documents which are
required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits thereto which have not been so
described and filed as required;
(xv) No filing with, or authorization, approval, consent,
license, order, registration, qualification or decree of, any court or
governmental authority or agency is necessary or required for the
performance by the Company of its obligations hereunder, in connection
with the offering, issuance or sale of the Preferred Stock hereunder
or the consummation of the transactions contemplated by this
Agreement, except such as have been already obtained or as may be
required under the Act or the rules and regulations thereunder or
state securities laws or by the OCC;
(xvi) The Company possesses such permits, licenses,
approvals, consents, and other authorizations (collectively
"Governmental Licenses") issued by the appropriate federal, state,
local or foreign regulatory agencies or bodies necessary to conduct
the business now operated by it; the Company is in compliance with the
terms and conditions of all such Governmental Licenses, except where
the failure so to comply would not have a material adverse effect on
the financial position, stockholders' equity or results of operations
of the Company; all of the Governmental Licenses are valid and in full
force and effect, except where the invalidity of such Governmental
Licenses or the failure of such Governmental Licenses to be in full
force and effect would not have a material adverse effect on the
financial position, stockholders' equity or results of operations of
5
<PAGE> 6
the Company; the Company has not received any notice of proceedings
relating to the revocation or modification of any such Governmental
Licenses which singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would result in a material
adverse effect on the financial position, stockholders' equity or
results of operations of the Company;
(xvii) There are no persons with registration rights or
other similar rights to have any securities registered pursuant to the
Registration Statement or otherwise registered by the Company under
the Act; and
(xviii) The Company is organized and carries on its business
so as to qualify as a "real estate investment trust" (a "REIT") under
Sections 856 through 860 of the Internal Revenue Code of 1986, as
amended (the "Code"), and no transaction or other event has occurred
which would cause the Company not to enable it to qualify as a REIT
for its current taxable year or for future taxable years.
(c) The Bank represents and warrants to, and agrees with, each of
the Underwriters that:
(i) The Bank has been duly organized and is validly
existing as a national bank under the laws of the United States of
America, with power and authority (corporate and other) to own its
properties and conducts its business as now being conducted;
(ii) Since December 31, 1996, there has not been any
material adverse change in or affecting the general affairs,
management, financial position, stockholders' equity, results of
operations of the Bank;
(iii) The issue and sale of the Shares by the Company and
the compliance by the Company and the Bank with all of the provisions
of this Agreement and the consummation of the transactions herein
contemplated will not conflict with or result in a breach or violation
of any of the terms or provisions of, or constitute a default under,
any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which the Bank is a party or by which the
Bank is bound or to which any of the property or assets of the Bank is
subject, nor will such action result in any violation of the
provisions of the Articles of Association (or other charter document)
or By-laws of the Bank or any statute or any order, rule or regulation
of any court or governmental agency or body having jurisdiction over
the Bank or any of its properties, except where such would not result
in a material adverse effect on the financial position, stockholders'
equity or results of operations of the Company or the Bank; and,
except as have been obtained, no consent, approval, authorization,
order, registration or qualification of or with any such court or
governmental agency or body is required to be obtained by the Bank for
the issue and sale of the Shares by the Company or the consummation by
the Bank of the transactions contemplated by this Agreement and the
agreements listed in Annex II hereto;
6
<PAGE> 7
(iv) Each of the agreements listed in Annex II hereto has
been duly authorized, executed and delivered by the Bank and
constitutes the valid and legally binding obligation of the Bank and
is enforceable in accordance with its terms, subject to bankruptcy,
insolvency, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights;
(v) The representations and warranties of the Bank
contained in the Residential Mortgage Loan Purchase and Warranties
Agreement between the Company and the Bank, the Commercial Mortgage
Loan Purchase and Warranties Agreement between the Company and the
Bank, the Residential Mortgage Loan Servicing Agreement between the
Company and the Bank, and the Commercial Mortgage Loan Servicing
Agreement between the Company and the Bank, each of even date
herewith, are as of the date hereof and will be as of the Time of
Delivery true and correct;
(vi) This Agreement has been duly authorized, executed and
delivered by the Bank;
(vii) The Bank Registration Statement and the Bank
Prospectus, at the respective times the Bank Registration Statement
and any post-effective amendments thereto became effective, at the
date hereof and at all times subsequent thereto up to the Time of
Delivery (as defined in Section 4 hereof), and if any Optional Shares
are purchased, at the Second Time of Delivery (as defined in Section 4
hereof), complied and will comply in all material respects with the
requirements of the OCC Rules and Regulations; the Bank Registration
Statement, at the respective times the Bank Registration Statement and
any post-effective amendments thereto became effective, and at the
date hereof, did not or will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; the Bank
Prospectus, at the respective times the Bank Registration Statement
and any post-effective amendments thereto up to the Time of Delivery,
and if any Optional Shares are purchased, at the Second Time of
Delivery, did not and will not include an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading;
provided, however, that this representation and warranty shall not
apply to any statements or omissions made in reliance upon, and in
conformity with, information furnished in writing to the Bank by an
Underwriter expressly for use therein;
(viii) The documents incorporated or deemed to be
incorporated by reference in the Bank Registration Statement and the
Bank Prospectus, at the time they were or hereafter are filed with the
OCC, complied and will comply in all material respects with the
requirements of the OCC Rules and Regulations, and, when read together
with the other information in the Bank Prospectus, at the time the
Bank Registration Statement became effective, at the time the Bank
Prospectus was issued and at the Time of Delivery
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<PAGE> 8
(and if any Optional Shares are purchased, at the Second Time of
Delivery), did not and will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading;
(ix) Grant Thornton LLP, who have certified certain
financial statements of the Bank, are independent public accountants
as required by the Act and the rules and regulations of the Commission
and the OCC thereunder;
(x) The financial statements and the related notes
thereto included in the Bank Prospectus present fairly the financial
position of the Bank and its subsidiaries as of the latest respective
dates of such financial statements, and the results of operations of
the Bank and its subsidiaries for the respective periods covered
thereby. Such statements and related notes have been prepared in
accordance with generally accepted accounting principles applied on a
consistent basis throughout the periods involved; the tables included
in the Bank Prospectus present fairly the information purported to be
shown thereby at the respective dates thereof and for the respective
periods covered thereby and conform in all material respects with the
OCC Rules and Regulations;
(xi) Except as disclosed in the Bank Prospectus, the Bank
and its subsidiaries are conducting their respective businesses in
compliance in all material respects with all laws, rules, regulations,
decisions, directives and orders (including, without limitation, all
regulations and orders of, or agreements with, the OCC and the FDIC)
applicable to them. There is no action, suit, investigation or
proceeding before or by any government, governmental instrumentality
or court, domestic or foreign, now pending or, to the knowledge of the
Bank, threatened against or affecting the Bank or any of its
subsidiaries (A) that is required to be disclosed in the Bank
Prospectus and not disclosed therein, (B) that would likely result in
any material adverse change in the condition (financial or otherwise),
earnings, business affairs of the Bank and its subsidiaries, (C) that
could materially and adversely affect the properties, assets or
leasehold interests thereof, or (D) that would likely adversely affect
the consummation of the transactions contemplated by this Agreement;
all pending legal or governmental proceedings to which the Bank or any
of its subsidiaries is a party or of which any of their property is
subject, which are not described in the Bank Prospectus, including
ordinary routine litigation incidental to their respective businesses,
would not have a material adverse effect on the condition (financial
or otherwise), earnings, business affairs of the Bank and its
subsidiaries;
(xii) There are no contracts or documents which are
required to be described in the Registration Statement, the Bank
Registration Statement, the Prospectus or the Bank Prospectus or to be
filed as exhibits thereto which have not been so described and filed
as required;
(xiii) No filing with, or authorization, approval, consent,
license, order, registration, qualification or decree of, any court or
governmental authority or agency is necessary or required for the
performance by the Bank of its obligations hereunder, in
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<PAGE> 9
connection with the offering, issuance or sale of the Preferred Stock
hereunder or the consummation of the transactions contemplated by this
Agreement, except such as have been already obtained or as may be
required under applicable law or the OCC Rules and Regulations or
state securities laws;
(xiv) The Bank possesses such Governmental Licenses issued
by the appropriate federal, state, local or foreign regulatory
agencies or bodies necessary to conduct the business now operated by
it; the Bank is in compliance with the terms and conditions of all
such Governmental Licenses, except where the failure so to comply
would not have a material adverse effect on the financial position,
stockholders' equity or results of operations of the Bank; all of the
Governmental Licenses are valid and in full force and effect, except
where the invalidity of such Governmental Licenses or the failure of
such Governmental Licenses to be in full force and effect would not
have a material adverse effect on the financial position,
stockholders' equity or results of operations of the Bank; the Bank
has not received any notice of proceedings relating to the revocation
or modification of any such Governmental Licenses which singly or in
the aggregate, if the subject of an unfavorable decision, ruling or
finding, would result in a material adverse effect on the financial
position, stockholders' equity or results of operations of the Bank;
(xv) There are no persons with registration rights or
other similar rights to have any securities registered pursuant to the
Registration Statement or otherwise registered by the Bank under the
Act; and
(xvi) The Bank Preferred Shares have been duly authorized
and, if and when issued and delivered by the Bank pursuant to the
terms and conditions set forth in the Registration Statement, will be
validly issued and fully paid and nonassessable; the Bank Preferred
Shares conform to the statements relating thereto in the Bank
Prospectus and such description conforms to the instruments defining
the same; no holder of the Bank Preferred Shares will be subject to
personal liability by reason of being such a holder and the issuance
of the bank Preferred Shares is not subject to the preemptive or other
similar rights of any stockholder of the Bank.
2. Subject to the terms and conditions herein set forth, (a) the
Company agrees to issue and sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company,
at a purchase price per share of $10.00 the number of Firm Shares set forth
opposite the name of such Underwriter in Schedule I hereto and (b) in the event
and to the extent that the Underwriters shall exercise the election to purchase
Optional Shares as provided below, the Company agrees to issue and sell to each
of the Underwriters, and each of the Underwriters agrees, severally and not
jointly, to purchase from the Company, at the purchase price per share set
forth in clause (a) of this Section 2, that portion of the number of Optional
Shares as to which such election shall have been exercised (to be adjusted by
you so as to eliminate fractional shares) determined by multiplying such number
of Optional Shares by a fraction, the numerator of which is the maximum number
of Optional Shares which such Underwriter is entitled to purchase as set forth
opposite the name of such Underwriter in
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<PAGE> 10
Schedule I hereto and the denominator of which is the maximum number of
Optional Shares that all of the Underwriters are entitled to purchase
hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election up to 270,000 Optional Shares, at the purchase price per share
set forth in the paragraph above, for the sole purpose of covering
overallotments in the sale of the Firm Shares. Any such election to purchase
Optional Shares may be exercised only by written notice from you to the
Company, given within a period of 30 business days after the date of this
Agreement, setting forth the aggregate number of Optional Shares to be
purchased and the date on which such Optional Shares are to be delivered, as
determined by you but in no event earlier than the First Time of Delivery (as
defined in Section 4 hereof) or, unless you and the Company otherwise agree in
writing, earlier than two or later than ten business days after the date of
such notice.
As compensation to the Underwriters for their commitments hereunder,
the Company at each Time of Delivery (as defined in Section 4 hereof) will pay
to Roney & Co., L.L.C. ("Roney"), for the accounts of the several Underwriters,
an amount equal to $.425 per share for the Shares to be delivered by the
Company hereunder at such Time of Delivery; provided that, if any or all of the
Optional Shares are purchased by the Underwriters, the Company will pay to
Roney, for the account of the several Underwriters, an amount equal to $.400
per share for such Optional Shares.
3. Upon the authorization by you of the release of the Firm
Shares, the several Underwriters propose to offer the Firm Shares for sale upon
the terms and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter
hereunder will be represented by one or more definitive certificates registered
in the name of Roney which will be deposited by or on behalf of the Company
with The Depository Trust Company ("DTC") or its designated custodian. The
Company will deliver the Shares to Roney, for the account of each Underwriter,
against payment by or on behalf of such Underwriter of the purchase price
therefor by wire transfer to the account specified by the Company in Federal
(same day) funds, by causing DTC to credit the Shares to the account of Roney
at DTC. The Company will cause the certificates representing the Shares to be
made available to Roney for checking at least twenty-four hours prior to the
Time of Delivery at the office of DTC or its designated custodian (the
"Designated Office"). The time and date of such delivery and payment shall be,
with respect to the Firm Shares, 9:30 A.M., Detroit time, on _______, 1997 or
such other time and date as Roney and the Company may agree upon in writing,
and, with respect to the Optional Shares, 9:30 A.M., Detroit time, on the date
specified by Roney in the written notice given by Roney of the Underwriters'
election to purchase such Optional Shares, or such other time and date as Roney
and the Company may agree upon in writing. Such time and date for delivery of
the Firm Shares is herein called the "First Time of Delivery," such time and
date for delivery of the Optional Shares, if not the First Time of Delivery, is
herein called the "Second Time of Delivery," and each such time and date for
delivery is herein called a "Time of Delivery."
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<PAGE> 11
(b) The documents to be delivered at each Time of Delivery by or
on behalf of the parties hereto pursuant to Section 8 hereof, including the
cross-receipt for the Shares and any additional documents requested by the
Underwriters pursuant to Section 8(k) hereof, will be delivered at the offices
of Honigman Miller Schwartz and Cohn, 2290 First National Building, Detroit, MI
48226-3583 (the "Closing Location"), the Shares will be delivered at the
Designated Office, and the wire transfers will be made to the specified
accounts, all at such Time of Delivery. A meeting will be held at the Closing
Location at 2:00 P.M., Detroit time, on the Detroit Business Day next preceding
such Time of Delivery, at which meeting the final drafts of the documents to be
delivered pursuant to the preceding sentence will be available for review by
the parties hereto. For the purposes of this Section 4, "Detroit Business Day'
shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not a
day on which banking institutions in Detroit are generally authorized or
obligated by law or executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to
file such Prospectus pursuant to Rule 424(b) under the Act not later than the
Commission's close of business on the second business day following the
execution and delivery of this Agreement, or, if applicable, such earlier time
as may be required by Rule 430A(a)(3) under the Act; to make no further
amendment or any supplement to the Registration Statement or Prospectus which
shall be disapproved by you promptly after reasonable notice thereof; to advise
you, promptly after it receives notice thereof, of the time when any amendment
to the Registration Statement has been filed or becomes effective or any
supplement to the Prospectus or any amended Prospectus has been filed and to
furnish you with copies thereof; to advise you, promptly after it receives
notice thereof, of the issuance by the Commission of any stop order or of any
order preventing or suspending the use of any Preliminary Prospectus or
Prospectus, of the suspension of the qualification of the Shares for offering
or sale in any jurisdiction, of the initiation or threatening of any proceeding
for any such purpose, or of any request by the Commission for the amending or
supplementing of the Registration Statement or Prospectus or for additional
information; and, in the event of the issuance of any stop order or of any
order preventing or suspending the use of any Preliminary Prospectus or
Prospectus or suspending any such qualification, promptly to use every
reasonable effort to obtain the withdrawal of such order;
(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Shares for offering and sale under the
securities laws of such jurisdictions as you may request and to comply with
such laws so as to permit the continuance of sales and dealings therein in such
jurisdictions for as long as may be necessary to complete the distribution of
the Shares, provided that in connection therewith the Company shall not be
required to qualify as a foreign corporation or to file a general consent to
service of process in any jurisdiction;
(c) As soon after the execution and delivery of this Agreement as
possible and thereafter from time to time for such period as delivery of a
Prospectus is required in connection with the offering or sale of the Shares,
to furnish the Underwriters with copies of the Prospectus in Detroit in such
quantities as you may from time to time reasonably request, and, if the
delivery
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<PAGE> 12
of a prospectus is required at any time prior to the expiration of nine months
after the time of issue of the Prospectus in connection with the offering or
sale of the Shares and if at such time any event shall have occurred as a
result of which the Prospectus as then amended or supplemented would include an
untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made when such Prospectus is delivered, not
misleading, or, if for any other reason it shall be necessary during such
period to amend or supplement the Prospectus in order to comply with the Act,
to notify you and upon your request to prepare and furnish without charge to
each Underwriter and to any dealer in securities as many copies as you may from
time to time reasonably request of an amended Prospectus or a supplement to the
Prospectus which will correct such statement or omission or effect such
compliance, and in case any Underwriter is required to deliver a prospectus in
connection with sales of any of the Shares at any time nine months or more
after the time of issue of the Prospectus, upon your request but at the expense
of such Underwriter, to prepare and deliver to such Underwriter as many copies
as you may reasonably request of an amended or supplemented Prospectus
complying with Section 10(a)(3) of the Act;
To make generally available to the Company's security holders as soon
as practicable, but in any event not later than eighteen months after the
effective date of the Registration Statement (as defined in Rule 158(c) under
the Act), an earnings statement of the Company complying with Section 11(a) of
the Act and the rules and regulations thereunder (including, at the option of
the Company, Rule 158);
(e) During the period beginning from the date hereof and
continuing to and including the date 90 days after the date of the Prospectus,
not to offer, sell, contract to sell or otherwise dispose of, except as
provided hereunder, any securities of the Company or another subsidiary of the
Bank that are substantially similar to the Shares;
(f) To the extent necessary to comply with NASDAQ NMS rules and
regulations or the rules and regulations of any other exchange on which the
Shares are listed, to furnish to holders of the Shares as soon as practicable
after the end of each fiscal year an annual report (including a balance sheet
and statements of income, stockholders, equity and cash flows of the Company
certified by independent public accountants) and, as soon as practicable after
the end of each of the first three quarters of each fiscal year (beginning with
the fiscal quarter ending after the effective date of the Registration
Statement), consolidated summary financial information of the Company for such
quarter in reasonable detail;
(g) During a period of three years from the effective date of the
Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to stockholders of the Company,
and to deliver to you (i) as soon as they are available, copies of any reports
and financial statements furnished to or filed with the Commission or any
national securities exchange on which any class of securities of the Company is
listed; and (ii) such additional information concerning the business and
financial condition of the Company as you may from time to time reasonably
request (such financial statements to be on a consolidated
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<PAGE> 13
basis to the extent the accounts of the Company and its subsidiaries (if any)
are consolidated in reports furnished to their stockholders generally or to the
Commission);
(h) To use the net proceeds received by it from the sale of the
Shares pursuant to this Agreement in the manner specified in the Prospectus
under the caption "Use of Proceeds;"
If the Company elects to rely upon Rule 462(b), the Company shall file
a Rule 462(b) Registration Statement with the Commission in compliance with
Rule 462(b) by 5:00 P.M., Washington, D.C. time, on the date of this Agreement,
and the Company shall at the time of filing either pay to the Commission the
filing fee for the Rule 462(b) Registration Statement or give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b) under the Act;
(j) Except to the extent that a Tax Event (as defined in the
Prospectus) shall have occurred, to make the elections and take the procedural
steps described in the Prospectus under the heading "Federal Income Tax
Considerations" in a timely fashion, to meet the requirements to qualify, for
its taxable year ending December 31, 1997, as a REIT under the Code as in
effect on the date hereof and to otherwise use every reasonable effort to do
so; and
(k) To file with the Commission such reports on Form SR as may be
required by Rule 463 under the Act.
6. The Bank agrees with each of the Underwriters:
(a) The Bank will notify the Underwriters immediately, and confirm
the notice in writing, (i) of the effectiveness of the Bank Registration
Statement and any amendment thereto, (ii) of the receipt by the Bank or its
counsel of any comments from the OCC with respect to the offering of the
Shares, (iii) of any request to the Bank or its counsel by the OCC for any
amendment or supplement to the Bank Prospectus or for any additional
information, and (iv) of the issuance or initiation by the OCC or by any other
state or federal banking or securities regulatory authority of any stop order
or cease-and-desist proceeding to suspend the effectiveness of the Bank
Prospectus or interfering with the offering of the Shares, or of the suspension
of the qualification of the Shares for offering or sale in any jurisdiction, or
the initiation or threat of any other orders or proceedings for such purposes;
the Bank will make every reasonable effort to prevent the issuance or
initiation of any such stop orders or cease-and-desist proceedings and, if any
such stop orders or cease-and-desist proceedings are issued or initiated, to
obtain the lifting or dismissal thereof at the earliest possible moment;
(b) The Bank will give the Underwriters notice of its intention
to file or prepare any amendment to the Bank Prospectus (or to any Bank
Preliminary Prospectus, as the case may be) or any amendment, supplement or
revision to the Prospectus, will furnish Roney with copies of any such
documents a reasonable amount of time prior to such proposed filing or use, as
the case may be, and will not file or use any such document to which Roney or
counsel for the Underwriters shall object;
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<PAGE> 14
(c) The Bank has furnished or will deliver to the Underwriters
and counsel for the Underwriters, without charge, signed copies of the Bank
Registration Statement, as originally filed and of each amendment thereto
(including exhibits filed therewith or incorporated by reference therein) and
signed copies of all consents and certificates of experts, and will also
deliver to the Underwriters, without charge, a conformed copy of the Bank
Registration Statement, as originally filed and each amendment thereto (without
exhibits) for each of the Underwriters;
(d) If any event shall occur as a result of which it is necessary,
in the opinion of counsel for the Underwriters, to amend or supplement the Bank
Prospectus in order to make the Bank Prospectus not misleading in the light of
the circumstances existing at the time it is delivered to a purchaser, the Bank
will forthwith amend or supplement the Bank Prospectus by preparing and
furnishing to the Underwriters a reasonable number of copies of an amendment or
amendments of, or a supplement or supplements to, the Bank Prospectus (in form
and substance reasonably satisfactory to such counsel) so that, as so amended
or supplemented, the Bank Prospectus will not contain an untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements therein, in the light of circumstances existing at the time the Bank
Prospectus is delivered to a purchaser, not misleading, and the Bank will
furnish to each underwriter such number of copies of such amendment or
supplement as such Underwriter shall reasonably request. For the purposes of
this subsection, the Bank shall furnish such information with respect to itself
to the Underwriters, counsel for the Underwriters and counsel for the Bank,
as may be necessary for counsel for the Underwriters and counsel for the Bank
with respect to the need to amend or supplement the Bank Prospectus and shall
furnish such further information as may from time to time be reasonably
requested; and
(e) The Bank, during the period when the Bank Prospectus is
required to be delivered, will file all documents required to be filed with the
OCC within the time periods required by OCC Rules and Regulations.
7. The Company and the Bank, jointly and severally, covenant and
agree with the several Underwriters to pay or cause to be paid the following:
(i) the fees, disbursements and expenses of their counsel and accountants in
connection with the registration of the Shares under the Act and all other
expenses in connection with the preparation, printing and filing of the
Registration Statement, any Preliminary Prospectus and the Prospectus and
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; (ii) the cost of printing or producing
any Agreement among Underwriters, this Agreement and Blue Sky Memoranda,
closing documents (including any compilations thereof) and any other documents
in connection with the offering, purchase, sale and delivery of the Shares;
(iii) all expenses in connection with the qualification of the Shares for
offering and sale under state securities laws as provided in Section 5(b)
hereof, including the fees and disbursements of counsel for the Underwriters in
connection with such qualification and in connection with the Legal Investment
and Blue Sky surveys; (iv) all fees and expenses in connection with listing the
Shares on the NASDAQ NMS; (v) the cost of preparing stock certificates; (vi)
the cost and charges of any transfer agent or registrar; (vii) the cost and
charges of DTC; (vii) the out-of-
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<PAGE> 15
pocket expenses of the Underwriters, including without limitation, road show
expenses and the Underwriter's legal fees and expenses (provided that the
Company's and the Bank's obligation to pay such out-of-pocket expenses shall
not exceed the amount of $65,000) and (viii) all other costs and expenses
incident to the performance of its obligations hereunder which are not
otherwise specifically provided for in this Section.
8. The obligations of the Underwriters hereunder, as to the
Shares to be delivered at each Time of Delivery, shall be subject, in their
discretion, to the condition that all representations and warranties and other
statements of the Company and the Bank herein are, at and as of such Time of
Delivery, true and correct, the condition that the Company and the Bank shall
have performed all of their respective obligations hereunder theretofore to be
performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission
pursuant to Rule 424(b) within the applicable time period prescribed for such
filing by the rules and regulations under the Act and in accordance with
Section 5(a) hereof; no stop order suspending the effectiveness of the
Registration Statement or any part thereof shall have been issued and no
proceeding for that purpose shall have been initiated or threatened by the
Commission; and all requests for additional information on the part of the
Commission shall have been complied with to your reasonable satisfaction; if
the Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration
Statement shall have become effective by 5:00 P.M., Washington, D.C. time, on
the date of this Agreement;
(b) Honigman Miller Schwartz and Cohn, counsel for the
Underwriters, shall have furnished to you such opinion or opinions, dated such
Time of Delivery, with respect to the validity of the Shares as well as such
other related matters as you may reasonably request, and such counsel shall
have received such papers and information as they may reasonably request to
enable them to pass upon such matters;
(c) Silver, Freedman & Taff, L.L.P., counsel for the Company,
shall have furnished to you their written opinion, dated such Time of Delivery,
in form and substance satisfactory to you, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Michigan, and the Bank has been duly organized and is validly
existing under the laws of the United States of America as a national
bank, each with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus;
(ii) The Company has an authorized capitalization as set
forth in the Prospectus, and all of the issued shares of capital stock
of the Company (including the Shares being delivered at such Time of
Delivery) have been duly and validly authorized and issued and are
fully paid and non-assessable; and the Shares conform in all material
respects to the description of the Preferred Stock contained in the
Prospectus;
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<PAGE> 16
(iii) To the knowledge of such counsel and other than as
set forth in the Prospectus there are no legal or governmental
proceedings pending to which the Company is a party or of which any
property of the Company is the subject which, if determined adversely
to the Company, would individually or in the aggregate have a material
adverse effect on the current or future consolidated financial
position, stockholders' equity or results of operations of the
Company; and, to the knowledge of such counsel, no such proceedings
are threatened or contemplated by governmental authorities or
threatened by others;
(iv) This Agreement has been duly authorized, executed and
delivered by the Company and the Bank;
(v) The issue and sale of the Shares being delivered at
such Time of Delivery by the Company and the compliance by the Company
with all of the provisions of this Agreement and the consummation of
the transactions herein contemplated will not conflict with or result
in a breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument known to such counsel
to which the Company is a party or by which the Company is bound or to
which any of the property or assets of the Company is subject, nor
will such action result in any violation of the provisions of the
Articles of Incorporation (or other charter document) or By-laws of
the Company or any statute or any order, rule or regulation known to
such counsel of any court or governmental agency or body having
jurisdiction over the Company or any of its properties;
(vi) No consent, approval, authorization, order,
registration or qualification of or with any such court or
governmental agency or body is required for the issue and sale of the
Shares or the consummation by the Company or the Bank of the
transactions contemplated by this Agreement and the agreements listed
in Annex II hereto, except the registration under the Act of the
Shares and such consents, approvals, authorizations, registrations or
qualifications as may be required under the OCC Rules and Regulations,
state securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters;
(vii) The Company is not, to the knowledge of such counsel,
(i) in violation of its Articles of Incorporation (or other charter
documents) or By-laws or (ii) in default in the performance or
observance of any material obligation, agreement, covenant or
condition contained in any indenture, mortgage, deed of trust, loan
agreement, lease or other agreement or instrument to which it is a
party or by which it or any of its properties may be bound;
(viii) The statements set forth in the Prospectus under the
captions "Description of Series A Preferred Shares," insofar as they
purport to constitute a summary of the terms of the Preferred Stock
and the Automatic Exchange, "Description of Capital Stock," insofar as
they purport to constitute a summary of the terms of the capital stock
of the
16
<PAGE> 17
Company, and under the captions "Federal Income Tax Considerations,"
"ERISA Considerations," "Business and Strategy -- Acquisition of
Initial Portfolio," "Business and Strategy -- Servicing," "Management
-- The Advisor," and "Underwriting," insofar as they constitute or
purport to describe matters of law or legal conclusions, provisions of
laws and documents referred to therein, have been reviewed by such
counsel, are accurate in all material respects and present fairly the
information required to be shown therein;
(ix) Each of the agreements listed in Annex II hereto has
been duly authorized, executed and delivered by the Bank and the
Company and constitutes the valid and legally binding obligation of
the Bank and the Company enforceable in accordance with its terms,
subject to bankruptcy, insolvency, reorganization, moratorium and
similar laws of general applicability relating to or affecting
creditors' rights;
(x) The Company is not an "investment company" or an
entity "controlled" by an "investment company," as such terms are
defined in the Investment Company Act;
(xi) The Registration Statement and the Prospectus and any
further amendments and supplements thereto made by the Company prior
to such Time of Delivery (other than the financial statements, related
schedules and other financial data therein, as to which such counsel
need express no opinion) comply as to form in all material respects
with the requirements of the Act and the rules and regulations
thereunder; although such counsel does not assume any responsibility
for the accuracy, completeness or fairness of the statements contained
in the Registration Statement or the Prospectus, except as otherwise
indicated in its opinion, such counsel has no reason to believe that,
as of its effective date, the Registration Statement or any further
amendment thereto made by the Company prior to such Time of Delivery
(other than the financial statements, related schedules and other
financial data therein, as to which such counsel need express no
opinion) contained an untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to
make the statements therein not misleading or that, as of its date,
the Prospectus or any further amendment or supplement thereto made by
the Company prior to such Time of Delivery (other than the financial
statements, related schedules and other financial data therein, as to
which such counsel need express no opinion) contained an untrue
statement of a material fact or omitted to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading or that, as
of such Time of Delivery, either the Registration Statement or the
Prospectus or any further amendment or supplement thereto made by the
Company prior to such Time of Delivery (other than the financial
statements, related schedules and other financial data therein, as to
which such counsel need express no opinion) contains an untrue
statement of a material fact or omits to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and they do
not know of any amendment to the Registration Statement required to be
filed or of any contracts or other documents of a character required
to be filed as an exhibit to the Registration Statement or required to
be described in the Registration Statement or the Prospectus which are
not filed or described as required; and
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(d) [SEYBURN KAHN], counsel of the Bank, shall have furnished to
you its written opinion, dated such Time of Delivery, in form and substance
satisfactory to you, to the effect that the issue and sale of the Shares being
delivered at such Time of Delivery by the Company and the compliance by the
Company and the Bank with all of the provisions of this Agreement and the
consummation of the transactions herein contemplated will not conflict with or
result in a breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument known to such counsel to which the
Bank is a party or by which the Bank is bound or to which any of the property
or assets of the Bank is subject, nor will such action result in any violation
of the provisions of the Certificate of Incorporation (or other charter
document) or By-laws of the Bank or any statute or any order, rule or
regulation known to such counsel of any court or governmental agency or body
having jurisdiction over the Bank or any of its properties;
(e) On the date of the Prospectus at a time prior to the execution
of this Agreement, at 9:30 A.M., Detroit time, on the effective date of any
post-effective amendment to the Registration Statement filed subsequent to the
date of this Agreement and also at each Time of Delivery, Grant Thornton LLP
shall have furnished to you a letter or letters, dated the respective dates of
delivery thereof, in form and substance satisfactory to you, to the effect set
forth in Annex I hereto (the executed copy of the letter delivered prior to the
execution of this Agreement is attached as Annex I(a) hereto and a draft of the
form of letter to be delivered on the effective date of any post-effective
amendment to the Registration Statement and as of each Time of Delivery is
attached as Annex I(b) hereto);
(f) (i) Neither the Company nor the Bank shall have sustained
since the date of the latest audited financial statements included in the
Prospectus or the Bank Prospectus, as the case may be, any loss or interference
with its business from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or governmental
action, order or decree, otherwise than as set forth or contemplated in the
Prospectus or the Bank Prospectus, and (ii) since the respective dates as of
which information is given in the Prospectus or the Bank Prospectus there shall
not have been any change in the capital stock or long-term debt of the Company
or the Bank or any change in or affecting the general affairs, management,
financial position, stockholders' equity, results of operations of the Company
or the Bank, otherwise than as set forth or contemplated in the Prospectus or
the Bank Prospectus, the effect of which, in any such case described in clause
(i) or (ii), is in the judgment of the Underwriters after discussion with
the Company so material and adverse as to make it impracticable or inadvisable
to proceed with the public offering or the delivery of the Shares being
delivered at such Time of Delivery on the terms and in the manner contemplated
in the Prospectus.
(g) The Prospectus has become effective and at the Time of
Delivery (and, if any of the Optional Shares are purchased, at the Second Time
of Delivery), no stop order or cease-and-desist proceeding suspending the
effectiveness of the Prospectus or interfering with the offering of the Shares
or the Bank Preferred Shares shall have been issued and no proceedings for the
purposes of issuing a stop order or cease-and-desist proceedings shall have
been instituted or shall
18
<PAGE> 19
be pending, or to the knowledge of the Bank, shall be contemplated by the OCC
or by any other state or federal banking or securities regulatory authority.
Any request on the part of the OCC for additional information or for the
inclusion of additional information in the Bank Registration Statement shall
have been complied with to the reasonable satisfaction of counsel for the
Underwriters.
(h) (x) On or after the date hereof (i) trading in securities
generally on the NASDAQ NMS shall not have been suspended or materially
limited, (ii) trading in the Shares on the NASDAQ NMS shall not have been
suspended, (iii) a general moratorium on commercial banking activities in
Detroit shall not have been declared by Federal or Detroit authorities, (iv)
there shall not have occurred any outbreak of hostilities or escalation thereof
or other calamity or crisis having an adverse effect on the financial markets
of the United States or (v) there shall not have occurred any material adverse
development in any of the real estate markets in which the mortgaged properties
are located and (y) the occurrence or consequences of any one or more of such
events shall have, in the reasonable judgment of the Underwriters, made it
impracticable to market the Shares on the terms and in the manner contemplated
by the Prospectus;
(i) The Shares to be sold at such Time of Delivery shall have been
duly listed, subject to notice of issuance, on the NASDAQ NMS;
(j) The Company shall have complied with the provisions of Section
5(c) hereof with respect to the furnishing of Prospectuses;
(k) The Company shall furnish or cause to be furnished to you at
such Time of Delivery certificates of officers of the Company and the Bank
satisfactory to you as to the accuracy of the representations and warranties of
the Company and the Bank herein at and as of such Time of Delivery, as to the
performance by the Company and the Bank of all of its obligations hereunder to
be performed at or prior to such Time of Delivery, as to the matters set forth
in subsections (a) and (e) of this Section and as to such other matters as you
may reasonably request; and
(l) The Company shall be furnished or caused to be furnished to
you at such Time of Delivery an opinion of Seyburn Kahn Ginn Bess Deitch &
Serlin, in form and substance satisfactory to you, to the effect that
commencing with the Company's taxable year ending December 31, 1997 and
assuming that the elections and other procedural steps described in the
Prospectus under the heading "Federal Income Tax Considerations," are completed
by the Company in a timely fashion and based on the other assumptions stated
therein, the Company will be organized, managed and owned in conformity with
the requirements for qualification as a REIT under the Code and its proposed
method of operation will enable it to meet the requirements for qualification
and taxation as a REIT under the Code.
9. (a) The Company and the Bank, jointly and severally, will
indemnify and hold harmless each Underwriter against any losses, claims,
damages or liabilities, joint or several, to which such Underwriter may become
subject, under the Act or otherwise, insofar as such losses,
19
<PAGE> 20
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon an untrue statement or alleged untrue statement of a material
fact contained in any Preliminary Prospectus, Bank Preliminary Prospectus, the
Registration Statement, the Bank Registration Statement, the Prospectus or the
Bank Prospectus, or any amendment or supplement thereto, or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse each Underwriter for any legal or other expenses
reasonably incurred by such Underwriter in connection with investigating or
defending any such action or claim as such expenses are incurred; provided,
however, that neither the Company nor the Bank shall be liable in any such case
to the extent that any such loss, claim, damage or liability arises out of or
is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in any Preliminary Prospectus, Bank Preliminary
Prospectus, the Registration Statement, the Bank Registration Statement, the
Prospectus or the Bank Prospectus, or any such amendment or supplement thereto
in reliance upon and in conformity with written information furnished to the
Company by any Underwriter expressly for use therein; and provided, further,
that with respect to any untrue statement or omission or alleged untrue
statement or omission made in any Preliminary Prospectus or Bank Preliminary
Prospectus, the indemnity agreement contained in this subsection (a) shall not
inure to the benefit of any Underwriter to the extent that any such loss,
claim, damage or liability of such Underwriter results from the fact that a
copy of the Prospectus or the Bank Prospectus was not sent or given to any
person at or prior to the written confirmation of the sale of such securities
to such person.
(b) Each Underwriter will indemnify and hold harmless the Company
and the Bank against any losses, claims, damages or liabilities to which the
Company and the Bank may become subject, under the Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon an untrue statement or alleged untrue statement
of a material fact contained in any Preliminary Prospectus, Bank Preliminary
Prospectus, the Registration Statement, the Bank Registration Statement, the
Prospectus or the Bank Prospectus, or any amendment or supplement thereto, or
arise out of or are based on the omission or alleged omission to state therein
a material fact required be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent,
that such untrue statement, alleged untrue statement or omission or alleged
omission was made in any Preliminary Prospectus, Bank Preliminary Prospectus,
the Registration Statement, the Bank Registration Statement, the Prospectus or
the Bank Prospectus, or any such amendment or supplement thereto in reliance
upon and in conformity with written information furnished to the Company by
such Underwriter expressly for use therein.
(c) Promptly after receipt by an indemnified party under
subsections (a) or (b) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against an
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under such subsection. In case any such
action shall be brought against any
20
<PAGE> 21
indemnified party and it has notified the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party), and,
after notice from the indemnifying party to such indemnified party of its
election to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party under such subsection for any legal expenses
of other counsel or any other expenses, in each case subsequently incurred by
such indemnified party, in connection with the defense thereof other than
reasonable costs of investigation. No indemnifying party shall, without the
written consent of the indemnified party, effect the settlement or compromise
of, or consent to the entry of any judgment with respect to, any pending or
threatened action or claim in respect of which indemnification or contribution
may be sought hereunder unless such settlement, compromise or judgment (i)
includes a conditional release of the indemnified party from all liability
arising out of such action or claim and (ii) does not include a statement as
to, or an admission of, fault, culpability or a failure to act, by or on behalf
of any indemnified party.
(d) If the indemnification provided for in this Section 9 is
unavailable or insufficient to hold harmless an indemnified party under
subsections (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities
(or actions in respect thereof) such proportion as is appropriate to reflect
the relative benefits received by the Company and the Bank on the one hand and
the Underwriters on the other from the offering of the Shares. If, however,
the allocation provided for by the immediately preceding sentence is not
permitted by applicable law or if the indemnified party failed to give the
notice required under subsection (c) above, then each indemnifying party shall
contribute to such amount paid or payable by such indemnified party in such
proportion as is appropriate to reflect not only such relative benefits but
also the relative fault of the Company and the Bank on the one hand and the
Underwriters on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or abilities (or actions in respect
thereof), as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Bank on the one hand and the
Underwriters on the other shall be deemed to be in the same proportion the
total net proceeds from the offering (before deducting expenses) received by
the Company and the Bank bear to the total underwriting commissions received by
the Underwriters, in each case as set forth in the table on the cover page of
the Prospectus. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company and the Bank on the one hand or the
Underwriters on the other and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such statement or
omission. The Company, the Bank and the Underwriters agree that it would not
be just and equitable if contributions pursuant to this section (d) were
determined by pro rata allocation (even if the Underwriters are treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this
21
<PAGE> 22
subsection (d). The amount paid or payable by an indemnified party as a result
of the losses, claims, damages or liabilities (or actions in respect thereof)
referred to above in this subsection (d) shall be deemed to include any legal
or other expenses reasonably incurred by such indemnified party in connection
with investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (d), no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at which
the Shares underwritten by it and distributed to the public were offered to the
public exceeds the amount of any damages which such Underwriter has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this subsection (d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) The obligations of the Company and the Bank under this Section
9 shall be in addition to any liability which the Company and the Bank may
otherwise have and shall extend, upon the same terms and conditions, to each
person, if any, who controls any Underwriter within the meaning of the Act; and
the obligations of the Underwriters under this Section 9 shall be in addition
to any liability which the respective Underwriters may otherwise have and shall
extend, upon the same terms and conditions, to each officer and director of the
Company or the Bank and to each person, if any, who controls the Company or the
Bank within the meaning of the Act.
10. (a) If any Underwriter shall default in its obligation to
purchase the Shares which it has agreed to purchase hereunder at a Time of
Delivery, you may in your discretion arrange for you or another party or other
parties to purchase such Shares on the terms contained herein. If within
thirty-six hours after such default by any Underwriter you do not arrange for
the purchase of such Shares, then the Company shall be entitled to a further
period of thirty-six hours within which to procure another party or other
parties satisfactory to you to purchase such Shares on such terms. In the
event that, within the respective prescribed periods, you notify the Company
that you have so arranged for the purchase of such Shares, or the Company
notifies you that it has so arranged for the purchase of such Shares, you or
the Company shall have the right to postpone such Time of Delivery for a period
of not more than seven days, in order to effect whatever changes may thereby be
made necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees to file promptly any
amendments to the Registration Statement or the Prospectus which in your
opinion may thereby be made necessary. The term "Underwriter" as used in this
Agreement shall include any person substituted under this Section with like
effect as if such person had originally been a party to this Agreement with
respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase
of the Shares of a defaulting Underwriter or Underwriters by you and the
Company as provided in subsection (a) above, the aggregate number of such
Shares which remains unpurchased does not exceed one-tenth of the aggregate
number of all the Shares to be purchased at such Time of Delivery, then the
Company shall have the right to require each non- defaulting Underwriter to
purchase the
22
<PAGE> 23
number of shares which such Underwriter agreed to purchase hereunder at such
Time of Delivery and, in addition, to require each non-defaulting Underwriter
to purchase its pro rata share (based on the number of Shares which such
Underwriter agreed to purchase hereunder) of the Shares of such defaulting
Underwriter or Underwriters for which such arrangements have not been made, but
nothing herein shall relieve a defaulting Underwriter from liability for its
default.
(c) If, after giving effect to any arrangements for the purchase
of the Shares of a defaulting Underwriter or Underwriters by you and the
Company as provided in subsection (a) above, the aggregate number of such
Shares which remains unpurchased exceeds one-tenth of the aggregate number of
all the Shares to be purchased at such Time of Delivery, or if the Company
shall not exercise the right described in subsection (b) above to require
non-defaulting Underwriters to purchase Shares of a defaulting Underwriter or
Underwriters, then this Agreement (or, with respect to the Second Time of
Delivery, the obligations of the Underwriters to purchase and of the Company to
sell the Optional Shares) shall thereupon terminate, without liability on the
part of any non-defaulting Underwriter, the Company or the Bank, except for the
expenses to be borne by the Company, the Bank, and the Underwriters as provided
in Section 7 hereof and the indemnity and contribution agreements in Section 9
hereof; but nothing herein shall relieve a defaulting Underwriter from
liability for its default.
11. The respective indemnities, agreements, representations,
warranties and other statements of the Company or the Bank and the several
Underwriters, as set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement, shall remain in full force and
effect, regardless of any investigation (or any statement as to the results
thereof) made by or on behalf of any Underwriter or any controlling person of
any Underwriter, or the Company or the Bank, or any officer or director or
controlling person of the Company or the Bank, and shall survive delivery of
and payment for the Shares.
12. If this Agreement shall be terminated pursuant to Section 10
hereof, neither the Company nor the Bank shall then be under any liability to
any Underwriter except as provided in Sections 7 and 9 hereof; but, if for any
other reason, any Shares are not delivered by or on behalf of the Company as
provided herein, the Company will reimburse the Underwriters through you for
all out-of-pocket expenses approved in writing by you, including fees and
disbursements of counsel, reasonably incurred by the Underwriters in making
preparations for the purchase, sale and delivery of the Shares not so
delivered, but the Company or the Bank shall then be under no further liability
to any Underwriter except as provided in Sections 7 and 9 hereof.
13. In all dealings hereunder, you shall act on behalf of each of
the Underwriters, and the parties hereto shall be entitled to act and rely upon
any statement, request, notice or agreement on behalf of any Underwriter made
or given by you.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex
or facsimile transmission to Roney & Co., L.L.C. at One Griswold, Detroit,
Michigan 48226, Attention: Corporate Finance Department and Principal
Financial Securities, Inc., 2 North LaSalle Street, 13th Floor, Chicago, IL
60602,
23
<PAGE> 24
Attention:______________; and if to the Company or the Bank shall be delivered
or sent by mail to the address of the Company or the Bank, respectively set
forth in the Registration Statement, Attention: Peter L. Lemmer, Esq.;
provided, however, that any notice to an Underwriter pursuant to Section 9(c)
hereof shall be delivered or sent by mail, telex or facsimile transmission to
such Underwriter at its address set forth in its Underwriters' Questionnaire,
or telex constituting such Questionnaire, which address will be supplied to the
Company or the Bank by you upon request. Any such statements, requests,
notices or agreements shall take effect upon receipt thereof.
14. This Agreement shall be binding upon, and inure solely to the
benefit of, the Underwriters, the Company, the Bank and, to the extent provided
in Sections 9 and 11 hereof, the officers and directors of the Company, the
Bank and each person who controls the Company, the Bank or any Underwriter, and
their respective heirs, executors, administrators, successors and assigns, and
no other person shall acquire or have any right under or by virtue of this
Agreement. No purchaser of any of the Shares from any Underwriter shall be
deemed a successor or assign by reason merely of such purchase.
15. As used herein, the term "business day" shall mean any day
when the Commission's office in Washington, D.C. is open for business.
16. This Agreement shall be governed by and construed in
accordance with the laws of the State of Michigan.
17. This Agreement may be executed by any one or more of the
parties hereto in any number of counterparts, each of which shall be deemed to
be an original, but all such counterparts shall together constitute one and the
same instrument.
If the foregoing is in accordance with your understanding, please sign
and return to us one counterpart for the Company and the Bank plus one for each
counsel thereof, and upon the acceptance hereof by each of the Underwriters,
this letter and such acceptance hereof shall constitute a binding agreement
between each of the Underwriters, the Company and the Bank.
24
<PAGE> 25
Very truly yours,
Franklin Finance Corporation
By:_____________________________________
Name:
Title:
Franklin Bank, N.A.
By:_____________________________________
Name:
Title:
Accepted as of the date hereof:
Roney & Co., L.L.C.
By:________________________________
Name:
Title:
Principal Financial Securities, Inc.
By:________________________________
Name:
Title:
25
<PAGE> 26
SCHEDULE I
<TABLE>
<CAPTION>
Number of Optional
Shares to be
Total Number of Purchased if
Shares to be Maximum Option
Underwriter Purchased Exercised
-------------- -------------- ----------------
<S> <C> <C>
Roney & Co, L.L.C. . . . . . . . . . . . . . . . .
Principal Financial Securities, Inc. . . . . . . .
Total 1,800,000 270,000
</TABLE>
<PAGE> 27
ANNEX I
ANNEX 1 (a)
ANNEX 1 (b)
<PAGE> 28
ANNEX II
Residential Mortgage Loan Purchase and Warranties Agreement
Residential Mortgage Loan Servicing Agreement
Commercial Mortgage Loan Purchase and Warranties Agreement
Commercial Mortgage Loan Servicing Agreement
Advisory Agreement
<PAGE> 1
EXHIBIT 3(a)(i)
MICHIGAN DEPARTMENT OF CONSUMER AND INDUSTRY SERVICES
CORPORATION, SECURITIES AND LAND DEVELOPMENT BUREAU
Date Received (FOR BUREAU USE ONLY)
Name
JANIS K. KUJAN, LEGAL ASSISTANT
Honigman Miller Schwartz and Cohn
Address
2290 First National Building 660 Woodward Avenue
City State Zip Code
Detroit Michigan 48226-3583 EFFECTIVE DATE:
DOCUMENT WILL BE RETURNED TO THE NAME AND ADDRESS YOU ENTER ABOVE
ARTICLES OF INCORPORATION
FOR USE BY DOMESTIC PROFIT CORPORATIONS
(Please read information and instructions on the last page)
Pursuant to the provisions of Act 284, Public Acts of 1972, the
undersigned corporation executes the following Articles:
ARTICLE I
The name of the corporation is:
FRANKLIN FINANCE CORPORATION
ARTICLE II
The purpose or purposes for which the corporation is formed is to
engage in any activity within the purposes for which corporations may be formed
under the Business Corporation Act of Michigan.
ARTICLE III
The total authorized shares:
1. Common Shares 60,000
--------------------
Preferred Shares
----------------
2. A statement of all or any of the relative rights, preferences and
limitations of the shares of each class is as follows:
<PAGE> 2
ARTICLE IV
1. The address of the registered office is:
30600 TELEGRAPH ROAD, BINGHAM FARMS, Michigan 48025
------------------------------------ ----------
(Street Address) (City) (Zip Code)
2. The mailing address or the registered office if different than above:
, Michigan
------------------------------------- -------------------
(Street address of P.O. Box) (City) (Zip Code)
3. The name of the resident agent at the registered office is:
CT CORPORATION SYSTEM
---------------------
ARTICLE V
The names(s) and address(es) of the incorporator(s) is (are) as follows:
Name Residence or Business Address
JANIS K. KUJAN, 2290 FIRST NATIONAL BUILDING, DETROIT, MI 48226
------------------------------------------------------------------------------
------------------------------------------------------------------------------
------------------------------------------------------------------------------
------------------------------------------------------------------------------
------------------------------------------------------------------------------
------------------------------------------------------------------------------
ARTICLE VI (Optional. Delete if not applicable)
Any action required or permitted by the Act to be taken at an annual or
special meeting of shareholders may be taken without a meeting, without prior
notice, and without a vote, if consents in writing, setting forth the action
so taken, are signed by the holders of outstanding shares having not less than
the minimum number of votes that would be necessary to authorize or take the
action at a meeting at which all shares entitled to vote on the action were
present and voted. The written consents shall bear the date of signature of
each shareholder who signs the consent. No written consents shall be effective
to take the corporate action referred to unless, within 60 days after the
record date for determining shareholders entitled to express consent to or to
dissent from a proposal without a meeting, written consents dated not more
than 10 days before the record date and signed by a sufficient number of
shareholders to take the action are delivered to the corporation. Delivery
shall be to the corporation's registered office, its principal place of
business, or an officer or agent of the corporation having custody of the
minutes of the proceedings of its shareholders. Delivery made to a
corporation's registered office shall be by hand or by certified or registered
mail, return receipt requested.
Prompt notice of the taking of the corporate action without a meeting
by less than unanimous written consent shall be given to shareholders who
would have been entitled to notice of the shareholder meeting if the action
had been taken at a meeting and who have not consented in writing.
<PAGE> 3
Use space below for additional Articles or for continuation of previous
Articles. Please identify any Article being continued or added. Attach
additional pages if needed.
To the full extent permitted by the Michigan Business Corporation Act
or any other applicable laws presently or hereafter in effect, no director of
this Corporation shall be personally liable to this Corporation or its
shareholders for or with respect to any acts or omissions in the performance of
his or her duties as a director of this Corporation. Any repeal or
modification of this Article VII shall not adversely affect any right or
protection of a director of this Corporation existing immediately prior to such
repeal or modification.
<TABLE>
<S> <C>
I, (We), the incorporator(s) sign my (our) name(s) this 23rd day of SEPTEMBER, 1997
------ -----------------------------------------
/s/ Janis K. Kujan
- ------------------------------------------------- -----------------------------------------------
Janis K. Kujan
- ------------------------------------------------- -----------------------------------------------
- ------------------------------------------------- -----------------------------------------------
- ------------------------------------------------- -----------------------------------------------
- ------------------------------------------------- -----------------------------------------------
</TABLE>
<PAGE> 4
Name of person or organizations Preparer's name and business
remitting fees: telephone number:
HONIGMAN MILLER SCHWARTZ AND COHN JANIS K. KUJAN, LEGAL ASSISTANT
- --------------------------------- --------------------------------
- --------------------------------- --------------------------------
- ---------------------------------
(313) 256 - 7833
--------------------------------
INFORMATION AND INSTRUCTIONS
1. The articles of incorporation cannot be filed until this form or a
comparable document; is submitted.
2. Submit one original of this document. Upon filing, the document will be
added to the records of the Corporation, Securities and Land
Development Bureau. The original will be returned to the address
appearing in the box on the front as evidence of filing.
Since this document will be maintained on optical disk media, it is
important that the filing be legible. Documents with poor black and
white contrast, or otherwise ilegible, will be rejected.
3. This document is to be used pursuant to the provisions of Act 284, P.A. of
1972, by one or more persons for the purpose of forming a domestic
profit corporation.
4. Article I - The corporate name of a domestic profit corporation is
required to contain one of the following words or abbreviations:
"Corporation", "Company", "Incorporated", "Limited", "Corp.", "Co.",
"Inc.", or "Ltd.".
5. Article II - State, in general terms, the character of the particular
business to be carried on. Under section 202(b) of the Act, it is
sufficient to state substantially, alone or with specifically enumerated
purposes, that the corporation may engage in any activity within the
purposes for which corporations may formed under the Act. The Act
requires, however, that educational corporations state their specific
purposes.
6. Article III - Indicate the total number of shares which the corporation
has authority to issue. If there is more than one class or series of
shares, state the relative rights, preferences and limitations of the
shares of each class in Article III(2).
7. Article IV - A post office box may not be designated as the address of the
registered office.
8. Article V - The Act requires one or more incorporators. Educational
corporations are required to have at least three (3) incorporators.
The address(es) should include a street number and name (or other
designation), city and state.
9. The duration of the corporation should be stated in the articles only if
not perpetual.
10. This document is effective on the date endorsed "filed" by the Bureau. A
later effective date, no more than 90 days after the date of delivery,
may be stated as an additional article.
11. The articles must be signed in ink by each incorporator. The names of the
incorporators as set out in article V should correspond with the
signatures.
12. FEES: Make remittance payable to the State of Michigan. Include
corporation name on check or money order.
<TABLE>
<S> <C>
NONREFUNDABLE FEE...........................................................................................$10.00
ORGANIZATION FEE: first 60,000 authorized shares or portion thereof.........................................$50.00
TOTAL MINIMUM FEE...........................................................................................$60.00
ADDITIONAL ORGANIZATION FEE FOR AUTHORIZED SHARES OVER 60,000:
each additional 20,000 authorized shares or portion thereof......................................$30.00
maximum fee for first 10,000,000 authorized shares............................................$5,000.00
each additional 20,000 authorized shares or portion thereof in excess of 10,000,000 shares.......$30.00
maximum fee for authorized shares in excess of 10,000,000 shares............................$200,000.00
</TABLE>
<TABLE>
<S><C> <C>
13. Mail form and fee to: The office is located at:
Michigan Department of Consumer and Industry Services 6546 Mercantile Way
Corporation, Securities and Land Development Bureau Lansing, MI 48910
Corporation Division Telephone: (517) 334-6302
P.O. Box 30054
Lansing, MI 48909-7554
</TABLE>
<PAGE> 1
EXHIBIT 3(a)(ii)
CERTIFICATE OF DESIGNATION
OF
[ ]% NONCUMULATIVE EXCHANGEABLE
PREFERRED STOCK, SERIES A
OF
FRANKLIN FINANCE CORPORATION
Pursuant to Section 302(4) of the
Michigan Business Corporation Act
Franklin Finance Corporation, a corporation organized and existing
under the laws of the State of Michigan (the "Corporation"), HEREBY CERTIFIES
that the following resolution was duly adopted by the Board of Directors of the
Corporation on [ ], 1997, pursuant to authority conferred upon the
Board of Directors by the provisions of the Restated Certificate of
Incorporation of the Corporation which authorizes the issuance of up to [
] shares of preferred stock, $10.00 par value per share (the "Preferred
Stock"):
RESOLVED that the issue of [ ] shares of [ ]% Noncumulative
Exchangeable Preferred Stock, Series A, $10.00 par value, of the Corporation is
hereby authorized and the designation, preferences, relative, participating,
optional and other special rights, and qualifications, or restrictions of all [
] shares of this Series, in addition to those set forth in the Restated
Certificate of Incorporation of the Corporation are hereby fixed as follows:
1. Designation. The designation of this Series shall be [ ]%
Noncumulative Exchangeable Preferred Stock, Series A (hereinafter referred to
as this "Series"), and the number of shares constituting this Series shall be [
]. Shares of this Series shall have a liquidation preference of $10.00 per
share. The number of authorized shares of this Series may be reduced by further
resolution duly adopted by the Board of Directors of the Corporation or a duly
authorized committee thereof and by the filing of a certificate pursuant to the
provisions of the Business Corporation Act ("Act") of the State of Michigan
stating that such reduction has been so authorized, but the number of
authorized shares of this Series shall not be increased.
2. Dividends.
(a) For each quarterly dividend period (a "Dividend Period")
dividends payable on each share of this Series shall be
payable at a rate of [ ]% per annum of the liquidation
preference per share divided by four. Each Dividend Period
shall commence on the January 1, April 1, July 1 and October 1
following the last day
<PAGE> 2
of the preceding Dividend Period and shall end on and
include the day next preceding the first day of the next
Dividend Period. Dividends are noncumulative and shall be
payable, when, as, and if, declared by the Board of Directors
or by a duly authorized committee thereof, on March 31, June
30, September 30 and December 31 of each year, commencing on
[December 31], 1997. Each such dividend shall be paid to the
holders of record of shares of this Series as they appear on
the stock register of the Corporation on such record date, not
exceeding 45 days preceding the payment date thereof, as shall
be fixed by the Board of Directors of the Corporation or by a
duly authorized committee thereof.
(b) Dividends payable on this Series for any Dividend Period less
than a full Dividend Period, shall be computed on the basis of
a 360-day year consisting of twelve 30-day months and the
actual number of days elapsed in the period.
(c) Dividends shall be noncumulative. If the Board of Directors of
the Corporation fails to declare a dividend on the Preferred
Stock for a Dividend Period, then holders of the Preferred
Stock will have no right to receive a dividend for that
Dividend Period, and the Corporation will have no obligation
to pay a dividend for that Dividend Period, whether or not
dividends are declared and paid for any future Dividend Period
with respect to either the Preferred Stock or the common
stock, par value $300.00 per share, of the Corporation (the
"Common Stock").
(d) If full dividends on the Preferred Stock for any Dividend
Period shall not have been declared and paid, or declared and
a sum sufficient for the payment thereof shall not have been
set apart for such payments, no dividends shall be declared or
paid or set aside for payment and no other distribution shall
be declared or made or set aside for payment upon the Common
Stock or any other capital stock of the Corporation ranking
junior to or on a parity with the Preferred Stock as to
dividends or amounts upon liquidation, nor shall any Common
Stock or any other capital stock of the Corporation ranking
junior to or on a parity with the Preferred Stock as to
dividends or amounts upon liquidation be redeemed, purchased
or otherwise acquired for any consideration (or any monies to
be paid to or made available for a sinking fund for the
redemption of any such stock) by the Corporation (except by
conversion into or exchange for other capital stock of the
Corporation ranking junior to the Preferred Stock as to
dividends and amounts upon liquidation), until such time as
dividends on all outstanding Preferred Stock have been (i)
declared and paid or declared and a sum sufficient for the
payment thereof has been set apart for payment for three
consecutive dividend periods and (ii) declared and paid or
declared and a sum sufficient for the payment thereof has been
set apart for payment for the fourth consecutive Dividend
Period. Notwithstanding the above, nothing in this
subparagraph shall prevent the Corporation from treating an
amount consented to by the holder of the Common Stock under
the provisions of section 565 of the Internal Revenue Code of
1986,
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<PAGE> 3
as amended (the "Code"), as a dividend for purposes of
the dividends paid deduction under section 561 of the Code.
(e) When dividends are not paid in full (or a sum sufficient for
such full payment is not set apart) upon the Preferred Stock
and the shares of any other series of capital stock ranking on
a parity as to dividends with the Preferred Stock, all
dividends declared upon the Preferred Stock and any other
series of capital stock ranking on a parity as to dividends
with the Preferred Stock shall be declared pro rata so that
the amount of dividends declared per share on the Preferred
Stock and such other series of capital stock shall in all
cases bear to each other the same ratio that full dividends,
for the then-current Dividend Period, per share on the
Preferred Stock (which shall not include any accumulation in
respect of unpaid dividends for prior Dividend Periods) and
full dividends, including required or permitted accumulations,
if any, on such other series of capital stock bear to each
other.
(f) Holders of the Preferred Stock shall not be entitled to any
dividend, whether payable in cash, property or stock, in
excess of full dividends, as herein provided, on the Preferred
Stock. No interest, or sum of money in lieu of interest, shall
be payable in respect of any dividend payment or payments on
the Preferred Stock which may be in arrears.
3. Redemption.
(a) The shares of this Series are not redeemable prior to [
], 2002, except upon the occurrence of a Tax Event (as
defined in paragraph (b) below). The Corporation, at its
option, may redeem shares of this Series, as a whole or in
part, at any time or from time to time, on or after [
], 2002, at a redemption price of $10.00 per share, plus the
accrued and unpaid dividends for the most recent quarter
thereon to the date fixed for redemption.
(b) The Corporation will have the right, at any time upon the
occurrence of a Tax Event and with the prior written approval
of the OCC, to redeem the shares of this Series, in whole, but
not in part, at a redemption price of $10.00 per share, plus
the accrued and unpaid dividends for the most recent quarter
to the date fixed for redemption. "Tax Event" means the
receipt by the Corporation of an opinion of a nationally
recognized law or accounting firm experienced in such matters
to the effect that, as a result of (i) any amendment to,
clarification of, or change (including any announced
prospective change) in, the laws or treaties (or any
regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein affecting
taxation, (ii) any judicial decision, official administrative
pronouncement, published or private ruling, regulatory
procedure, notice or announcement (including any notice or
announcement of intent to adopt such procedures or
regulations) ("Administrative Action") or (iii) any amendment
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<PAGE> 4
to, clarification of, or change in the official
position or the interpretation of such Administrative Action
or any interpretation or pronouncement that provides for a
position with respect to such Administrative Action that
differs from the theretofore generally accepted position, in
each case, by any legislative body, court, governmental
authority or regulatory body, irrespective of the manner in
which such amendment, clarification or change is made known,
which amendment, clarification, or change is effective or such
pronouncement or decision is announced on or after the date of
issuance of the shares of this Series, there is more than an
insubstantial risk that (a) dividends paid or to be paid by
the Corporation with respect to the Common Stock and Preferred
Stock of the Corporation are not, or will not be, fully
deductible by the Corporation for United States federal income
tax purposes or (b) the Corporation is, or will be, subject to
more than a de minimis amount of other taxes, duties or other
governmental charges.
(c) In the event that fewer than all the outstanding shares of
this Series are to be redeemed, the number of shares to be
redeemed shall be determined by the Board of Directors of the
Corporation or a duly authorized committee thereof and the
shares to be redeemed shall be determined by lot or pro rata
as may be determined by the Board of Directors of the
Corporation or such duly authorized committee thereof or by
any other method as may be determined by the Board of
Directors of the Corporation or such duly authorized committee
thereof in its sole discretion to be equitable, provided that
such method satisfies any applicable requirements of the
Nasdaq System or other exchange on which this Series is
listed.
(d) In the event the Corporation shall redeem shares of this
Series, notice of such redemption shall be given by first
class mail, postage prepaid, mailed not less than 30 or more
than 60 days prior to the redemption date, to each holder of
record of the shares to be redeemed, at such holder's address
as the same appears on the stock register of the Corporation.
Each such notice shall state: (i) the redemption date; (ii)
the number of shares of this Series to be redeemed and, if
fewer than all the shares held by such holder are to be
redeemed, the number of such shares to be redeemed from such
holder; (iii) the redemption price; (iv) the place or places
where certificates for such shares are to be surrendered for
payment of the redemption price; and (v) that quarterly
dividends on the shares to be redeemed will cease to accrue on
the redemption date.
(e) Notice having been mailed as aforesaid, from and after the
redemption date (unless default shall be made by the
Corporation in providing money for the payment of the
redemption price) quarterly dividends on the shares of this
Series so called for redemption shall cease to accrue, and
said shares shall no longer be deemed to be outstanding, and
all rights of the holders thereof as stockholders of the
Corporation (except the right to receive from the Corporation
the redemption price) shall cease.
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<PAGE> 5
Upon surrender in accordance with said notice of the
certificates for any shares so redeemed (properly endorsed or
assigned for transfer, if the Board of Directors of the
Corporation or a duly authorized committee thereof shall so
require and the notice shall so state), such shares shall be
redeemed by the Corporation at the redemption price aforesaid.
In case fewer than all the shares represented by any such
certificate are redeemed, a new certificate shall be issued
representing the unredeemed shares without cost to the holder
thereof.
(f) Any shares of this Series which shall at any time have been
redeemed shall, after such redemption, have the status of
authorized but unissued shares of Preferred Stock, without
designation as to series until such shares are once more
designated as part of a particular series by the Board of
Directors of the Corporation or a duly authorized committee
thereof.
(g) Notwithstanding the foregoing provisions of this Section 3,
unless full dividends on the Preferred Stock have been or
contemporaneously are declared and paid or declared and a sum
sufficient for the payment thereof has been set apart for
payment for the then-current Dividend Period, no shares of
this Series shall be redeemed unless all outstanding shares of
this Series are simultaneously redeemed, and the Corporation
shall not purchase or otherwise acquire any shares of this
Series; provided, however, that the foregoing shall not
prevent the purchase or acquisition of shares of this Series
pursuant to a purchase or exchange offer made on the same
terms to holders of all outstanding shares of this Series.
4. Automatic Exchange.
(a) Subject to the terms and conditions of this Section 4, each
share of Preferred Stock will be exchanged automatically (the
"Automatic Exchange") for one share of [ ]% Noncumulative
Preferred Stock, Series A, $10.00 par value per share (a "Bank
Preferred Share"), of Franklin Bank, N.A. (the "Bank"). The
issuance of the Bank Preferred Shares has been duly authorized
by the board of directors of the Bank. Prior to or
contemporaneously with the filing of this Certificate of
Designation with the Michigan Department of Consumer and
Industry Services, the Bank shall file with the OCC a
Certificate of Designation establishing the Bank Preferred
Shares. The preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of the Bank Preferred
Shares shall be substantially identical to the preferences,
conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and
conditions of the Preferred Stock established by this
Certificate of Designation.
(b) The Automatic Exchange will occur only if the appropriate
regulatory agency directs in writing (a "Directive") an
exchange of the Preferred Stock for Bank
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Preferred Shares because (i) the Bank becomes
"undercapitalized" under prompt corrective action regulations,
(ii) the Bank is placed into conservatorship or receivership
or (iii) the appropriate regulatory agency, in its sole
discretion, anticipates the Bank's becoming "undercapitalized"
in the near term (the "Exchange Event").
(c) Upon the Exchange Event, each holder of the Preferred Stock
shall be unconditionally obligated to surrender to the Bank
the certificates representing each share of the Preferred
Stock of such holder, and the Bank shall be unconditionally
obligated to issue to such holder in exchange for each share
of Preferred Stock a certificate representing one Bank
Preferred Share.
(d) The Automatic Exchange shall occur as of 8:00 a.m. Eastern
Time on the date for such exchange set forth in the Directive,
or, if such date is not set forth in the Directive, as of 8:00
a.m. on the earliest possible date such exchange could occur
consistent with the Directive (the "Time of Exchange"), as
evidenced by the issuance by the Bank of a press release. As
of the Time of Exchange, all of the Preferred Stock required
to be exchanged will be deemed canceled without any further
action by the Corporation, all rights of the holders of the
Preferred Stock as stockholders of the Corporation shall
cease, and such persons shall thereupon and thereafter be
deemed to be and shall be for all purposes the holders of Bank
Preferred Shares. Notice of the occurrence of the Exchange
Event shall be given by first-class mail, postage prepaid,
mailed within 30 days of such event, to each holder of record
of the Preferred Stock, at such holder's address as the same
appears on the stock register of the Corporation. Each such
notice shall indicate the place or places where certificates
for the Preferred Stock are to be surrendered by the holders
thereof, and the Bank shall deliver to each such holder
certificates for Bank Preferred Shares upon surrender of
certificates for the Preferred Stock. Until such replacement
stock certificates are delivered (or in the event such
replacement certificates are not delivered), certificates
previously representing the Preferred Stock shall be deemed
for all purposes to represent Bank Preferred Shares.
(e) Any Preferred Stock purchased or redeemed by the Corporation
in accordance with Section 3 hereof prior to the Time of
Exchange shall not be deemed outstanding and shall not be
subject to the Automatic Exchange. In the event of the
Automatic Exchange, any accrued and unpaid dividends for the
most recent quarter on the Preferred Stock as of the Time of
Exchange would be deemed to be accrued and unpaid dividends on
the Bank Preferred Shares.
5. Conversion. The holders of shares of this Series shall not
have any rights to convert such shares into shares of any other class or series
of capital stock of the Corporation.
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<PAGE> 7
6. Liquidation Rights.
(a) Upon the voluntary or involuntary dissolution, liquidation or
winding up of the Corporation, the holders of the shares of
this Series shall be entitled to be paid or have funds set
aside for such payment out of the assets of the Corporation
available for distribution to its stockholders, before any
payment or distribution shall be made on the Common Stock or
on any other class of stock ranking junior to this Series upon
liquidation, the amount of $10.00 per share, plus accrued and
unpaid dividends for the most recent quarter thereon.
(b) After the payment to the holders of the shares of this Series
of the full preferential amounts provided for in this Section
6, the holders of this Series as such shall have no right or
claim to any of the remaining assets of the Corporation.
(c) If, upon any voluntary or involuntary dissolution,
liquidation, or winding up of the Corporation, the amounts
payable with respect to the stated value of the shares of this
Series and any other shares of stock of the Corporation
ranking as to any such distribution on a parity with the
shares of this Series are not paid in full, the holders of the
shares of this Series and of such other shares will share
ratably in any such distribution of assets of the Corporation
in proportion to the full respective liquidating distributions
to which they are entitled.
(d) Neither the sale of all or substantially all the property or
business of the Corporation, nor the merger or consolidation
of the Corporation into or with any other corporation or the
merger or consolidation of any other corporation into or with
the Corporation, shall be deemed to be a dissolution,
liquidation or winding up, voluntary or involuntary, for the
purposes of this Section 6.
(e) Upon the dissolution, liquidation or winding up of the
Corporation, the holders of shares of this Series then
outstanding shall be entitled to be paid out of the assets of
the Corporation available for distribution to its stockholders
all amounts to which such holders are entitled pursuant to
paragraph (a) of this Section 6 before any payment shall be
made to the holder of any class of capital stock of the
Corporation ranking junior to this Series upon liquidation.
7. Ranking. For purposes of this resolution, any stock of any
class or classes of the Corporation shall be deemed to rank:
(a) prior to the shares of this Series, either as to dividends or
upon liquidation, if the holders of such class or classes
shall be entitled to the receipt of dividends or of amounts
distributable upon dissolution, liquidation or winding up of
the Corporation, as the case may be, in preference or priority
to the holders of shares of this Series;
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<PAGE> 8
(b) on a parity with shares of this Series, either as to dividends
or upon liquidation, whether or not the dividend rates,
dividend payment dates or redemption or liquidation prices per
share or sinking fund provisions, if any, be different from
those of this Series, if the holders of such stock shall be
entitled to the receipt of dividends or of amounts
distributable upon dissolution, liquidation or winding up of
the Corporation, as the case may be, without preference or
priority, one over the other, as between the holders of such
stock and the holders of shares of this Series; and
(c) junior to shares of this Series, either as to dividends or
upon liquidation, if such class shall be Common Stock or if
the holders of shares of this Series shall be entitled to
receipt of dividends or of amounts distributable upon
dissolution, liquidation or winding up of the Corporation, as
the case may be, in preference or priority to the holders of
shares of such class or classes.
8. Voting Rights. The shares of this Series shall not have any
voting powers either general or special, except that:
(a) If at the time of any annual meeting of the Corporation's
stockholders for the election of directors there is a default
in preference dividends on the Preferred Stock, the number of
directors constituting the Board of Directors of the
Corporation shall be increased by two (if not already
increased by two due to a default in preference dividends),
and the holders of the Preferred Stock of all series (whether
or not the holders of such series of Preferred Stock would be
entitled to vote for the election of directors if such default
in preference dividends did not exist), shall have the right
at such meeting, voting together as a single class without
regard to series, to the exclusion of the holders of Common
Stock, to elect two additional directors of the Corporation to
fill such newly created directorships. Each director elected
by the holders of shares of the Preferred Stock (a "Preferred
Director") shall continue to serve as such director until the
later of: (i) the full term for which he shall have been
elected or (ii) the payment of four consecutive quarterly
dividends on the Preferred Stock. So long as a default in any
preference dividends on the Preferred Stock shall exist, any
vacancy in the office of a Preferred Director may be filled by
an instrument in writing signed by the remaining Preferred
Director and filed with the Corporation. Each director
appointed as aforesaid by the remaining Preferred Director
shall be deemed, for all purposes hereof, to be a Preferred
Director. Whenever the term of office of the Preferred
Directors shall end and a default in preference dividends
shall no longer exist, the number of directors constituting
the Board of Directors shall be reduced by two. For the
purposes hereof, a "default in preference dividends" on the
Preferred Stock shall be deemed to have occurred whenever the
Corporation has failed to pay or declare and set aside for
payment a quarterly dividend during
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any of the four preceding quarterly dividend periods on
all shares of Preferred Stock of any series then outstanding;
and
(b) Without the consent of the holders of shares entitled to cast
at least 66-2/3% of the votes entitled to be cast by the
holders of the total number of shares of Preferred Stock then
outstanding, voting together as a single class without regard
to series, the holders of shares of this series being entitled
to cast one vote per share thereon, the Corporation may not:
(i) create any class or series of stock which shall have
preference as to dividends or distribution of assets
over any outstanding series of Preferred Stock other
than a series which shall not have any right to
object to such creation; or
(ii) alter or change the provisions of the Corporation's
Restated Certificate of Incorporation (including this
Certification of Designation) so as to adversely
affect the voting powers, preferences or special
rights of the holders of Preferred Stock; provided,
however, that if such creation or such alteration or
change would adversely affect the voting power,
preferences or special rights of one or more, but not
all, series of Preferred Stock at the time
outstanding, consent of the holders of shares
entitled to cast at least 66-2/3% of the votes
entitled to be cast by the holders of all of the
shares of all such series so affected, voting
together as a single class, shall be required in lieu
of the consent of the holders of shares entitled to
cast at least 66-2/3% of the votes entitled to be
cast by the holders of the total number of shares of
Preferred Stock at the time outstanding.
9. Approval of Independent Directors.
(a) For so long as any shares of this Series are outstanding, the
Corporation may not take the following actions without first
obtaining the approval of a majority of the Independent
Directors. "Independent Director" means any director of the
Corporation who is either (i) not a current director (except a
Preferred Director), officer or employee of the Corporation,
the Bank or any affiliate of the Bank; (ii) the owner of not
more than one percent of the outstanding common stock of the
Bank; or (iii) a Preferred Director. The actions which require
the prior approval of a majority of the Independent Directors
include:
(i) the issuance of a series of Preferred Stock on a
parity with the shares of this Series;
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(ii) the incurrence of debt for borrowed money in excess
of 20% of the aggregate amount of net proceeds
received in connection with the issuance of any
Preferred Stock and Common Stock;
(iii) the modification of the general distribution policy
or the declaration of any distribution in respect of
Common Stock for any year if, after taking into
account any such proposed distribution, total
distributions on the shares of this Series and on the
Common Stock would exceed an amount equal to the sum
of 105% of the Corporation's "REIT taxable income"
(excluding capital gains) for such year plus net
capital gains of the Corporation for that year;
(iv) the acquisition of real estate assets other than
mortgage loans or mortgage securities representing
interests in or obligations backed by pools of
mortgage loans that (A) qualify as real estate assets
under Section 856(c)(6)(B) of the Code, (B) are rated
investment grade or better by at least one nationally
recognized independent rating organization, (C) are
not interest-only, principal-only or high-risk
securities and (D) represent interests in or
obligations backed by pools of mortgage loans;
(v) the redemption of any shares of Common Stock;
(vi) the termination or material modification of, or
election not to renew, the Advisory Agreement, dated
[ ], 1997, between the Corporation and the Bank or
any servicing agreement entered into in connection
with the purchase of mortgage loans, the
subcontracting of any duties under the Advisory
Agreement or any servicing agreement to persons who
are not affiliates of the Bank;
(vii) any dissolution, liquidation or termination of the
Corporation prior to [ ], 2002;
(viii) any material amendment to or modification of any
agreements pursuant to which the Corporation
purchases its real estate mortgage assets; and
(ix) the determination to revoke the Corporation's status
as a real estate investment trust ("REIT").
(b) In assessing the benefits to the Corporation of any proposed
action requiring their consent, the Independent Directors
shall take into account the interests of holders of both the
Common Stock and the Preferred Stock, including, without
limitation, the holders of shares of this Series. In
considering the interests of the holders of the Preferred
Stock, including without limitation holders of shares of this
Series,
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the Independent Directors shall owe the same duties
which the Independent Directors owe to holders of Common
Stock.
10. Status as a Reporting Company. For so long as any shares of
this Series are outstanding, the Corporation shall comply with the reporting
requirements of the Securities Exchange Act of 1934, as amended.
IN WITNESS WHEREOF, Franklin Finance Corporation has caused this
Certificate to be signed by [ ], its Secretary, this [
] day of [ ], 1997.
FRANKLIN FINANCE CORPORATION
By:
-----------------------------------
[ ], Secretary
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EXHIBIT 3(a)(iii)
MICHIGAN DEPARTMENT OF COMMERCE - CORPORATION AND SECURITIES BUREAU
Date Received (FOR BUREAU USE ONLY)
Name
Janis K. Kujan, Legal Assistant
Address
Honigman Miller Schwartz and Cohn
2290 First National Building
City State Zip Code
Detroit MI 48226
EFFECTIVE DATE:
Document will be returned to the name and address you enter above
RESTATED ARTICLES OF INCORPORATION
For use by Domestic Profit Corporations
(Please read information and instructions on the last page)
<TABLE>
<S> <C>
Pursuant to the provisions of Act 284, Public Acts of 1972, the undersigned corporation executes the following
Articles:
1. The present name of the corporation is:
Franklin Finance Corporation
------------------------------------
2. The identification number assigned by the Bureau is:
------------------------------------
3. All former names of the corporation are:
4. The date of filing the original Articles of Incorporation was:
------------------------------------------------------
The following Restated Articles of Incorporation supersede the Articles of Incorporation as amended and shall be
the Articles of Incorporation for the corporation:
ARTICLE I
The name of the corporation is:
FRANKLIN FINANCE CORPORATION
ARTICLE II
The purpose or purposes for which the corporation is formed is to engage in any activity within
the purposes for which corporations may be formed under the Business Corporation
Act of Michigan.
</TABLE>
<PAGE> 2
ARTICLE III
The total authorized shares:
Common shares $300 par value Preferred shares $10 par value
-------------- -------------------------------
A statement of all or any of the relative rights, preferences and limitations
of the shares of each class is as follow:
See Exhibit A
ARTICLE IV
1. The address of the current registered office is:
30600 Telegraph Road, Bingham Farms, Michigan 48025
----------------------------------- -----
2. The mailing address of the current registered office, if different than
above:
-----------------------------------------, Michigan ---------------------
3. The name of the current resident agent is: CT Corporation System
------------------------------
ARTICLE V (Optional. Delete if not applicable)
Any action required or permitted by the Act to be taken at an annual or
special meeting of shareholders may be taken without a meeting, without prior
notice, and without a vote, if consents in writing, setting forth the action
so taken, are signed by the holders of outstanding shares having not less than
the minimum number of votes that would be necessary to authorize or take the
action at a meeting at which all shares entitled to vote on the action were
present and voted. The written consents shall bear the date of signature of
each shareholder who signs the consent. No written consents shall be
effective to take the corporate action referred to unless, within 60 days
after the record date for determining shareholders entitled to express
consent to or to dissent from a proposal without a meeting, written consents
dated not more than 10 days before the record date and signed by a sufficient
number of shareholders to take the action are delivered to the corporation.
Delivery shall be to the corporation's registered office, its principal place
of business, or an officer or agent of the corporation having custody of the
minutes of the proceedings of its shareholders. Delivery made to a
corporation's registered office shall be by hand or by certified or registered
mail, return receipt requested.
Prompt notice of the taking of the corporate action without a meeting
by less than unanimous written consent shall be given to shareholders who
would have been entitled to notice of the shareholder meeting if the action
had been taken at a meeting and who have not consented in writing.
<PAGE> 3
<TABLE>
<S><C>
ARTICLE VI (Additional provisions, if any, may be inserted here; attach additional pages if needed.)
- --------------------------------------------------------------------------------
See Exhibit B
----------------------------------------------------------------------------
5. COMPLETE SECTION (a) IF THE RESTATED ARTICLES WERE ADOPTED BY THE
UNANIMOUS CONSENT OF THE INCORPORATOR(S) BEFORE THE FIRST MEETING OF THE
BOARD OF DIRECTORS; OTHERWISE, COMPLETE SECTION (b). DO NOT COMPLETE
BOTH.
a. [ ] These Restated Articles of Incorporation were duly adopted on the
day of 19 in accordance with the
-------------- ---------------, ------,
provisions of Section 642 of the Act by the unanimous consent of the
incorporator(s) before the first meeting of the Board of Directors.
Signed this day of 19
------------- ---------------------, ----.
---------------------------------- ----------------------------------
---------------------------------- ----------------------------------
(Signatures of Incorporators; Type or Print Name Under Each Signature)
b. [x] These Restated Articles of Incorporation were duly adopted on the
day of 1997 in accordance with the
-------------- ----------------,
provisions of Section 642 of the Act and: (check one of the following)
[ ] were duly adopted by the Board of Directors without a vote of the shareholders. These Restated
Articles of Incorporation only restate and integrate and do not further amend the provisions of the
Articles of Incorporation as heretofore amended and there is no material discrepancy between those
provisions and the provisions of these Restated Articles.
[ ] were duly adopted by the shareholders. The necessary number of shares as required by statute were
voted in favor of these Restated Articles.
[ ] were duly adopted by the written consent of the shareholders having not less than the minimum
number of votes required by statute in accordance with Section 407(1) of the Act. Written notice to
shareholders who have not consented in writing has been given. (Note: Written consent by less than
all of the shareholders is permitted only if such provision appears in the Articles of Incorporation.)
[x] were duly adopted by the written consent of all the shareholders entitled to vote in accordance with
section 407(2) of the Act.
Signed this _______________day of ________________________, 1997
---
By _____________________________________________________________________________________
(Only Signature of President, Vice-President, Chairperson, or Vice-Chairperson)
________________________________________________________________________________________
(Type or Print Name) (Type or Print Title)
</TABLE>
<PAGE> 4
Name of person or organization Preparer's name and business
remitting fees: telephone number:
Honigman Miller Schwartz and Cohn Janis K. Kujan, Legal Assistant
--------------------------------- -------------------------------
(313) 256-7833
--------------------------------- -------------------------------
INFORMATION AND INSTRUCTIONS
1. The articles of incorporation cannot be restated until this form, or a
comparable document, is submitted.
2. Submit one original of this document. Upon filing, the document will be
added to the records of the Corporation and Securities Bureau. The original
will be returned to the address appearing in the box on the front as evidence
of filing.
Since this document will be maintained on optical disk media, it is
important that the filing be legible. Documents with poor black and white
contrast, or otherwise illegible, will be rejected.
3. This document is to be used pursuant to sections 641 through 643 of the
Act for the purpose of restating the articles of incorporation of a domestic
profit corporation. Restated articles of incorporation are an integration into
a single instrument of the current provisions of the corporation's articles of
incorporation, along with any desired amendments to those articles.
4. Restated articles of incorporation which do not amend the articles of
incorporation may be adopted by the board of directors without a vote of the
shareholders. Restated articles of incorporation which amend the articles of
incorporation require adoption by the shareholders. Restated articles of
incorporation submitted before the first meeting of the board of directors
require adoption by all of the incorporators.
5. Item 2 - Enter the identification number previously assigned by the
Bureau. If this number is unknown, leave it blank.
6. The duration of the corporation should be stated in the restated articles
of incorporation only if it is not perpetual.
7. This document is effective on the date endorsed "filed" by the Bureau. A
later effective date, no more than 90 days after the date of delivery, may be
stated as an additional article.
8. If the restated articles are adopted before the first meeting of the board
of directors, item 5(a) must be completed and signed in ink by a majority of
the incorporators. Other restated articles must be signed by the president,
vice-president, chairperson or vice-chairperson.
9. FEES: Make remittance payable to the State of Michigan. Include
corporation name and identification number on check or money order.
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<S> <C>
NONREFUNDABLE FEE...........................................................................................$10.00
TOTAL MINIMUM FEE...........................................................................................$10.00
ADDITIONAL FEES DUE FOR INCREASED AUTHORIZED SHARES ARE:
each additional 20,000 authorized shares or portion thereof......................................$30.00
maximum fee for first 10,000,000 authorized shares............................................$5,000.00
each additional 20,000 authorized shares or portion thereof in excess of 10,000,000 shares.......$30.00
maximum fee per filing for authorized shares in excess of 10,000,000 shares.................$200,000.00
</TABLE>
<TABLE>
<CAPTION>
<S><C>
10. Mail form and fee to: The office is located at:
Michigan Department of Commerce 6546 Mercantile Way
Corporation and Securities Bureau Lansing, MI 48910
Corporation Division Telephone: (517) 334-6302
P.O. Box 30054
Lansing, MI 48909-7554
</TABLE>
<PAGE> 5
EXHIBIT A TO
RESTATED ARTICLES OF INCORPORATION
OF
FRANKLIN FINANCE CORPORATION
ARTICLE III
A statement of all or any of the relative rights, preferences and
limitations of the shares of each class is as follows:
The Board of Directors is expressly authorized at any time, and from
time to time, to provide for the issuance of shares of Preferred Stock in one
or more class or series, with such voting powers, full or limited but not to
exceed one vote per share, or without voting powers and with such designations,
preferences and relative, participating, optional or other special rights, and
qualifications, or restrictions thereof, as shall be stated and expressed in
the resolution or resolutions providing for the issue thereof adopted by the
Board of Directors, and as are not stated and expressed in this Certificate of
Incorporation, or any amendment thereto, including (but without limiting the
generality of the foregoing) the following:
(a) the designation of such class or series;
(b) the dividend rate or rates of such class or series and/or the
methods of determining dividends, the conditions and dates
upon which such dividends shall be payable, the preference or
relation which such dividends shall bear to the dividends
payable on any other class or classes or on any other series
of any class or classes of capital stock, and whether such
dividends shall be cumulative or non-cumulative;
(c) whether the shares of such class or series shall be subject to
redemption by the Corporation, and, if made subject to such
redemption, the times, prices and other terms and conditions
of such redemption;
(d) the terms and amount of any sinking fund provided for the
purchase or redemption of the shares of such class or series;
(e) whether or not the shares of such class or series shall be
convertible into or exchangeable for shares of any other class
or classes or of any other series of any class or classes of
capital stock of the Corporation or affiliate of the
Corporation, and, if provision be made for conversion or
exchange, the times, prices, rates, adjustments and other
terms and conditions of such conversion or exchange;
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<PAGE> 6
(f) the extent, if any, to which the holders of the shares of such
class or series shall be entitled to vote as a class or
otherwise with respect to the election of the directors or
otherwise; provided, however, that in no event shall any
holder of any class or series of Preferred Stock be entitled
to more than one vote for each share of such Preferred Stock
held by it;
(g) the restrictions, if any, on the issue or reissue of any
additional Preferred Stock;
(h) the liquidation preference of such class or series and other
rights of the holders of the shares of such class or series
upon the dissolution of, or upon the distribution of assets
of, the Corporation;
(i) whether or not (a) warrants for such class or series or (b)
depositary shares evidenced by depositary receipts, each
representing a fraction (as determined by the Board of
Directors) of a share of such class or series, shares of which
class or series will be issued and deposited with a
depositary, shall be issued, in each case, in lieu of offering
full shares of such class of series; and
(j) whether or not warrants for Preferred Stock, depositary shares
or Common Stock shall be issued, whether alone or in
connection with any other class or series, and the terms and
conditions of any such warrants.
Voting Power/Limits Thereto.
Except as otherwise required by law and except for such voting powers
with respect to the election of directors or other matters as may be stated in
the resolutions of the Board of Directors, or duly authorized committee
thereof, creating any class or series of Preferred Stock, the holders of any
such class or series shall have no voting power whatsoever.
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<PAGE> 7
EXHIBIT B TO
RESTATED ARTICLES OF INCORPORATION
OF
FRANKLIN FINANCE CORPORATION
6.1 Bylaws.
The Board of Directors is authorized to make, alter, amend or
repeal the bylaws of the Corporation. The books of the Corporation (subject to
the provisions of the laws of the State of Michigan) shall be kept outside of
the State of Michigan at such places as from time to time may be designated by
the Board of Directors. Election of directors need not be by written ballot.
6.2 Liability.
To the fullest extent that the Michigan Business Corporation Act
("Act") as it exists on the date hereof or as it may hereafter be amended
permits the limitation or elimination of the liability of directors, no
director of the Corporation shall be personally liable to the Corporation or
its stockholders for monetary damages for breach of fiduciary duty as a
director.
6.3 Indemnification.
The Corporation shall have the power to indemnify any director,
officer, employee or agent of the Corporation or any other person who is
serving at the request of the Corporation in any such capacity with another
corporation, partnership, joint venture, trust or other enterprise (including,
without limitation, any employee benefit plan) to the fullest extent permitted
by the Act as it exists on the date hereof or as it may hereafter be amended,
and any such indemnification may continue as to any person who has ceased to be
a director, officer, employee or agent and may inure to the benefit of the
heirs, executors and administrators of such a person.
6.4 Insurance.
By action of its Board of Directors, notwithstanding any interest of
the directors in such action, the Corporation may purchase and maintain
insurance, in such amounts as the Board of Directors deems appropriate, to
protect any director, officer, employee or agent of the Corporation or any
other person who is serving at the request of the Corporation in any such
capacity with another corporation, partnership, joint venture, trust or other
enterprise (including, without limitation, any employee benefit plan) against
any liability asserted against such person or incurred by such person in any
such capacity or arising out of such person's status as such (including,
without limitation, expenses, judgments, fines and amounts paid in settlement)
to the
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<PAGE> 8
fullest extent permitted by the Act as it exists on the date hereof or as it
may hereafter be amended, and whether or not the Corporation would have the
power or would be required to indemnify any such person under the terms of any
agreement or bylaw or the Act. For purposes of this paragraph (3), "fines"
shall include any excise taxes assessed on a person with respect to any
employee benefit plan.
7. RESTRICTION OF TRANSFER,
ACQUISITION AND REDEMPTION OF SHARES
7.1 Definitions.
The following terms shall have the following meanings for purposes of
these Restated Articles of Incorporation:
"Acquire" shall mean the acquisition of Beneficial Ownership of shares
of Preferred Stock by any means, including, without limitation, the exercise of
any rights under any option, warrant, convertible security, pledge or other
security interest or similar right to acquire shares, but shall not include the
acquisition of any such rights unless, as a result, the acquirer would be
considered a Beneficial Owner. The terms Acquires and Acquisition shall
have correlative meanings.
"Beneficial Ownership" means ownership of shares of any class or
series of Common Stock or Preferred Stock by a Person who would be treated as
an owner of such shares under Section 542(a)(2) of the Code either directly or
constructively through the application of Section 544 of the Code as modified
by Section 856(h)(1)(B) of the Code. The terms "Beneficial Owner,"
"Beneficially Own" and "Own Beneficially" shall have correlative meanings.
"Beneficiary" means, with respect to the Trust, one or more
organizations named by the Corporation as beneficiary or beneficiaries of the
Trust in accordance with Section 7.12(a). Each such Beneficiary shall be an
organization described in Section 501(c)(3) of the Code, that is not an
"individual" within the meaning of Section 542 of the Code, contributions to
which must be eligible for deduction under each of Sections 170(b)(1)(A), 2055
and 2522 of the Code.
"Board of Directors" means the Board of Directors of the Corporation.
"Code" means the Internal Revenue Code of 1986, as amended from time
to time, or any successor statute thereto. Reference to any provision of the
Code shall mean such provision as in effect from time to time, as the same may
be amended, and any successor thereto, as interpreted by any applicable
regulations or other administrative pronouncements as in effect from time to
time.
"Excess Shares" has the meaning set forth in Section 7.3.
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<PAGE> 9
Individual shall mean a natural person or any entity considered an
individual for purposes of Section 542(a)(2) of the Code.
"Initial Public Offering" means the sale of shares of Preferred Stock
to the public pursuant to the Corporation's first effective registration
statement for such Preferred Stock filed under the Securities Act of 1933, as
amended.
"Market Price", with respect to any class or series of Preferred
Stock, on any date means the Closing Price on the Trading Day immediately
preceding such date of such class or series of Preferred Stock. The "Closing
Price", with respect to any class or series of Preferred Stock, on any date
shall mean the last sale price, regular way, or, in case no such sale takes
place on such day, the average of the closing bid and asked prices, regular
way, in either case as reported in the principal consolidated transaction
reporting system with respect to securities listed or admitted to trading on
the NYSE or, if such class or series of Preferred Stock is not then listed or
admitted to trading on the NYSE, as reported in the principal consolidated
transaction reporting system with respect to securities listed on the principal
national securities exchange on which such class or series of Preferred Stock
is listed or admitted to trading or, if such class or series of Preferred Stock
is not listed or admitted to trading on any national securities exchange, the
last quoted price, or if not so quoted, the average of the high bid and low
asked prices in the over-the-counter market, as reported by the Nasdaq System
or, if such system is no longer in use, the principal other automated
quotations system that may then be in use or, if such class or series of
Preferred Stock is not quoted by any such organization, the average of the
closing bid and asked prices as furnished by a professional market maker making
a market in such class or series of Preferred Stock selected by the Board of
Directors of the Corporation, or, if there is no such market maker or such
closing prices otherwise are not available, the fair market value of the
affected series of Preferred Stock as of such day, as determined by the Board
of Directors, in its discretion. "Trading Day" means a day on which the
principal national securities exchange on which the relevant class or series of
Preferred Stock is listed or admitted to trading is open for the transaction of
business or, if the relevant class or series of Preferred Stock is not listed
or admitted to trading on any national securities exchange, shall mean any day
other than a Saturday, a Sunday or a day on which banking institutions in the
State of Michigan are authorized or obligated by law or executive order to
close.
"Non-Transfer Event" means any event other than a purported Transfer
that would cause (i) any Person to Own Beneficially shares of Preferred Stock
in excess of the Ownership Limit, (ii) the Corporation to become "closely held"
within the meaning of Section 856(h) of the Code, and/or (iii) the Corporation
to otherwise fail to qualify as a REIT (other than as a result of a violation
of the "100-shareholder" requirement of Section 856(a)(5) of the Code), in each
case including, but not limited to, the granting of any option or entering into
any agreement for the sale, transfer or other disposition of shares of
Preferred Stock or the sale, transfer, assignment or other disposition of any
securities or rights convertible into or exchangeable for shares of Preferred
Stock.
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<PAGE> 10
"Ownership Limit" means, for any Person, the Beneficial Ownership of
nine and nine-tenths percent (9.9%), in number of shares or value, of the
outstanding shares of any class or series of Preferred Stock of the
Corporation. The value of the outstanding shares of any class or series of
Preferred Stock of the Corporation shall be determined by the Board of
Directors in good faith, which determination shall be conclusive for all
purposes hereof.
"Permitted Transferee" means any Person designated as a Permitted
Transferee in accordance with the provisions of Section 7.12(e) hereof.
"Person" means (a) an individual, corporation, partnership, estate,
trust (including a trust qualified under Section 401(a) or 501(c)(17) of the
Code), a portion of a trust permanently set aside for or to be used exclusively
for the purposes described in Section 642(c) of the Code, association, private
foundation within the meaning of Section 509(a) of the Code, joint stock
company, limited liability company or other entity and (b) also includes a
group as that term is used for purposes of Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended; but does not include an underwriter which
participated in a public offering of Preferred Stock for a period of sixty (60)
days following the purchase by such underwriter of such Preferred Stock
therein, provided that the foregoing exclusion shall apply only if the
ownership of such Preferred Stock by an underwriter or underwriters
participating in a public offering would not cause the Corporation to fail to
qualify as a REIT by reason of being closely held within the meaning of
Section 856(a) of the Code or otherwise cause the Corporation to fail to
qualify as a REIT.
"Prohibited Owner" means, with respect to any purported Transfer or
Non-Transfer Event, any Person who, except for the provisions of Section 7.3,
would Beneficially Own shares of Preferred Stock.
"REIT" means a Real Estate Investment Trust defined in Sections 856
through 860 of the Code.
"Restriction Termination Date" means the first day after the date of
the Initial Public Offering on which the Board of Directors determines that it
is no longer in the best interests of the Corporation to attempt to, or
continue to, qualify as a REIT.
"Transfer" means any sale, transfer, gift, hypothecation, assignment,
devise or other disposition of a direct or indirect interest in any shares of
Common Stock or Preferred Stock or the right to vote or receive dividends on
such Common Stock or Preferred Stock (including (i) the granting of any option
(including, but not limited to, an option to acquire an option or any series of
such options) or entering into any agreement for the sale, transfer or other
disposition of Common Stock or Preferred Stock or the right to vote or receive
dividends on such Common Stock or Preferred Stock or (ii) the sale, transfer,
assignment or other disposition of any securities or rights convertible into or
exchangeable for Common Stock or Preferred Stock or the exercise of such
rights), whether voluntary or involuntary, whether of record or beneficially,
and whether by operation of law or otherwise (including, but not limited to,
any transfer of an interest in other
4
<PAGE> 11
entities which results in a change in the Beneficial Ownership of shares of
Common Stock or Preferred Stock). The terms "Transfers," "Transferred" and
Transferable shall have correlative meanings.
"Trust" means the trust created pursuant to Section 7.12.
"Trustee" means any Person or entity unaffiliated with both the
Corporation and any Prohibited Owner who is designated by the Corporation to
act as trustee of the Trust, and any successor trustee appointed by the
Corporation.
7.2 Restriction on Ownership and Transfers.
(a) Except as provided in Section 7.9, from and after the date of
the Initial Public Offering and prior to the Restriction
Termination Date, no Person shall Beneficially Own shares of
any class or series of Preferred Stock in excess of the
Ownership Limit.
(b) Except as provided in Section 7.9, and subject to the
provisions of Section 7.13, from and after the date of the
Initial Public Offering and prior to the Restriction
Termination Date, any Transfer or other event that, if
effective, would result in any Person Beneficially Owning
shares of any class or series of Preferred Stock in excess of
the Ownership Limit shall be void ab initio as to the Transfer
of such shares of Preferred Stock which would be otherwise
Beneficially Owned by such Person in excess of the Ownership
Limit, and the intended transferee shall acquire no rights in
such shares of Preferred Stock.
(c) Subject to the provisions of Section 7.13, from and after the
date of the Initial Public Offering and prior to the
Restriction Termination Date, any Transfer that, if effective,
would result in the outstanding Common Stock and Preferred
Stock being Beneficially Owned by less than 100 Persons
(determined without reference to any rules of attribution)
shall be void ab initio, and the intended transferee shall
acquire no rights in such shares of Common Stock or Preferred
Stock.
(d) Notwithstanding any other provision herein, subject to the
provisions of Section 7.13, from and after the date of the
Initial Public Offering and prior to the Restriction
Termination Date, any Transfer that, if effective, would
result in the Corporation being "closely held" within the
meaning of Section 856(h) of the Code shall be void ab initio
as to the Transfer of that number of shares of Common Stock or
Preferred Stock, as the case may be, that would cause the
Corporation to be "closely held" within the meaning of Section
856(h) of the Code; and the intended transferee shall acquire
no rights in such shares of Common Stock or Preferred Stock,
as the case may be.
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<PAGE> 12
(e) Notwithstanding any other provision herein, subject to the
provisions of Section 7.13, from and after the date of the
Initial Public Offering and prior to the Restriction
Termination Date, any Transfer that, if effective, would cause
the Corporation to fail to qualify as a REIT shall be void ab
initio as to the Transfer of that number of shares of Common
Stock or Preferred Stock, as the case may be, in excess of the
number that could have been Transferred without such result;
and the intended transferee shall acquire no rights in such
shares of Common Stock or Preferred Stock, as the case may be.
(f) A Transfer of a share of Common Stock or Preferred Stock which
is null and void under paragraphs (b), (c), (d) or (e) of this
Section 7.2 shall not adversely affect the validity of the
Transfer of any other share of Common Stock or Preferred Stock
in the same or any other related transaction.
7.3 Transfer in Trust.
(a) If, notwithstanding the other provisions contained in this
Article 7, at any time from and after the date of the Initial
Public Offering and prior to the Restriction Termination Date,
there is a purported Transfer or Non-Transfer Event such that
any Person would Own Beneficially shares of any class or
series of Preferred Stock in excess of the Ownership Limit,
then (i) except as otherwise provided in Section 7.9, the
Prohibited Owner shall acquire no right or interest (or, in
the case of a Non-Transfer Event, shall cease to own any right
or interest) in such number of shares of such class or series
of Preferred Stock that would cause such Beneficial Owner to
Beneficially Own shares of such class or series of Preferred
Stock in excess of the Ownership Limit and (ii) such number of
shares of such class or series of Preferred Stock in excess of
the Ownership Limit (rounded up to the nearest whole share)
shall be designated as Excess Shares and, in accordance with
Section 7.12, be transferred automatically and by operation of
law to the Trust for the benefit of the Beneficiary. Such
transfer to a Trust and the designation of the shares as
Excess Shares shall be effective as of the close of business
on the business day prior to the date of the purported
Transfer or Non-Transfer Event, as the case may be.
(b) If, notwithstanding the other provisions contained in this
Article 7, at any time from and after the date of the Initial
Public Offering and prior to the Restriction Termination Date,
there is a purported Transfer or Non-Transfer Event that, if
effective, would cause the Corporation to become "closely
held" within the meaning of Section 856(h) of the Code or to
otherwise fail to qualify as a REIT (other than as a result of
a violation of the 100-shareholder requirement of Section
856(a)(5)), then (i) except as otherwise provided in Section
7.9, the Prohibited Owner shall acquire no right or interest
(or, in the case of a Non-Transfer Event, shall cease to own
any right or interest) in such number of shares of Preferred
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<PAGE> 13
Stock, the ownership of which by such purported
transferee or record holder would cause the Corporation to be
"closely held" within the meaning of Section 856(h) of the
Code or to otherwise fail to qualify as a REIT (other than as
a result of a violation of the 100-shareholder requirement of
Section 856(a)(5)) and (ii) such number of shares of Preferred
Stock (rounded up to the nearest whole share) shall be
designated as Excess Shares and, in accordance with the
provisions of Section 7.12, be transferred automatically and
by operation of law to the Trust for the benefit of the
Beneficiary. Such transfer to a Trust and the designation of
shares as Excess Shares shall be effective as of the close of
business on the business day prior to the date of the Transfer
or Non-Transfer Event, as the case may be.
7.4 Remedies for Breach
If the Board of Directors or a committee thereof shall at any time
determine in good faith that a Non-Transfer Event has occurred, a Transfer has
taken place in violation of Section 7.2 or that a Person intends to acquire or
has attempted to acquire or may acquire Beneficial Ownership of any shares of
Common Stock or Preferred Stock in violation of Section 7.2 (whether or not
such violation is intended), the Board of Directors shall be empowered to take
any action it deems advisable to refuse to give effect to or to prevent such
Transfer or Non-Transfer Event, including, but not limited to, refusing to give
effect to such Transfer or Non-Transfer Event on the books of the Corporation
or instituting proceedings to enjoin or rescind such Transfer or acquisition.
7.5 Notice of Restricted Transfer.
Any Person who acquires or attempts to acquire shares of Common Stock
or Preferred Stock in violation of Section 7.2, or any Person who owned shares
of Preferred Stock that were transferred to a Trust pursuant to the provisions
of Section 7.3, shall immediately give written notice to the Corporation of
such event and shall provide to the Corporation such other information as the
Corporation may request in order to determine the effect, if any, of such
Transfer or Non-Transfer Event, as the case may be, on the Corporation's status
as a REIT. Failure to give such notice shall not in any way limit the rights
and remedies of the Board of Directors provided herein.
7.6 Owners Required to Provide Information.
From and after the date of the Initial Public Offering and prior to
the Restriction Termination Date:
(a) Every Beneficial Owner of more than 1% (or such lower
percentage as required in the applicable regulations adopted
under the Code) of any class or series of Preferred Stock of
the Corporation outstanding shall, within 30 days after June
30
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<PAGE> 14
and December 31 of each year, give written notice to
the Corporation stating the name and address of such
Beneficial Owner, the number of shares of such class or series
of Preferred Stock Beneficially Owned by such Beneficial
Owner, a full description of how shares are held and a
statement identifying the actual or constructive owners of
such shares. Each such Beneficial Owner shall, upon demand by
the Corporation, disclose to the Corporation in writing such
additional information with respect to its Beneficial
Ownership of such class or series of Preferred Stock as the
Corporation, in its sole discretion, deems appropriate or
necessary, (i) to comply with the provisions of the Code
regarding the qualification of the Corporation as a REIT and
(ii) to ensure compliance with the Ownership Limit.
(b) At the request of the Corporation, any Person who is a
Beneficial Owner of Common Stock or Preferred Stock and any
Person (including the shareholder of record) who is holding
Common Stock or Preferred Stock for a Beneficial Owner, and
any proposed transferee of shares, shall provide (i) such
information as the Corporation, in its sole discretion, may
request from time to time in order (A) to determine the
Corporation's status as a REIT, (B) to ensure compliance with
the requirements of any taxing authority or other governmental
agency or (C) to ensure compliance with the Ownership Limit
and (ii) a statement or affidavit to the Corporation setting
forth the number of shares of each class or series of Common
Stock or Preferred Stock Beneficially Owned by such
shareholder or proposed transferee and any related Persons
specified, which statement or affidavit shall be in the form
prescribed by the Corporation for that purpose.
7.7 Remedies Not Limited.
Nothing contained in this Article 7 shall limit the authority of the
Board of Directors to take such other action as it deems necessary or advisable
(subject to the provisions of Section 7.13) to protect the Corporation and the
interests of its shareholders in the preservation of the Corporation's status
as a REIT, and to insure compliance with the Ownership Limit.
7.8 Ambiguity.
In the case of an ambiguity in the application of any of the
provisions of Article 7, including any definition contained in Section 7.1, the
Board of Directors shall have the power to determine the application of such
provisions with respect to any situation based on its reasonable belief,
understanding or knowledge of the circumstances.
7.9 Exceptions.
(a) The Board of Directors, upon receipt of a ruling from the
Internal Revenue Service or an opinion of tax counsel
satisfactory to it, may waive the application
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<PAGE> 15
of the Ownership Limit, in whole or in part, to any
Person, if such Person is not an individual for purpose of
Section 542(a) of the Code and is a corporation, partnership,
estate or trust; provided, however, in no event may the Board
of Directors grant any such exception if it would, in the
Board of Director's judgment, jeopardize the Corporation's
status as a REIT. In connection with any such exemption, the
Board of Directors may require such representations and
undertakings from such Person and may impose such other
conditions as the Board of Directors deems necessary, in its
sole discretion to determine the effect, if any, of the
proposed Transfer on the Corporation's status as a REIT.
(b) For a period of 90 days following the acquisition of Preferred
Stock by an underwriter that (i) is a corporation or a
partnership and (ii) participates in an offering of the
Preferred Stock, such underwriter shall not be subject to the
Ownership Limit with respect to the Preferred Stock purchased
by it as a part of such offering.
7.10 Legend.
Each certificate for Preferred Stock shall bear the following legend:
"The shares of Preferred Stock represented by this certificate
are subject to restrictions on transfer for the purpose of the
Corporation's maintenance of its status as a Real Estate
Investment Trust under the Internal Revenue Code of 1986, as
amended. No Person may (1) Beneficially Own shares of any
class or series of Preferred Stock in excess of the Ownership
Limit, except as set forth in the Corporation's Restated
Articles of Incorporation, as the same may be amended from
time to time (the "Articles of Incorporation"), or (2)
Beneficially Own shares of Preferred Stock that would result
in the Corporation being "closely held" under 856(h) of the
Code or otherwise to fail as a REIT. Any Person who attempts
to Own Beneficially shares of Preferred Stock in excess of the
applicable limitation must immediately notify the Corporation
in writing. No Person may transfer shares of Preferred Stock
if such transfer would result in the outstanding Common Stock
and Preferred Stock being Beneficially Owned by less than 100
Persons (determined without reference to any rules of
attribution). If the restrictions on transfer are violated,
the shares of Preferred Stock represented hereby will be
transferred automatically and by operation of law to a Trust
and shall be designated Excess Shares. All capitalized terms
in this legend have the meanings ascribed to such terms in the
Articles of Incorporation, a copy of which, including the
restrictions on transfer, will be sent without charge to each
stockholder who so requests."
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7.11 Severability.
If any provision of this Article 7 or any application of any such
provision is determined to be void, invalid or unenforceable by any Federal or
state court having jurisdiction over the issues, the validity and
enforceability of the remaining provisions of this Restated Articles of
Incorporation (including without limitation this Article 7) shall not be
affected and other applications of such provision shall be affected only to the
extent necessary to comply with the determination of such court.
7.12 Excess Shares.
(a) Ownership in Trust. Upon any purported Transfer, Non-Transfer
Event, Acquisition, change in the capital structure of the
Corporation or purported change in Beneficial Ownership or
event or transaction that results in shares of Preferred Stock
being designated Excess Shares pursuant to Section 7.3, such
Excess Shares shall be transferred to a Trust for the
exclusive benefit of the Beneficiary to whom an interest in
such Excess Shares may later be transferred pursuant to
Section 7.12(e). The Corporation shall name a Beneficiary
that is an organization described in Section 501(c)(3) of the
Code, that is not an "individual" within the meaning of
Section 542 of the Code, if one does not already exist, within
five (5) days after the discovery of any Transfer to the
Trust. Excess Shares so held in trust shall remain issued and
outstanding stock of the Corporation and shall be entitled to
the same rights and privileges on identical terms and
conditions as all other issued and outstanding shares of the
same class and series. When transferred to the Permitted
Transferee in accordance with the provisions of Section
7.12(e), such Excess Shares shall cease to be designated as
Excess Shares.
(b) Dividend Rights. Excess Shares shall not be entitled to any
dividends or distributions (except as provided in Paragraph
(c) of this Section 7.12). Any dividend or distribution paid
prior to the discovery by the Corporation that the shares of
Preferred Stock have been exchanged for Excess Shares shall be
repaid by the original transferee to the Corporation and by
the Corporation to the trustee, and any dividend or
distribution declared but unpaid at the time of such discovery
shall be void ab initio with respect to such Excess Shares.
(c) Rights Upon Liquidation. Except as provided below, in the
event of any voluntary or involuntary liquidation, dissolution
or winding up, or any other distribution of the assets, of the
Corporation, each holder of Excess Shares resulting from the
exchange of Preferred Stock of any specified series shall only
be entitled to receive, ratably with each other holder of
Excess Shares resulting from the exchange of shares of
Preferred Stock of such series and each holder of shares of
Preferred Stock of such series, the price paid by the original
transferee for the Excess Shares or, if no value was given,
the price per share equal to the closing
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market price on the date of the purported transfer.
The trustee of the trust shall promptly sell the shares to any
person whose ownership is not prohibited, whereupon the
interest of the trust shall terminate. Proceeds of the sale
shall be paid to the original transferee up to its purchase
price (or, if the original transferee did not purchase the
shares, the value on its date of acquisition) and any
remaining proceeds shall be paid to a charity to be named by
the Corporation.
(d) Voting Rights. The holders of Excess Shares shall not be
entitled to vote on any matters. Any vote of the shares while
the shares were held by the original transferee prior to the
Corporation's discovery thereof shall be void ab initio and
the original transferee shall be deemed to have given its
proxy to the trustee.
(e) Designation of Permitted Transferee. The Corporation shall
have the exclusive and absolute right to designate a Permitted
Transferee of any and all Excess Shares. As soon as reasonably
practicable, in an orderly fashion so as not to materially
adversely affect the Market Price of the Excess Shares, the
Corporation shall designate any Person as Permitted
Transferee; provided, however, that (i) the Permitted
Transferee so designated purchases for valuable consideration
(whether in a public or private sale) the Excess Shares and
(ii) the Permitted Transferee so designated may acquire such
Excess Shares without such acquisition resulting in a transfer
to a Trust and the redesignation of such shares of Preferred
Stock so acquired as Excess Shares under Section 7.3. Upon
the designation by the Corporation of a Permitted Transferee
in accordance with the provisions of this paragraph, the
Trustee of a Trust shall (i) cause to be transferred to the
Permitted Transferee that number of Excess Shares acquired by
the Permitted Transferee; (ii) cause to be recorded on the
books of the Corporation that the Permitted Transferee is the
holder of record of such number of shares of Preferred Stock;
and (iii) distribute to the Beneficiary any and all amounts
held with respect to the Excess Shares after making that
payment to the Prohibited Owner pursuant to Section 7.12(f).
(f) Compensation to Record Holder of Shares that Become Excess
Shares. Any Prohibited Owner shall be entitled (following
discovery of the Excess Shares and subsequent designation of
the Permitted Transferee in accordance with Section 7.12(e))
to receive from the Trustee the lesser of (i) in the case of
(a) a purported Transfer in which the Prohibited Owner gave
value for shares of Preferred Stock and which Transfer
resulted in the transfer of the shares to the Trust, the price
per share, if any, such Prohibited Owner paid for such shares,
or in the case of (b) a Non-Transfer Event or Transfer in
which the Prohibited Owner did not give value for such shares
(e.g., if the shares were received through a gift or devise)
and which Non-Transfer Event or Transfer, as the case may be,
resulted in the transfer of shares to the Trust, the price per
share equal to the Market Price on the date of such
Non-Transfer Event or Transfer, and (ii) the price per share
received by the
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Trustee of the Trust from the sale or other disposition
of such Excess Shares in accordance with Section 7.12(e). Any
amounts received by the Trustee in respect of such Excess
Shares in excess of such amounts to be paid to the Prohibited
Owner pursuant to this Section 7.12(f) shall be distributed to
the Beneficiary in accordance with the provisions of Section
7.12(e). Each Beneficiary and Prohibited Owner waives any and
all claims that they may have against the Trustee and the
Corporation arising out of the disposition of Excess Shares,
except for claims arising out of the gross negligence or
willful misconduct of, or any failure to make payments in
accordance with this Section 7.12 by, such Trustee or the
Corporation.
(g) Purchase Right in Excess Shares. Excess Shares shall be deemed
to have been offered for sale to the Corporation, or its
designee, at a price per share equal to the lesser of (i) the
price per share in the transaction that created such Excess
Shares (or, in the case of a devise or gift, the Market Price
on the date of such devise or gift) and (ii) the Market Price
on the date the Corporation, or its designee, accepts such
offer. The Corporation shall have the right to accept such
offer for a period of ninety days after the later of (i) the
date of the Transfer which resulted in such Excess Shares and
(ii) the date the Board of Directors determines in good faith
that a Transfer resulting in Excess Shares has occurred.
7.13 Settlement.
Notwithstanding any provision contained herein to the contrary,
nothing in these Restated Articles Incorporation shall preclude the settlement
of any transaction with respect to any class or series of Preferred Stock
entered into through facilities of the Nasdaq System.
AMENDMENTS
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in these Restated Articles of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
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EXHIBIT 3(b)
BYLAWS OF
FRANKLIN FINANCE CORPORATION
ARTICLE I
OFFICES
1.1 Registered Office. The registered office of the Corporation
shall be located at such place in Michigan as the Board of Directors from time
to time determines.
1.2 Other Offices. The Corporation may also have offices or
branches at such other places as the Board of Directors from time to time
determines or the business of the Corporation requires.
ARTICLE II
MEETINGS OF SHAREHOLDERS
2.1 Time and Place. All meetings of the shareholders shall be
held at such place and time as the Board of Directors determines.
2.2 Annual Meetings. An annual meeting of shareholders shall be
held on the first Tuesday of the third month of each fiscal year of the
corporation if not a legal holiday in the state in which the meeting shall be
held, and if a legal holiday, then on the next secular day following, at such
time as determined by the Board of Directors, or at such other date and time as
shall be designated from time to time by the Board of Directors and stated in
the notice of the meeting. At the annual meeting, the shareholders shall elect
directors and transact such other business as is properly brought before the
meeting and described in the notice of meeting. If the annual meeting is not
held on its designated date, the Board of Directors shall cause it to be held
as soon thereafter as convenient.
2.3 Special Meetings. Special meetings of the shareholders, for
any purpose, (a) may be called by the Corporation's chief executive officer or
the Board of Directors, and (b) shall be called by the President or Secretary
upon written request (stating the purpose for which the meeting is to be
called) of the holders of a majority of all the shares entitled to vote at the
meeting.
2.4 Notice of Meetings. Written notice of each shareholders'
meeting, stating the place, date and time of the meeting and the purposes for
which the meeting is called, shall be given (in the manner described in Section
5.1 below) not less than 10 nor more than 60 days before the date of the
meeting to each shareholder of record entitled to vote at the meeting.
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Notice of adjourned meetings is governed by Section 2.6 below.
2.5 List of Shareholders. The officer or agent who has charge
of the stock transfer books for shares of the Corporation shall make and
certify a complete list of the shareholders entitled to vote at a shareholders'
meeting or any adjournment of the meeting. The list shall be arranged
alphabetically within each class and series and shall show the address of, and
the number of shares held by, each shareholder. The list shall be produced at
the time and place of the meeting and may be inspected by any shareholder at
any time during the meeting.
2.6 Quorum; Adjournment. At all shareholders' meetings, the
shareholders present in person or represented by proxy who, as of the record
date for the meeting, were holders of shares entitled to cast a majority of the
votes at the meeting, shall constitute a quorum. Once a quorum is present at a
meeting, all shareholders present in person or represented by proxy at the
meeting may continue to do business until adjournment, notwithstanding the
withdrawal of enough shareholders to leave less than a quorum. Regardless of
whether a quorum is present, a shareholders' meeting may be adjourned to
another time and place by a vote of the shares present in person or by proxy
without notice other than announcement at the meeting; provided, that (a) only
such business may be transacted at the adjourned meeting as might have been
transacted at the original meeting and (b) if the adjournment is for more than
60 days or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting must be given to each
shareholder of record entitled to vote at the meeting.
2.7 Voting. Each shareholder shall at every meeting of the
shareholders be entitled to one vote in person or by proxy for each share
having voting power held by such shareholder and on each matter submitted to a
vote. A vote may be cast either orally or in writing. When an action, other
than the election of directors, is to be taken by vote of the shareholders, it
shall be authorized by a majority of the votes cast by the holders of shares
entitled to vote on such action. Directors shall be elected by a plurality of
the votes cast at any election.
2.8 Proxies. A shareholder entitled to vote at a meeting of
shareholders or to express consent or dissent without a meeting may authorize
other persons to act for him or her by proxy. Each proxy shall be in writing
and signed by the shareholder or the shareholder's authorized agent or
representative. A proxy is not valid after the expiration of three years after
its date unless otherwise provided in the proxy.
2.9 Questions Concerning Elections. The Board of Directors
may, in advance of the meeting, or the presiding officer may, at the meeting,
appoint one or more inspectors to act at a shareholders' meeting. If
appointed, the inspectors shall determine the number of shares outstanding and
the voting power of each, the shares represented at the meeting, the existence
of a quorum, the validity and effect of proxies, and shall receive votes,
ballots or consents, hear and determine challenges and questions arising in
connection with the right to vote, count and tabulate votes, ballots or
consents, determine the result, and do such acts as are proper to conduct the
election or vote with fairness to all shareholders.
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2.10 Telephonic Attendance. Shareholders may participate in any
shareholders' meeting by means of conference telephone or similar
communications equipment through which all persons participating in the meeting
may communicate with the other participants and all participants are advised of
the communications equipment and the names of the participants in the
conference. Participation in a meeting pursuant to this Section 2.10
constitutes presence in person at such meeting.
2.11 Action by Written Consent. To the extent permitted by the
Articles of Incorporation or applicable law, any action required or permitted
to be taken at any shareholders' meeting may be taken without a meeting, prior
notice and a vote, by written consent of shareholders.
ARTICLE III
DIRECTORS
3.1 Number and Residence. The business and affairs of the
Corporation shall be managed by or under the direction of a Board of Directors
consisting of not less than one nor more than fifteen members. The number of
Directors shall be determined from time to time by the Board of Directors.
Directors need not be Michigan residents or shareholders of the Corporation.
3.2 Election and Term. Except as provided in Section 3.5
below, Directors shall be elected at the annual shareholders' meeting. Each
Director elected shall hold office for the term for which he or she is elected
and until his or her successor is elected and qualified or until his or her
resignation or removal.
3.3 Resignation. A Director may resign by written notice to
the Corporation. A Director's resignation is effective upon its receipt by the
Corporation or a later time set forth in the notice of resignation.
3.4 Removal. One or more Directors may be removed, with or
without cause, by vote of the holders of a majority of the shares entitled to
vote at an election of Directors.
3.5 Vacancies. Vacancies, including vacancies resulting from an
increase in the number of Directors, may be filled by the Board of Directors,
by the affirmative vote of a majority of all the Directors remaining in office,
if the Directors remaining in office constitute less than a quorum, or by the
shareholders. Each Director so chosen shall hold office until the next annual
election of Directors by the shareholders and until his or her successor is
elected and qualified, or until his or her resignation or removal.
3.6 Place of Meetings. The Board of Directors may hold meetings
at any location.
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The location of annual and regular Board of Directors' meetings shall be
determined by the Board and the location of special meetings shall be
determined by the person calling the meeting.
3.7 Annual Meetings. Each newly elected Board of Directors may
meet promptly after the annual shareholders' meeting for the purposes of
electing officers and transacting such other business as may properly come
before the meeting. No notice of the annual Directors' meeting shall be
necessary to the newly elected Directors in order to legally constitute the
meeting, provided a quorum is present.
3.8 Regular Meetings. Regular meetings of the Board of
Directors or Board committees may be held without notice at such places and
times as the Board or committee determines at least 30 days before the date of
the meeting.
3.9 Special Meetings. Special meetings of the Board of
Directors may be called by the chief executive officer, and shall be called by
the President or Secretary upon the written request of two Directors, on two
days notice to each Director or committee member by mail or 24 hours notice by
any other means provided in Section 5.1. The notice must specify the place,
date and time of the special meeting, but need not specify the business to be
transacted at, nor the purpose of, the meeting. Special meetings of Board
committees may be called by the Chairperson of the committee or a majority of
committee members pursuant to this Section 3.9.
3.10 Quorum. At all meetings of the Board or a Board committee,
a majority of the Directors then in office, or of members of such committee,
constitutes a quorum for transaction of business, unless a higher number is
otherwise required by the Articles of Incorporation, these Bylaws or the Board
resolution establishing such Board committee. If a quorum is not present at
any Board or Board committee meeting, a majority of the Directors present at
the meeting may adjourn the meeting to another time and place without notice
other than announcement at the meeting. Any business may be transacted at the
adjourned meeting which might have been transacted at the original meeting,
provided a quorum is present.
3.11 Voting. The vote of a majority of the members present at
any Board or Board committee meeting at which a quorum is present constitutes
the action of the Board of Directors or of the Board committee, unless a higher
vote is otherwise required by the Michigan Business Corporation Act, the
Articles of Incorporation, these Bylaws, or the Board resolution establishing
the Board committee.
3.12 Telephonic Participation. Members of the Board of
Directors or any Board committee may participate in a Board or Board committee
meeting by means of conference telephone or similar communications equipment
through which all persons participating in the meeting can communicate with
each other. Participation in a meeting pursuant to this Section 3.12
constitutes presence in person at such meeting.
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3.13 Action by Written Consent. Any action required or permitted
to be taken under authorization voted at a Board or Board committee meeting may
be taken without a meeting if, before or after the action, all members of the
Board then in office or of the Board committee consent to the action in
writing. Such consents shall be filed with the minutes of the proceedings of
the Board or committee and shall have the same effect as a vote of the Board or
committee for all purposes.
3.14 Committees. The Board of Directors may, by resolution
passed by a majority of the entire Board, designate one or more committees,
each consisting of one or more Directors. The Board may designate one or more
Directors as alternate members of a committee, who may replace an absent or
disqualified member at a committee meeting. In the absence or disqualification
of a member of a committee, the committee members present and not disqualified
from voting, regardless of whether they constitute a quorum, may unanimously
appoint another member of the Board of Directors to act at the meeting in place
of such absent or disqualified member. Any committee, to the extent provided
in the resolution of the Board, may exercise all powers and authority of the
Board of Directors in management of the business and affairs of the
Corporation, except a committee does not have power or authority to:
(a) Amend the Articles of Incorporation.
(b) Adopt an agreement of merger or share exchange.
(c) Recommend to shareholders the sale, lease or
exchange of all or substantially all of the
Corporation's property and assets.
(d) Recommend to shareholders a dissolution of the
Corporation or a revocation of a dissolution.
(e) Amend the Bylaws of the Corporation.
(f) Fill vacancies in the Board.
(g) Unless the resolution designating the committee or a
later Board of Director's resolution expressly so
provides, declare a distribution or dividend or
authorize the issuance of shares.
Each committee and its members shall serve at the pleasure of the Board, which
may at any time change the members and powers of, or discharge, the committee.
Each committee shall keep regular minutes of its meetings and report them to
the Board of Directors when required.
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3.15 Compensation. The Board, by affirmative vote of a majority
of Directors in office and irrespective of any personal interest of any of
them, may establish reasonable compensation of Directors for services to the
Corporation as directors, officers or members of a Board committee. No such
payment shall preclude any Director from serving the Corporation in any other
capacity and receiving compensation for such service.
ARTICLE IV
OFFICERS
4.1 Officers and Agents. The Board of Directors, at its first
meeting after each annual meeting of shareholders, shall elect a President, a
Secretary and a Treasurer, and may also elect and designate as officers a
Chairperson of the Board, a Vice Chairperson of the Board and one or more
Executive Vice Presidents, Vice Presidents, Assistant Vice Presidents,
Assistant Secretaries and Assistant Treasurers. The Board of Directors may
also from time to time appoint, or delegate authority to the Corporation's
chief executive officer to appoint, such other officers and agents as it deems
advisable. Any number of offices may be held by the same person, but an
officer shall not execute, acknowledge or verify an instrument in more than one
capacity if the instrument is required by law to be executed, acknowledged or
verified by two or more officers. An officer has such authority and shall
perform such duties in the management of the Corporation as provided in these
Bylaws, or as may be determined by resolution of the Board of Directors not
inconsistent with these Bylaws, and as generally pertain to their offices,
subject to the control of the Board of Directors.
4.2 Compensation. The compensation of all officers of the
Corporation shall be fixed by the Board of Directors.
4.3 Term. Each officer of the Corporation shall hold office
for the term for which he or she is elected or appointed and until his or her
successor is elected or appointed and qualified, or until his or her
resignation or removal. The election or appointment of an officer does not, by
itself, create contract rights.
4.4 Removal. An officer elected or appointed by the Board of
Directors may be removed by the Board of Directors with or without cause. An
officer elected by the shareholders may be removed, with or without cause, only
by vote of the shareholders, but his or her authority to act as an officer may
be suspended by the Board of Directors for cause. The removal of an officer
shall be without prejudice to his or her contract rights, if any.
4.5 Resignation. An officer may resign by written notice to
the Corporation. The resignation is effective upon its receipt by the
Corporation or at a subsequent time specified in the notice of resignation.
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4.6 Vacancies. Any vacancy occurring in any office of the
Corporation shall be filled by the Board of Directors.
4.7 Chairperson of the Board. The Chairperson of the Board, if
such office is filled, shall be a Director and shall preside at all
shareholders' and Board of Directors' meetings.
4.8 Chief Executive Officer. The Chairperson of the Board, if
any, or the President, as designated by the Board, shall be the chief executive
officer of the Corporation and shall have the general powers of supervision and
management of the business and affairs of the Corporation usually vested in the
chief executive officer of a corporation and shall see that all orders and
resolutions of the Board of Directors are carried into effect. If no
designation of chief executive officer is made, or if there is no Chairperson
of the Board, the President shall be the chief executive officer. The chief
executive officer may delegate to the other officers such of his or her
authority and duties at such time and in such manner as he or she deems
advisable.
4.9 President. If the office of Chairperson of the Board is not
filled, the President shall perform the duties and execute the authority of the
Chairperson of the Board. If the Chairperson of the Board is designated by the
Board as the Corporation's chief executive officer, the President shall be the
chief operating officer of the Corporation, shall assist the Chairperson of the
Board in the supervision and management of the business and affairs of the
Corporation and, in the absence of the Chairperson of the Board, shall preside
at all shareholders' and Board of Directors' meetings. The President may
delegate to the officers other than the Chairperson of the Board, if any, such
of his or her authority and duties at such time and in such manner as he or she
deems appropriate.
4.10 Executive Vice Presidents and Vice Presidents. The
Executive Vice Presidents and Vice Presidents shall assist and act under the
direction of the Chairman of the Board and President. The Board of Directors
may designate one or more Executive Vice Presidents and may grant other Vice
Presidents titles which describe their functions or specify their order of
seniority. In the absence or disability of the President, the authority of the
President shall descend to the Executive Vice Presidents or, if there are none,
to the Vice Presidents in the order of seniority indicated by their titles or
otherwise specified by the Board. If not specified by their titles or the
Board, the authority of the President shall descend to the Executive Vice
Presidents or, if there are none, to the Vice Presidents, in the order of their
seniority in such office.
4.11 Secretary. The Secretary shall act under the direction of
the Corporation's chief executive officer and President. The Secretary shall
attend all shareholders' and Board of Directors' meetings, record minutes of
the proceedings and maintain the minutes and all documents evidencing corporate
action taken by written consent of the shareholders and Board of Directors in
the Corporation's minute book. The Secretary shall perform these duties for
Board committees when required. The Secretary shall see to it that all notices
of shareholders' meetings and special Board of Directors' meetings are duly
given in accordance with applicable law, the Articles of Incorporation and
these Bylaws. The Secretary shall have custody of the Corporation's seal and,
when authorized by the Corporation's chief executive officer, President
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or the Board of Directors, shall affix the seal to any instrument requiring it
and attest such instrument.
4.12 Treasurer. The Treasurer shall act under the direction of
the Corporation's chief executive officer and President. The Treasurer shall
have custody of the corporate funds and securities and shall keep full and
accurate accounts of the Corporation's assets, liabilities, receipts and
disbursements in books belonging to the Corporation. The Treasurer shall
deposit all moneys and other valuables in the name and to the credit of the
Corporation in such depositories as may be designated by the Board of
Directors. The Treasurer shall disburse the funds of the Corporation as may be
ordered by the Corporation's chief executive officer, the President or the
Board of Directors, taking proper vouchers for such disbursements, and shall
render to the Corporation's chief executive officer, the President and the
Board of Directors (at its regular meetings or whenever they request it) an
account of all his or her transactions as Treasurer and of the financial
condition of the Corporation. If required by the Board of Directors, the
Treasurer shall give the Corporation a bond for the faithful discharge of his
or her duties in such amount and with such surety as the Board prescribes.
4.13 Assistant Vice Presidents, Secretaries and Treasurers. The
Assistant Vice Presidents, Assistant Secretaries and Assistant Treasurers, if
any, shall act under the direction of the Corporation's chief executive
officer, the President and the officer they assist. In the order of their
seniority, the Assistant Secretaries shall, in the absence or disability of the
Secretary, perform the duties and exercise the authority of the Secretary. The
Assistant Treasurers, in the order of their seniority, shall, in the absence or
disability of the Treasurer, perform the duties and exercise the authority of
the Treasurer.
4.14 Execution of Contracts and Instruments. The Board of
Directors may designate an officer or agent with authority to execute any
contract or other instrument on the Corporation's behalf; the Board may also
ratify or confirm any such execution. If the Board authorizes, ratifies or
confirms the execution of a contract or instrument without specifying the
authorized executing officer or agent, the Corporation's chief executive
officer, the President or any Executive Vice President or Vice President may
execute the contract or instrument in the name and on behalf of the Corporation
and may affix the corporate seal to such document or instrument.
4.15 Voting of Shares and Securities of Other Corporations and
Entities. Unless the Board of Directors otherwise directs, the Corporation's
chief executive officer shall be entitled to vote or designate a proxy to vote
all shares and other securities which the Corporation owns in any other
corporation or entity.
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ARTICLE V
NOTICES AND WAIVERS OF NOTICE
5.1 Delivery of Notices. All written notices to shareholders,
Directors and Board committee members shall be given personally or by mail
(registered, certified or other first class mail, with postage pre-paid),
addressed to such person at the address designated by him or her for that
purpose or, if none is designated, at his or her last known address. Written
notices to Directors or Board committee members may also be delivered at his or
her office on the Corporation's premises, if any, or by overnight carrier,
telegram, telex, telecopy, radiogram, cablegram, facsimile, computer
transmission or similar form of communication, addressed to the address
referred to in the preceding sentence. Notices given pursuant to this Section
5.1 shall be deemed to be given when dispatched, or, if mailed, when deposited
in a post office or official depository under the exclusive care and custody of
the United States postal service. Notices given by overnight carrier shall be
deemed "dispatched" at 9:00 a.m. on the day the overnight carrier is reasonably
requested to deliver the notice. The Corporation shall have no duty to change
the written address of any Director, Board committee member or shareholder
unless the Secretary receives written notice of such address change.
5.2 Waiver of Notice. Action may be taken without a required
notice and without lapse of a prescribed period of time, if at any time before
or after the action is completed the person entitled to notice or to
participate in the action to be taken or, in the case of a shareholder, his or
her attorney-in-fact, submits a signed waiver of the requirements, or if such
requirements are waived in such other manner permitted by applicable law.
Neither the business to be transacted at, nor the purpose of, the meeting need
be specified in the written waiver of notice. Attendance at any shareholders'
meeting (in person or by proxy) will result in both of the following:
(a) Waiver of objection to lack of notice or defective notice of
the meeting, unless the shareholder at the beginning of the
meeting objects to holding the meeting or transacting
business at the meeting.
(b) Waiver of objection to consideration of a particular matter
at the meeting that is not within the purpose or purposes
described in the meeting notice, unless the shareholder
objects to considering the matter when it is presented.
A director's attendance at or participation in any Board or Board committee
meeting waives any required notice to him or her of the meeting unless he or
she, at the beginning of the meeting or upon his or her arrival, objects to the
meeting or the transacting of business at the meeting and does not thereafter
vote for or assent to any action taken at the meeting.
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<PAGE> 10
ARTICLE VI
SHARE CERTIFICATES AND SHAREHOLDERS OF RECORD
6.1 Certificates for Shares. The shares of the Corporation
shall be represented by certificates signed by the Chairperson of the Board,
Vice-chairperson of the Board, President or a Vice-president and which also may
be signed by another officer of the Corporation. The officers' signatures may
be facsimiles if the certificate is countersigned by a transfer agent or
registered by a registrar other than the Corporation or its employee. If any
officer who has signed or whose facsimile signature has been placed upon a
certificate ceases to be such officer before the certificate is issued, it may
be issued by the Corporation with the same effect as if the person were such
officer at the date of issue.
6.2 Lost or Destroyed Certificates. The Board of Directors may
direct or authorize an officer to direct that a new certificate for shares be
issued in place of any certificate alleged to have been lost or destroyed.
When authorizing such issue of a new certificate, the Board of Directors or
officer may, in its discretion and as a condition precedent to the issuance
thereof, require the owner (or the owner's legal representative) of such lost
or destroyed certificate to give the Corporation an affidavit claiming that the
certificate is lost or destroyed or a bond in such sum as it may direct as
indemnity against any claim that may be made against the Corporation with
respect to such old or new certificate.
6.3 Transfer of Shares. Shares of the Corporation are
transferable only on the Corporation's stock transfer books upon surrender to
the Corporation or its transfer agent of a certificate for the shares, duly
endorsed for transfer, and the presentation of such evidence of ownership and
validity of the transfer as the Corporation requires.
6.4 Record Date. The Board of Directors may fix, in advance, a
date as the record date for determining shareholders for any purpose, including
determining shareholders entitled to (a) notice of, and to vote at, any
shareholders' meeting or any adjournment of such meeting; (b) express consent
to, or dissent from, a proposal without a meeting; or (c) receive payment of a
share dividend or distribution or allotment of a right. The record date shall
not be more than 60 nor less than 10 days before the date of the meeting, nor
more than 10 days after the Board resolution fixing a record date for
determining shareholders entitled to express consent to, or dissent from, a
proposal without a meeting, nor more than 60 days before any other action.
If a record date is not fixed:
(a) the record date for determining the shareholders
entitled to notice of, or to vote at, a
shareholders' meeting shall be the close of business
on the day next preceding the day on which notice of
the meeting is given, or, if no notice is given, the
close of business on the day next preceding the day
on which the meeting is held; and
10
<PAGE> 11
(b) if prior action by the Board of Directors is not
required with respect to the corporate action to be
taken without a meeting, the record date for
determining shareholders entitled to express consent
to, or dissent from, a proposal without a meeting,
shall be the first date on which a signed written
consent is properly delivered to the Corporation;
and
(c) the record date for determining shareholders for any
other purpose shall be the close of business on the
day on which the resolution of the Board of
Directors relating to the action is adopted.
A determination of shareholders of record entitled to notice of, or to vote at,
a shareholders' meeting shall apply to any adjournment of the meeting, unless
the Board of Directors fixes a new record date for the adjourned meeting.
Only shareholders of record on the record date shall be entitled to
notice of, or to participate in, the action relating to the record date,
notwithstanding any transfer of shares on the Corporation's books after the
record date. This Section 6.4 shall not affect the rights of a shareholder and
the shareholder's transferor or transferee as between themselves.
6.5 Registered Shareholders. The Corporation shall be entitled
to recognize the exclusive right of a person registered on its books as the
owner of a share for all purposes, including notices, voting, consents,
dividends and distributions, and shall not be bound to recognize any other
person's equitable or other claim to interest in such share, regardless of
whether it has actual or constructive notice of such claim or interest.
ARTICLE VII
INDEMNIFICATION
The Corporation shall, to the fullest extent authorized or permitted
by the Michigan Business Corporation Act, (a) indemnify any person, and his or
her heirs, personal representatives, executors, administrators and legal
representatives, who was, is, or is threatened to be made, a party to any
threatened, pending or completed action, suit or proceeding (whether civil,
criminal, administrative or investigative) by reason of the fact that such
person is or was a director or officer of the Corporation or is or was serving
at the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
(collectively, "Covered Matters"); and (b) pay or reimburse the reasonable
expenses incurred by such person and his or her heirs, executors,
administrators and legal representatives in connection with any Covered Matters
in advance of final disposition of such Covered Matters. The Corporation may
provide such other indemnification to directors, officers, employees and agents
by insurance, contract or otherwise as is permitted by law and authorized by
the Board of Directors.
11
<PAGE> 12
ARTICLE VIII
GENERAL PROVISIONS
8.1 Checks and Funds. All checks, drafts or demands for money
and notes of the Corporation must be signed by such officer or officers or such
other person or persons as the Board of Directors from time to time designates.
All funds of the Corporation not otherwise employed shall be deposited or used
as the Board of Directors from time to time designates.
8.2 Fiscal Year. The fiscal year of the Corporation shall be
fixed by resolution of the Board of Directors.
8.3 Corporate Seal. The Board of Directors may adopt a
corporate seal for the Corporation. The corporate seal, if adopted, shall be
circular and contain the name of the Corporation and the words "Corporate Seal
Michigan". The seal may be used by causing it or a facsimile of it to be
impressed, affixed, reproduced or otherwise.
8.4 Books and Records. The Corporation shall keep within or
outside of Michigan books and records of account and minutes of the proceedings
of its shareholders, Board of Directors and Board committees, if any. The
Corporation shall keep at its registered office or at the office of its
transfer agent within or outside of Michigan records containing the names and
addresses of all shareholders, the number, class and series of shares held by
each and the dates when they respectively became recordholders of shares. Any
of such books, records or minutes may be in written form or in any other form
capable of being converted into written form within a reasonable time.
8.5 Financial Statements. The Corporation shall cause to be
made and distributed to its shareholders, within four months after the end of
each fiscal year, a financial report (including a statement of income, year-end
balance sheet, and, if prepared by the Corporation, its statement of sources
and application of funds) covering the preceding fiscal year of the
Corporation.
ARTICLE IX
AMENDMENTS
These Bylaws may be amended or repealed, or new Bylaws may be adopted,
by action of either the shareholders or a majority of the Board of Directors
then in office. The Articles of
12
<PAGE> 13
Incorporation or these Bylaws may from time to time specify particular
provisions of the Bylaws which may not be altered or repealed by the Board of
Directors.
ARTICLE X
SCOPE OF BYLAWS
These Bylaws govern the regulation and management of the affairs of
the Corporation to the extent that they are consistent with applicable law and
the Articles of Incorporation; to the extent they are not consistent,
applicable law and the Articles of Incorporation shall govern.
13
<PAGE> 1
EXHIBIT 4.1
NUMBER SHARES
- ------ ------
CUSIP
FRANKLIN FINANCE CORPORATION
INCORPORATED UNDER THE LAWS
OF THE STATE OF MICHIGAN
FULLY PAID AND NON-ASSESSABLE
[ ]% NONCUMULATIVE EXCHANGEABLE PREFERRED STOCK, SERIES A
THIS IS TO CERTIFY THAT: IS THE OWNER OF THE ABOVE STATED NUMBER
OF SHARES OF [ ]% NONCUMULATIVE EXCHANGEABLE PREFERRED STOCK, SERIES A, PAR
VALUE OF $10.00 PER SHARE, OF FRANKLIN FINANCE CORPORATION (THE "CORPORATION").
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE TRANSFERABLE ONLY ON THE STOCK
TRANSFER BOOKS OF THE CORPORATION BY THE HOLDER OF RECORD HEREOF IN PERSON, OR
BY HIS DULY AUTHORIZED ATTORNEY OR LEGAL REPRESENTATIVE, UPON THE SURRENDER OF
THIS CERTIFICATE PROPERLY ENDORSED. THIS CERTIFICATE IS NOT VALID UNTIL
COUNTERSIGNED AND REGISTERED BY THE CORPORATION'S TRANSFER AGENT AND REGISTRAR.
THIS SECURITY IS NOT A DEPOSIT OR ACCOUNT AND IS NOT FEDERALLY INSURED OR
GUARANTEED.
THE INTEREST IN SAID CORPORATION REPRESENTED BY THIS CERTIFICATE MAY
NOT BE RETIRED OR WITHDRAWN EXCEPT AS PROVIDED IN THE RESTATED ARTICLES
OF INCORPORATION AND BYLAWS OF THIS CORPORATION.
IN WITNESS WHEREOF, FRANKLIN FINANCE CORPORATION, HAS CAUSED
THIS CERTIFICATE TO BE EXECUTED BY THE FACSIMILE SIGNATURES OF ITS DULY
AUTHORIZED OFFICERS AND HAS CAUSED A FACSIMILE OF ITS CORPORATE SEAL TO
BE HEREUNTO AFFIXED.
____________________________ [SEAL] ______________________________
COUNTERSIGNED: _______________________________
TRANSFER AGENT AND REGISTRAR
BY: __________________________
AUTHORIZED SIGNATURE
<PAGE> 2
The securities represented by this Certificate (the "Preferred Stock") are
issued subject to all the provisions of the Article of Incorporation, Restated
Articles of Incorporation and Bylaws of the Corporation, as from time to time
amended or supplemented (copies of which are on file at the principal executive
offices of the Corporation) to all of which the holder, by acceptance hereof,
assents.
The Corporation's Restated Articles of Incorporation contains certain
limitations on the ownership of the Preferred Stock. The Preferred Stock may be
automatically exchanged, without the consent of the owner thereof, for identical
shares of preferred stock of Franklin Bank, N.A., (the "Bank") in the event a
conservator or receiver is appointed for the Board, the Bank fails to meet its
capital requirements or applicable Bank regulatory authorities believe such
failure is likely in the near future.
The shares of Preferred Stock represented by this certificate are subject to
restrictions on transfer for the purpose of the Corporation's maintenance of its
status as a Real Estate Investment Trust under the Internal Revenue Code of
1986, as amended. No Person may (1) Beneficially Own shares of any class or
series of preferred stock in excess of the Ownership Limit, except as set forth
in the Corporation's Restated Articles of Incorporation, as the same may be
amended from time to time (the "Articles of Incorporation"), or (2) Beneficially
Own shares of Preferred Stock that would result in the Corporation being
"closely held" under Section 856(h) of the Code or otherwise to fail as a REIT.
Any Person who attempts to Own Beneficially shares of Preferred Stock in excess
of the applicable limitation must immediately notify the Corporation in writing.
No Person may transfer shares of Preferred Stock if such transfer would result
in the outstanding Common Stock and Preferred Stock's being Beneficially Owned
by fewer than 100 Persons (determined without reference to any rules of
attribution). If the restrictions on transfer are violated, the shares of
Preferred Stock represented hereby will be transferred automatically and by
operation of law to a Trust and shall be designated Excess Shares. All
capitalized terms in this legend have the meanings ascribed to such terms in the
Articles of Incorporation, a copy of which, including the restrictions on
transfer, will be sent without charge to each stockholder who so requests.
The Preferred Stock will not be redeemable prior to ____________, 2002, except
upon the occurrence of a Tax Event (as defined in the Certificate of Designation
for the Preferred Stock). On or after such date, the Preferred Stock will be
redeemable at the option of the Corporation at $10.00 per share, plus the
quarterly accrued and unpaid dividends to the redemption date.
The Corporation will furnish to any stockholder, upon request and without
charge, a full statement of the powers, designations, preferences and special
rights of each authorized class of stock or series thereof and the
qualifications, limitations or restrictions of any such preferences and/or
rights, to the extent that the same have been fixed, and of the authority of the
Board of Directors to designate the same with respect to other series. Such
request may be made to the Secretary of the Corporation or its Transfer Agent.
The following abbreviations, when used in the inscription on the face
of this Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT Custodian
-------- -------
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of Under Uniform Gifts to Minors Act
survivorship and not as tenants
in common ----------
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For Value Received, hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
------------------------------
------------------------------
- -------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------ shares
of preferred stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- ---------------------------------------------------------------------- Attorney
to transfer the said shares on the books of the within named Corporation with
full power of substitution in the premises.
Dated
------------------------
----------------------------------------------
(Signature)
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE
WHATEVER.
<PAGE> 1
EXHIBIT 4.2
NUMBER SHARES
- ------ ------
See reverse for certain
definitions
CUSIP
FRANKLIN BANK, N.A.
SOUTHFIELD, MICHIGAN
CHARTERED UNDER THE LAWS
OF THE UNITED STATES OF AMERICA
FULLY PAID AND NON-ASSESSABLE
[ ]% NONCUMULATIVE PREFERRED STOCK, SERIES A
THIS IS TO CERTIFY THAT: IS THE OWNER OF THE ABOVE STATED NUMBER
OF SHARES OF [ ]% NONCUMULATIVE PREFERRED STOCK, SERIES A, PAR VALUE OF
$10.00 PER SHARE, OF FRANKLIN BANK, N.A. (THE "BANK"), A NATIONAL BANK CHARTERED
UNDER THE LAWS OF THE UNITED STATES OF AMERICA. THE SHARES REPRESENTED BY THIS
CERTIFICATE ARE TRANSFERABLE ONLY ON THE STOCK TRANSFER BOOKS OF THE BANK BY THE
HOLDER OF RECORD HEREOF IN PERSON, OR BY HIS DULY AUTHORIZED ATTORNEY OR LEGAL
REPRESENTATIVE, UPON THE SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED. THIS
CERTIFICATE IS NOT VALID UNTIL COUNTERSIGNED AND REGISTERED BY THE BANK'S
TRANSFER AGENT AND REGISTRAR.
THE INTEREST IN SAID BANK REPRESENTED BY THIS CERTIFICATE MAY NOT BE
RETIRED OR WITHDRAWN EXCEPT AS PROVIDED IN THE ARTICLES OF ASSOCIATION
AND BYLAWS OF THIS BANK. SUCH INTEREST IS NOT OF AN INSURABLE TYPE AND
IS NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER GOVERNMENT AGENCY.
IN WITNESS WHEREOF, FRANKLIN BANK, N.A. HAS CAUSED THIS
CERTIFICATE TO BE EXECUTED BY ITS DULY AUTHORIZED OFFICERS AND HAS
CAUSED A FACSIMILE OF ITS CORPORATE SEAL TO BE HEREUNTO AFFIXED.
___________________________ [SEAL] ___________________________________
COUNTERSIGNED: _______________________________
TRANSFER AGENT AND REGISTRAR
BY: __________________________
AUTHORIZED SIGNATURE
<PAGE> 2
The securities represented by this Certificate are issued subject to
all the provisions of the Articles of Association and Bylaws of the Bank, as
from time to time amended or supplemented (copies of which are on file at the
principal executive offices of the Bank) to all of which the holder, by
acceptance hereof, assents.
The Series A Preferred Stock will not be redeemable prior to
_____________, 2002. On or after such date, the Series A Preferred Stock will be
redeemable at the option of the Bank $10.00 per share, plus the quarterly
accrued and unpaid dividends to the redemption date.
The Bank will furnish to any stockholder, upon request and without
charge, a full statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each authorized class of
stock or series thereof and the qualifications, limitations or restrictions of
any such preferences and/or rights, to the extent that the same have been fixed,
and of the authority of the Board of Directors to designate the same with
respect to other series. Such request may be made in writing to the Secretary of
the Bank at its principal place of business.
The following abbreviations, when used in the inscription on the face
of this Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT Custodian
------- -------
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of Under Uniform Gifts to Minors Act
survivorship and not as tenants
in common -----------
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For Value Received,______________hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
------------------------------
------------------------------
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
_______________________________________________________________________________
_____________________________________________________________________ shares
of preferred stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_____________________________________________________________________ Attorney
to transfer the said shares on the books of the within named Bank with full
power of substitution in the premises.
Dated ___________________
______________________________________________
(Signature)
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
<PAGE> 1
EXHIBIT 5.1
[SILVER, FREEDMAN & TAFF LETTERHEAD]
____________, 1997
Franklin Finance Corporation
24725 West Twelve Mile Road
Suite 210
Southfield, Michigan 48034
Re: Franklin Finance Corporation - Public Offering of 2,070,000
Shares of its [ ]% Noncumulative Exchangeable Preferred Stock,
Series A (Liquidation Preference $10.00 per share)
Ladies and Gentlemen:
We are acting as special counsel for Franklin Finance Corporation, a
Michigan corporation (the "Company"), in connection with the proposed public
offering of an aggregate of 2,070,000 shares (including 270,000 shares subject
to the Underwriters' over-allotment option) of the [ ]% Noncumulative
Exchangeable Preferred Stock, Series A (Liquidation Preference $10.00 per share)
of the Company (the "Shares"). In connection with the proposed offering, the
Company has filed Registration Statement No. 333-[_____] on Form S-11 (the
"Registration Statement"), with the Securities and Exchange Commission for the
purpose of registering the Shares under the Securities Act of 1933, as amended.
As special counsel to the Company, we are familiar with the corporate
proceedings taken by the Company in connection with the authorization and sale
of the Shares and with the provisions of the proposed Underwriting Agreement
between the Company, on the one hand, and Roney & Co. and Principal Financial
Securities, Inc., on the other hand, as Lead Underwriters, in accordance with
which the sales of the Shares are to be made, in the form filed as an exhibit to
the Registration Statement (the "Underwriting Agreement").
We have examined originals, or copies certified to our satisfaction, of
such corporate records of the Company, agreements and other instruments,
certificates of public officials, certificates of officers and representatives
of the Company and other documents as we have deemed it necessary to require as
a basis for the opinions hereinafter expressed. In such examination we have
assumed (i) the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity with the originals of all documents
submitted to us as copies and the authenticity of the originals of such latter
documents and (ii) the filing with the Office of the Secretary of State of the
State of Michigan, prior to the issuance of
<PAGE> 2
Franklin Finance Corporation
________________, 1997
Page 2
the Shares, of the Amended and Restated Articles of Incorporation of the
Company and the Certificate of Designation establishing the Shares, each in the
form filed as an exhibit to the Registration Statement. As to various questions
of fact material to such opinions we have, when relevant facts were not
independently established, relied upon certifications by officers of the Company
and other appropriate persons and statements contained in the Registration
Statement.
Based upon the foregoing, and having regard to legal considerations
which we deem relevant, we are of the opinion that the Shares have been duly
authorized and, when certificates representing the Shares shall have been
executed by proper officers of the Company, authenticated by the transfer agent
and registrar for the Shares, delivered to persons entitled thereto pursuant to
the Underwriting Agreement in accordance with the terms thereof and paid for at
the price specified therein, the Shares will have been legally and validly
issued, fully paid and nonassessable.
Very truly yours,
SILVER, FREEDMAN & TAFF, L.L.P.
<PAGE> 1
EXHIBIT 5.2
[SILVER, FREEDMAN & TAFF, L.L.P. LETTERHEAD]
_____________, 1997
Franklin Bank, N.A.
24725 West Twelve Mile Road
Suite 210
Southfield, Michigan 48034
Re: Franklin Bank, N.A. - Public Offering of up to 2,070,000
Shares of its [ ]% Noncumulative Preferred Stock, Series A
(Liquidation Preference $10.00 per share)
Ladies and Gentlemen:
We are acting as special counsel for Franklin Bank, N.A., a national
bank (the "Bank"), in connection with the registration of an aggregate of up to
2,070,000 shares (including 270,000 shares subject to the Underwriters'
over-allotment option) of the [ ]% Noncumulative Preferred Stock, Series A
(Liquidation Preference $10.00 per share) of the Bank (the "Shares"). In
connection with the registration, the Bank has filed a Registration Statement on
Form S-11 (the "Form OC"), with the Office of the Comptroller of the Currency
(the "OCC") for the purpose of registering the Shares under the rules and
regulations of the OCC as set forth at Part 16 of Title 12 of the Code of
Federal Regulations.
As special counsel to the Bank, we are familiar with the corporate
proceedings taken by the Bank in connection with the authorization and
registration of the Shares.
We have examined originals, or copies certified to our satisfaction, of
such corporate records of the Bank, agreements and other instruments,
certificates of public officials, certificates of officers and representatives
of the Bank and other documents as we have deemed it necessary to require as a
basis for the opinions hereinafter expressed. In such examination we have
assumed (i) the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity with the originals of all documents
submitted to us as copies and the authenticity of the originals of such latter
documents and (ii) the filing with the OCC of a Supplemental Articles of
Association, prior to the issuance of the Shares, incorporating thereby the
Certificate of Designation establishing the Shares, each in the form filed as an
exhibit to the Form S-11. As to various questions of fact material to such
opinions we have, when relevant facts were not independently established, relied
upon certifications by officers of the Bank and other appropriate persons and
statements contained in the Form S-11.
<PAGE> 2
Franklin Bank, N.A.
___________, 1997
Page 2
Based upon the foregoing, and having regard to legal considerations
which we deem relevant, we are of the opinion that the Shares have been duly
authorized and, when certificates representing the Shares shall have been
executed by proper officers of the Bank, authenticated by the transfer agent and
registrar for the Shares and delivered to persons entitled thereto, the Shares
will have been legally and validly issued, fully paid and nonassessable.
Very truly yours,
SILVER, FREEDMAN & TAFF, L.L.P.
<PAGE> 1
EXHIBIT 8
BRUCE H. SEYBURN
BRUCE S. KAHN(1)
JAMES M. GINN
BARRY R. BESS
LAURENCE B. DEITCH
JOEL H. SERLIN
GORDON S. GOLD
MARK S. COHN
CHERYL SCOTT DUBE
HAROLD R. OSEFF
RICHARD C. BRUDER
BETH S. GOTTHELF
LESLIE STEIN
BARRY M. ROSENBAUM
TOVA G. SHABAN
NANCY S. HARRISON
ALAN M. STILLMAN
FRED B. GREEN
HENRY M. NIRENBERG, L.L.M.
CLARK G. DOUGHTY(2)
RICHARD E. BAKER
DAVID C. MAY
CAROLYN SCHWARZ TISDALE(5&6)
KATHRYN A. BUCKNER(3)
RONALD L. CORNELL, JR.(4)
MICHAEL N. SANTEUFEMIA
DAVID A. GOLDBERG
BRADLEY L. GOLDEN
ADAM D. ROSENBERG
LAW OFFICES
SEYBURN, KAHN, GINN,
BESS, DEITCH AND SERLIN
PROFESSIONAL CORPORATION
2000 TOWN CENTER, SUITE 1500
SOUTHFIELD, MICHIGAN 48075-1195
------------
TELEPHONE (810) 353-7620
FACSIMILE (810) 353-3727
October 8, 1997
OF COUNSEL
JEFFREY L. HOWARD
-------
COUNSEL
GORDON S. SMITH
DAVID J. LIEBERMAN
-----------
(1) ALSO MEMBER OF CALIFORNIA BAR
(2) ALSO MEMBER OF FLORIDA BAR
(3) ALSO MEMBER OF ILLINOIS BAR
(4) ALSO MEMBER OF NORTH CAROLINA BAR
(5) ALSO MEMBER OF CONNECTICUT BAR
(6) ALSO MEMBER OF NEW YORK BAR
WAYNE COUNTY OFFICE:
150 WEST JEFFERSON, SUITE 1510
DETROIT, MICHIGAN 48226
-------
TELEPHONE (313) 381-8671
FACSIMILE (313) 381-8675
Franklin Finance Corporation
Franklin Bank, N.A.
24725 West Twelve Mile Road
Southfield, Michigan 48034
To Franklin Finance Corporation and Franklin Bank, N.A.:
In accordance with your request, we provide this opinion on the ability of
Franklin Finance Corporation (the "Company") to qualify as a real estate
investment trust ("REIT") for federal income tax purposes.
The facts as we understand them as provided in the Prospectus of Franklin
Finance Corporation included in the Company's Registration Statement on Form
S-11, of which this opinion is a part, are as follows:
The Company is a new corporation formed after August 5, 1997 for the purpose of
acquiring, holding, and managing real estate mortgage assets. The Company has
been formed by Franklin Bank, N.A., a national bank (the "Bank"), to raise
capital for regulatory purposes. Franklin Finance Corporation is a wholly owned
subsidiary of Franklin Bank, N.A. Franklin Bank, N.A.'s common stock is widely
held.
The Company is to be financed through the issuance of preferred and common
securities. The Company will issue 1,800,000 shares of noncumulative
exchangeable preferred stock with a par value of $10 per share. Dividends on the
preferred shares are not cumulative, and if declared, are payable quarterly in
arrears. The preferred shares are not redeemable prior to the anniversary date
of the stock issuance in 2002 except on the occurrence of a Tax Event.
<PAGE> 2
LAW OFFICES
SEYBURN, KAHN, GINN,
BESS, DEITCH AND SERLIN
Franklin Finance Corporation
Franklin Bank, N.A.
October 8, 1997
Page 2
In general, a Tax Event is triggered by the Company receiving an
opinion of law that (a) the dividends paid or to be paid with
respect to the capital stock of the Company are not, or will not be,
fully deductible by the Company for United States federal income tax
purposes, or (b) the Company is, or will be, subject to more than a de
minimis amount of other taxes, duties or other governmental charges.
After the Tax Event is triggered or after the anniversary date of the
stock issuance in 2002, the preferred shares may be redeemed at the
option of Franklin Finance Corporation in whole or in part, at any
time or from time to time for cash at a redemption price of $10.00 per
share plus the accrued and unpaid dividends for the most recent
quarter to the date of redemption, if any, thereon. In addition to the
Tax Event, the preferred securities are subject to an Automatic
Exchange provision if the appropriate regulatory agency directs in
writing an exchange of the preferred shares because (i) the Bank
becomes undercapitalized under prompt corrective action regulations
established pursuant to FDICIA, (ii) the Bank is placed into
conservatorship or receivership or (iii) the appropriate regulatory
agency in its sole discretion, even if the Bank is not
"undercapitalized," anticipates the Bank becoming "undercapitalized"
in the near term.
Simultaneously with the offering of the Company's preferred securities,
the Bank will purchase shares of the Company's Common Stock for $18
Million. The Company will use the aggregate proceeds of $36 Million
from the offering of the preferred stock and the Bank's acquisition of
common stock to purchase a portfolio of mortgage loans from the Bank.
The Bank will purchase additional shares of common stock for a price
equal to the aggregate amount of underwriting discount and expenses
incurred by the Company in connection with its offering and formation.
An estimate of the underwriting discounts, offering expenses, and
formation expenses was not provided. The comparative value of the
Company's preferred stock to the common stock is expected to remain
constant subsequent to the initial offering.
Pursuant to the Company Prospectus, it is understood that the Company
contemplates ownership of property consisting of mortgage assets,
including mortgage securities. The mortgage assets of the Company will
be comprised of approximately 60% of residential mortgage loans
including approximately 40% of commercial mortgage loans. The Company
expects that subsequent to the initial acquisition of mortgage assets
that it will acquire additional assets in similar form and terms to
the original purchase. The Company may dispose of any mortgage assets
at anytime for any reason. However, the Company has not indicated an
intent to securitize its mortgage assets or otherwise participate in
the "trade or business" of selling mortgage assets. The Company may
also acquire mortgage securities representing interests in or
obligations backed by pools of mortgage loans.
<PAGE> 3
LAW OFFICES
SEYBURN, KAHN, GINN,
BESS, DEITCH AND SERLIN
Franklin Finance Corporation
Franklin Bank, N.A.
October 8, 1997
Page 3
The Company's day-to-day activities will be managed by the Bank through
a service agreement. In administering the Company's mortgage assets,
the Bank has been given a high degree of autonomy. The Company's Board
of Directors has established certain policies for the Bank including a
prohibition against the purchase of (1) a commercial mortgage loan
constituting more than 5% of the total book value of the mortgage
assets of the Company, and (2) certain loans in default.
With respect to the income expected to be realized on an annual basis,
the Company anticipates that greater than 75% of its gross income will
be generated from interest on mortgage assets. In addition, the Company
expects that at least 95% of its annual income will be derived from
interests in mortgage assets, dividends, interest, or gain or loss from
the sale or other disposition of capital assets. The Company will not
receive income from servicing loans.
The Company expects to pay dividends on its outstanding capital stock
equal to approximately 100% of its REIT taxable income (excluding
capital gains). In the event the Company has insufficient cash flow to
meet the 95% distribution requirement, as provided in the Internal
Revenue Code, it may find it necessary to arrange borrowings or to pay
dividends in the form of taxable stock dividends.
DISCUSSION:
The requirements for qualifying as a REIT for federal income tax
purposes are four-fold. First, the entity must meet certain
organizational requirements. Second, the entity must satisfy four
interrelated asset tests under IRC Section 856(c)(4). Third, the entity
must satisfy two separate income tests each year it operates under IRC
Sections 856(c)(2) and (3). Finally, the entity must meet certain
distribution requirements under IRC 857(a)(1).
A. ORGANIZATIONAL REQUIREMENTS:
For an entity to qualify as a REIT, IRC Section 856(a) and the
corresponding Regulations provide that an entity must:
1. be managed by one or more trustees or directors;
<PAGE> 4
LAW OFFICES
SEYBURN, KAHN, GINN,
BESS, DEITCH AND SERLIN
Franklin Finance Corporation
Franklin Bank, N.A.
October 8, 1997
Page 4
2. have transferrable shares or certificates relating to
the beneficial ownership;
3. be taxable as a domestic corporation if not for the
provisions of IRC Sections 856-859;
4. be neither an IRC Section 582(c)(2) financial
institution nor an insurance company;
5. be owned by 100 or more persons;
6. not be closely held;
7. elect to be taxed as a REIT; and
8. be organized as a corporation, trust, or association.
IRC Section 856(b) provides that the conditions described in items (1)
to (4) must be met during the entire taxable year whereas condition (5)
must exist during at least 335 days of a taxable year, or during a
proportionate part of a taxable year of less than 12 months. Condition
(6) must be met by the Company during the last half of the taxable
year. Conditions (7) and (8) are organization requirements for the
entity. Each of the above listed factors is discussed in detail below:
1. Management: To qualify as a REIT, the Company must be
managed by one or more trustees or directors. Reg.
Sec. 1.856-1(d)(1) defines a trustee [director] as a
person who holds legal title to the property of the
REIT. The Regulations explain that the trustee
[director] will be considered to hold legal title to
the property, for purposes of the requirement, when
the title is held in the trust's [corporation's]
name. In the present case, the Company (i.e. the
"REIT") will hold title to the mortgage assets.
The Regulations further provide that the trustee
[director] must have rights and powers that would
meet the requirements of centralized management under
IRC Section 301.7701-2. An organization has
centralized management if any person (or group of any
persons which does not include all members) has
continuing exclusive
<PAGE> 5
LAW OFFICES
SEYBURN, KAHN, GINN,
BESS, DEITCH AND SERLIN
Franklin Finance Corporation
Franklin Bank, N.A.
October 8, 1997
Page 5
authority to make the decisions necessary to conduct
the business. Reg. Sec. 301.7701-2(c)(1). In other
words, the directors must not be required to obtain
shareholder ratification for their day-to-day
business decisions.
In the present case, the Bank administers the
day-to-day activities of the Company through
servicing agreements. The Bank will be responsible
for (i) monitoring the credit quality of mortgage
assets held by the Company, and (ii) advising the
Company with respect to the acquisition, management,
financing and disposition of the Company's mortgage
assets. The Bank is allowed to subcontract its
obligations to one or more of its affiliates. In Rev.
Rul. 72-254, the IRS held that a trustee's delegation
of duties within certain parameters to an advisory
company was not a violation of the centralized
management requirement. In Rev. Rul. 72-254 the
trustees of a REIT entered into an agreement with an
advisory company to manage the trust with respect to
investments and administer the day-to-day operation
of the trust, subject to the supervision of the
trust. The advisory company was authorized to make
investments on behalf of the trust up to a specific
amount, subject to the policies and guidelines set
forth in the declaration of trust. In the instant
case, the Company Prospectus provides that the Bank
has been given a high degree of autonomy in managing
the Company's mortgage assets. The Bank's management
authority is only restricted to the purchase of (1) a
commercial mortgage loan constituting more than 5% of
the total book value of the mortgage assets of the
Company, and (2) certain loans in default.
2. Transferable Shares: To qualify as a REIT the
Company's beneficial ownership must be transferable.
The preferred stock will be listed on the NASDAQ
System and therefore will be fully transferable. The
Company's common stock held by the Bank is not
intended to be listed on the exchange. The Company's
Articles of Incorporation do contain specific
restrictions on the number of shares of preferred
stock an individual stockholder may own. This
restriction was established in order to prevent the
termination of REIT status. PLR 9627017; PLR 9621032;
PLR 8921067. In these Private Letter Rulings, an
excess share provision within the governing
instrument of a REIT, which is designed to prevent
the violation of the closely held prohibition, does
not result in the shares being deemed
nontransferable.
<PAGE> 6
LAW OFFICES
SEYBURN, KAHN, GINN,
BESS, DEITCH AND SERLIN
Franklin Finance Corporation
Franklin Bank, N.A.
October 8, 1997
Page 6
IRC Section 6110(j)(3) provides that PLR's may not be
cited as precedent. However, PLR holdings may provide
insight on how the IRS may rule in a similar
instance.
3. Corporate Status: The Company must be taxable as a
corporation notwithstanding the REIT provisions. This
determination is made under the provisions and
Regulations of Sections 7701(a)(3) and (4). Treasury
Regulation 301.7701-3(c)(v)(B) provides that, "an
eligible entity that files an election under section
856(c)(1) to be treated as a real estate investment
trust is treated as having made an election under
this section to be classified as an association."
Therefore, for purposes of the recently finalized
"check-the-box" regulations, an entity is deemed to
be taxable as a corporation upon the election to be
treated as a REIT.
4. Financial Institution/Insurance Company: The Company
must not be a financial institution or an insurance
company in order to qualify as a REIT. IRC Section
582(c) defines a financial institution to be (i) any
bank, mutual savings bank, cooperative bank, domestic
building and loan, and other savings institutions
chartered under Federal or State law (ii) any small
business investment company, and (iii) any business
development corporation. IRC Section 581 generally
defines a bank as a business in which a substantial
part of its transactions include receiving deposits
and making loans and discounts. In accordance with
the Company Prospectus, the Company is only expected
to maintain a portfolio of mortgage assets. The
Company is not expected to receive deposits, make
loans, or to discount debt obligations.
IRC Reg. Sec. 1.801-3(a) defines an insurance company
as an entity engaged in the business of issuing
insurance contracts and annuity contracts or
reinsuring risks underwritten by insurance companies.
The Company Prospectus does not provide that the
Company is contemplating entering into any other
activity outside of holding mortgage assets.
5. One Hundred Shareholders: The Company must have 100
shareholders for 335 days of a 12 month taxable year
or a proportionally smaller number of days for a
shorter year in order to qualify as a REIT. The days
are not required to be consecutive. Reg. Sec.
1.856-1(c). In addition, IRC Section 856(h)(2) waives
the 100 shareholder
<PAGE> 7
LAW OFFICES
SEYBURN, KAHN, GINN,
BESS, DEITCH AND SERLIN
Franklin Finance Corporation
Franklin Bank, N.A.
October 8, 1997
Page 7
requirement in the first year an entity elects to be
treated as a REIT. In the present case, the Company
is offering its preferred securities on the NASDAQ
market. Based on this type of offering, the Company
Prospectus provides that the Company will have more
than 100 preferred stock shareholders. The Company
should be able to rely on the fact that it meets the
100 shareholder test through ownership of the
preferred stock (the sole Common Stock holder is the
Bank). In PLR 8342016, Company A formed a subsidiary
corporation, Company B, intending to qualify it as a
REIT. Company A retained 100% of Company B's Common
Stock and sold one share of Company B's preferred
stock to each of its 125 employees. Company B was
held to meet the 100 shareholder test. The facts in
PLR 8342016 parallel the present case; the Company
will have one common stockholder and over 100
preferred stockholders.
Under certain circumstances, the Company's preferred
stock could be converted into Bank preferred stock.
The conditions which would result in the conversion
of the Company's preferred stock are not expected to
arise. However, such an event could result in the
termination of the Company's REIT status. This
opinion does not address this issue as the Company is
expected to have more than 100 shareholders as of the
offering date. In addition, this opinion does not
address the issue of an offering completed (and the
Preferred Shares issued) in a year other than 1997.
6. Closely Held Provision: The Company will not qualify
as a REIT if more than 50% of the value of its
outstanding stock is owned, directly or indirectly,
by or for not more than 5 individuals during the last
half of the year. The Company Prospectus provides
that at no time will five or fewer shareholders who
are individuals, private foundations, pension trusts
or other relevant entities in aggregate own more than
50% of the value of the stock in either the Company
or the Bank. In addition, the Company Prospectus
provides that no holder of preferred stock is
permitted to own (including attributed shares) more
than 9.9% of any issued and outstanding class or
series of preferred stock. In this manner, no more
than 9.9% of the preferred stock could be held by one
individual; thus, by definition the 50% test should
be met.
The Company's Common Stock is held 100% by the Bank.
However, for purposes of applying the 50% test, each
shareholder of Franklin Bank, N.A. counts as a
<PAGE> 8
LAW OFFICES
SEYBURN, KAHN, GINN,
BESS, DEITCH AND SERLIN
Franklin Finance Corporation
Franklin Bank, N.A.
October 8, 1997
Page 8
beneficial owner of the Company. IRC Section
544(a)(1). Franklin Bank, N.A. is widely held.
The Company Prospectus provides that the comparative
value of the Company's preferred stock to the Common
Stock is expected to remain constant subsequent to
the initial offering. Under these circumstances, the
relative value of the common stock to the preferred
stock should not affect the Company's compliance with
the closely held provision.
IRC Reg. Sec. 1.857-8 provides that a REIT is
required to keep records that will disclose the
actual ownership of its outstanding stock.
Specifically, under Reg. Sec. 1.857-8(d) and (e) the
REIT must demand written statements from the
shareholders disclosing the actual ownership of the
stock. These statements shall be demanded from
shareholders of record based on the number of
shareholders within the REIT as follows:
a. 2,000 Plus Shareholders: Each record holder
of 5% or more of its stock.
b. Less than 2,000 but more than 200
Shareholders: Each record holder of 1% or
more of its stock.
c. 200 or less Shareholders: Each record holder
of one-half of 1% or more of its stock.
The written statements must be demanded within 30
days after the close of the REIT's taxable year. Reg.
Sec. 1.857-8(e). A REIT that fails to comply with the
demand statement requirements shall be taxed as an
ordinary corporation. Reg. Sec. 1.857-8(e). In
addition, upon notice and demand for such payment, a
penalty of $25,000 (or $50,000 for intentional
disregard) may be imposed by the IRS. IRC Section
857(f).
7. Elect REIT Status: The Company must elect to be
treated as a REIT. IRC Section 859 provides that in
order for the Company to elect REIT status it must
adopt a
<PAGE> 9
LAW OFFICES
SEYBURN, KAHN, GINN,
BESS, DEITCH AND SERLIN
Franklin Finance Corporation
Franklin Bank, N.A.
October 8, 1997
Page 9
calendar year accounting period. The election to be
treated as a REIT is made by computing taxable income
as a real estate investment trust in its return for
the first taxable year for which it desires the
election to apply. It is presumed that the Company
will adopt a calendar year period and elect to be
taxed as a REIT.
8. Organized as a Corporation: Reg. Sec. 1.856-1(a)
provides in part that the term REIT means a
corporation that meets certain requirements. In the
instant case, the Company was formed as a corporation
in the State of Michigan.
B. ASSET TESTS:
The Company must satisfy certain asset tests in order to maintain its
qualification as a REIT. Pursuant to IRC Section 856(c)(4), an entity
is not considered to be a REIT unless at the close of each quarter of
the taxable year the following tests are satisfied:
1. at least 75% of the value of its total assets is
represented by real estate assets, cash and cash
items (including receivables), and Government
securities; and
2. not more than 25% of the value of its total assets is
represented by securities (other than those included
under Subparagraph 1.).
In addition, IRC Section 856(c)(4)(B) imposes the following two
sub-requirements in order to satisfy the 25% test:
1. not more than 5% of the value of the total assets of
the trust may consist of securities of any one
issuer, other than the securities included under the
75% test; and
2. not more than 10% of the outstanding voting
securities of any one issuer may be held, other than
those securities included under the 75% test.
<PAGE> 10
LAW OFFICES
SEYBURN, KAHN, GINN,
BESS, DEITCH AND SERLIN
Franklin Finance Corporation
Franklin Bank, N.A.
October 8, 1997
Page 10
A REIT must satisfy each of the four asset tests noted above at the end
of each quarter of the REIT's taxable year. IRC Section 856(c)(4)(B).
Failure to satisfy any one of the four asset tests may result in
disqualification of REIT status. However, certain mitigation provisions
within the Internal Revenue Code (Code) may prevent the
disqualification of the REIT if a violation of one of the asset tests
occurs. Under Rev. Rul. 72-83, the mitigation provisions can only be
applied once the tests have actually been met for at least one quarter.
The mitigation tests are not provided herein in that the purpose of
this letter is only to address whether or not the Company initially
qualifies as a REIT. Pursuant to the Company Prospectus, the Company
intends to maintain adequate records of the value of its assets to
ensure compliance with the asset tests, and to take the necessary
action within 30 days after the close of any quarter as may be required
to cure any noncompliance with the asset tests.
A more detailed discussion of the requirements of the 75% and 25% Asset
Tests follows.
1. 75% Asset Test: IRC Section 856(c)(4)(A) requires
that at least 75% of the value of the total assets of
the trust must be represented by one or more of
either (1) real estate assets, (2) Government
securities, and (3) cash and cash items (including
receivables). For purposes of applying the 75%
"asset" test, IRC Section 856(c)(5)(B) defines the
term "real estate assets" as follows:
". . . real property (including interests in
real property and interests in mortgages on
real property) and shares (or transferrable
certificates of beneficial interest) in
other real estate investment trusts which
meet the requirements of this part."
Several rulings make clear that the nature of the
underlying asset secured by a mortgage will determine
whether a mortgage is secured by qualified "real
estate assets." In Rev. Rul. 70-544, 1970-2 C.B. 6, a
federally insured mortgage pool that was subsequently
sold at a discount was considered to be a "real
estate asset." In Rev. Rul. 77-349, 1977-2 C.B. 2,
the IRS considered whether a mortgage pooling
arrangement where "straight pass-through" mortgage
certificates in a "pool" of residential mortgage
loans that were sold to building and loan
associations, individuals and REITs qualified as
"real estate assets." The REIT's interest was secured
by private mortgage insurance. The IRS ruled that a
REIT that owns mortgage certificates is considered as
owning "real estate assets" within IRC Section
<PAGE> 11
LAW OFFICES
SEYBURN, KAHN, GINN,
BESS, DEITCH AND SERLIN
Franklin Finance Corporation
Franklin Bank, N.A.
October 8, 1997
Page 11
856(c)(4)(A). As such, it is clear that the nature of
the underlying asset of a mortgage is determinative
of whether such mortgage is included for purposes of
determining the trust's compliance with the 75% asset
test.
If a REIT asset constitutes an interest in a mortgage
on both real and personal property, an apportionment
is necessary because only the value of the portion of
a mortgage secured by real property is included for
purposes of the 75% asset test. Reg. Sec. 1.856-3(d).
Although not specifically defined, IRC Section
856(c)(4)(A) also indicates that cash, cash items,
and Government securities are also considered for
purposes of determining a REIT's compliance with the
75% asset test.
In addition to the items identified above, IRC
Section 856(c)(5)(B) states that the term "real
estate assets" shall also include property
attributable to "temporary investment of new
capital." Section 856(c)(5)(B) provides in pertinent
part:
". . .any property (not otherwise a real
estate asset) attributable to the temporary
investment of new capital, but only if such
property is stock or a debt instrument, and
only for the one-year period beginning on
the date the real estate trust receives such
capital."
As stated above, the Company contemplates ownership
of property consisting solely of mortgage assets and
mortgage backed securities. The Company Prospectus
indicates that the Company's business objective is to
acquire, hold and manage "mortgage loans" secured by
first mortgages or deeds of trust on single family
residential or commercial real estate properties.
Further, the Company Prospectus provides that from
time to time the Company will acquire mortgage
securities that qualify as "real estate assets" under
IRC Section 856(c)(5)(B). Such mortgage securities
will consist of interests in or obligations backed by
pools of mortgage loans.
2. 25%, 5% and 10% Asset Tests: For purposes of applying
the 25% asset test, the Regulations indicate that not
more than 25% of the value of the total assets of the
<PAGE> 12
LAW OFFICES
SEYBURN, KAHN, GINN,
BESS, DEITCH AND SERLIN
Franklin Finance Corporation
Franklin Bank, N.A.
October 8, 1997
Page 12
trust may be represented by securities other than
those described in section 856(c)(4)(A) as defined
above. Thus, the 25% limitation is necessarily
satisfied by virtue of compliance with the 75% asset
requirement. However, the Reg. Sec. 1.856-2(d)(2)
indicates that the trust must meet the 5% and 10%
tests provided under IRC Section 856(c)(4)(B).
Pursuant to IRC Section 856(c)(4)(B), a trust may not
own "securities" of any one issuer in an amount
greater in value than 5% of the value of the total
assets of the trust and not more than 10% of the
outstanding voting securities of such issuer. Reg.
Sec. 1.856-3(e) provides that the term "securities"
does not include "interests in real property" or
"real estate assets". Therefore, interests in
mortgages on real property should not be considered
securities for these purposes.
The Company Prospectus indicates that the Company may
acquire from time to time solely securities which
qualify as "real estate assets" under IRC Section
856(c)(5)(B). As indicated above, securities
consisting of mortgages or interests in mortgages are
specifically excluded from the term "securities" for
purposes of the 5% and 10% asset tests.
With regard to "securities" included with the 5% and
10% limitations, the Company Prospectus specifically
restricts ownership by the Company of securities of
any one issuer which are either (a) in an amount
greater than 5% in value of the trust's asset; and
(b) equal to or greater than 10% of the outstanding
voting securities of the issuer.
3. Determination of "Value" for Purposes of Asset Tests:
The various asset tests are based on the value of the
REIT's total assets as of the close of each quarter.
A revaluation of assets is not required at the end of
any particular quarter unless during that period the
REIT acquired assets which do not meet the 75% test
(e.g. non "real estate assets" as defined under IRC
Sec. 856(c)(4)(A) above). IRC 856(c)(4). As such, the
mere fluctuation in the market value of the REIT's
assets does not, in itself, require the REIT to
revalue the assets for purposes of determining the
REIT's compliance with the asset tests. Reg. Sec.
1.856-2(d)(3).
<PAGE> 13
LAW OFFICES
SEYBURN, KAHN, GINN,
BESS, DEITCH AND SERLIN
Franklin Finance Corporation
Franklin Bank, N.A.
October 8, 1997
Page 13
For purposes of valuing the REIT's assets, securities
(other than REIT shares) for which market quotations
are readily available must be valued at market value.
Reg. Sec. 1.1856-3(a). With respect to other
securities and assets, Reg. Sec. 1.856-3(a) provides
that the trustees of the REIT are permitted to
determine the fair market value. The regulations
require that such determination by the trustee be
made in good faith. Id.
Pursuant to the Company Prospectus, the Company
intends to maintain adequate records of the value of
its assets to ensure compliance with the asset tests,
and to take the necessary action within 30 days after
the close of any quarter as may be required to cure
any noncompliance with the asset tests.
C. INCOME TESTS:
To qualify as a REIT, the corporation must meet two "income" tests each
year under IRC Section 856(c). The two tests, both of which must be
satisfied, are:
1. At least 75% of gross income (excluding income from
prohibited transactions) must be derived from the
following sources:
a. rents from real property;
b. interest on obligations secured by mortgages
on real property or on interests in
mortgages on real property;
c. gain from the sale or other disposition of
real property (including interests in real
property, interests in mortgages on real
property and gain realized on the shared
appreciation provision of a shared
appreciation mortgage) other than property
held primarily for sale to customers in the
ordinary course of a trade or business;
<PAGE> 14
LAW OFFICES
SEYBURN, KAHN, GINN,
BESS, DEITCH AND SERLIN
Franklin Finance Corporation
Franklin Bank, N.A.
October 8, 1997
Page 14
d. dividends or other distributions on, and
gain (other than gain from prohibited
transactions) from the sale or other
disposition of, transferable shares (or
certificates of beneficial interest) in
other qualifying REITs;
e. abatements and refunds of taxes on real
property;
f. income and gain from foreclosure property;
g. amounts (other than amounts determined by
the income or profits of another person)
received or accrued as consideration for
entering into commitments to make mortgage
loans or to purchase or lease real property
(including interests in real property and
interests in mortgages on real property);
h. gain received from the sale or other
disposition of a real estate asset which is
not a prohibited transaction solely by
reason of section 857(b)(6); and
i. qualified temporary investment income;
2. At least 95% of gross income (excluding gross income
from prohibited transactions) must be derived from
the following sources:
a. sources that satisfy the 75% income test;
b. dividends;
c. interest;
d. capital gains on the sale or other
disposition of stocks or securities; and
<PAGE> 15
LAW OFFICES
SEYBURN, KAHN, GINN,
BESS, DEITCH AND SERLIN
Franklin Finance Corporation
Franklin Bank, N.A.
October 8, 1997
Page 15
e. certain income and gain realized under
various financial instruments used to reduce
the interest rate fluctuation on real estate
related indebtedness or the sale of the
same. IRC Section 856(c)(5)(G).
A REIT must satisfy the income tests on an annual basis. IRC Sec.
856(c). The income tests are based on gross income. However, the 75%
and 95% income tests apply to gross income other than gross income from
prohibited transactions (discussed below). IRC Sec. 856(c)(2) and
(c)(3).
If a REIT fails to satisfy either the 75% or 95% income tests in any
year, and such failure is disclosed and is due to "reasonable cause"
and not willful neglect, the REIT will not lose its status as such, but
instead the REIT will be subject to 100% tax on its taxable income
attributable to the amount by which it failed to comply with such
tests. IRC Secs. 856(c)(6) and 857(b)(5). If a REIT violates either or
both 75% or 95% income tests other than for reasonable cause, the REIT
will be disqualified and taxable as a regular corporation for the
taxable year and the four succeeding years. IRC Sec. 856(g)(1), (3),
and (4).
The following discussion is intended to further define and explain the
75% and 95% tests:
1. 75% and 95% Income Tests
a. Qualified Sources of Income:
(i) Interest: Interest is qualified
income for purposes of both the 75%
and 95% income test. IRC Sec.
856(c)(2)(B). For interest to
qualify as "interest on obligations
secured by mortgages on real
property or on interests in real
property" for purposes of the 75%
test, the obligation must be
secured by real property having a
fair market value at the time of
acquisition at least equal to the
principal amount of the loan. Reg.
Sec. 1.856-5(c). The term
"interest"
<PAGE> 16
LAW OFFICES
SEYBURN, KAHN, GINN,
BESS, DEITCH AND SERLIN
Franklin Finance Corporation
Franklin Bank, N.A.
October 8, 1997
Page 16
includes only an amount that
constitutes compensation for the
use or forbearance of money. Reg.
Sec. 1.856-5(a); Rev. Rul. 76-413,
1976-2 C.B. 213. For purposes of
both the 75% and 95% income tests,
income that a REIT derives from
mortgages it originates and holds
as investments is "interest on
obligations secured by mortgages"
within the meaning of IRC Sec.
856(c)(3)(B). Rev. Rul. 65-67.
1965-1 C.B. 269. In the present
case, the Company's primary source
of income is from interest on its
mortgage assets. No projections or
facts were made available that
provided the specific amount of
income that the Company would
recognize from the mortgage assets.
(ii) Interest from Hypothecation Loans:
Interest received on a
hypothecation loan is qualifying
interest for purposes of the 75%
income test as long as the security
for such loan consists of a first
mortgage which is secured by real
property. Rev. Rul. 80-280, 1980-2
C.B. 207. In the present case, the
Company Prospectus indicates that
the Company's business objective is
to acquire, hold and manage
"mortgage assets" which are secured
by first mortgages or deeds of
trust on single
<PAGE> 17
LAW OFFICES
SEYBURN, KAHN, GINN,
BESS, DEITCH AND SERLIN
Franklin Finance Corporation
Franklin Bank, N.A.
October 8, 1997
Page 17
family residential or commercial
real estate properties.
(iii) Loans Purchased at Market Discount:
Income from loans secured by
mortgages on real property
purchased for an amount less than
the face amount of the loan
("market discount") qualify for
purposes of the 75% and 95% income
tests. The difference between the
face amount and the purchase price
of the loan is treated as a gain
from the "disposition" of interests
in mortgages on real property as
provided in IRC Secs. 1276 through
1278. As such, income related to
the disposition of mortgage assets
will be qualified income for
purposes of the 75% and 95% income
tests provided that the mortgage
assets are not property held in the
ordinary course of the taxpayer's
trade or business and such notes
are secured by real property. PLR
8202005. In the present case, the
Company is expected to purchase $36
Million of mortgage assets from the
Bank. This acquisition of debt may
produce market discount providing
that the amount paid is less than
the face value of such debt.
(iv) Penalties and Prepayments on Loans:
A REIT can provide for penalties on
<PAGE> 18
LAW OFFICES
SEYBURN, KAHN, GINN,
BESS, DEITCH AND SERLIN
Franklin Finance Corporation
Franklin Bank, N.A.
October 8, 1997
Page 18
the prepayment of all or a portion
of a loan balance, loan assumption
fees and late payment charges. The
IRS has ruled, in a non-REIT
context, that penalties received on
prepayments of loans constitute
interest. Rev. Rul 57-198, 1957-1
C.B. 94; Rev. Rul. 73-141, 1973-1
C.B. 331. The IRS has issued
favorable Private Letter Rulings to
REITs in this regard. PLR 8640018;
PLR 8545039. In the instant case,
the Company may receive income from
prepayment penalties on the
mortgage assets it will hold.
(v) Interest on Loans Secured by
Personal Property: Interest
received from loans secured by
personal property is excluded for
purposes of the 75% income test.
Reg. Sec. 1.856-5(c). Interest from
mortgages secured by both real and
personal property must be
apportioned for purposes of
satisfying the 75% and 95% income
tests. Id. In the case of a
construction loan, the portion of
interest related to a mortgage
secured by personal property must
also be apportioned. Reg. Sec.
1.856-5(c)(2).
b. Other Income: In addition to the types of
income discussed above, two other kinds of
income qualify for either the 75% or 95%
income tests including:
<PAGE> 19
LAW OFFICES
SEYBURN, KAHN, GINN,
BESS, DEITCH AND SERLIN
Franklin Finance Corporation
Franklin Bank, N.A.
October 8, 1997
Page 19
(i) Deed In Lieu of Foreclosure: If a
REIT acquires property through a
deed in lieu of foreclosure and the
fair market value of property
exceeds the REIT's basis in the
mortgage note, the REIT realizes
gain in the amount of the excess.
Rev. Rul. 80-56, 1980-1 C.B. 154.
Similarly, if the REIT purchases
property at a foreclosure sale for
less than its fair market value and
if the REIT's basis in its mortgage
note is also less than the
property's fair market value, the
REIT realizes ordinary income to
the extent that the property's fair
market value exceeds the purchase
price. Rev. Rul. 80-57, 1980-1 C.B.
157. In both cases, the gain is
qualified income for purposes of
the 75% and 95% tests.
(ii) Commitment Fees: Commitment fees
are qualifying income for purposes
of the 75% and 95% income tests.
The Company Prospectus does not
contemplate that the Company will
receive commitment fees.
2. Prohibited Transactions: a "prohibited transaction"
is any sale of dealer property that is not
foreclosure property. IRC Sec. 857(b)(6); See also,
IRS Sec. 1221(1). Transactions which constitute
"prohibited transactions" do not necessarily
terminate REIT status. However, income from
"prohibited transactions" will not qualify for either
the 75% or 95% income tests.
a. Sale or disposition in the Ordinary Course
of Taxpayer's Trade or Business: Real estate
loans that are originated or acquired by a
REIT for the purpose of being packaged for
sale may constitute "prohibited
transactions". In Rev. Rul. 74-554, 1974-2
C.B. 199, a REIT that sold several mortgages
to two
<PAGE> 20
LAW OFFICES
SEYBURN, KAHN, GINN,
BESS, DEITCH AND SERLIN
Franklin Finance Corporation
Franklin Bank, N.A.
October 8, 1997
Page 20
unrelated mortgage brokers in two separate
transactions within one taxable year as part
of a single plan to reduce the REIT's long
term investments was deemed to have held the
mortgages primarily for sale to customers in
the ordinary course of its trade or
business.
b. Sale of Mortgage in an Isolated Transaction:
In Rev. Rul. 76-356, 1976-2 C.B. 213, a REIT
that sold mortgage loans in a single,
isolated transaction to balance its loan
portfolio was deemed not to have held the
mortgages primarily for sale to customers in
the ordinary course of its business.
Accordingly, such sales qualified for the
75% income test. Id.
c. Sale of Mortgage to Protect Investment: In
Rev. Rul. 76-327, 1976-2 C.B. 212, a REIT,
which financed construction of a townhouse
development, subsequently made mortgage
loans to purchasers after the developer
could not arrange financing and then sold
the mortgage loans to investors at no profit
or premium in order to protect its
investment. The Service ruled that the REIT
in this instance was not a dealer.
d. Foreclosure Property: "Foreclosure property"
is property that a REIT acquires through
foreclosure. When a REIT earns income from
involuntarily acquired foreclosure property,
it runs the risk of receiving "trade or
business" income that could cause it to fail
the income tests and possibly forfeit its
REIT status. However the REIT may make an
election that allows for a grace period
following the acquisition of property by
foreclosure that provides time to convert
potentially disqualifying income into
qualifying income without consequence to
REIT status. IRC Sec. 856(e)(5). During this
grace period, income from foreclosure
property is taxed at the REIT level at the
maximum corporate income tax rate. IRC Sec.
857(b)(4).
Although the Company's business strategy may
not intend for the trust to engage in rental
real estate activities, it may nevertheless
become the lessor of real property upon a
mortgage default. Due to the limitations
imposed under the Code on the activities of
a REIT in connection with rental real
<PAGE> 21
LAW OFFICES
SEYBURN, KAHN, GINN,
BESS, DEITCH AND SERLIN
Franklin Finance Corporation
Franklin Bank, N.A.
October 8, 1997
Page 21
estate, ownership of real estate upon
foreclosure may create nonqualifying income
issues.
e. Safe Harbor Provisions: IRC Section
857(b)(6)(C) identifies certain safe harbor
provisions which permits a REIT to avoid
entering into prohibited transactions.
Pursuant to these safe harbor rules, a sale
of property which is a "real estate asset"
(including interests in mortgages secured by
real property as defined above), does not
constitute a "prohibited transaction" if:
(i) the trust has held the property for
not less than four years;
(ii) aggregate expenditures made by the
trust, or any partner of the trust
during the four years prior to the
date of sale which are included in
the basis of the property do not
exceed 30% of the net selling price
of the property;
(iii) (I) during the taxable year the
trust does not make more than 7
sales of property (other than
foreclosure or involuntary
conversion [IRC Section 1033]
property) or (II) the aggregate
adjusted basis of property (other
than foreclosure or involuntary
conversion [IRC Section 1033]
property) sold during the year does
not exceed 10% of the aggregate
basis of all of the assets of the
trust as of the beginning of the
year;
(iv) in the case of property, which
consists of land or improvements,
not acquired through foreclosure
(or deed in lieu of foreclosure) or
lease termination, the trust has
held the property for not less than
four years for production of rental
income; and
(v) if the requirement of clause (iii)
(I) is not satisfied, substantially
all of the marketing and
development expenditures with
respect to the property were made
through an independent contractor .
. . from whom the trust itself does
not derive or receive any income.
<PAGE> 22
LAW OFFICES
SEYBURN, KAHN, GINN,
BESS, DEITCH AND SERLIN
Franklin Finance Corporation
Franklin Bank, N.A.
October 8, 1997
Page 22
D. DISTRIBUTION REQUIREMENTS
To qualify as a REIT, the Company must satisfy certain distribution
requirements set forth in IRC Sec. 857(a)(1). Pursuant to Section
857(a)(1), the REIT must distribute an amount equal to the following:
1. The sum of:
a. 95% of the REIT's taxable income computed
without regard to distributions and
excluding net capital gain, and
b. 95% of the excess of net income from
foreclosure property over the tax on such
income, minus
2. any excess "noncash income" as determined under IRC
Sec. 857(e).
As a general rule, only dividends actually paid during a taxable year
are taken into account for purposes of satisfying the distribution
requirements. IRC Sec. 858(a) provides certain statutory exceptions
which treat dividends paid in one year as paid in the prior year for
purposes of the distribution requirements and for purposes of
calculating REIT taxable income.
For the purposes of the distribution requirements, the term "real
estate investment trust taxable income" ("REITTI") is defined as
taxable income computed according to the normal corporate rules with
specific adjustments as set forth in IRC Sec. 857(b)(2)(A) through (F).
The Company Prospectus contemplates a plan to distribute an aggregate
amount of dividends with respect to the Company's outstanding shares of
capital stock equal to 100% of the Company's REITTI excluding capital
gains.
CONCLUSION:
The Requirements for qualifying as a REIT for federal income tax
purposes are four-fold. These requirements encompass organization,
asset, income and distribution tests. We believe that these tests will
be met based on the following:
<PAGE> 23
LAW OFFICES
SEYBURN, KAHN, GINN,
BESS, DEITCH AND SERLIN
Franklin Finance Corporation
Franklin Bank, N.A.
October 8, 1997
Page 23
A. ORGANIZATIONAL REQUIREMENTS:
The Company will, based upon the facts provided herein, qualify as a
REIT under the organizational provisions of IRC Section 856(a). This
conclusion is based upon the Company:
1. retaining centralized management through its board of
directors by maintaining sufficient control over the
Bank as its advisor;
2. maintaining the free transferability of the preferred
stock and common stock;
3. retaining a taxable corporate status notwithstanding
the REIT provisions pursuant to the check-the-box
entity classification regulations;
4. not being deemed a financial institution as long as
it does not receive deposits, make loans, or discount
debt obligations and not being deemed an insurance
company as long as it does not issue insurance or
annuity contracts or reinsure risks of insurance
companies;
5. continuing to have more than 100 preferred
shareholders through its public offering and the IRS
remains consistent with its holding in PLR 8342016
that each class of stock need not have 100
shareholders;
6. insuring that it will never allow more than 50% of
the value of its outstanding stock to be owned,
directly or indirectly by or for not more than 5
individuals during the last half of the year;
7. electing to be treated as a REIT; and
8. organizing as a corporation.
B. ASSET TEST:
The Company will qualify as a REIT under the asset test of IRC Section
856(c)(4). This conclusion is based upon the Company:
<PAGE> 24
LAW OFFICES
SEYBURN, KAHN, GINN,
BESS, DEITCH AND SERLIN
Franklin Finance Corporation
Franklin Bank, N.A.
October 8, 1997
Page 24
1. maintaining an asset base which includes at least 75%
of property which consists solely of mortgage assets,
mortgage securities or other property which quali-
fies as "real estate assets" for purpose of IRC
Sec. 856(c)(4)(A) or (c)(5)(B); and
2. not owning "securities" of any one issuer in an
amount greater in value than 5% of the value of the
total assets of the trust and not owning more than
10% of the outstanding voting securities of such
issuer.
C. INCOME TEST:
The income test under IRC Section 856(c) will be met by the Company as
long as it:
1. continues to derive at least 75% of its gross income
(excluding income from prohibited transactions) from
mortgage assets and mortgage securities; and
2. continues to derive at least 95% of its gross income
(excluding income from prohibited transactions) from
sources that satisfy 75% income test; dividends;
interest; and capital gains on the sale or other
disposition of stocks or securities;
<PAGE> 25
LAW OFFICES
SEYBURN, KAHN, GINN,
BESS, DEITCH AND SERLIN
Franklin Finance Corporation
Franklin Bank, N.A.
October 8, 1997
Page 25
D. DISTRIBUTION TEST:
The distribution test under IRC Section 857(a)(1) will be met by the
Company as long as it distributes an aggregate amount of dividends with
respect to the Company's outstanding shares of capital stock equal to
(i) 95% of the Company's REITTI excluding capital gains, (ii) 95% of
the excess income from foreclosure property over the tax imposed on
such income, minus (iii) any excess noncash income.
The conclusions in this letter are based upon a review of the facts as
of the date of this letter and upon pertinent statutory, legislative
and other relevant tax authority as of such date. To confirm these
conclusions with respect to the actual transaction it will be necessary
to review the final transaction documents, other factual data as may be
relevant and the tax authority as of the date of implementation. It
must be emphasized that all tax authority is subject to modification at
any time by legislation, judicial and/or administrative action. Any
such change in law could be applied retroactively. Further, it is
possible that the Internal Revenue Service may disagree with these
conclusions and argue for a different, more adverse result.
We consent to the inclusion of this opinion as an exhibit to this
Registration Statement on Form S-11 and to the reference of our firm
under the heading "Certain Legal Matters" in the Prospectus
included in this Form S-11. In giving this consent, we do not admit
that we are within the category of persons whose consent is required
under Section 7 of the Securities Act of 1933, as amended, or the
rules and regulations of the Securities and Exchange Commission
thereunder.
Very truly yours,
SEYBURN, KAHN, GINN, BESS,
DEITCH AND SERLIN, P.C.
<PAGE> 1
EXHIBIT 10.1
- --------------------------------------------------------------------------------
MORTGAGE LOAN PURCHASE AND WARRANTIES AGREEMENT
FRANKLIN FINANCE CORPORATION
PURCHASER
FRANKLIN BANK, N.A.
SELLER
DATED AS OF [__________], 1997
CONVENTIONAL RESIDENTIAL MORTGAGE LOANS
- --------------------------------------------------------------------------------
<PAGE> 2
<TABLE>
TABLE OF CONTENTS
<S> <C>
Page
SECTION 1. DEFINITIONS1
SECTION 2. AGREEMENT TO PURCHASE9
[SECTION 3. RESERVED.]10
SECTION 4. PURCHASE PRICE10
SECTION 5. EXAMINATION OF MORTGAGE FILES 10
SECTION 6. CONVEYANCE FROM SELLER TO PURCHASER 11
Subsection 6.01. Conveyance of Mortgage Loans; Possession of Servicing Files 11
Subsection 6.02. Books and Records11
Subsection 6.03. Delivery of Mortgage Loan Documents 11
SECTION 7. SERVICING OF THE MORTGAGE LOANS12
SECTION 8. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE SELLER; REMEDIES FOR BREACH 13
Subsection 8.01. Representations and Warranties Regarding the Seller 13
Subsection 8.02. Representations and Warranties Regarding Individual Mortgage Loans 15
Subsection 8.03. Remedies for Breach of Representations and Warranties 27
SECTION 9. CLOSING 29
SECTION 10. CLOSING DOCUMENTS 30
SECTION 11. COSTS 31
SECTION 12. MERGER OR CONSOLIDATION OF THE SELLER 31
SECTION 13. MANDATORY DELIVERY; GRANT OF SECURITY INTEREST 31
SECTION 14. NOTICES 32
SECTION 15. SEVERABILITY CLAUSE 32
SECTION 16. COUNTERPARTS 33
</TABLE>
ii
<PAGE> 3
<TABLE>
<S> <C>
SECTION 17. GOVERNING LAW 33
SECTION 18. INTENTION OF THE PARTIES 33
SECTION 19. SUCCESSORS AND ASSIGNS; ASSIGNMENT OF PURCHASE AGREEMENT 33
SECTION 20. WAIVERS 34
SECTION 21. EXHIBITS 34
SECTION 22. GENERAL INTERPRETIVE PRINCIPLES 34
SECTION 23. REPRODUCTION OF DOCUMENTS 35
SECTION 24. FURTHER AGREEMENTS 35
SECTION 25. RECORDATION OF ASSIGNMENTS OF MORTGAGE 35
</TABLE>
EXHIBITS
EXHIBIT A CONTENTS OF EACH MORTGAGE FILE
EXHIBIT B FORM OF SERVICING AGREEMENT
EXHIBIT C FORM OF SELLER'S/SERVICER'S OFFICER'S CERTIFICATE
EXHIBIT D FORM OF OPINION OF COUNSEL TO THE SELLER/SERVICER
EXHIBIT E FORM OF SECURITY RELEASE CERTIFICATION
EXHIBIT F FORM OF SECURITY RELEASE CERTIFICATION
EXHIBIT G FORM OF ASSIGNMENT AND ASSUMPTION AGREEMENT
EXHIBIT H MORTGAGE LOAN SCHEDULE
EXHIBIT I THE UNDERWRITING GUIDELINES OF FRANKLIN BANK, N.A.
iii
<PAGE> 4
MORTGAGE LOAN PURCHASE AND WARRANTIES AGREEMENT
This MORTGAGE LOAN PURCHASE AND WARRANTIES AGREEMENT (the "Agreement"),
dated as of [__________,] 1997, by and between Franklin Finance Corporation, a
Michigan corporation, having an office at 24725 West Twelve Mile Road,
Southfield, Michigan 48034 (the "Purchaser") and Franklin Bank, N.A., a
national bank, having an office at 24725 West Twelve Mile Road, Southfield,
Michigan 48034 (the "Seller").
W I T N E S S E T H:
WHEREAS, the Seller desires to sell to the Purchaser, and the Purchaser
desires to purchase from the Seller, certain conventional residential first
mortgage loans (the "Mortgage Loans") on a servicing retained basis as
described herein, and which shall be delivered as whole loans on the Closing
Date, as defined below;
WHEREAS, each Mortgage Loan is secured by a mortgage, deed of trust or
other security instrument creating a first lien on a residential dwelling
located in the jurisdiction indicated on the Mortgage Loan Schedule; and
WHEREAS, the Purchaser and the Seller wish to prescribe the manner of the
conveyance, servicing and control of the Mortgage Loans.
NOW, THEREFORE, in consideration of the promises and mutual agreements set
forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Purchaser and the Seller
agree as follows:
SECTION 1. DEFINITIONS.
For purposes of this Agreement the following capitalized terms shall have
the respective meanings set forth below. Other capitalized terms used in this
Agreement and not defined herein shall have the respective meanings set forth
in the Servicing Agreement attached as Exhibit B hereto.
"Accepted Servicing Practices" means, with respect to any Mortgage Loan,
those mortgage servicing practices of prudent mortgage lending institutions
which service mortgage loans of the same type as such Mortgage Loan in the
jurisdiction where the related Mortgaged Property is located.
"Act" means The National Housing Act, as amended from time to time.
"Adjustable Rate Mortgage Loan" means any individual Mortgage Loan
purchased pursuant to this Agreement the interest rate of which adjusts
periodically.
"Affiliate" means, with respect to any specified Person, any other Person
controlling or controlled by or under common control with such specified
Person. For the purposes of this
<PAGE> 5
definition, "control" when used with respect to any specified Person means
the power to direct the management and policies of such Person, directly or
indirectly, whether through the ownership of voting securities, by contract or
otherwise and the terms "controlling" and "controlled" have meanings correlative
to the foregoing.
"Agreement" means this Mortgage Loan Purchase and Warranties Agreement and
all amendments hereof and supplements hereto.
"ALTA" means The American Land Title Association or any successor thereto.
"Ancillary Income" means all late charges, escrow account benefits,
reinstatement fees, and similar types of fees arising from or in connection
with any Mortgage, to the extent not otherwise payable to the Mortgagor under
applicable law or pursuant to the terms of the related Mortgage Note.
"Appraised Value" means the value set forth in an appraisal made in
connection with the origination of the related Mortgage Loan as the value of
the Mortgaged Property.
"Assignment and Assumption Agreement" has the meaning set forth in Section
19.
"Assignment of Mortgage" means an assignment of the Mortgage delivered in
blank, notice of transfer or equivalent instrument in recordable form,
sufficient under the laws of the jurisdiction wherein the related Mortgaged
Property is located to reflect the sale of the Mortgage to the Purchaser.
"Business Day" means any day other than (i) a Saturday or Sunday, or (ii)
a day on which banking and savings and loan institutions, in the State of
Michigan are authorized or obligated by law or executive order to be closed.
"Closing Date" means [_________], 1997, or such other date as is mutually
agreed upon by the parties.
"Code" means Internal Revenue Code of 1986, as amended.
"Condemnation Proceeds" means all awards or settlements in respect of a
Mortgaged Property, whether permanent or temporary, partial or entire, by
exercise of the power of eminent domain or condemnation, to the extent not
required to be released to a Mortgagor in accordance with the terms of the
related Mortgage Loan Documents.
"Conventional Loan" means a conventional residential first lien mortgage
loan which is a Mortgage Loan.
"Convertible Mortgage Loan" means any individual Mortgage Loan purchased
pursuant to this Agreement which contains a provision whereby the Mortgagor is
permitted to convert the
2
<PAGE> 6
Mortgage Loan to a fixed rate Mortgage Loan in accordance with the terms of
the related Mortgage Note.
"Custodial Account" means the separate trust account created and
maintained
pursuant to Section 2.04 of the Servicing Agreement.
"Cut-off Date" means [__________], 1997.
"Deleted Mortgage Loan" means a Mortgage Loan that is repurchased or
replaced with a Qualified Substitute Mortgage Loan by the Seller in accordance
with the terms of this Agreement.
"Determination Date" means the earlier of two (2) Business Days prior to
the related Remittance Date or the 15th day of the month in which the related
Remittance Date occurs.
"Due Date" means the day of the month on which the Monthly Payment is due
on a Mortgage Loan, exclusive of any days of grace.
"Escrow Account" means the separate account created and maintained
pursuant to Section 2.06 of the Servicing Agreement with respect to each
Mortgage Loan, as specified in the Servicing Agreement.
"Escrow Payments" means, with respect to any Mortgage Loan, the amounts
constituting taxes, assessments, water rates, sewer rents, municipal charges,
mortgage insurance premiums, fire and hazard insurance premiums, condominium
charges, and any other payments required to be escrowed by the Mortgagor with
the mortgagee pursuant to the Mortgage or any other document.
"FHA" means the Federal Housing Administration, an agency within the
United States Department of Housing and Urban Development, or any successor
thereto and including the Federal Housing Commissioner and the Secretary of
Housing and Urban Development where appropriate under the FHA Regulations.
"FHLMC" means the Federal Home Loan Mortgage Corporation, or any successor
thereto.
"FNMA" means the Fannie Mae, or any successor thereto.
"Gross Margin" means, with respect to each Adjustable Rate Mortgage Loan,
the fixed percentage amount set forth in the related Mortgage Note which amount
is added to the Index in accordance with the terms of the related Mortgage Note
to determine on each Interest Rate Adjustment Date the Mortgage Interest Rate
for such Mortgage Loan.
"HUD" means the Department of Housing and Urban Development, or any
federal agency or official thereof which may from time to time succeed to the
functions thereof with regard to FHA mortgage insurance. The term "HUD," for
purposes of this Agreement, is also deemed to include subdivisions thereof such
as the FHA and Government National Mortgage Association.
3
<PAGE> 7
"Index" means, with respect to each Interest Rate Adjustment Date of any
Adjustable Rate Mortgage Loan sold pursuant to this Agreement, the weekly
average yield on United States Treasury securities adjusted to a constant
maturity of one year, as made available by the Federal Reserve Board.
"Insurance Proceeds" means, with respect to each Mortgage Loan, proceeds
of insurance policies insuring the Mortgage Loan or the related Mortgaged
Property.
"Interest Rate Adjustment Date" means, with respect to each Adjustable
Rate Mortgage Loan, the date, specified in the related Mortgage Note and the
Mortgage Loan Schedule, on which the Mortgage Interest Rate is adjusted.
"Lifetime Rate Cap" means the provision of each Mortgage Note related to
an Adjustable Rate Mortgage Loan which provides for an absolute maximum
Mortgage Interest Rate thereunder. The Mortgage Interest Rate during the terms
of each Adjustable Rate Mortgage Loan shall not at any time exceed the amount
per annum set forth on Exhibit H hereto.
"Liquidation Proceeds" means cash received in connection with the
liquidation of a defaulted Mortgage Loan, whether through the sale or
assignment of such Mortgage Loan, trustee's sale, foreclosure sale or
otherwise, or the sale of the related Mortgaged Property if the Mortgaged
Property is acquired in satisfaction of the Mortgage Loan.
"Loan-to-Value Ratio" or "LTV" means, with respect to any Mortgage Loan,
the ratio (expressed as a percentage) of the original principal amount of the
Mortgage Loan to the lesser of (a) the Appraised Value of the Mortgaged
Property at origination and (b) if the Mortgage Loan was made to finance the
acquisition of the related Mortgaged Property, the purchase price of the
Mortgaged Property.
"Monthly Payment" means the scheduled monthly payment of principal and
interest on a Mortgage Loan.
"Mortgage" means the mortgage, deed of trust or other instrument securing
a Mortgage Note, which creates a first lien on an unsubordinated estate in fee
simple in real property securing the Mortgage Note.
"Mortgage File" means the items pertaining to a particular Mortgage Loan
referred to in Exhibit A annexed hereto, and any additional documents required
to be added to the Mortgage File pursuant to this Agreement.
"Mortgage Interest Rate" means the annual rate of interest borne on a
Mortgage Note, which, in the case of an Adjustable Rate Mortgage Loan, shall be
adjusted from time to time, with respect to each Mortgage Loan.
"Mortgage Interest Rate Cap" means, with respect to each Adjustable Rate
Mortgage Loan, the limit on each Mortgage Interest Rate adjustment as set forth
in the related Mortgage Note.
4
<PAGE> 8
"Mortgage Loan" means an individual Mortgage Loan which is the subject of
this Agreement, each Mortgage Loan originally sold and subject to this
Agreement being identified on the applicable Mortgage Loan Schedule, which
Mortgage Loan includes without limitation the Mortgage File, the Monthly
Payments, Principal Prepayments, Liquidation Proceeds, Condemnation Proceeds,
Insurance Proceeds, and all other rights, benefits, proceeds and obligations
arising from or in connection with such Mortgage Loan, excluding replaced or
repurchased mortgage loans.
"Mortgage Loan Documents" means, with respect to each Mortgage Loan, the
following documents pertaining to such Mortgage Loan:
a. The original Mortgage Note (or, with respect to the
Mortgage Loan listed on Schedule I to Exhibit A hereto, a
lost note affidavit, executed by an officer of the Seller,
with a copy of the original note attached thereto) bearing
all intervening endorsements, endorsed "Pay to the order of
Franklin Finance Corporation without recourse" and signed in
the name of the Seller by an authorized officer. To the
extent that there is no room on the face of the Mortgage
Notes for endorsements, the endorsement may be contained on
an allonge, if state law so allows. If the Mortgage Loan was
acquired by the Seller in a merger, the endorsement must be
by "[Seller], successor by merger to [name of predecessor]".
If the Mortgage Loan was acquired or originated by the Seller
while doing business under another name, the endorsement must
be by "[Seller], formerly known as [previous name]"; and
b. The original Assignment of Mortgage for each Mortgage
Loan in form and substance acceptable for recording endorsed
"Pay to the order of Franklin Finance Corporation" and signed
in the name of the Seller. If the Mortgage Loan was acquired
by the Seller in a merger, the Assignment of Mortgage must be
made by "[Seller], successor by merger to [name of
predecessor]". If the Mortgage Loan was acquired or
originated by the Seller while doing business under another
name, the Assignment of Mortgage must be by "[Seller],
formerly known as [previous name]". With respect to Co-op
Loans, the Assignment of Mortgage shall include an assignment
of Security Instruments.
c. The original of any guarantee executed in connection with
the Mortgage Note.
d. The original Mortgage, with evidence of recording
thereon. If in connection with any Mortgage Loan, the
Seller cannot deliver or cause to be delivered the original
Mortgage with evidence of recording thereon on or prior to
the Closing Date because of a delay caused by the public
recording office where such Mortgage has been delivered for
recordation, a photocopy of such Mortgage certified by the
Seller to be true and
5
<PAGE> 9
correct will be delivered; if such Mortgage has been lost or
if such public recording office retains the original recorded
Mortgage, the Seller shall deliver or cause to be delivered
to the Purchaser, a photocopy of such Mortgage, certified by
such public recording office to be a true and complete copy
of the original recorded Mortgage.
e. The originals of all assumption, modification, consolidation
or extension agreements, if any, with evidence
of recording thereon or certified copies of such documents if
the originals thereof are unavailable.
f. Originals of all intervening assignments of the Mortgage with
evidence of recording thereon, if such
intervening assignment has been recorded.
g. The original mortgagee policy of title insurance or,
in the event such original title policy is unavailable, a
certified true copy of the related policy binder or
commitment for title certified to be true and complete by the
title insurance company.
h. Any security agreement, chattel mortgage or equivalent
executed in connection with the Mortgage.
i. For Mortgage Loans with original LTV's greater than
85%, evidence of a Primary Insurance Policy. "Mortgage Loan
Schedule" means the schedule of Mortgage Loans attached
hereto as Exhibit H setting forth at least the following
information with respect to each Mortgage Loan: (1) the
Seller's Mortgage Loan identifying number; (2) the
Mortgagor's name; (3) the street address of the Mortgaged
Property including the city, state and zip code; (4) a code
indicating whether the Mortgaged Property is owner occupied,
second home or investor owned; (5) the type of residential
units constituting the Mortgaged Property; (6) the original
months to maturity; (7) the remaining months to maturity from
the Cut-off Date, based on the original amortization
schedule, and, if different, the maturity expressed in the
same manner but based on the actual amortization schedule;
(8) the Loan-to-Value Ratio at origination; (9) the Mortgage
Interest Rate as of the Cut-off Date; (10) the stated
maturity date; (11) the amount of the Monthly Payment as of
the Cut-off Date; (12) the original principal amount of the
Mortgage Loan; (13) the principal balance of the Mortgage
Loan as of the close of business on the Cut-off Date, after
deduction of payments of principal due on or before the
Cut-off Date whether or not collected; (14) a code indicating
the purpose of the loan (i.e., purchase, rate and term
refinance, equity take-out refinance); (15) a code indicating
the documentation style (i.e. full, alternative or reduced);
(16) a code indicating whether the Mortgage Loan is a
Convertible Mortgage Loan; (17) the number of times during
the 12 month period preceding the Closing Date that any
Monthly Payment has been received thirty or more days after
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its Due Date; (18) the type of Mortgage Loan product, if any;
(19) the first payment Due Date; (19) the initial Mortgage
Interest Rate; (20) the amount of the first Monthly Payment;
(21) the name of any Qualified Insurer with respect to a PMI
Policy; and (22) the Servicing Fee Rate. With respect to any
Adjustable Rate Mortgage Loan, (1) the Interest Rate
Adjustment Dates; (2) the Gross Margin; (3) the Lifetime Rate
Cap; (4) any Periodic Rate Caps; (5) any minimum interest
rate, if other than the Gross Margin; (6) the first Rate
Adjustment Date after the Cut-off Date; and (8) the name of
the applicable Index, in each case, under the terms of the
Mortgage Note. With respect to the Mortgage Loans in the
aggregate, the Mortgage Loan Schedule shall set forth the
following information, as of the Cut-off Date: (1) the number
of Mortgage Loans; (2) the current aggregate outstanding
principal balance of the Mortgage Loans; (3) the weighted
average Mortgage Interest Rate of the Mortgage Loans; and (4)
the weighted average maturity of the Mortgage Loans.
"Mortgage Note" means the note or other evidence of the
indebtedness of a Mortgagor secured by a Mortgage.
"Mortgaged Property" means the real property securing repayment of the
debt evidenced by a Mortgage Note.
"Mortgagor" means the obligor on a Mortgage Note.
"Officer's Certificate" means a certificate signed by the Chairman of the
Board or the Vice Chairman of the Board or a President or a Vice President and
by the Treasurer or the Secretary or one of the Assistant Treasurers or
Assistant Secretaries of the Seller, as the case may be, and delivered to the
Purchaser as required by this Agreement.
"Opinion of Counsel" means a written opinion of counsel, who may be
counsel for the Seller, reasonably acceptable to the Purchaser.
"Periodic Rate Cap" means the provision of each Mortgage Note related to
each Adjustable Rate Mortgage Loan which provides for an absolute maximum
amount by which the Mortgage Interest Rate therein may increase or decrease on
an Interest Rate Adjustment Date above or below the Mortgage Interest Rate
previously in effect. The Periodic Rate Cap for each Adjustable Rate Mortgage
Loan is the rate set forth on Exhibit H hereto.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, limited liability company,
unincorporated organization, government or any agency or political subdivision
thereof.
"PMI Policy" or "Primary Insurance Policy" means a policy of primary
mortgage guaranty insurance issued by a Qualified Insurer.
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"Prime Rate" means the prime rate announced to be in effect from time to
time, as published as the average rate in The Wall Street Journal (Chicago
edition).
"Principal Prepayment" means any payment or other recovery of principal on
a Mortgage Loan which is received in advance of its scheduled Due Date,
including any prepayment penalty or premium thereon and which is not
accompanied by an amount of interest representing scheduled interest due on any
date or dates in any month or months subsequent to the month of prepayment.
"Purchase Price" means the price paid on the Closing Date by the Purchaser
to the Seller in exchange for the Mortgage Loans purchased on the Closing Date
as set forth in Section 4 of this Agreement.
"Purchaser" means Franklin Finance Corporation or its successor in
interest or assigns or any successor to the Purchaser under this Agreement as
herein provided.
"Qualified Appraiser" means an appraiser who had no interest, direct or
indirect in the Mortgaged Property or in any loan made on the security thereof,
and whose compensation is not affected by the approval or disapproval of the
Mortgage Loan, and such appraiser and the appraisal made by such appraiser both
satisfy the requirements of Title XI of the Federal Institutions Reform,
Recovery, and Enforcement Act of 1989 and the regulations promulgated
thereunder, all as in effect on the date the Mortgage Loan was originated.
"Qualified Insurer" means an insurance company duly qualified as such
under the laws of the states in which the Mortgaged Properties are located,
duly authorized and licensed in such states to transact the applicable
insurance business and to write the insurance provided, approved as an insurer
by FNMA and FHLMC with respect to primary mortgage insurance and, in addition,
in the two highest rating categories by Best's with respect to hazard and flood
insurance.
"Qualified Substitute Mortgage Loan" means a mortgage loan eligible to be
substituted by the Seller for a Deleted Mortgage Loan which must, on the date
of such substitution, (i) have an outstanding principal balance, after
deduction of all scheduled payments due in the month of substitution (or in the
case of a substitution of more than one mortgage loan for a Deleted Mortgage
Loan, an aggregate principal balance), not in excess of the outstanding
principal balance of the Deleted Mortgage Loan (the amount of any shortfall
will be deposited in the Custodial Account by the Seller in the month of
substitution); (ii) have a Mortgage Interest Rate not less than and not more
than 1.00% greater than the Mortgage Interest Rate of the Deleted Mortgage
Loan; (iii) have a remaining term to maturity not greater than and not more
than one year less than that of the Deleted Mortgage Loan (iv) be of the same
type as the Deleted Mortgage Loan (i.e., Mortgage Loan with the same Mortgage
Interest Rate Caps or fixed rate); and (v) comply with each representation and
warranty (respecting individual Mortgage Loans) set forth in Section 8.02
hereof.
"Remittance Date" means the date specified in the Servicing Agreement
(with respect to each Mortgage Loan, as specified therein).
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"Repurchase Price" means, with respect to any Mortgage Loan, a price equal
to (i) the unpaid principal balance of such Mortgage Loan plus (ii) interest on
such unpaid principal balance of such Mortgage Loan at the Mortgage Interest
Rate from the last date through which interest has been paid and distributed to
the Purchaser to the date of repurchase, less amounts received or advanced, if
any, by the Seller in respect of such repurchased Mortgage Loan.
"RESPA" means Real Estate Settlement Procedures Act, as amended from time
to time.
"Seller" means Franklin Bank, N.A., its successors in interest and
assigns.
"Servicing Agreement" means the agreement, attached as Exhibit B hereto,
to be entered into by the Purchaser and the Seller, as servicer, providing for
the Seller to service the Mortgage Loans as specified by the Servicing
Agreement.
"Servicing Fee" means, with respect to each Mortgage Loan, subject to the
Servicing Agreement, the amount of the annual fee the Purchaser shall pay to
the Seller, which shall for a period of one full month be equal to one-twelfth
of the product of (a) the Servicing Fee Rate and (b) the outstanding principal
balance of such Mortgage Loan. Such fee shall be payable monthly, and shall be
pro rated for any portion of a month during which the Mortgage Loan is serviced
by the Seller under the Servicing Agreement. The obligation of the Purchaser
to pay the Servicing Fee is limited to, and the Servicing Fee is payable solely
from, the interest portion (including recoveries with respect to interest from
Liquidation Proceeds, to the extent permitted by this Agreement) of such
Monthly Payment collected by the Seller, or as otherwise provided under this
Agreement. In addition to the Servicing Fee, the Seller shall be entitled to
retain Ancillary Income.
"Servicing Fee Rate" means, with respect to each Mortgage Loan, the rate
specified in the Mortgage Loan Schedule with respect to such Mortgage Loan.
"Servicing File" means with respect to each Mortgage Loan, the file
retained by the Seller during the period in which the Seller is acting as
servicer pursuant to the Servicing Agreement consisting of originals of all
documents in the Mortgage File which are not delivered to the Purchaser or its
designee and copies of the Mortgage Loan Documents.
"Stated Principal Balance" means as to each Mortgage Loan, (i) the
principal balance of the Mortgage Loan at the Cut-off Date after giving effect
to payments of principal due on or before such date, whether or not received,
minus (ii) all amounts previously received by the Purchaser with respect to the
related Mortgage Loan representing payments or recoveries of principal or
advances in lieu thereof.
SECTION 2. AGREEMENT TO PURCHASE.
The Seller agrees to sell and the Purchaser agrees to purchase Mortgage
Loans having an aggregate principal balance on the Cut-off Date in an amount
equal to $[__________], or in such
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other amount as agreed by the Purchaser and the Seller as evidenced by the
actual aggregate principal balance of the Mortgage Loans accepted by the
Purchaser on the Closing Date.
[SECTION 3. RESERVED.]
SECTION 4. PURCHASE PRICE.
The Purchase Price for the Mortgage Loans listed on the Mortgage Loan
Schedule shall be $[__________], or in such other amount as agreed by the
Purchaser and the Seller as evidenced by the actual aggregate principal balance
of the Mortgage Loans accepted by the Purchaser on the Closing Date. The
initial principal amount of the Mortgage Loans shall be the aggregate principal
balance of the Mortgage Loans, so computed as of the Cut-off Date, after
application of scheduled payments of principal due on or before the Cut-off
Date whether or not collected.
In addition to the Purchase Price as described above, the Purchaser shall
pay to the Seller, at closing, accrued interest on the initial principal amount
of the related Mortgage Loans at the weighted average Mortgage Interest Rate of
those Mortgage Loans, minus any amounts attributable to Servicing Fees as
provided in the Servicing Agreement from the Cut-off Date through the day prior
to the Closing Date, inclusive.
The Purchase Price plus accrued interest as set forth in the preceding
paragraph shall be paid on the Closing Date by wire transfer of immediately
available funds.
The Purchaser shall be entitled to (l) all scheduled principal due after
the Cut-off Date, (2) all other recoveries of principal collected on or after
the Cut-off Date (provided, however, that all scheduled payments of principal
due on or before the Cut-off Date and collected after the Cut-off Date shall
belong to the Seller), and (3) all payments of interest on the Mortgage Loans
net of applicable Servicing Fees collected on or after the Cut-off Date (minus
that portion of any such payment which is allocable to the period prior to the
Cut-off Date). The outstanding principal balance of each Mortgage Loan as of
the Cut-off Date is determined after application of payments of principal due
on or before the Cut-off Date whether or not collected, together with any
unscheduled principal prepayments collected prior to the Cut-off Date;
provided, however, that payments of scheduled principal and interest prepaid
for a Due Date beyond the Cut-off Date shall not be applied to the principal
balance as of the Cut-off Date. Such prepaid amounts shall be the property of
the Purchaser. Any such prepaid amounts shall be deposited into the Custodial
Account, which account is established for the benefit of the Purchaser for
subsequent remittance to the Purchaser.
SECTION 5. EXAMINATION OF MORTGAGE FILES.
Prior to the date hereof, the Seller has (a) delivered to the Purchaser or
its designee in escrow, for examination with respect to each Mortgage Loan to
be purchased, the related Mortgage File, including a copy of the Assignment of
Mortgage, pertaining to each Mortgage Loan, or (b) made the related Mortgage
File available to the Purchaser for examination at the Seller's offices or such
other location as shall otherwise be agreed upon by the Purchaser and the
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Seller. The fact that the Purchaser or its designee has conducted or has
failed to conduct any partial or complete examination of the Mortgage Files
shall not affect the Purchaser's (or any of its successor's) rights to demand
repurchase, substitution or other relief as provided herein.
SECTION 6. CONVEYANCE FROM SELLER TO PURCHASER.
SUBSECTION 6.01. CONVEYANCE OF MORTGAGE LOANS; POSSESSION OF SERVICING
FILES.
The Seller hereby agrees to sell, transfer, assign, set over and convey to
the Purchaser on the Closing Date, without recourse, but subject to the terms
of this Agreement, all right, title and interest of the Seller in and to the
Mortgage Loans and the Mortgage Files and all rights and obligations arising
under the documents contained therein. The Servicing File shall be retained by
the Seller in accordance with the terms of the Servicing Agreement and, as
provided therein, shall be appropriately identified in the Seller's computer
system and/or books and records, as appropriate, to clearly reflect the sale of
the related Mortgage Loan to the Purchaser.
SUBSECTION 6.02. BOOKS AND RECORDS.
Record title to each Mortgage Loan as of the Closing Date shall be in the
name of the Seller. Notwithstanding the foregoing, each Mortgage and related
Mortgage Note shall be possessed solely by the Purchaser or the appropriate
designee of the Purchaser, as the case may be. All rights arising out of the
Mortgage Loans including, but not limited to, all funds received by the Seller
after the Cut-off Date on or in connection with a Mortgage Loan shall be vested
in the Purchaser or one or more of its designees; provided, however, that all
funds received on or in connection with a Mortgage Loan shall be received and
held by the Seller in trust for the benefit of the Purchaser or its designee,
as the case may be, as the owner of the Mortgage Loans pursuant to the terms of
this Agreement.
The sale of each Mortgage Loan shall be reflected on the Seller's balance
sheet and other financial statements as a sale of assets by the Seller.
SUBSECTION 6.03. DELIVERY OF MORTGAGE LOAN DOCUMENTS.
The Seller shall deliver and release to the Purchaser or its designee on
the Closing Date the Mortgage Loan Documents with respect to each Mortgage Loan
set forth on the Mortgage Loan Schedule.
The Seller shall forward to the Purchaser or its designee original
documents evidencing an assumption, modification, consolidation, conversion or
extension of any Mortgage Loan entered into in accordance with this Agreement
within two (2) weeks of their execution, provided, however, that the Seller
shall provide the Purchaser or its designee with a certified true copy of any
such document submitted for recordation within two (2) weeks of its execution,
and shall promptly provide the original of any document submitted for
recordation or a copy of such document certified by the appropriate public
recording office to be a true and complete copy of the original within ninety
(90) days of its submission for recordation.
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In the event that such original or copy of any document submitted for
recordation to the appropriate public recording office is not so delivered to
the Purchaser or its designee within 90 days following the Closing Date (other
than with respect to the Assignments of Mortgage which shall be delivered to
the Purchaser or its designee in blank, and in the event that the Seller does
not cure such failure within 30 days of discovery or receipt of written
notification of such failure from the Purchaser, the related Mortgage Loan
shall, upon the request of the Purchaser, be repurchased by the Seller at the
price and in the manner specified in Subsection 8.03. The foregoing repurchase
obligation shall not apply in the event that the Seller cannot deliver, or
cause to be delivered, such original or copy of any document submitted for
recordation to the appropriate public recording office within the specified
period due to a delay caused by the recording office in the applicable
jurisdiction; provided that the Seller shall instead deliver, or cause to be
delivered, a recording receipt of such recording office or, if such recording
receipt is not available, an officer's certificate of a servicing officer of
the Seller, confirming that such documents have been accepted for recording;
provided that, upon request of the Purchaser and delivery by the Purchaser to
the Seller of a schedule of the related Mortgage Loans, the Seller shall
reissue and deliver to the Purchaser or its designee said officer's certificate
relating to the related Mortgage Loans.
The Seller shall pay all initial recording fees, if any, for the
Assignments of Mortgage and any other fees or costs in transferring all
original documents to the Purchaser or its designee. The Purchaser or its
designee shall be responsible for recording the Assignments of Mortgage and
shall be reimbursed by the Seller for the reasonable costs associated therewith
pursuant to the preceding sentence.
SECTION 7. SERVICING OF THE MORTGAGE LOANS.
The Mortgage Loans have been sold by the Seller to the Purchaser on a
servicing retained basis.
The Purchaser shall retain the Seller as independent contract servicer of
the Mortgage Loans pursuant to and in accordance with the terms and conditions
contained in the Servicing Agreement. The Purchaser and the Seller shall
execute the Servicing Agreement on the Closing Date in the form attached hereto
as Exhibit B.
Pursuant to the Servicing Agreement, the Seller shall begin servicing the
Mortgage Loans on behalf of the Purchaser and shall be entitled to the
Servicing Fee and any Ancillary Income with respect to such Mortgage Loans from
the Closing Date until the termination of the Servicing Agreement with respect
to any of the Mortgage Loans as set forth in the Servicing Agreement. The
Seller shall conduct such servicing in accordance with the terms of the
Servicing Agreement.
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SECTION 8. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE SELLER; REMEDIES
FOR BREACH.
SUBSECTION 8.01. REPRESENTATIONS AND WARRANTIES REGARDING THE SELLER.
The Seller represents, warrants and covenants to the Purchaser that as of
the date hereof and as of the Closing Date:
(a) Due Organization and Authority; Enforceability. The
Seller is a national bank duly organized and validly existing
under the laws of the United States and has all licenses
necessary to carry on its business as now being conducted and
is licensed, qualified and in good standing in each state
wherein it owns or leases any material properties or where a
Mortgaged Property is located, if the laws of such state
require licensing or qualification in order to conduct
business of the type conducted by the Seller, and in any
event the Seller is in compliance with the laws of any such
state to the extent necessary to ensure the enforceability of
the related Mortgage Loan in accordance with the terms of
this Agreement; the Seller has the full corporate power,
authority and legal right to hold, transfer and convey the
Mortgage Loans and to execute and deliver this Agreement and
to perform its obligations hereunder; the execution, delivery
and performance of this Agreement (including all instruments
of transfer to be delivered pursuant to this Agreement) by
the Seller and the consummation of the transactions
contemplated hereby have been duly and validly authorized;
this Agreement and all agreements contemplated hereby have
been duly executed and delivered and constitute the valid,
legal, binding and enforceable obligations of the Seller
subject to bankruptcy laws and other similar laws of general
application affecting rights of creditors and subject to the
application of the rules of equity, including those
respecting the availability of specific performance, none of
which will materially interfere with the realization of the
benefits provided thereunder, regardless of whether such
enforcement is sought in a proceeding in equity or at law;
and all requisite corporate action has been taken by the
Seller to make this Agreement and all agreements contemplated
hereby valid and binding upon the Seller in accordance with
their terms;
(b) Ordinary Course of Business. The consummation of
the transactions contemplated by this Agreement are in the
ordinary course of business of the Seller, and the transfer,
assignment and conveyance of the Mortgage Notes and the
Mortgages by the Seller pursuant to this Agreement are not
subject to the bulk transfer or any similar statutory
provisions in effect in any applicable jurisdiction;
(c) No Conflicts. Neither the execution and delivery of
this Agreement, the sale of the Mortgage Loans to the
Purchaser, the consummation of the
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transactions contemplated hereby, nor the fulfillment of
or compliance with the terms and conditions of this Agreement,
will conflict with or result in a breach of any of the terms,
conditions or provisions of the Seller's Articles of
Association or by-laws or any legal restriction or any
agreement or instrument to which the Seller is now a party or
by which it is bound, or constitute a default or result in an
acceleration under any of the foregoing, or result in the
violation of any law, rule, regulation, order, judgment or
decree to which the Seller or its property is subject, or
result in the creation or imposition of any lien, charge or
encumbrance that would have an adverse effect upon any of its
properties pursuant to the terms of any mortgage, contract,
deed of trust or other instrument, or impair the ability of
the Purchaser to realize on the Mortgage Loans, impair the
value of the Mortgage Loans, or impair the ability of the
Purchaser to realize the full amount of any mortgage insurance
benefits accruing pursuant to this Agreement;
(d) Ability to Perform: Solvency. The Seller does not
believe, nor does it have any reason or cause to believe,
that it cannot perform each and every covenant contained in
this Agreement. The Seller is solvent and the sale of the
Mortgage Loans will not cause the Seller to become insolvent.
The sale of the Mortgage Loans is not undertaken with the
intent to hinder, delay or defraud any of the Seller's
creditors;
(e) No Litigation Pending. There is no action, suit,
proceeding or investigation pending or threatened against the
Seller, before any court, administrative agency or other
tribunal asserting the invalidity of this Agreement, seeking
to prevent the consummation of any of the transactions
contemplated by this Agreement or which, either in any one
instance or in the aggregate, could result in any material
adverse change in the business, operations, financial
condition, properties or assets of the Seller, or in any
material impairment of the right or ability of the Seller to
carry on its business substantially as now conducted, or in
any material liability on the part of the Seller, or which
would draw into question the validity of this Agreement or
the Mortgage Loans or of any action taken or to be taken in
connection with the obligations of the Seller contemplated
herein, or which would be likely to impair materially the
ability of the Seller to perform under the terms of this
Agreement;
(f) No Consent Required. No consent, approval, authorization or
order of, or registration or filing with, or notice to any
court or governmental agency or body including HUD is required
for the execution, delivery and performance by the Seller of
or compliance by the Seller with this Agreement or the
Mortgage Loans, the delivery of a portion of the Mortgage
Files to the Purchaser or its designee or the sale of the
Mortgage Loans or the consummation of the transactions
contemplated by this
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Agreement, or if required, such approval has been obtained
prior to the Closing Date;
(g) Selection Process. The Mortgage Loans were selected
from among the outstanding one- to four-family mortgage loans
in the Seller's portfolio at the Closing Date as to which the
representations and warranties set forth in Subsection 8.02
could be made and such selection was not made in a manner so
as to affect adversely the interests of the Purchaser;
(h) Initial Portfolio. The aggregate characteristics of
the Mortgage Loans are as set forth under the heading
"Business and Strategy--Description of Initial Portfolio" in
the Prospectus of the Purchaser dated [___________,] 1997;
(i) No Untrue Information. Neither this Agreement nor
any information, statement, tape, diskette, report, form, or
other document furnished or to be furnished pursuant to this
Agreement or in connection with the transactions contemplated
hereby contains or will contain any untrue statement of a
material fact or omits or will omit to state a material fact
necessary to make the statements contained herein or therein
not misleading; and
(j) No Brokers. The Seller has not dealt with any broker,
investment banker, agent or other person that may be entitled
to any commission or compensation in connection with
the sale of the Mortgage Loans.
SUBSECTION 8.02. REPRESENTATIONS AND WARRANTIES REGARDING INDIVIDUAL
MORTGAGE LOANS.
The Seller hereby represents and warrants to the Purchaser that, as to
each Mortgage Loan, as of the Closing Date for such Mortgage Loan:
(a) Mortgage Loans as Described. The information set
forth in the Mortgage Loan Schedule is complete, true and
correct in all material respects;
(b) Payments Current; Status. All payments required to
be made up to, but not including, the Cut-off Date for the
Mortgage Loan under the terms of the Mortgage Note have been
made and credited. No payment required under the Mortgage
Loan is delinquent nor has any payment under the Mortgage
Loan been 30 days or more delinquent more than once within
the period falling twelve (12) months prior to the Cut-off
Date. The Mortgage Loan is not, and has not been at any time
in the preceding twelve months, (i) classified, (ii) in
nonaccrual status or (iii) renegotiated due to the financial
deterioration of the Mortgagor;
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(c) No Outstanding Charges. There are no defaults in
complying with the terms of the Mortgage, and all taxes,
governmental assessments, insurance premiums, or water, sewer
and municipal charges which previously became due and owing
have been paid, or an escrow of funds has been established in
an amount sufficient to pay for every such item which remains
unpaid and which has been assessed but is not yet due and
payable. The Seller has not advanced funds, or induced,
solicited or knowingly received any advance of funds by a
party other than the Mortgagor, directly or indirectly, for
the payment of any amount required under the Mortgage Loan,
except for interest accruing from the date of the Mortgage
Note or date of disbursement of the Mortgage Loan proceeds,
whichever is earlier, to the day which precedes by one month
the Due Date of the first installment of principal and
interest;
(d) Original Terms Unmodified. The terms of the
Mortgage Note and Mortgage have not been impaired, waived,
altered or modified in any respect, from the date of
origination except by a written instrument which has been
recorded, if necessary to protect the interests of the
Purchaser, and which has been delivered to the Purchaser or
its designee and the terms of which are reflected in the
Mortgage Loan Schedule, if applicable. The substance of any
such waiver, alteration or modification has been approved by
the title insurer, if any, to the extent required by the
policy, and its terms are reflected on the Mortgage Loan
Schedule, if applicable. No Mortgagor has been released, in
whole or in part, except in connection with an assumption
agreement, which assumption agreement is part of the Mortgage
Loan File delivered to the Purchaser or its designee and the
terms of which are reflected in the Mortgage Loan Schedule;
(e) No Defenses. The Mortgage Loan is not subject to
any right of rescission, set-off, counterclaim or defense,
including without limitation the defense of usury, nor will
the operation of any of the terms of the Mortgage Note or the
Mortgage, or the exercise of any right thereunder, render
either the Mortgage Note or the Mortgage unenforceable, in
whole or in part and no such right of rescission, set-off,
counterclaim or defense has been asserted with respect
thereto, and no Mortgagor is now or was, at the time of
origination of the related Mortgage Loan, a debtor in any
state or Federal bankruptcy or insolvency proceeding;
(f) Hazard Insurance. Pursuant to the terms of the
Mortgage, all buildings or other improvements upon the
Mortgaged Property are insured by a generally acceptable
insurer against loss by fire, hazards of extended coverage
and such other hazards as are set forth in Section 2.10 of
the Servicing Agreement attached hereto as Exhibit B. If
required by the Flood Disaster Protection Act of 1973, as
amended, the Mortgage Loan is covered by a flood insurance
policy meeting the requirements of the current
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guidelines of the Federal Insurance Administration which
policy generally conforms to FNMA and FHLMC, as well as all
additional requirements set forth in Section 2.10 of the
Servicing Agreement attached hereto as Exhibit B. All
individual insurance policies contain a standard mortgagee
clause naming the Seller and its successors and assigns as
mortgagee, and all premiums thereon have been paid. The
Mortgage for each Mortgage Loan obligates the Mortgagor
thereunder to maintain the hazard insurance policy at the
Mortgagor's cost and expense, and on the Mortgagor's failure
to do so, authorizes the holder of the Mortgage to obtain and
maintain such insurance at such Mortgagor's cost and expense,
and to seek reimbursement therefor from the Mortgagor. Where
required by state law or regulation, the Mortgagor has been
given an opportunity to choose the carrier of the required
hazard insurance, provided the policy is not a "master" or
"blanket" hazard insurance policy covering a condominium, or
any hazard insurance policy covering the common facilities of
a planned unit development. The hazard insurance policy is
the valid and binding obligation of the insurer, is in full
force and effect, and will be in full force and effect and
inure to the benefit of the Purchaser upon the consummation of
the transactions contemplated by this Agreement. The Seller
has not engaged in, and has no knowledge of the Mortgagor's
having engaged in, any act or omission which would impair the
coverage of any such policy, the benefits of the endorsement
provided for herein, or the validity and binding effect of
either including, without limitation, no unlawful fee,
commission, kickback or other unlawful compensation or value
of any kind has been or will be received, retained or realized
by any attorney, firm or other person or entity, and no such
unlawful items have been received, retained or realized by the
Seller;
(g) Compliance with Applicable Laws. Any and all
requirements of any federal, state or local law including,
without limitation, usury, truth-in-lending, real estate
settlement procedures, consumer credit protection, fair
housing, equal credit opportunity and disclosure laws
applicable to the Mortgage Loan have been complied with, the
consummation of the transactions contemplated hereby will not
involve the violation of any such laws or regulations, and
the Seller shall maintain in its possession, available for
the Purchaser's inspection, and shall deliver to the
Purchaser upon demand, evidence of compliance with all such
requirements;
(h) No Satisfaction of Mortgage. The Mortgage has not
been satisfied, canceled, subordinated or rescinded, in whole
or in part, and the Mortgaged Property has not been released
from the lien of the Mortgage, in whole or in part, nor has
any instrument been executed that would effect any such
release, cancellation, subordination or rescission. The
Seller has not waived the performance by the Mortgagor of any
action, if the
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Mortgagor's failure to perform such action would cause
the Mortgage Loan to be in default, nor has the Seller waived
any default resulting from any action or inaction by the
Mortgagor;
(i) Location and Type of Mortgaged Property. The
Mortgaged Property is located in the state identified in the
Mortgage Loan Schedule and consists of a single parcel of real
property with a detached single family residence erected
thereon, or a townhouse, or a two- to four-family dwelling, or
an individual condominium unit in a condominium project, or an
individual unit in a planned unit development, provided,
however, that any condominium unit or planned unit development
shall conform with requirements acceptable to FNMA or FHLMC
regarding such dwellings or shall conform to Seller's
underwriting guidelines and that no residence or dwelling is a
single parcel of real property with a cooperative housing
corporation erected thereon, a mobile home or a manufactured
dwelling. As of the date of origination, no portion of the
Mortgaged Property is used for commercial purposes, and since
the date of origination no portion of the Mortgaged Property
is used for commercial purposes;
(j) Valid First Lien. The Mortgage is a valid, subsisting,
enforceable and perfected first lien on the Mortgaged
Property, including all buildings and improvements
on the Mortgaged Property and all installations and
mechanical, electrical, plumbing, heating and air
conditioning systems located in or annexed to such buildings,
and all additions, alterations and replacements made at any
time with respect to the foregoing. The lien of the Mortgage
is subject only to:
(1) the lien of current real property taxes and
assessments not yet due and payable;
(2) covenants, conditions and restrictions, rights
of way, easements and other matters of the public
record as of the date of recording acceptable to
prudent mortgage lending institutions generally and
specifically referred to in the lender's title
insurance policy delivered to the originator of the
Mortgage Loan and (a) specifically referred to or
otherwise considered in the appraisal made for the
originator of the Mortgage Loan or (b) which do not
adversely affect the Appraised Value of the Mortgaged
Property set forth in such appraisal; and
(3) other matters to which like properties are commonly
subject which do not materially interfere with
the benefits of the security intended to be provided by
the Mortgage or the use, enjoyment, value or
marketability of the related Mortgaged Property.
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Any security agreement related to and delivered in connection with the
Mortgage Loan establishes and creates a valid, subsisting, enforceable and
perfected first lien and first priority security interest on the property
described therein and the Seller has full right to sell and assign the same to
the Purchaser. The Mortgaged Property was not, as of the date of origination
of the Mortgage Loan, subject to a mortgage, deed of trust, deed to secure debt
or other security instrument creating a lien subordinate to the lien of the
Mortgage (except any such subordinate loan which was created in connection with
the origination of the related Mortgage Loan details of which are contained in
the related Mortgage File);
(k) Validity of Mortgage Documents. The Mortgage Note
and the Mortgage and any other agreement executed and
delivered by a Mortgagor in connection with a Mortgage Loan
are genuine, and each is the legal, valid and binding
obligation of the maker thereof enforceable in accordance
with its terms. All parties to the Mortgage Note, the
Mortgage and any other such related agreement had legal
capacity to enter into the Mortgage Loan and to execute and
deliver the Mortgage Note, the Mortgage and any such
agreement, and the Mortgage Note, the Mortgage and any other
such related agreement have been duly and properly executed
by such parties. No fraud, error, omission,
misrepresentation, negligence or similar occurrence with
respect to a Mortgage Loan has taken place on the part of any
Person, including without limitation, the Mortgagor, any
appraiser, any builder or developer, or any other party
involved in the origination of the Mortgage Loan. The Seller
has reviewed all of the documents constituting the Servicing
File and has made such inquiries as it deems necessary to
make and confirm the accuracy of the representations set
forth herein;
(l) Full Disbursement of Proceeds. The Mortgage Loan
has been closed and the proceeds of the Mortgage Loan have
been fully disbursed and there is no requirement for future
advances thereunder, and any and all requirements as to
completion of any on-site or off-site improvement and as to
disbursements of any escrow funds therefor have been complied
with. All costs, fees and expenses incurred in making or
closing the Mortgage Loan and the recording of the Mortgage
were paid, and the Mortgagor is not entitled to any refund of
any amounts paid or due under the Mortgage Note or Mortgage;
(m) Ownership. The Seller is the sole owner of record
and holder of the Mortgage Loan and the indebtedness
evidenced by each Mortgage Note, except for the assignments
of mortgage which have been sent for recording, and upon
recordation the Seller will be the owner of record of each
Mortgage and the indebtedness evidenced by each Mortgage
Note, and upon the sale of the Mortgage Loans to the
Purchaser, the Seller will retain the Mortgage Files or any
part thereof with respect thereto not delivered to the
Purchaser or its designee in trust only for the purpose of
servicing and supervising the servicing of each Mortgage
Loan. The Mortgage Loan is
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not assigned or pledged, and the Seller has good,
indefeasible and marketable title thereto, and has full right
to transfer and sell the Mortgage Loan to the Purchaser free
and clear of any encumbrance, equity, participation interest,
lien, pledge, charge, claim or security interest, and has full
right and authority subject to no interest or participation
of, or agreement with, any other party, to sell and assign
each Mortgage Loan pursuant to this Agreement and following
the sale of each Mortgage Loan, the Purchaser will own such
Mortgage Loan free and clear of any encumbrance, equity,
participation interest, lien, pledge, charge, claim or
security interest. The Seller intends to relinquish all
rights to possess, control and monitor the Mortgage Loan,
except indirectly for purposes of servicing the Mortgage Loan
as set forth in the Servicing Agreement. After the Closing
Date, the Seller will have no right to modify or alter the
terms of the sale of the Mortgage Loan and the Seller will
have no obligation or right to repurchase the Mortgage Loan or
substitute another Mortgage Loan, except as provided in this
Agreement;
(n) Doing Business. All parties which have had any
interest in the Mortgage Loan, whether as mortgagee,
assignee, pledgee or otherwise, are (or, during the period in
which they held and disposed of such interest, were) (1) in
compliance with any and all applicable licensing requirements
of the laws of the state wherein the Mortgaged Property is
located, and (2) either (i) organized under the laws of such
state, or (ii) qualified to do business in such state, or
(iii) a federal savings and loan association, a savings bank
or a national bank having a principal office in such state,
or (3) not doing business in such state;
(o) LTV, PMI Policy. No Conventional Loan has an LTV
greater than 95%. The original LTV of each Conventional Loan
either was not more than 85% or the excess over 80% is and
will be insured as to payment defaults by a PMI Policy until
the LTV of such Conventional Loan is reduced to 85%. All
provisions of such PMI Policy have been and are being
complied with, such policy is valid and remains in full force
and effect, and all premiums due thereunder have been paid.
No action, inaction, or event has occurred and no state of
facts exists that has, or will result in the exclusion from,
denial of, or defense to coverage by the PMI Policy. Any
Conventional Loan subject to a PMI Policy obligates the
Mortgagor thereunder to maintain the PMI Policy and to pay
all premiums and charges in connection therewith. The
Mortgage Interest Rate for each Conventional Loan as set
forth on the Mortgage Loan Schedule is net of any such
insurance premium;
(p) Title Insurance. The Mortgage Loan is covered by an
ALTA lender's title insurance policy or other generally
acceptable form of policy or insurance acceptable to FNMA or
FHLMC and each such title insurance policy is
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issued by a title insurer acceptable to FNMA or FHLMC
and qualified to do business in the jurisdiction where the
Mortgaged Property is located, insuring the Seller, its
successors and assigns, as to the first priority lien of the
Mortgage in the original principal amount of the Mortgage
Loan, subject only to the exceptions contained in clauses (1),
(2) and (3) of paragraph (j) of this Subsection 8.02, and
against any loss by reason of the invalidity or
unenforceability of the lien resulting from the provisions of
the Mortgage providing for adjustment to the Mortgage Interest
Rate and Monthly Payment. Where required by state law or
regulation, the Mortgagor has been given the opportunity to
choose the carrier of the required mortgage title insurance.
Additionally, such lender's title insurance policy
affirmatively insures ingress and egress, and against
encroachments by or upon the Mortgaged Property or any
interest therein. The Seller, its successor and assigns, are
the sole insurers of such lender's title insurance policy, and
such lender's title insurance policy is valid and remains in
full force and effect and will be in force and effect upon the
consummation of the transactions contemplated by this
Agreement. No claims have been made under such lender's title
insurance policy, and no prior holder of the related Mortgage,
including the Seller, has done, by act or omission, anything
which would impair the coverage of such lender's title
insurance policy, including without limitation, no unlawful
fee, commission, kickback or other unlawful compensation or
value of any kind has been or will be received, retained or
realized by any attorney, firm or other person or entity, and
no such unlawful items have been received, retained or
realized by the Seller;
(q) No Defaults. There is no default, breach, violation
or event which would permit acceleration existing under the
Mortgage or the Mortgage Note and no event which, with the
passage of time or with notice and the expiration of any
grace or cure period, would constitute a default, breach,
violation or event which would permit acceleration, and
neither the Seller nor its predecessors have waived any
default, breach, violation or event which would permit
acceleration;
(r) No Mechanics' Liens. There are no mechanics' or
similar liens or claims which have been filed for work, labor
or material (and no rights are outstanding that under law
could give rise to such liens) affecting the related
Mortgaged Property which are or may be liens prior to, or
equal or coordinate with, the lien of the related Mortgage;
(s) Location of Improvements; No Encroachments. All
improvements which were considered in determining the
Appraised Value of the Mortgaged Property lay wholly within
the boundaries and building restriction lines of the
Mortgaged Property, and no improvements on adjoining
properties encroach upon the Mortgaged Property. No
improvement located on or
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being part of the Mortgaged Property is in violation of
any applicable zoning law or regulation;
(t) Origination; Payment Terms. The Mortgage Loan was
originated by a mortgagee approved by the Secretary of
Housing and Urban Development pursuant to Sections 203 and
211 of the Act, a savings and loan association, a savings
bank, a commercial bank, credit union, insurance company or
similar institution which is supervised and examined by a
federal or state authority. The documents, instruments and
agreements submitted for loan underwriting were not falsified
and contain no untrue statement of material fact or omit to
state a material fact required to be stated therein or
necessary to make the information and statements therein not
misleading. Principal payments on the Mortgage Loan
commenced no more than sixty (60) days after funds were
disbursed in connection with the Mortgage Loan. The Mortgage
Interest Rate, as well as the Lifetime Rate Cap and the
Periodic Rate Cap if the Mortgage Loan is an Adjustable Rate
Mortgage Loan, are as set forth on Exhibit J and/or Exhibit K
hereto. The Mortgage Note is payable on the first day of
each month in equal monthly installments of principal and
interest, which installments of interest are subject to
change if the Mortgage Loan is an Adjustable Rate Mortgage
Loan due to the adjustments to the Mortgage Interest Rate on
each Interest Rate Adjustment Date, with interest calculated
and payable in arrears, sufficient to amortize the Mortgage
Loan fully by the stated maturity date, over an original term
of not more than thirty years from commencement of
amortization. There is no negative amortization with respect
to any Mortgage Loan. Each Convertible Mortgage Loan
contains a provision allowing the Mortgagor to convert the
Mortgage Note from an adjustable interest rate Mortgage Note
to a fixed interest rate Mortgage Note in accordance with the
terms of the Mortgage Note or a rider to the related Mortgage
Note;
(u) Customary Provisions. The Mortgage contains customary and
enforceable provisions such as to render the rights and
remedies of the holder thereof adequate for the realization
against the Mortgaged Property of the benefits of the
security provided thereby, including, (i) in the case of a
Mortgage designated as a deed of trust, by trustee's sale,
and (ii) otherwise by judicial foreclosure. Upon default by
a Mortgagor on a Mortgage Loan and foreclosure on, or
trustee's sale of, the Mortgaged Property pursuant to the
proper procedures, the holder of the Mortgage Loan will be
able to deliver good and merchantable title to the Mortgaged
Property. There is no homestead or other exemption available
to a Mortgagor which would interfere with the right to sell
the Mortgaged Property at a trustee's sale or the right to
foreclose the Mortgage, subject to applicable federal and
state laws and judicial precedent with respect to bankruptcy
and right of redemption or similar law. The Mortgage
contains due-on-sale provisions
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providing for the acceleration of the payment of the
unpaid principal balance of such Mortgage Loan in the event
that all or any part of the Mortgaged Property is sold or
transferred without the prior written consent of the
Mortgagee;
(v) Conformance with Agency and Underwriting Standards.
The Mortgage Loan was underwritten in accordance with the
underwriting standards of Franklin Bank, N.A. (a copy of
which is attached hereto as Exhibit I), or FNMA's
underwriting standards (except that the principal balance of
certain Mortgage Loans may have exceeded the limits of FNMA),
in each case in effect at the time the Mortgage Loan was
originated. The Mortgage Note and Mortgage are on forms
acceptable to FHLMC or FNMA, except with respect to Mortgage
Loans underwritten in accordance with the underwriting
guidelines of Franklin Bank, N.A., which are on forms
acceptable to the Purchaser, in the Purchaser's sole
discretion, as evidenced by the Purchaser's purchase of the
related Mortgage Loans, and, in either case, the Seller has
not made any representations to a Mortgagor that are
inconsistent with the mortgage instruments used. All
Mortgage Loans have full asset verification;
(w) Occupancy of the Mortgaged Property. As of the
Closing Date, the Mortgaged Property is lawfully occupied
under applicable law. All inspections, licenses and
certificates required to be made or issued with respect to
all occupied portions of the Mortgaged Property and, with
respect to the use and occupancy of the same, including but
not limited to certificates of occupancy and fire
underwriting certificates, have been made or obtained from
the appropriate authorities. Unless otherwise specified on
the description of characteristics for the Mortgage Loans
delivered pursuant to Section 10 on the Closing Date in the
Mortgage Loan Schedule attached as Exhibit H hereto, the
Mortgagor represented at the time of origination of the
Mortgage Loan that the Mortgagor would occupy the Mortgaged
Property as the Mortgagor's primary residence;
(x) No Additional Collateral. The Mortgage Note is not
and has not been secured by any collateral except the lien of
the corresponding Mortgage and the security interest of any
applicable security agreement or chattel mortgage referred to
in clause (j) above;
(y) Deeds of Trust. In the event the Mortgage
constitutes a deed of trust, a trustee, authorized and duly
qualified under applicable law to serve as such, has been
properly designated and currently so serves and is named in
the Mortgage, and no fees or expenses are or will become
payable by the Purchaser to the trustee under the deed of
trust, except in connection with a trustee's sale after
default by the Mortgagor;
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(z) Acceptable Investment. There are no circumstances
or conditions with respect to the Mortgage, the Mortgaged
Property, the Mortgagor, the Mortgage File or the Mortgagor's
credit standing that can reasonably be expected to cause the
Mortgage Loan to become delinquent, or adversely affect the
value or marketability of the Mortgage Loan;
(aa) Delivery of Mortgage Documents. The Mortgage Note,
the Mortgage, the Assignment of Mortgage and any other
Mortgage Loan Documents for each Mortgage Loan have been
delivered to the Purchaser or its designee. The Seller is in
possession of a complete, true and accurate Mortgage File in
compliance with Exhibit A hereto, except for such documents
the originals of which have been delivered to the Purchaser
or its designee;
(bb) Condominiums/Planned Unit Developments. If the
Mortgaged Property is a condominium unit or a planned unit
development, such condominium or planned unit development
project is acceptable to FNMA or FHLMC or is located in a
condominium or planned unit development project which has
received project approval from FNMA or FHLMC;
(cc) Transfer of Mortgage Loans. The Assignment of
Mortgage with respect to each Mortgage Loan is in recordable
form and is acceptable for recording under the laws of the
jurisdiction in which the Mortgaged Property is located;
(dd) Assumability. The Mortgage Loan Documents provide
that a related Mortgage Loan may only be assumed if the party
assuming such Mortgage Loan meets certain credit requirements
stated in the Mortgage Loan Documents;
(ee) No Buydown Provisions; No Graduated Payments or
Contingent Interests. The Mortgage Loan does not contain
provisions pursuant to which Monthly Payments are paid or
partially paid with funds deposited in any separate account
established by the Seller, the Mortgagor, or anyone on behalf
of the Mortgagor, or paid by any source other than the
Mortgagor nor does it contain any other similar provisions
which may constitute a "buydown" provision. The Mortgage
Loan is not a graduated payment mortgage loan and the
Mortgage Loan does not have a shared appreciation or other
contingent interest feature;
(ff) RESERVED
(gg) Mortgaged Property Undamaged; No Condemnation
Proceedings. There is no proceeding pending or threatened
for the total or partial condemnation of the Mortgaged
Property. The Mortgaged Property is undamaged by waste,
fire, earthquake or earth movement, windstorm, flood, tornado
or
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other casualty so as to affect adversely the value of the
Mortgaged Property as security for the Mortgage Loan or the
use for which the premises were intended and each Mortgaged
Property is in good repair. There have not been any
condemnation proceedings with respect to the Mortgaged
Property and the Seller has no knowledge of any such
proceedings in the future;
(hh) Collection Practices; Escrow Deposits; Interest
Rate Adjustments. The origination and collection practices
used by the Seller with respect to the Mortgage Loan have
been in all respects in compliance with Accepted Servicing
Practices, applicable laws and regulations, and have been in
all respects legal and proper. With respect to escrow
deposits and Escrow Payments, with the exception of FHA
Mortgage Loans, all such payments are in the possession of,
or under the control of, the Seller and there exist no
deficiencies in connection therewith for which customary
arrangements for repayment thereof have not been made. All
Escrow Payments have been collected in full compliance with
state and federal law and the provisions of the related
Mortgage Note and Mortgage. An escrow of funds is not
prohibited by applicable law and has been established in an
amount sufficient to pay for every item that remains unpaid
and has been assessed but is not yet due and payable. No
escrow deposits or Escrow Payments or other charges or
payments due the Seller have been capitalized under the
Mortgage or the Mortgage Note. All Mortgage Interest Rate
adjustments to the Monthly Payment, if the Mortgage Loan is
an Adjustable Rate Mortgage Loan, have been made in strict
compliance with state and federal law and the terms of the
related Mortgage and Mortgage Note on the related Interest
Rate Adjustment Date. With respect to each Adjustable Rate
Mortgage Loan, the Mortgage Interest Rate adjusts annually as
set forth herein. If, pursuant to the terms of the Mortgage
Note, another index was selected for determining the Mortgage
Interest Rate, the same index was used with respect to each
Mortgage Note which required a new index to be selected, and
such selection did not conflict with the terms of the related
Mortgage Note. The Seller executed and delivered any and all
notices required under applicable law and the terms of the
related Mortgage Note and Mortgage regarding the Mortgage
Interest Rate and the Monthly Payment adjustments. Any
interest required to be paid pursuant to state, federal and
local law has been properly paid and credited;
(ii) Other Insurance Policies. No action, inaction or
event has occurred and no state of facts exists or has
existed that has resulted or could result in the exclusion
from, denial of, or defense to coverage under any hazard
insurance policy or PMI Policy. In connection with the
placement of any such insurance, no commission, fee, or other
compensation has been or will be received by the Seller or by
any officer, director, or employee of the Seller or any
designee of the Seller or any corporation in which the Seller
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or any officer, director, or employee had a financial
interest at the time of placement of such insurance;
(jj) No Violation of Environmental Laws. There is no
pending action or proceeding directly involving the Mortgaged
Property in which compliance with any environmental law, rule
or regulation is an issue; there is no violation of any
environmental law, rule or regulation with respect to the
Mortgaged Property; and nothing further remains to be done to
satisfy in full all requirements of each such law, rule or
regulation constituting a prerequisite to use and enjoyment
of said property;
(kk) Soldiers' and Sailors' Civil Relief Act. The
Mortgagor has not notified the Seller and the Seller has no
knowledge of any relief requested or allowed to the Mortgagor
under the Soldiers' and Sailors' Civil Relief Act of 1940;
(ll) Appraisal. The Mortgage File contains an appraisal
of the related Mortgaged Property signed prior to the
approval of the Mortgage Loan application by a Qualified
Appraiser who had no interest, direct or indirect in the
Mortgaged Property or in any loan made on the security
thereof, and whose compensation is not affected by the
approval or disapproval of the Mortgage Loan, and the
appraisal and appraiser both satisfy the requirements of FNMA
or FHLMC and Title XI of the Federal Institutions Reform,
Recovery, and Enforcement Act of 1989 and the regulations
promulgated thereunder, all as in effect on the date the
Mortgage Loan was originated;
(mm) Disclosure Materials. The Mortgagor has received
all disclosure materials required by and the Seller complied
with all applicable law with respect to the making of the
Mortgage Loans;
(nn) Construction or Rehabilitation of Mortgaged Property. No
Mortgage Loan was made in connection with the construction
or rehabilitation of a Mortgaged Property or facilitating
the trade-in or exchange of a Mortgaged Property;
(oo) Value of Mortgaged Property. The Seller has no
knowledge of any circumstances existing that could reasonably
be expected to adversely affect the value or the
marketability of any Mortgaged Property or Mortgage Loan;
(pp) No Defense to Insurance Coverage. No action has
been taken or failed to be taken, no event has occurred and
no state of facts exists or has existed on or prior to the
Closing Date (whether or not known to the Seller on or prior
to such date) which has resulted or will result in an
exclusion from, denial of, or defense to coverage under any
primary mortgage insurance
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policy (including, without limitation, any exclusions,
denials or defenses which would limit or reduce the
availability of the timely payment of the full amount of the
loss otherwise due thereunder to the insured) whether arising
out of actions, representations, errors, omissions,
negligence, or fraud of the Seller, the related Mortgagor or
any party involved in the application for such coverage,
including the appraisal, plans and specifications and other
exhibits or documents submitted therewith to the insurer under
such insurance policy, or for any other reason under such
coverage, but not including the failure of such insurer to pay
by reason of such insurer's breach of such insurance policy or
such insurer's financial inability to pay;
(qq) Escrow Analysis. With respect to each Mortgage,
Seller has within the last twelve months (unless such
Mortgage was originated within such twelve month period)
analyzed the required Escrow Payments for each Mortgage and
adjusted the amount of such payments so that, assuming all
required payments are timely made, any deficiency will be
eliminated on or before the first anniversary of such
analysis, or any overage will be refunded to the Mortgagor,
in accordance with RESPA and any other applicable law; and
(rr) Prior Servicing. Each Mortgage Loan has been
serviced in all material respects in compliance with Accepted
Servicing Practices; provided that, in the event of any
breach of the representation and warranty set forth in this
Subsection (rr), the Seller shall not be required to
repurchase any such Mortgage Loan unless such breach had, and
continues to have, a material and adverse effect on the value
of the related Mortgage Loan or the interest of the Purchaser
therein.
SUBSECTION 8.03. REMEDIES FOR BREACH OF REPRESENTATIONS AND WARRANTIES.
It is understood and agreed that the representations and warranties set
forth in Subsections 8.01 and 8.02 shall survive the sale of the Mortgage Loans
to the Purchaser and shall inure to the benefit of the Purchaser,
notwithstanding any restrictive or qualified endorsement on any Mortgage Note
or Assignment of Mortgage or the examination or failure to examine any Mortgage
File. Upon discovery by either the Seller or the Purchaser of a breach of any
of the foregoing representations and warranties which materially and adversely
affects the value of the Mortgage Loans or the interest of the Purchaser (or
which materially and adversely affects the interests of the Purchaser in the
related Mortgage Loan in the case of a representation and warranty relating to
a particular Mortgage Loan), the party discovering such breach shall give
prompt written notice to the other.
The Seller, promptly after discovery of a breach of any representation or
warranty, shall notify the Purchaser of such breach and the details thereof.
Within sixty (60) days of the earlier of (i) notice by the Seller pursuant to
the immediately preceding sentence or (ii) notice by the
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Purchaser to the Seller of any breach of a representation or warranty
with respect to a Mortgage Loan, the Seller shall use its best efforts promptly
to cure such breach in all material respects and, if such breach cannot be
cured, the Seller shall, at the Purchaser's option and subject to Subsection
8.04, repurchase such Mortgage Loan at the Repurchase Price, unless the Seller
elects to substitute a Qualified Substitute Mortgage Loan for such Mortgage Loan
pursuant to this Subsection. In the event that a breach shall involve any
representation or warranty set forth in Subsection 8.01, and such breach cannot
be cured within sixty (60) days of the earlier of either discovery by or notice
to the Seller of such breach, all of the Mortgage Loans shall, at the
Purchaser's option and subject to Subsection 8.04, be repurchased by the Seller
at the Repurchase Price. However, if the breach shall involve a representation
or warranty set forth in Subsection 8.02 and the Seller discovers or receives
notice of any such breach within two (2) years of the Closing Date, the Seller
may, at the Seller's option and provided that the Seller has a Qualified
Substitute Mortgage Loan, rather than repurchase the Mortgage Loan as provided
above, remove such Mortgage Loan (a "Deleted Mortgage Loan") and substitute in
its place a Qualified Substitute Mortgage Loan or Loans, provided that any such
substitution shall be effected not later than two (2) years after the Closing
Date. If the Seller has no Qualified Substitute Mortgage Loan, it shall
repurchase the deficient Mortgage Loan. Any repurchase of a Mortgage Loan or
Loans pursuant to the foregoing provisions of this Subsection 8.03 shall be
accomplished by either (a) if the Servicing Agreement is in effect, deposit in
the Custodial Account of the amount of the Repurchase Price for payment to the
Purchaser on the next scheduled Remittance Date, after deducting therefrom any
amount received in respect of such repurchased Mortgage Loan or Loans and being
held in the Custodial Account for future distribution or (b) if the Servicing
Agreement is no longer in effect, by direct remittance of the Repurchase Price
to the Purchaser or its designee in accordance with the Purchaser's
instructions.
At the time of repurchase or substitution, the Purchaser and the Seller
shall arrange for the reassignment of the Deleted Mortgage Loan to the Seller
and the delivery to the Seller of any documents held by the Purchaser or its
designee relating to the Deleted Mortgage Loan. In addition, upon any such
repurchase, all funds maintained in the Escrow Account with respect to such
Deleted Mortgage Loan shall be transferred to the Seller. In the event of a
repurchase or substitution, the Seller shall, simultaneously with such
reassignment, give written notice to the Purchaser that such repurchase or
substitution has taken place, amend the Mortgage Loan Schedule to reflect the
withdrawal of the Deleted Mortgage Loan from this Agreement, and, in the case
of substitution, identify a Qualified Substitute Mortgage Loan and amend the
Mortgage Loan Schedule to reflect the addition of such Qualified Substitute
Mortgage Loan to this Agreement. In connection with any such substitution, the
Seller shall be deemed to have made as to such Qualified Substitute Mortgage
Loan the representations and warranties set forth in this Agreement except that
all such representations and warranties set forth in this Agreement shall be
deemed made as of the date of such substitution. The Seller shall effect such
substitution by delivering to the Purchaser or its designee for such Qualified
Substitute Mortgage Loan the documents required by Subsection 6.03, with the
Mortgage Note endorsed as required by Subsection 6.03. No substitution will be
made in any calendar month after the Determination Date for such month. The
Seller shall deposit in the Custodial Account the Monthly Payment, or in the
event that the Servicing Agreement is no longer in effect remit directly to the
Purchaser or its designee in accordance with the Purchaser's instructions the
Monthly Payment less the Servicing Fee due, if
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<PAGE> 32
any, on such Qualified Substitute Mortgage Loan or Loans in the month following
the date of such substitution. Monthly Payments due with respect to Qualified
Substitute Mortgage Loans in the month of substitution shall be retained by the
Seller. For the month of substitution, payments to the Purchaser shall include
the Monthly Payment due on any Deleted Mortgage Loan in the month of
substitution, and the Seller shall thereafter be entitled to retain all amounts
subsequently received by the Seller in respect of such Deleted Mortgage Loan.
For any month in which the Seller substitutes a Qualified Substitute
Mortgage Loan for a Deleted Mortgage Loan, the Seller shall determine the
amount (if any) by which the aggregate principal balance of all Qualified
Substitute Mortgage Loans as of the date of substitution is less than the
aggregate Stated Principal Balance of all Deleted Mortgage Loans (after
application of scheduled principal payments due in the month of substitution).
The amount of such shortfall shall be distributed by the Seller directly to the
Purchaser or its designee in accordance with the Purchaser's instructions
within two (2) Business Days of such substitution.
In addition to such repurchase or substitution obligation, the Seller
shall indemnify the Purchaser and hold it harmless against any losses, damages,
penalties, fines, forfeitures, reasonable and necessary legal fees and related
costs, judgments, and other costs and expenses resulting from any claim,
demand, defense or assertion based on or grounded upon, or resulting from, a
breach of the Seller representations and warranties contained in this
Agreement. It is understood and agreed that the obligations of the Seller set
forth in this Subsection 8.03 to cure, substitute for or repurchase a defective
Mortgage Loan and to indemnify the Purchaser as provided in this Subsection
8.03 constitute the sole remedies of the Purchaser respecting a breach of the
foregoing representations and warranties.
Any cause of action against the Seller relating to or arising out of the
breach of any representations and warranties made in Subsections 8.01 and 8.02
shall accrue as to any Mortgage Loan upon (i) discovery of such breach by the
Purchaser or notice thereof by the Seller to the Purchaser, (ii) failure by the
Seller to cure such breach or repurchase such Mortgage Loan as specified above,
and (iii) demand upon the Seller by the Purchaser for compliance with this
Agreement.
SECTION 9. CLOSING.
The closing for the purchase and sale of the Mortgage Loans shall take
place on the Closing Date. At the Purchaser's option, the closing shall be
either: by telephone, confirmed by letter or wire as the parties shall agree,
or conducted in person, at such place as the parties shall agree.
The closing for the Mortgage Loans to be purchased on the Closing Date
shall be subject to each of the following conditions:
(a) all of the representations and warranties of the
Seller under this Agreement and under the Servicing Agreement
(with respect to each Mortgage Loan, as specified therein)
shall be true and correct as of the Closing Date and no
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<PAGE> 33
event shall have occurred which, with notice or the passage of
time, would constitute a default under this Agreement or an
Event of Default under the Servicing Agreement;
(b) the Purchaser shall have received, or the Purchaser's
attorneys shall have received in escrow, all closing
documents as specified in Section 10 of this Agreement, in
such forms as are agreed upon and acceptable to the
Purchaser, duly executed by all signatories other than
the Purchaser as required pursuant to the terms hereof;
(c) the Seller shall have delivered and released to the
Purchaser or its designee all Mortgage Loan Documents with
respect to each Mortgage Loan; and
(d) all other terms and conditions of this Agreement shall have
been complied with.
Subject to the foregoing conditions, the Purchaser shall pay to the Seller
on the Closing Date the Purchase Price, plus accrued interest pursuant to
Section 4 of this Agreement, by wire transfer of immediately available funds to
the account designated by the Seller.
SECTION 10. CLOSING DOCUMENTS.
The closing documents for the Mortgage Loans to be purchased on the
Closing Date shall consist of fully executed originals of the following
documents:
1. this Agreement;
2. the Servicing Agreement in the form of Exhibit B hereto;
3. a Custodial Account Letter Agreement or a Custodial Account
Certification, as applicable, as required under the Servicing
Agreement;
4. an Escrow Account Letter Agreement or an Escrow Account
Certification, as applicable, as required under the Servicing
Agreement;
5. an Officer's Certificate, in the form of Exhibit C hereto,
including all attachments thereto;
6. an Opinion of Counsel of the Seller/Servicer (who may be an
employee of the Seller/Servicer), in the form of Exhibit D
hereto;
7. a Security Release Certification, in the form of Exhibit E or
Exhibit F, if applicable, hereto executed by any person, as
requested by the Purchaser, if any of the Mortgage Loans have
at any time been subject to any security interest, pledge or
hypothecation for the benefit of such person;
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<PAGE> 34
8. a certificate or other evidence of merger or
change of name, signed or stamped by the applicable regulatory
authority, if any of the MortgageLoans were acquired by the
Seller by merger or acquired or originated by the Seller while
conducting business under a name other than its present name,
if applicable; and
9. the underwriting guidelines of Franklin Bank,
N.A., to be attached hereto as Exhibit I.
The Seller shall bear the risk of loss of the closing documents until such
time as they are received by the Purchaser or its attorneys.
SECTION 11. COSTS.
The Purchaser shall pay the legal fees and expenses of its attorneys. All
other costs and expenses incurred in connection with the transfer and delivery
of the Mortgage Loans including recording fees, fees for recording Assignments
of Mortgage, fees for title policy endorsements and continuations, if
applicable, the Seller's attorney's fees, shall be paid by the Seller.
SECTION 12. MERGER OR CONSOLIDATION OF THE SELLER.
The Seller will keep in full effect its existence, rights and franchises
as a national bank and will obtain and preserve its qualification to do
business as a foreign corporation in each jurisdiction in which such
qualification is or shall be necessary to protect the validity and
enforceability of this Agreement, or any of the Mortgage Loans and to perform
its duties under this Agreement.
Any Person into which the Seller may be merged or consolidated, or any
corporation resulting from any merger, conversion or consolidation to which the
Seller shall be a party, or any Person succeeding to the business of the
Seller, shall be the successor of the Seller hereunder, without the execution
or filing of any paper or any further act on the part of any of the parties
hereto, anything herein to the contrary notwithstanding; provided, however,
that the successor or surviving Person shall have a tangible net worth of at
least $30,000,000.
SECTION 13. MANDATORY DELIVERY; GRANT OF SECURITY INTEREST.
The sale and delivery on the Closing Date of the Mortgage Loans described
on the Mortgage Loan Schedule is mandatory from and after the date of the
execution of this Agreement, it being specifically understood and agreed that
each Mortgage Loan is unique and identifiable on the date hereof and that an
award of money damages would be insufficient to compensate the Purchaser for
the losses and damages incurred by the Purchaser (including damages to
prospective purchasers of the Mortgage Loans) in the event of the Seller's
failure to deliver (i) each of the Mortgage Loans or (ii) one or more Qualified
Substitute Mortgage Loans or (iii) one or more Mortgage Loans otherwise
acceptable to the Purchaser on or before the Closing Date. The Seller hereby
grants to the Purchaser a lien on and a continuing security interest in each
Mortgage Loan
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<PAGE> 35
and each document and instrument evidencing each such Mortgage Loan to secure
the performance by the Seller of its obligations under this Agreement, and the
Seller agrees that it shall hold such Mortgage Loans in custody for the
Purchaser subject to the Purchaser's (i) right to reject any Mortgage Loan (or
Qualified Substitute Mortgage Loan) under the terms of this Agreement and to
require another Mortgage Loan (or Qualified Substitute Mortgage Loan) to be
substituted therefor, and (ii) obligation to pay the Purchase Price plus accrued
interest as set forth in Section 4 hereof for the Mortgage Loans. All rights
and remedies of the Purchaser under this Agreement are distinct from, and
cumulative with, any other rights or remedies under this Agreement or afforded
by law or equity and all such rights and remedies may be exercised concurrently,
independently or successively.
SECTION 14. NOTICES.
All demands, notices and communications hereunder shall be in writing and
shall be deemed to have been duly given if mailed, by registered or certified
mail, return receipt requested, or, if by other means, when received by the
other party at the address as follows:
(i) if to the Seller:
Franklin Bank, N.A.
24725 West Twelve Mile Road
Southfield, Michigan 48034
Attention: President
(ii) if to the Purchaser:
Franklin Finance Corporation
24725 West Twelve Mile Road
Southfield, Michigan 48034
Attention: President
or such other address as may hereafter be furnished to the other party by like
notice. Any such demand, notice or communication hereunder shall be deemed to
have been received on the date delivered to or received at the premises of the
addressee (as evidenced, in the case of registered or certified mail, by the
date noted on the return receipt).
SECTION 15. SEVERABILITY CLAUSE.
Any part, provision, representation or warranty of this Agreement which is
prohibited or unenforceable or is held to be void or unenforceable in any
jurisdiction shall be ineffective, as to such jurisdiction, to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction as to any Mortgage Loan shall not invalidate or render
unenforceable such provision in any other jurisdiction. To the extent
permitted by applicable law, the parties hereto waive any provision of law
which prohibits or renders void or unenforceable any provision hereof. If the
invalidity of
32
<PAGE> 36
any part, provision, representation or warranty of this Agreement
shall deprive any party of the economic benefit intended to be conferred by
this Agreement, the parties shall negotiate, in good faith, to develop a
structure the economic effect of which is nearly as possible the same as the
economic effect of this Agreement without regard to such invalidity.
SECTION 16. COUNTERPARTS.
This Agreement may be executed simultaneously in any number of
counterparts. Each counterpart shall be deemed to be an original, and all such
counterparts shall constitute one and the same instrument.
SECTION 17. GOVERNING LAW.
The Agreement shall be construed in accordance with the laws of the State
of Michigan and the obligations, rights and remedies of the parties hereunder
shall be determined-in accordance with the substantive laws of the State of
Michigan (without regard to conflicts of laws principles), except to the extent
preempted by Federal law.
SECTION 18. INTENTION OF THE PARTIES.
It is the intention of the parties that the Purchaser is purchasing, and
the Seller is selling the Mortgage Loans and not a debt instrument of the
Seller or another security. Accordingly, the parties hereto each intend to
treat the transaction for Federal income tax purposes as a sale by the Seller,
and a purchase by the Purchaser, of the Mortgage Loans.
SECTION 19. SUCCESSORS AND ASSIGNS; ASSIGNMENT OF
PURCHASE AGREEMENT.
This Agreement shall bind and inure to the benefit of and be enforceable
by the Seller and the Purchaser and the respective permitted successors and
assigns of the Seller and the successors and assigns of the Purchaser. This
Agreement shall not be assigned, pledged or hypothecated by the Seller to a
third party without the consent of the Purchaser. This Agreement may be
assigned, pledged or hypothecated by the Purchaser without the prior consent of
the Seller. If the Purchaser assigns all or any of its rights as Purchaser
hereunder, the assignee of the Purchaser will become the "Purchaser" hereunder
to the extent of such assignment, provided that at no time shall there be more
than fifteen (15) persons having the status of "Purchaser" hereunder. Any
assignment by the Purchaser shall be accompanied by the delivery and execution
of an Assignment and Assumption Agreement (the "Assignment and Assumption
Agreement") substantially in the form attached hereto as Exhibit G. The
Servicer shall be required to remit all amounts required to be remitted to the
Purchaser hereunder to said assignee commencing with the first Remittance Date
falling after receipt of said copy of the related Assignment and Assumption
Agreement provided that the Seller receives said copy no later than three (3)
Business Days immediately prior to the first day of the month of the related
Remittance Date.
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<PAGE> 37
SECTION 20. WAIVERS.
No term or provision of this Agreement may be waived or modified unless
such waiver or modification is in writing and signed by the party against whom
such waiver or modification is sought to be enforced.
SECTION 21. EXHIBITS.
The exhibits to this Agreement are hereby incorporated and made a part
hereof and are an integral part of this Agreement.
SECTION 22. GENERAL INTERPRETIVE PRINCIPLES.
For purposes of this Agreement, except as otherwise expressly provided or
unless the context otherwise requires:
(a) the terms defined in this Agreement have the meanings
assigned to them in this Agreement and include the
plural as well as the singular, and the use of any gender
herein shall be deemed to include the other gender;
(b) accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally
accepted accounting principles;
(c) references herein to "Articles," "Sections," "Subsections,"
"Paragraphs," and other subdivisions without reference to a
document are to designated Articles, Sections, Subsections,
Paragraphs and other subdivisions of this Agreement;
(d) reference to a Subsection without further reference
to a Section is a reference to such Subsection as contained
in the same Section in which the reference appears, and this
rule shall also apply to Paragraphs and other subdivisions;
(e) the words "herein," "hereof," "hereunder" and other words
of similar import refer to this Agreement as a whole and not
to any particular provision; and
(f) the term "include" or "including" shall mean without
limitation by reason of enumeration.
SECTION 23. REPRODUCTION OF DOCUMENTS.
This Agreement and all documents relating thereto, including, without
limitation, (a) consents, waivers and modifications which may hereafter be
executed, (b) documents received by any party at the closing, and (c) financial
statements, certificates and other information previously
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<PAGE> 38
or hereafter furnished, may be reproduced by any photographic, photostatic,
microfilm, micro-card, miniature photographic or other similar process. The
parties agree that any such reproduction shall be admissible in evidence as the
original itself in any judicial or administrative proceeding, whether or not the
original is in existence and whether or not such reproduction was made by a
party in the regular course of business, and that any enlargement, facsimile or
further reproduction of such reproduction shall likewise be admissible in
evidence.
SECTION 24. FURTHER AGREEMENTS.
The Seller and the Purchaser each agree to execute and deliver to the
other such reasonable and appropriate additional documents, instruments or
agreements as may be necessary or appropriate to effectuate the purposes of
this Agreement.
SECTION 25. RECORDATION OF ASSIGNMENTS OF MORTGAGE.
To the extent permitted by applicable law, each of the Assignments of
Mortgage is subject to recordation in all appropriate public offices for real
property records in all the counties or their comparable jurisdictions in which
any or all of the Mortgaged Properties are situated, and in any other
appropriate public recording office or elsewhere, such recordation to be
effected at the Seller's expense for a single recordation with respect to each
Assignment of Mortgage in the event recordation is either necessary under
applicable law or requested by the Purchaser at its sole option.
35
<PAGE> 39
IN WITNESS WHEREOF, the parties have executed this Agreement under seal as
of the date and year first above written.
FRANKLIN FINANCE CORPORATION
(the Purchaser)
By:_______________________
Name:_____________________
Title:____________________
FRANKLIN BANK, N.A.
(the Seller)
By:_______________________
Name:_____________________
Title:____________________
36
<PAGE> 40
EXHIBIT A
CONTENTS OF EACH MORTGAGE FILE
With respect to each Mortgage Loan, the Mortgage File shall include each
of the following items, which shall be available for inspection by the
Purchaser and any prospective Purchaser, and which shall be delivered to the
Purchaser or its designee pursuant to Section 6.03 of the Mortgage Loan
Purchase and Warranties Agreement to which this Exhibit is attached (the
"Agreement"):
1. The original Mortgage Note (or, with respect to the Mortgage Loan
listed on Schedule I hereto, a lost note affidavit, executed by an officer of
the Seller, with a copy of the original note attached thereto) bearing all
intervening endorsements, endorsed "Pay to the order of Franklin Finance
Corporation, without recourse" and signed in the name of the Seller by an
authorized officer. To the extent that there is no room on the face of the
Mortgage Notes for endorsements, the endorsement may be contained on an
allonge, if state law so allows. If the Mortgage Loan was acquired by the
Seller in a merger, the endorsement must be by "[Seller], successor by merger
to [name of predecessor]". If the Mortgage Loan was acquired or originated by
the Seller while doing business under another name, the endorsement must be by
"[Seller], formerly known as [previous name]".
2. The original of any guarantee executed in connection with the Mortgage
Note.
3. The original Mortgage, with evidence of recording thereon. If in
connection with any Mortgage Loan, the Seller cannot deliver or cause to be
delivered the original Mortgage with evidence of recording thereon on or prior
to the Closing Date because of a delay caused by the public recording office
where such Mortgage has been delivered for recordation, a photocopy of such
Mortgage certified by the Seller to be true and correct will be delivered; if
such Mortgage has been lost or if such public recording office retains the
original recorded Mortgage, the Seller shall deliver or cause to be delivered
to the Purchaser, a photocopy of such Mortgage, certified by such public
recording office to be a true and complete copy of the original recorded
Mortgage.
4. The originals of all assumption, modification, consolidation or
extension agreements, if any, with evidence of recording thereon or certified
copies of such documents if the originals thereof are unavailable.
5. The original Assignment of Mortgage for each Mortgage Loan endorsed
"Pay to the order of Franklin Finance Corporation" and signed in the name of
the Seller by an authorized officer. If the Mortgage Loan was acquired by the
Seller in a merger, the Assignment of Mortgage must be made by "[Seller],
successor by merger to [name of predecessor]". If the Mortgage Loan was
acquired or originated by the Seller while doing business under another name,
the Assignment of Mortgage must be by "[Seller], formerly known as [previous
name]".
6. Originals of all intervening assignments of the Mortgage with evidence
of recording thereon if such intervening assignment has been recorded.
<PAGE> 41
7. The original mortgagee policy of title insurance or, in the event such
original title policy is unavailable, a certified true copy of the
related policy binder or commitment for title certified to be true and complete
by the title insurance company.
8. Any original security agreement executed in connection with the
Mortgage.
9. The original hazard insurance policy and, if required by law, flood
insurance policy, in accordance with Section 8.02(f) of the Agreement.
10. Residential loan application.
11. Mortgage Loan closing statement.
12. Verification of employment and income.
13. Verification of acceptable evidence of source and amount of down
payment.
14. Credit report on the Mortgagor.
15. Residential appraisal report.
16. Photograph of the Mortgaged Property.
17. Survey of the Mortgaged Property, if any.
18. Copy of each instrument necessary to complete identification of any
exception set forth in the exception schedule in the title policy, i.e., map or
plat, restrictions, easements, sewer agreements, home association declarations,
etc.
19. All required disclosure statements.
20. If available, termite report, structural engineer's report, water
potability and septic certification.
21. Sales contract.
22. Tax receipts, insurance premium receipts, ledger sheets, insurance
claim files, correspondence, current and historical computerized data files,
and all other processing, underwriting and closing papers and records which are
customarily contained in a mortgage loan file and which are required to
document the Mortgage Loan or to service the Mortgage Loan.
23. For Mortgage Loans with original LTV's greater than 85%, evidence of a
Primary Insurance Policy.
A-2
<PAGE> 42
In the event that such original or copy of any document submitted for
recordation to the appropriate public recording office is not so delivered to
the Purchaser or its designee within 90 days following the Closing Date (other
than with respect to the Assignments of Mortgage which shall be delivered to
the Purchaser or its designee in blank), and in the event that the Seller does
not cure such failure within 30 days of discovery or receipt of written
notification of such failure from the Purchaser, the related Mortgage Loan
shall, upon the request of the Purchaser, be repurchased by the Seller at the
price and in the manner specified in Subsection 8.03 of the Agreement. The
foregoing repurchase obligation shall not apply in the event that the Seller
cannot deliver such original or copy of any document submitted for recordation
to the appropriate public recording office within the specified period due to a
delay caused by the recording office in the applicable jurisdiction; provided
that the Seller shall instead deliver a recording receipt of such recording
office or, if such recording receipt is not available, an officer's certificate
of a servicing officer of the Seller, confirming that all such documents have
been accepted for recording; provided that, upon request of the Purchaser and
delivery by the Purchaser to the Seller of a schedule of the related Mortgage
Loans, the Seller shall reissue and deliver to the Purchaser or its designee
said officer's certificate relating to the related Mortgage Loans.
A-3
<PAGE> 43
EXHIBIT B
[SERVICING AGREEMENT]
<PAGE> 44
EXHIBIT C
FORM OF SELLER'S/SERVICER'S OFFICER'S CERTIFICATE
I, _______________________, hereby certify that I am the duly elected
[_______________] of Franklin Bank, N.A., a national bank (the "Seller") and
further as follows:
1. Attached hereto as Exhibit 1 is a true, correct and complete
copy of the restated Articles of Association of the Seller which is
in full force and effect on the date hereof and which has been in
effect without amendment, waiver, rescission or modification since
[_________.]
2. Attached hereto as Exhibit 2 is a true, correct and complete
copy of the bylaws of the Seller which are in effect on the date
hereof and which have been in effect without amendment, waiver,
rescission or modification since [_________.]
3. Attached hereto as Exhibit 3 is an original certificate of
due incorporation and valid existence of the Seller issued within
ten days of the date hereof, and no event has occurred since the
date thereof which would impair such standing.
4. Attached hereto as Exhibit 4 is a true, correct and complete
copy of the corporate resolutions of the Board of Directors of the
Seller authorizing the Seller to execute and deliver each of the
Mortgage Loan Purchase and Warranties Agreements, dated as of
[__________,] 1997, by and between Franklin Capital Corporation (the
"Purchaser") and the Seller (the "Purchase Agreement"), to endorse
the mortgage notes and execute the assignments of mortgages by
original [or facsimile] signature, and to execute and deliver each
of the Servicing Agreements dated as of [__________,] 1997, by and
between Franklin Capital Corporation (the "Purchaser") and the
Seller as Servicer (the "Servicing Agreement") and such resolutions
are in effect on the date hereof and have been in effect without
amendment, waiver, rescission or modification since [_________.]
5. Either (i) no consent, approval, authorization or order of
any court or governmental agency or body is required for the
execution, delivery and performance by the Seller of or compliance
by the Seller with the Purchase Agreement and the Servicing
Agreement, the sale of the mortgage loans or the consummation of the
transactions contemplated by the Purchase Agreement and the Serving
Agreement; or (ii) any required consent, approval, authorization or
order has been obtained by the Seller.
6. Neither the consummation of the transactions contemplated by,
nor the fulfillment of the terms of, the Purchase Agreement and the
Servicing Agreement conflicts or will conflict with or results or
will result in a breach of or constitutes or will constitute a
default under the Articles of Association or by-laws of the Seller,
the terms of any indenture or other agreement or instrument to which
the Seller is a
<PAGE> 45
party or by which it is bound or to which it is subject, or any
statute or order, rule, regulations, writ, injunction or decree of
any court, governmental authority or regulatory body to which the
Seller is subject or by which it is bound.
7. To the best of my knowledge, there is no action, suit,
proceeding or investigation pending or threatened against the Seller
which, in my judgment, either in any one instance or in the
aggregate, may result in any material adverse change in the
business, operations, financial condition, properties or assets of
the Seller or in any material impairment of the right or ability of
the Seller to carry on its business substantially as now conducted
or in any material liability on the part of the Seller or which
would draw into question the validity of the Purchase Agreement and
the Servicing Agreement or the mortgage loans or of any action taken
or to be taken in connection with the transactions contemplated
hereby, or which would be likely to impair materially the ability of
the Seller to perform under the terms of the Purchase Agreement and
the Servicing Agreement.
8. Each person listed on Exhibit 5 attached hereto who, as an
officer or representative of the Seller, signed the Purchase
Agreement and any other document delivered prior to or on the date
hereof in connection with any purchase described in the Purchase
Agreement was, at the respective times of such signing and delivery,
and is now, a duly elected or appointed, qualified and acting
officer or representative of the Seller, who holds the office set
forth opposite his or her name on Exhibit 5, and the signatures of
such persons appearing on such documents are their genuine
signatures. The person who, as an officer or representative of the
Seller, signed the Servicing Agreement and any other document
delivered prior to or on the date hereof in connection with any
servicing duties described in the Servicing Agreement was, at the
respective times of such signing and delivery, and is now, a duly
elected or appointed, qualified and acting officer or representative
of the Seller, who holds the office set forth beneath his or her
name on the Servicing Agreement and the signature of such person
appearing on such document is his or her genuine signature.
9. The Seller is duly authorized to engage in the transactions
described and contemplated in the Purchase Agreement and Servicing
Agreement.
C-2
<PAGE> 46
IN WITNESS WHEREOF, I have hereunto signed my name and affixed the seal of
the Seller.
Dated: ____________, 1997 By:__________________________
Name:_______________________
Title:
[Seal]
I, _________________________, a ___________________ of Franklin Bank,
N.A., hereby certify that _____________________ is the duly elected, qualified
and acting _________________ of the Seller and that the signature appearing
above is his or her genuine signature.
IN WITNESS WHEREOF, I have hereunto signed my name.
Dated: ______________, 1997 By:__________________________
Name:_________________________
Title:
C-3
<PAGE> 47
EXHIBIT 5
to Seller's/Servicer's Officer's Certificate
NAME TITLE SIGNATURE
<PAGE> 48
EXHIBIT D
FORM OF OPINION OF COUNSEL TO THE SELLER/SERVICER
_________________, 1997
Franklin Finance Corporation
24725 West Twelve Mile Road
Southfield, Michigan 48034
Dear Sirs:
You have requested my opinion, as [General] Counsel to Franklin Bank, N.A.
(the "Seller"), with respect to certain matters in connection with the sale by
the Seller of the Mortgage Loans pursuant to that certain Mortgage Loan
Purchase and Warranties Agreement by and between the Seller and Franklin
Finance Corporation (the "Purchaser"), dated as of [__________,] 1997 (the
"Purchase Agreement") which sale is in the form of whole loans, delivered
pursuant to a Purchase Agreement and serviced pursuant to a Servicing
Agreement, dated as of [__________,] 1997, by and between the Purchaser and the
Seller as Servicer (the "Servicing Agreement"). Capitalized terms not
otherwise defined herein have the meanings set forth in the Purchase Agreement
and the Servicing Agreement.
I have examined the following documents:
1. the Purchase Agreement;
2. the Servicing Agreement;
3. the form of Assignment of Mortgage;
4. the form of endorsement of the Mortgage Notes; and
5. such other documents, records and papers as we have deemed
necessary and relevant as a basis for this opinion.
To the extent I have deemed necessary and proper, I have relied upon the
representations and warranties of the Seller contained in the Purchase
Agreement and the Servicing Agreement. I have assumed the authenticity of all
documents submitted to me as originals, the genuineness of all signatures, the
legal capacity of natural persons and the conformity to the originals of all
documents.
Based upon the foregoing, it is my opinion that:
<PAGE> 49
1. The Seller is a national bank duly organized and validly
existing under the laws of the United States and is qualified to
transact business in, and is in good standing under, the laws of
Michigan.
2. The Seller has the power to engage in the transactions
contemplated by the Purchase Agreement and the Servicing Agreement
and all requisite power, authority and legal right to execute and
deliver the Purchase Agreement and the Servicing Agreement and to
perform and observe the terms and conditions of such agreements.
3. The Purchase Agreement and Servicing Agreement have been duly
authorized, executed and delivered by the Seller and are legal,
valid and binding agreements enforceable in accordance with their
respective terms against the Seller, subject to bankruptcy laws and
other similar laws of general application affecting rights of
creditors and subject to the application of the rules of equity,
including those respecting the availability of specific performance,
none of which will materially interfere with the realization of the
benefits provided thereunder or with the Purchaser's ownership of
the Mortgage Loans.
4. The Seller has been duly authorized to allow any of its
officers to execute any and all documents by original signature in
order to complete the transactions contemplated by the Purchase
Agreement and the Servicing Agreement and by original or facsimile
signature in order to execute the endorsements to the Mortgage Notes
and the Assignments of Mortgages, and the original or facsimile
signature of the officer at the Seller executing the endorsements to
the Mortgage Notes and the Assignments of Mortgages represents the
legal and valid signature of said officer of the Seller.
5. Either (i) no consent, approval, authorization or order of
any court or governmental agency or body is required for the
execution, delivery and performance by the Seller of or compliance
by the Seller with the Purchase Agreement and the Servicing
Agreement and the sale of the Mortgage Loans or the consummation of
the transactions contemplated by the Purchase Agreement and the
Servicing Agreement or (ii) any required consent, approval,
authorization or order has been obtained and the Servicing Agreement
by the Seller.
6. Neither the consummation of the transactions contemplated by,
nor the fulfillment of the terms of, the Purchase Agreement and the
Servicing Agreement conflicts or will conflict with or results or
will result in a breach of or constitutes or will constitute a
default under the Articles of Association or by-laws of the Seller,
the terms of any indenture or other agreement or instrument to which
the Seller is a party or by which it is bound or to which it is
subject, or violates any statute or order, rule, regulations, writ,
injunction or decree of any court, governmental authority or
regulatory body to which the Seller is subject or by which it is
bound.
D-2
<PAGE> 50
7. There is no action, suit, proceeding or investigation pending
or, to the best of my knowledge, threatened against the Seller
which, in my judgment, either in any one instance or in the
aggregate, may result in any material adverse change in the
business, operations, financial condition, properties or assets of
the Seller or in any material impairment of the right or ability of
the Seller to carry on its business substantially as now conducted
or in any material liability on the part of the Seller or which
would draw into question the validity of the Purchase Agreement and
the Servicing Agreement or the Mortgage Loans or of any action taken
or to be taken in connection with the transactions contemplated
thereby, or which would be likely to impair materially the ability
of the Seller to perform under the terms of the Purchase Agreement
and the Servicing Agreement.
8. The sale of each Mortgage Note and Mortgage as and in the
manner contemplated by the Purchase Agreement is sufficient to fully
transfer to the Purchaser all right, title and interest of the
Seller thereto as noteholder and mortgagee.
9. The Mortgages have been duly assigned and the Mortgage Notes
have been duly endorsed as provided in the Purchase Agreement. The
Assignments of Mortgage are in recordable form, except for the
insertion of the name of the assignee, and upon the name of the
assignee being inserted, and to the best of my knowledge, with
respect to all other states, the Assignments of Mortgage are in
recordable form, except for the insertion of the name of the
assignee, and upon the name of the assignee being inserted, are
acceptable for recording under the laws of such other states. The
endorsement of the Mortgage Notes, the delivery to the Purchaser, or
its designee, of the Assignments of Mortgage, and the delivery of
the original endorsed Mortgage Notes to the Purchaser, or its
designee, are sufficient to permit the Purchaser to avail itself of
all protection available under applicable law against the claims of
any present or future creditors of the Seller, and are sufficient to
prevent any other sale, transfer, assignment, pledge or
hypothecation of the Mortgages and the Mortgage Notes by the Seller
from being enforceable.
This opinion is given to you for your sole benefit, and no other person or
entity is entitled to rely hereon except that the purchaser or purchasers to
which you initially and directly resell the Mortgage Loans may rely on this
opinion as if it were addressed to them as of its date.
Very truly yours,
[General] Counsel
D-3
<PAGE> 51
EXHIBIT E
______________________, 1997
Federal Home Loan Bank of Chicago (the "FHLB")
________________________________
________________________________
Attention:
________________________________
________________________________
Re: Notice of Sale and Release of Collateral
Dear Sirs:
This letter serves as notice that Franklin Bank, N.A., a national bank
(the "Bank") has committed to sell to Franklin Finance Corporation under a
Mortgage Loan Purchase and Warranties Agreement, dated as of [__________,]
1997, certain mortgage loans originated or owned by the Bank. The Bank
warrants that the mortgage loans to be sold to Franklin Finance Corporation are
in addition to and beyond any collateral required to secure advances made by
the FHLB to the Bank.
The Bank acknowledges that the mortgage loans to be sold to Franklin
Finance Corporation shall not be used as additional or substitute collateral
for advances made by the FHLB. Franklin Finance Corporation understands that
the balance of the Bank's mortgage loan portfolio may be used as collateral or
additional collateral for advances made by the FHLB, and confirms that it has
no interest therein.
Execution of this letter by the FHLB shall constitute a full and complete
release of any security interest, claim, or lien which the FHLB may have
against the mortgage loans to be sold to Franklin Finance Corporation.
Very truly yours,
__________________________
By:_______________________
Name:_____________________
Title:____________________
Date:_____________________
Acknowledge and approved:
FEDERAL HOME LOAN BANK OF CHICAGO
By:_____________________
Name:___________________
Title:__________________
Date:___________________
<PAGE> 52
EXHIBIT F
FORM OF SECURITY RELEASE CERTIFICATION
I. RELEASE OF SECURITY INTEREST
The financial institution named below hereby relinquishes any and all
right, title and interest it may have in all Mortgage Loans to be purchased by
Franklin Finance Corporation from Franklin Bank, N.A. pursuant to that certain
Mortgage Loan Purchase and Warranties Agreement, dated as of [__________,
1997,] and certifies that all notes, mortgages, assignments and other documents
in its possession relating to such Mortgage Loans have been delivered and
released to Franklin Bank, N.A. or its designees, as of the date and time of
the sale of such Mortgage Loans to Franklin Finance Corporation.
Name and Address of Financial Institution
________________________________
(name)
________________________________
(Address)
By:_____________________________
II. CERTIFICATION OF RELEASE
Franklin Bank, N.A. hereby certifies to Franklin Finance Corporation that,
as of the date and time of the sale of the above-mentioned Mortgage Loans to
Franklin Finance Corporation, the security interests in the Mortgage Loans
released by the above-named financial institution comprise all security
interests relating to or affecting any and all such Mortgage Loans. The
Company warrants that, as of such time, there are and will be no other security
interests affecting any or all of such Mortgage Loans.
_________________________________
By: _____________________________
Title: ___________________________
Date:____________________________
<PAGE> 53
EXHIBIT G
FORM OF ASSIGNMENT AND ASSUMPTION AGREEMENT
ASSIGNMENT AND ASSUMPTION AGREEMENT, dated [__________________,] between
Franklin Bank, N.A., a national bank ("Assignor") and Franklin Finance
Corporation, a Michigan corporation ("Assignee"):
For good and valuable consideration the receipt and sufficiency of which
hereby are acknowledged, and in consideration of the mutual covenants herein
contained, the parties hereto hereby agree as follows:
1. The Assignor hereby grants, transfers and assigns to
Assignee, as Purchaser, all of the right, title and interest of
Assignor with respect to the mortgage loans listed on Exhibit A
attached hereto (the "Mortgage Loans"), and with respect to such
Mortgage Loans, in, to and under (a) that certain Mortgage Loan
Purchase and Warranties Agreement dated [__________,] 1997 by and
between Franklin Bank, N.A. (the "Seller") and Franklin Finance
Corporation (the "Purchase Agreement"), and (b) that certain
Servicing Agreement dated as of [___________], 1997 by and between
the Purchaser and the Seller (the "Servicing Agreement"; the
Servicing Agreement and the Purchase Agreement are collectively
referred to as the "Agreements").
2. The Assignor warrants and represents to, and covenants with,
the Assignee that:
a. the Assignor is the lawful owner of the Mortgage
Loans with the full right to transfer the Mortgage Loans free
from any and all claims and encumbrances whatsoever;
b. the Assignor has not received notice of, and has no
knowledge of, any offsets, counterclaims or other defenses
available to the Seller with respect to the Agreements or the
Mortgage Loans;
c. the Assignor has not waived or agreed to any waiver
under, or agreed to any amendment or other modification of,
the Agreements. The Assignor has no knowledge of, and has
not received notice of, any waivers under or amendments or
other modifications of, or assignments of rights or
obligations under, the Agreements; and
d. Neither the Assignor nor anyone acting on its behalf
has offered, transferred, pledged, sold or otherwise disposed
of the Mortgage Loans or any interest in the Mortgage Loans,
or solicited any offer to buy or accept a transfer, pledge or
other disposition of the Mortgage Loans, or any interest in
the Mortgage Loans or otherwise approached or negotiated with
respect to the Mortgage Loans, or any interest in the
Mortgage with any
<PAGE> 54
person in any manner, or made any general solicitation
by means of general advertising or in any other manner, or
taken any other action which would constitute a distribution
of the Mortgage Loans under the Securities Act of 1933, as
amended (the "1933 Act") or which would render the disposition
of the Mortgage Loans a violation of Section 5 of the 1933 Act
or require registration pursuant thereto.
3. The Assignee warrants and represents to, and covenants
with, the Assignor and the Seller pursuant to the Agreements that:
a. the Assignee is a corporation duly organized, validly
existing and in good standing under the laws of the
jurisdiction of its incorporation, and has all requisite
corporate power and authority to acquire, own and purchase
the Mortgage Loans;
b. the Assignee has full corporate power and authority
to execute, deliver and perform under this Assignment and
Assumption Agreement, and to consummate the transactions set
forth herein. The execution, delivery and performance of the
Assignee of this Assignment and Assumption Agreement, and the
consummation by it of the transactions contemplated hereby,
have been duly authorized by all necessary corporate action
of the Assignee. This Assignment and Assumption Agreement
has been duly executed and delivered by the Assignee and
constitutes the valid and legally binding obligation of the
Assignee enforceable against the Assignee in accordance with
its respective terms;
c. To the best of Assignee's knowledge, no material
consent, approval, order or authorization of, or declaration,
filing or registration with, any governmental entity is
required to be obtained or made by the Assignee in connection
with the execution, delivery or performance by the Assignee
of this Assignment and Assumption Agreement, or the
consummation by it of the transactions contemplated hereby;
d. The Assignee agrees to be bound, as Purchaser, by all
of the terms, covenants and conditions of the Agreements, the
Mortgage Loans, and from and after the date hereof, the
Assignee assumes for the benefit of each of the Seller and
the Assignor all of the Assignor' s obligations as Purchaser
thereunder, including, without limitation, the limitation on
assignment set forth in Section 19 of the Purchase Agreement;
e. The Assignee understands that the Mortgage Loans have
not been registered under the 1933 Act or the securities laws
of any state;
G-2
<PAGE> 55
f. The purchase price being paid by the Assignee for the
Mortgage Loans is in excess of $250,000 and will be paid by
cash remittance of the full purchase price within sixty (60)
days of the sale;
g. The Assignee is acquiring the Mortgage Loans for
investment for its own account only and not for any other
person;
h. The Assignee considers itself a sophisticated
institutional investor having such knowledge and experience
in financial and business matters that it is capable of
evaluating the merits and risks of investment in the Mortgage
Loans;
i. The Assignee has been furnished with all information
regarding the Mortgage Loans that it has requested from the
Assignor or the Seller;
j. Neither the Assignee nor anyone acting on its behalf
has offered, transferred, pledged, sold or otherwise disposed
of the Mortgage Loans or any interest in the Mortgage Loans,
or solicited any offer to buy or accept a transfer, pledge or
other disposition of the Mortgage Loans or any interest in
the Mortgage Loans, or otherwise approached or negotiated
with respect to the Mortgage Loans or any interest in the
Mortgage Loans with any person in any manner which would
constitute a distribution of the Mortgage Loans under the
1933 Act or which would render the disposition of the
Mortgage Loans a violation of Section 5 of the 1933 Act or
require registration pursuant thereto, nor will it act, nor
has it authorized or will it authorize any person to act, in
such manner with respect to the Mortgage Loans; and
k. Either: (1) the Assignee is not an employee benefit
plan ("Plan") within the meaning of section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended
("ERISA") or a plan (also "Plan") within the meaning of
section 4975(e)(1) of the Internal Revenue Code of 1986
("Code"), and the Assignee is not directly or indirectly
purchasing the Mortgage Loans on behalf of, investment
manager of, as named fiduciary of, as Trustee of, or with
assets of, a Plan; or (2) the Assignee's purchase of the
Mortgage Loans will not result in a prohibited transaction
under section 406 of ERISA or section 4975 of the Code.
4. (a) The Assignee's address for purposes of all notices and
correspondence related to the Mortgage Loans and the Agreements is:
24725 West Twelve Mile Road, Southfield, Michigan 48034.
The Assignee's wire instructions for purposes of all remittances and
payments related to the Mortgage Loans are to be confirmed in writing.
G-3
<PAGE> 56
(b) The Assignor's address for purposes for all notices
and correspondence related to the Mortgage Loans and this
Agreement is: 24725 West Twelve Mile Road, Southfield,
Michigan 48034.
5. This Agreement shall be construed in accordance with the
substantive laws of the State of Michigan (without regard to
conflicts of laws principles) and the obligations, rights and
remedies of the parties hereunder shall be determined in accordance
with such laws, except to the extent preempted by federal law.
6. This Agreement shall inure to the benefit of the successors
and assigns of the parties hereto. This Agreement may not be
assigned by the Assignee without the express written consent of the
Assignor. Any entity into which the Assignor or Assignee may be
merged or consolidated shall, without the requirement for any
further writing, be deemed the Assignor or Assignee, respectively,
hereunder.
7. No term or provision of this Agreement may be waived or
modified unless such waiver or modification is in writing and signed
by the party against whom such waiver or modification is sought to
be enforced.
8. This Agreement shall survive the conveyance of the Mortgage
Loans and the assignment of the Agreements by the Assignor.
9. Notwithstanding the assignment of the Agreements by either
the Assignor or Assignee, this Agreement shall not be deemed
assigned by the Assignor or the Assignee unless assigned by separate
written instrument.
10. For the purpose for facilitating the execution of this
Agreement as herein provided and for other purposes, this Agreement
may be executed simultaneously in any number of counterparts, each
of which counterparts shall be deemed to be an original, and such
counterparts shall constitute and be one and the same instrument.
G-4
<PAGE> 57
IN WITNESS WHEREOF, the parties have caused this Assignment and Assumption
Agreement to be executed by their duly authorized officers as of the date first
above written.
_________________________ ______________________________
Assignor Assignee
By:______________________ By:__________________________
Its:_____________________ Its:_________________________
Taxpayer Taxpayer
Identification No.________ Identification No.________________
G-5
<PAGE> 1
EXHIBIT 10.2
- --------------------------------------------------------------------------------
MORTGAGE LOAN PURCHASE AND WARRANTIES AGREEMENT
FRANKLIN FINANCE CORPORATION
PURCHASER
FRANKLIN BANK, N.A.
SELLER
DATED AS OF [__________], 1997
CONVENTIONAL COMMERCIAL MORTGAGE LOANS
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
SECTION 1. DEFINITIONS 1
SECTION 2. AGREEMENT TO PURCHASE 8
SECTION 3. RESERVED.] 8
SECTION 4. PURCHASE PRICE 8
SECTION 5. EXAMINATION OF MORTGAGE FILES 9
SECTION 6. CONVEYANCE FROM SELLER TO PURCHASER 9
Subsection 6.01. Conveyance of Mortgage Loans; Possession of Servicing Files 9
Subsection 6.02. Books and Records 10
Subsection 6.03. Delivery of Mortgage Loan Documents 10
SECTION 7. SERVICING OF THE MORTGAGE LOANS 11
SECTION 8. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE
SELLER; REMEDIES FOR BREACH 11
Subsection 8.01. Representations and Warranties Regarding the Seller 11
Subsection 8.02. Representations and Warranties Regarding Individual
Mortgage Loans 14
Subsection 8.03. Remedies for Breach of Representations and Warranties 24
SECTION 9. CLOSING 26
SECTION 10. CLOSING DOCUMENTS 26
SECTION 11. COSTS 27
SECTION 12. MERGER OR CONSOLIDATION OF THE SELLER 27
SECTION 13. MANDATORY DELIVERY; GRANT OF SECURITY INTEREST 28
SECTION 14. NOTICES 28
SECTION 15. SEVERABILITY CLAUSE 29
SECTION 16. COUNTERPARTS 29
</TABLE>
ii
<PAGE> 3
<TABLE>
<S> <C> <C>
SECTION 17. GOVERNING LAW 29
SECTION 18. INTENTION OF THE PARTIES 29
SECTION 19. SUCCESSORS AND ASSIGNS; ASSIGNMENT OF PURCHASE AGREEMENT 30
SECTION 20. WAIVERS 30
SECTION 21. EXHIBITS 30
SECTION 22. GENERAL INTERPRETIVE PRINCIPLES 30
SECTION 23. REPRODUCTION OF DOCUMENTS 31
SECTION 24. FURTHER AGREEMENTS 31
SECTION 25. RECORDATION OF ASSIGNMENTS OF MORTGAGE 31
</TABLE>
EXHIBITS
EXHIBIT A CONTENTS OF EACH MORTGAGE FILE
EXHIBIT B FORM OF SERVICING AGREEMENT
EXHIBIT C FORM OF SELLER'S/SERVICER'S OFFICER'S CERTIFICATE
EXHIBIT D FORM OF OPINION OF COUNSEL TO THE SELLER/SERVICER
EXHIBIT E FORM OF SECURITY RELEASE CERTIFICATION
EXHIBIT F FORM OF SECURITY RELEASE CERTIFICATION
EXHIBIT G FORM OF ASSIGNMENT AND ASSUMPTION AGREEMENT
EXHIBIT H MORTGAGE LOAN SCHEDULE
EXHIBIT I THE UNDERWRITING GUIDELINES OF THE SELLER
iii
<PAGE> 4
MORTGAGE LOAN PURCHASE AND WARRANTIES AGREEMENT
This MORTGAGE LOAN PURCHASE AND WARRANTIES AGREEMENT (the "Agreement"),
dated as of [__________,] 1997, by and between Franklin Finance Corporation, a
Michigan corporation, having an office at 24725 West Twelve Mile Road,
Southfield, Michigan 48034 (the "Purchaser") and Franklin Bank, N.A., a
national bank, having an office at 24725 West Twelve Mile Road, Southfield,
Michigan 48034 (the "Seller").
WITNESSETH:
WHEREAS, the Seller desires to sell to the Purchaser, and the Purchaser
desires to purchase from the Seller, certain conventional commercial mortgage
loans (the "Mortgage Loans") on a servicing retained basis as described herein,
and which shall be delivered as whole loans on the Closing Date, as defined
below;
WHEREAS, each Mortgage Loan is secured by a mortgage, deed of trust or
other security instrument creating a first lien on a commercial property
located in the jurisdiction indicated on the Mortgage Loan Schedule; and
WHEREAS, the Purchaser and the Seller wish to prescribe the manner of the
conveyance, servicing and control of the Mortgage Loans.
NOW, THEREFORE, in consideration of the promises and mutual agreements set
forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Purchaser and the Seller
agree as follows:
SECTION 1. DEFINITIONS.
For purposes of this Agreement the following capitalized terms shall have
the respective meanings set forth below. Other capitalized terms used in this
Agreement and not defined herein shall have the respective meanings set forth
in the Servicing Agreement attached as Exhibit B hereto.
"Accepted Servicing Practices" means, with respect to any Mortgage Loan,
those mortgage servicing practices of prudent mortgage lending institutions
which service mortgage loans of the same type as such Mortgage Loan in the
jurisdiction where the related Mortgaged Property is located.
"Affiliate" means, with respect to any specified Person, any other Person
controlling or controlled by or under common control with such specified
Person. For the purposes of this definition, "control" when used with respect
to any specified Person means the power to direct the management and policies
of such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
<PAGE> 5
"Agreement" means this Mortgage Loan Purchase and Warranties Agreement and
all amendments hereof and supplements hereto.
"ALTA" means The American Land Title Association or any successor thereto.
"Ancillary Income" means all late charges, escrow account benefits,
reinstatement fees, and similar types of fees arising from or in connection
with any Mortgage, to the extent not otherwise payable to the Mortgagor under
applicable law or pursuant to the terms of the related Mortgage Note.
"Appraised Value" means the value set forth in an appraisal made in
connection with the origination of the related Mortgage Loan as the value of
the Mortgaged Property.
"Assignment and Assumption Agreement" has the meaning set forth in Section
19.
"Assignment of Mortgage" means an assignment of the Mortgage delivered in
blank, notice of transfer or equivalent instrument in recordable form,
sufficient under the laws of the jurisdiction wherein the related Mortgaged
Property is located to reflect the sale of the Mortgage to the Purchaser.
"Business Day" means any day other than (i) a Saturday or Sunday, or (ii)
a day on which banking and savings and loan institutions, in the State of
Michigan, are authorized or obligated by law or executive order to be closed.
"Closing Date" means [_________,] 1997, or such other date as is mutually
agreed upon by the parties.
"Code" means Internal Revenue Code of 1986, as amended.
"Condemnation Proceeds" means all awards or settlements in respect of a
Mortgaged Property, whether permanent or temporary, partial or entire, by
exercise of the power of eminent domain or condemnation, to the extent not
required to be released to a Mortgagor in accordance with the terms of the
related Mortgage Loan Documents.
"Conventional Loan" means a conventional commercial mortgage loan which is
a Mortgage Loan.
"Convertible Mortgage Loan" means any individual Mortgage Loan purchased
pursuant to this Agreement which contains a provision whereby the Mortgagor is
permitted to convert the Mortgage Loan to a fixed rate Mortgage Loan in
accordance with the terms of the related Mortgage Note.
"Custodial Account" means the separate trust account created and
maintained pursuant to Section 2.04 of the Servicing Agreement.
2
<PAGE> 6
"Cut-off Date" means [__________, 1997.]
"Deleted Mortgage Loan" means a Mortgage Loan that is repurchased or
replaced with a Qualified Substitute Mortgage Loan by the Seller in accordance
with the terms of this Agreement.
"Determination Date" means the earlier of two (2) Business Days prior to
the related Remittance Date or the 15th day of the month in which the related
Remittance Date occurs.
"Due Date" means the day of the month on which the Monthly Payment is due
on a Mortgage Loan, exclusive of any days of grace.
"Escrow Account" means the separate account created and maintained
pursuant to Section 2.06 of the Servicing Agreement with respect to each
Mortgage Loan, as specified in the Servicing Agreement.
"Escrow Payments" means, with respect to any Mortgage Loan, any payments
required to be escrowed by the Mortgagor with the mortgagee pursuant to the
Mortgage or any other document, including without limitation the amounts
constituting ground rents, taxes, assessments, water rates, sewer rents,
municipal charges, mortgage insurance premiums, fire and hazard insurance
premiums.
"Insurance Proceeds" means, with respect to each Mortgage Loan, proceeds
of insurance policies insuring the Mortgage Loan or the related Mortgaged
Property.
"Interest Rate Adjustment Date" means, with respect to each Variable Rate
Mortgage Loan, the date, specified in the related Mortgage Note and the
Mortgage Loan Schedule, on which the Mortgage Interest Rate is adjusted.
"Liquidation Proceeds" means cash received in connection with the
liquidation of a defaulted Mortgage Loan, whether through the sale or
assignment of such Mortgage Loan, trustee's sale, foreclosure sale or
otherwise, or the sale of the related Mortgaged Property if the Mortgaged
Property is acquired in satisfaction of the Mortgage Loan.
"Loan-to-Value Ratio" or "LTV" means, with respect to any Mortgage Loan,
the ratio (expressed as a percentage) of the original principal amount of the
Mortgage Loan to the lesser of (a) the Appraised Value of the Mortgaged
Property at origination and (b) if the Mortgage Loan was made to finance the
acquisition of the related Mortgaged Property, the purchase price of the
Mortgaged Property.
"Monthly Payment" means the scheduled monthly payment of principal and
interest on a Mortgage Loan.
"Mortgage" means the mortgage, deed of trust or other instrument securing
a Mortgage Note, which creates a first lien on an unsubordinated estate in fee
simple in real property securing the Mortgage Note; except that with respect to
real property located in jurisdictions in which the
3
<PAGE> 7
use of leasehold estates for commercial properties is a widely accepted
practice, the mortgage, deed of trust or other instrument securing the Mortgage
Note may secure and create a first lien upon a leasehold estate of the
Mortgagor.
"Mortgage File" means the items pertaining to a particular Mortgage Loan
referred to in Exhibit A annexed hereto, and any additional documents required
to be added to the Mortgage File pursuant to this Agreement.
"Mortgage Interest Rate" means the annual rate of interest borne on a
Mortgage Note, which, in the case of an Variable Rate Mortgage Loan, shall be
adjusted from time to time, with respect to each Mortgage Loan.
"Mortgage Loan" means an individual Mortgage Loan which is the subject of
this Agreement, each Mortgage Loan originally sold and subject to this
Agreement being identified on the applicable Mortgage Loan Schedule, which
Mortgage Loan includes without limitation the Mortgage File, the Monthly
Payments, Principal Prepayments, Liquidation Proceeds, Condemnation Proceeds,
Insurance Proceeds, and all other rights, benefits, proceeds and obligations
arising from or in connection with such Mortgage Loan, excluding replaced or
repurchased mortgage loans.
"Mortgage Loan Documents" means, with respect to each Mortgage Loan, the
following documents pertaining to such Mortgage Loan:
a. The original Mortgage Note bearing all intervening
endorsements, endorsed "Pay to the order of Franklin Finance
Corporation, without recourse" and signed in the name of the Seller
by an authorized officer. To the extent that there is no room on the
face of the Mortgage Notes for endorsements, the endorsement may be
contained on an allonge, if state law so allows. If the Mortgage
Loan was acquired by the Seller in a merger, the endorsement must be
by "[Seller], successor by merger to [name of predecessor]". If the
Mortgage Loan was acquired or originated by the Seller while doing
business under another name, the endorsement must be by "[Seller],
formerly known as [previous name]"; and
b. The original Assignment of Mortgage for each Mortgage Loan in
form and substance acceptable for recording endorsed "Pay to the
order of Franklin Finance Corporation" and signed in the name of the
Seller. If the Mortgage Loan was acquired by the Seller in a merger,
the Assignment of Mortgage must be made by "[Seller], successor by
merger to [name of predecessor]". If the Mortgage Loan was acquired
or originated by the Seller while doing business under another name,
the Assignment of Mortgage must be by "[Seller], formerly known as
[previous name]".
c. The original of any guarantee executed in connection with the
Mortgage Note.
4
<PAGE> 8
d. The original Mortgage, with evidence of recording thereon. If
in connection with any Mortgage Loan, the Seller cannot deliver or
cause to be delivered the original Mortgage with evidence of
recording thereon on or prior to the Closing Date because of a delay
caused by the public recording office where such Mortgage has been
delivered for recordation, a photocopy of such Mortgage certified by
the Seller to be true and correct will be delivered; if such
Mortgage has been lost or if such public recording office retains
the original recorded Mortgage, the Seller shall deliver or cause to
be delivered to the Purchaser, a photocopy of such Mortgage,
certified by such public recording office to be a true and complete
copy of the original recorded Mortgage.
e. The originals of all assumption, modification, consolidation
or extension agreements, if any, with evidence of recording thereon
or certified copies of such documents if the originals are
unavailable.
f. Originals of all intervening Assignments of the Mortgage with
evidence of recording thereon, or if any such intervening assignment
has not been returned from the applicable recording office, a
photocopy of each such assignment certified by the Seller to be true
and correct will be delivered, or if such assignment has been lost
or if such public recording office retains the original recorded
assignments of mortgage, the Seller shall deliver or cause to be
delivered to the Purchaser, a photocopy of such intervening
assignment, certified by such public recording office to be a true
and complete copy of the original recorded intervening assignment.
g. The original mortgagee policy of title insurance or, in the
event such original title policy is unavailable, a certified true
copy of the related policy binder or commitment for title certified
to be true and complete by the title insurance company; provided
that the original mortgagee policy of title insurance shall be
delivered promptly after receipt by the Seller thereof but in no
event later than one hundred twenty (120) days from and after the
Closing Date.
h. Any security agreement, chattel mortgage or equivalent
executed in connection with the Mortgage.
"Mortgage Loan Schedule" means the schedule of Mortgage Loans attached
hereto as Exhibit J setting forth at least the following information with
respect to each Mortgage Loan: (1) the Seller's Mortgage Loan identifying
number; (2) the Mortgagor's name; (3) the street address of the Mortgaged
Property including the state; (4) a code indicating whether the Mortgaged
Property is owner-occupied; (5) the type of commercial property constituting
the Mortgaged Property; (6) the type of Mortgage Loan (i.e., whether the
Mortgage Loan bears interest at a fixed or variable rate); (7) the original
months to maturity or the remaining months to maturity from the Cut-off Date,
in any case based on the original amortization schedule and, if different, the
maturity expressed in the same manner but based on the actual amortization
schedule; (8) the Loan-to-Value Ratio at origination; (9) the Mortgage Interest
Rate as of the Cut-off Date; (10) the
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<PAGE> 9
stated maturity date; (11) the amount of the Monthly Payment as of the Cut-off
Date; (12) the original principal amount of the Mortgage Loan; (13) the
principal balance of the Mortgage Loan as of the close of business on the
Cut-off Date, after deduction of payments of principal due on or before the
Cut-off Date whether or not collected; (14) a code indicating the purpose of the
loan (i.e., purchase, rate and term refinance, equity take-out refinance); (15)
the Interest Rate Adjustment Date with respect to any Variable Rate Mortgage
Loan; (16) a code indicating whether the Mortgage Loan is a Convertible Mortgage
Loan; (17) the Servicing Fee Rate; (18) with respect to any Variable Rate
Mortgage Loan, the index pursuant to which the Mortgage Interest Rate is
determined and (19) the number of times during the 12 month period preceding the
Closing Date that any Monthly Payment has been received thirty or more days
after its Due Date. With respect to the Mortgage Loans in the aggregate, the
Mortgage Loan Schedule shall set forth the following information, as of the
Cut-off Date: (1) the number of Mortgage Loans; and (2) the current aggregate
outstanding principal balance of the Mortgage Loans.
"Mortgage Note" means the note or other evidence of the indebtedness of a
Mortgagor secured by a Mortgage.
"Mortgaged Property" means the real property securing repayment of the
debt evidenced by a Mortgage Note.
"Mortgagor" means the obligor on a Mortgage Note.
"Officer's Certificate" means a certificate signed by the Chairman of the
Board or the Vice Chairman of the Board or a President or a Vice President and
by the Treasurer or the Secretary or one of the Assistant Treasurers or
Assistant Secretaries of the Seller, and delivered to the Purchaser as required
by this Agreement.
"Opinion of Counsel" means a written opinion of counsel, who may be
counsel for the Seller, reasonably acceptable to the Purchaser.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, limited liability company,
unincorporated organization, government or any agency or political subdivision
thereof.
"Prime Rate" means the prime rate announced to be in effect from time to
time, as published as the average rate in The Wall Street Journal (Chicago
edition).
"Principal Prepayment" means any payment or other recovery of principal on
a Mortgage Loan which is received in advance of its scheduled Due Date,
including any prepayment penalty or premium thereon and which is not
accompanied by an amount of interest representing scheduled interest due on any
date or dates in any month or months subsequent to the month of prepayment.
"Purchase Price" means the price paid on the Closing Date by the Purchaser
to the Seller in exchange for the Mortgage Loans purchased on the Closing Date
as set forth in Section 4 of this Agreement.
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"Purchaser" means Franklin Finance Corporation or its successor in
interest or assigns or any successor to the Purchaser under this Agreement as
herein provided.
"Qualified Appraiser" means an appraiser who had no interest, direct or
indirect in the Mortgaged Property or in any loan made on the security thereof,
and whose compensation is not affected by the approval or disapproval of the
Mortgage Loan, and such appraiser and the appraisal made by such appraiser both
satisfy the requirements of Title XI of the Federal Institutions Reform,
Recovery, and Enforcement Act of 1989 and the regulations promulgated
thereunder, all as in effect on the date the Mortgage Loan was originated.
"Qualified Insurer" means an insurance company duly qualified as such
under the laws of the states in which the Mortgaged Properties are located,
duly authorized and licensed in such states to transact the applicable
insurance business and to write the insurance provided, and in the two highest
rating categories by Best's with respect to hazard and flood insurance.
"Qualified Substitute Mortgage Loan" means a mortgage loan eligible to be
substituted by the Seller for a Deleted Mortgage Loan which must, on the date
of such substitution, (i) have an outstanding principal balance, after
deduction of all scheduled payments due in the month of substitution (or in the
case of a substitution of more than one mortgage loan for a Deleted Mortgage
Loan, an aggregate principal balance), not in excess of the outstanding
principal balance of the Deleted Mortgage Loan (the amount of any shortfall
will be deposited in the Custodial Account by the Seller in the month of
substitution); (ii) have a Mortgage Interest Rate not less than and not more
than 1.00% greater than the Mortgage Interest Rate of the Deleted Mortgage
Loan; (iii) have a remaining term to maturity not greater than and not more
than one year less than that of the Deleted Mortgage Loan (iv) be of the same
type as the Deleted Mortgage Loan; and (v) comply with each representation and
warranty (respecting individual Mortgage Loans) set forth in Section 8.02
hereof.
"Remittance Date" means the date specified in the Servicing Agreement
(with respect to each Mortgage Loan, as specified therein).
"Repurchase Price" means, with respect to any Mortgage Loan, a price equal
to (i) the unpaid principal balance of such Mortgage Loan plus (ii) interest on
such unpaid principal balance of such Mortgage Loan at the Mortgage Interest
Rate from the last date through which interest has been paid and distributed to
the Purchaser to the date of repurchase, less amounts received or advanced, if
any, by the Seller in respect of such repurchased Mortgage Loan.
"RESPA" means Real Estate Settlement Procedures Act, as amended from time
to time.
"Seller" means Franklin Bank, N.A., its successors in interest and
assigns.
"Servicing Agreement" means the agreement, attached as Exhibit B hereto,
to be entered into by the Purchaser and the Seller, as servicer, providing for
the Seller to service the Mortgage Loans as specified by the Servicing
Agreement.
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"Servicing Fee" means, with respect to each Mortgage Loan, subject to the
Servicing Agreement, the amount of the annual fee the Purchaser shall pay to
the Seller, which shall for a period of one full month be equal to one-twelfth
of the product of (a) the Servicing Fee Rate and (b) the outstanding principal
balance of such Mortgage Loan. Such fee shall be payable monthly, and shall be
pro-rated for any portion of a month during which the Mortgage Loan is serviced
by the Seller under the Servicing Agreement. The obligation of the Purchaser to
pay the Servicing Fee is limited to, and the Servicing Fee is payable solely
from, the interest portion (including recoveries with respect to interest from
Liquidation Proceeds, to the extent permitted by this Agreement) of such
Monthly Payment collected by the Seller, or as otherwise provided under this
Agreement. In addition to the Servicing Fee, the Seller shall be entitled to
retain Ancillary Income.
"Servicing Fee Rate" means, with respect to each Mortgage Loan, the rate
specified in the Mortgage Loan Schedule with respect to such Mortgage Loan.
"Servicing File" means with respect to each Mortgage Loan, the file
retained by the Seller during the period in which the Seller is acting as
servicer pursuant to the Servicing Agreement consisting of originals of all
documents in the Mortgage File which are not delivered to the Purchaser or its
designee and copies of the Mortgage Loan Documents.
"Stated Principal Balance" means as to each Mortgage Loan, (i) the
principal balance of the Mortgage Loan at the Cut-off Date after giving effect
to payments of principal due on or before such date, whether or not received,
minus (ii) all amounts previously distributed to the Purchaser with respect to
the related Mortgage Loan representing payments or recoveries of principal or
advances in lieu thereof.
"Variable Rate Mortgage Loan" means any individual Mortgage Loan purchased
pursuant to this Agreement the interest rate of which adjusts periodically
based on the index identified in the Mortgage Loan Schedule.
SECTION 2. AGREEMENT TO PURCHASE.
The Seller agrees to sell and the Purchaser agrees to purchase Mortgage
Loans having an aggregate principal balance on the Cut-off Date in an amount
equal to $[__________,] or in such other amount as agreed by the Purchaser and
the Seller as evidenced by the actual aggregate principal balance of the
Mortgage Loans accepted by the Purchaser on the Closing Date.
[SECTION 3. RESERVED.]
SECTION 4. PURCHASE PRICE.
The Purchase Price for the Mortgage Loans listed on the Mortgage Loan
Schedule shall be $[__________,] or in such other amount as agreed by the
Purchaser and the Seller as evidenced by the actual aggregate principal balance
of the Mortgage Loans accepted by the Purchaser on the Closing Date. The
initial principal amount of the Mortgage Loans shall be the aggregate principal
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balance of the Mortgage Loans, so computed as of the Cut-off Date, after
application of scheduled payments of principal due on or before the Cut-off
Date whether or not collected.
In addition to the Purchase Price as described above, the Purchaser shall
pay to the Seller, at closing, accrued interest on the initial principal amount
of the related Mortgage Loans at the weighted average Mortgage Interest Rate of
those Mortgage Loans, minus any amounts attributable to Servicing Fees as
provided in the Servicing Agreement from the Cut-off Date through the day prior
to the Closing Date, inclusive.
The Purchase Price plus accrued interest as set forth in the preceding
paragraph shall be paid on the Closing Date by wire transfer of immediately
available funds.
The Purchaser shall be entitled to (l) all scheduled principal due after
the Cut-off Date, (2) all other recoveries of principal collected on or after
the Cut-off Date (provided, however, that all scheduled payments of principal
due on or before the Cut-off Date and collected after the Cut-off Date shall
belong to the Seller), and (3) all payments of interest on the Mortgage Loans
net of applicable Servicing Fees collected on or after the Cut-off Date (minus
that portion of any such payment which is allocable to the period prior to the
Cut-off Date). The outstanding principal balance of each Mortgage Loan as of
the Cut-off Date is determined after application of payments of principal due
on or before the Cut-off Date whether or not collected, together with any
unscheduled principal prepayments collected prior to the Cut-off Date;
provided, however, that payments of scheduled principal and interest prepaid
for a Due Date beyond the Cut-off Date shall not be applied to the principal
balance as of the Cut-off Date. Such prepaid amounts shall be the property of
the Purchaser. Any such prepaid amounts shall be deposited into the Custodial
Account, which account is established for the benefit of the Purchaser for
subsequent remittance to the Purchaser.
SECTION 5. EXAMINATION OF MORTGAGE FILES.
Prior to the date hereof, the Seller has (a) delivered to the Purchaser or
its designee in escrow, for examination with respect to each Mortgage Loan to
be purchased, the related Mortgage File, including a copy of the Assignment of
Mortgage, pertaining to each Mortgage Loan, or (b) made the related Mortgage
File available to the Purchaser for examination at the Seller's offices or such
other location as shall otherwise be agreed upon by the Purchaser and the
Seller. The fact that the Purchaser or its designee has conducted or has failed
to conduct any partial or complete examination of the Mortgage Files shall not
affect the Purchaser's (or any of its successor's) rights to demand repurchase,
substitution or other relief as provided herein.
SECTION 6. CONVEYANCE FROM SELLER TO PURCHASER.
SUBSECTION 6.01. CONVEYANCE OF MORTGAGE LOANS; POSSESSION OF SERVICING
FILES.
The Seller hereby agrees to sell, transfer, assign, set over and convey to
the Purchaser on the Closing Date, without recourse, but subject to the terms
of this Agreement, all right, title and interest of the Seller in and to the
Mortgage Loans and the Mortgage Files and all rights and
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obligations arising under the documents contained therein. The Servicing File
shall be retained by the Seller in accordance with the terms of the Servicing
Agreement and, as provided therein, shall be appropriately identified in the
Seller's computer system and/or books and records, as appropriate, to clearly
reflect the sale of the related Mortgage Loan to the Purchaser.
SUBSECTION 6.02. BOOKS AND RECORDS.
Record title to each Mortgage Loan as of the Closing Date shall be in the
name of the Seller. Notwithstanding the foregoing, each Mortgage and related
Mortgage Note shall be possessed solely by the Purchaser or the appropriate
designee of the Purchaser, as the case may be. All rights arising out of the
Mortgage Loans including, but not limited to, all funds received by the Seller
after the Cut-off Date on or in connection with a Mortgage Loan shall be vested
in the Purchaser or one or more of its designees; provided, however, that all
funds received on or in connection with a Mortgage Loan shall be received and
held by the Seller in trust for the benefit of the Purchaser or its designee,
as the case may be, as the owner of the Mortgage Loans pursuant to the terms of
this Agreement.
The sale of each Mortgage Loan shall be reflected on the Seller's balance
sheet and other financial statements as a sale of assets by the Seller.
SUBSECTION 6.03. DELIVERY OF MORTGAGE LOAN DOCUMENTS.
The Seller shall deliver and release to the Purchaser or its designee on
the Closing Date the Mortgage Loan Documents with respect to each Mortgage Loan
set forth on the Mortgage Loan Schedule.
The Seller shall forward to the Purchaser or its designee original
documents evidencing an assumption, modification, consolidation, conversion or
extension of any Mortgage Loan entered into in accordance with this Agreement
within two (2) weeks of their execution, provided, however, that the Seller
shall provide the Purchaser or its designee with a certified true copy of any
such document submitted for recordation within two (2) weeks of its execution,
and shall promptly provide the original of any document submitted for
recordation or a copy of such document certified by the appropriate public
recording office to be a true and complete copy of the original within ninety
(90) days of its submission for recordation.
In the event that such original or copy of any document submitted for
recordation to the appropriate public recording office is not so delivered to
the Purchaser or its designee within 90 days following the Closing Date (other
than with respect to the Assignments of Mortgage which shall be delivered to
the Purchaser or its designee in blank), and in the event that the Seller does
not cure such failure within 30 days of discovery or receipt of written
notification of such failure from the Purchaser, the related Mortgage Loan
shall, upon the request of the Purchaser, be repurchased by the Seller at the
price and in the manner specified in Subsection 8.03. The foregoing repurchase
obligation shall not apply in the event that the Seller cannot deliver, or
cause to be delivered, such original or copy of any document submitted for
recordation to the appropriate public recording office within the specified
period due to a delay caused by the
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recording office in the applicable jurisdiction; provided that the Seller shall
instead deliver, or cause to be delivered, a recording receipt of such recording
office or, if such recording receipt is not available, an officer's certificate
of a servicing officer of the Seller, confirming that such documents have been
accepted for recording; provided that, upon request of the Purchaser and
delivery by the Purchaser to the Seller of a schedule of the related Mortgage
Loans, the Seller shall reissue and deliver to the Purchaser or its designee
said officer's certificate relating to the related Mortgage Loans.
The Seller shall pay all fees or costs in transferring all original
documents to the Purchaser or its designee. The Purchaser or its designee shall
be responsible for recording the Assignments of Mortgage and shall be
reimbursed by the Seller for the reasonable costs associated therewith pursuant
to the preceding sentence.
SECTION 7. SERVICING OF THE MORTGAGE LOANS.
The Mortgage Loans have been sold by the Seller to the Purchaser on a
servicing retained basis. The Purchaser shall retain the Seller as independent
contract servicer of the Mortgage Loans pursuant to and in accordance with the
terms and conditions contained in the Servicing Agreement. The Purchaser and
the Seller shall execute the Servicing Agreement on the Closing Date in the
form attached hereto as Exhibit B.
Pursuant to the Servicing Agreement, the Seller shall begin servicing the
Mortgage Loans on behalf of the Purchaser and shall be entitled to the
Servicing Fee and any Ancillary Income with respect to such Mortgage Loans from
the Closing Date until the termination of the Servicing Agreement with respect
to any of the Mortgage Loans as set forth in the Servicing Agreement. The
Seller shall conduct such servicing in accordance with the terms of the
Servicing Agreement.
SECTION 8. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE
SELLER; REMEDIES FOR BREACH.
SUBSECTION 8.01. REPRESENTATIONS AND WARRANTIES REGARDING THE SELLER.
The Seller represents, warrants and covenants to the Purchaser that as of
the date hereof and as of the Closing Date:
(a) Due Organization and Authority; Enforceability. The Seller is
a national bank duly organized and validly existing under the laws
of the United States and has all licenses necessary to carry on its
business as now being conducted and is licensed, qualified and in
good standing in each state wherein it owns or leases any material
properties or where a Mortgaged Property is located, if the laws of
such state require licensing or qualification in order to conduct
business of the type conducted by the Seller, and in any event the
Seller is in compliance with the laws of any such state to the
extent necessary to ensure the enforceability of the related
Mortgage Loan in accordance with the terms of this Agreement; the
Seller has the full corporate power, authority and legal right to
hold, transfer and convey the
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Mortgage Loans and to execute and deliver this Agreement and to
perform its obligations hereunder; the execution, delivery and
performance of this Agreement (including all instruments of transfer
to be delivered pursuant to this Agreement) by the Seller and the
consummation of the transactions contemplated hereby have been duly
and validly authorized; this Agreement and all agreements
contemplated hereby have been duly executed and delivered and
constitute the valid, legal, binding and enforceable obligations of
the Seller subject to bankruptcy laws and other similar laws of
general application affecting rights of creditors and subject to the
application of the rules of equity, including those respecting the
availability of specific performance, none of which will materially
interfere with the realization of the benefits provided thereunder,
regardless of whether such enforcement is sought in a proceeding in
equity or at law; and all requisite corporate action has been taken
by the Seller to make this Agreement and all agreements contemplated
hereby valid and binding upon the Seller in accordance with their
terms;
(b) Ordinary Course of Business. The consummation of the
transactions contemplated by this Agreement are in the ordinary
course of business of the Seller, and the transfer, assignment and
conveyance of the Mortgage Notes and the Mortgages by the Seller
pursuant to this Agreement are not subject to the bulk transfer or
any similar statutory provisions in effect in any applicable
jurisdiction;
(c) No Conflicts. Neither the execution and delivery of this
Agreement, the sale of the Mortgage Loans to the Purchaser, the
consummation of the transactions contemplated hereby, nor the
fulfillment of or compliance with the terms and conditions of this
Agreement, will conflict with or result in a breach of any of the
terms, conditions or provisions of the Seller's Articles of
Association or by-laws or any legal restriction or any agreement or
instrument to which the Seller is now a party or by which it is
bound, or constitute a default or result in an acceleration under
any of the foregoing, or result in the violation of any law, rule,
regulation, order, judgment or decree to which the Seller or its
property is subject, or result in the creation or imposition of any
lien, charge or encumbrance that would have an adverse effect upon
any of its properties pursuant to the terms of any mortgage,
contract, deed of trust or other instrument, or impair the ability
of the Purchaser to realize on the Mortgage Loans, impair the value
of the Mortgage Loans, or impair the ability of the Purchaser to
realize the full amount of any mortgage insurance benefits accruing
pursuant to this Agreement;
(d) Ability to Perform: Solvency. The Seller does not believe,
nor does it have any reason or cause to believe, that it cannot
perform each and every covenant contained in this Agreement. The
Seller is solvent and the sale of the Mortgage Loans will not cause
the Seller to become insolvent. The sale of the Mortgage Loans is
not undertaken with the intent to hinder, delay or defraud any of
the Seller's creditors;
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(e) No Litigation Pending. There is no action, suit, proceeding
or investigation pending or threatened against the Seller, before
any court, administrative agency or other tribunal asserting the
invalidity of this Agreement, seeking to prevent the consummation of
any of the transactions contemplated by this Agreement or which,
either in any one instance or in the aggregate, could result in any
material adverse change in the business, operations, financial
condition, properties or assets of the Seller, or in any material
impairment of the right or ability of the Seller to carry on its
business substantially as now conducted, or in any material
liability on the part of the Seller, or which would draw into
question the validity of this Agreement or the Mortgage Loans or of
any action taken or to be taken in connection with the obligations
of the Seller contemplated herein, or which would be likely to
impair materially the ability of the Seller to perform under the
terms of this Agreement;
(f) No Consent Required. No consent, approval, authorization or
order of, or registration or filing with, or notice to any court or
governmental agency or body is required for the execution, delivery
and performance by the Seller of or compliance by the Seller with
this Agreement or the Mortgage Loans, the delivery of a portion of
the Mortgage Files to the Purchaser or its designee or the sale of
the Mortgage Loans or the consummation of the transactions
contemplated by this Agreement, or if required, such approval has
been obtained prior to the Closing Date;
(g) Selection Process. The Mortgage Loans were selected from
among the outstanding commercial loans in the Seller's portfolio at
the Closing Date as to which the representations and warranties set
forth in Subsection 8.02 could be made and such selection was not
made in a manner so as to affect adversely the interests of the
Purchaser;
(h) Initial Portfolio. The aggregate characteristics of the
Mortgage Loans are as set forth under the heading "Business and
Strategy--Description of Initial Portfolio" in the Prospectus of the
Purchaser dated [___________,] 1997;
(i) No Untrue Information. Neither this Agreement nor any
information, statement, tape, diskette, report, form, or other
document furnished or to be furnished pursuant to this Agreement or
in connection with the transactions contemplated hereby contains or
will contain any untrue statement of a material fact or omits or
will omit to state a material fact necessary to make the statements
contained herein or therein not misleading; and
(j) No Brokers. The Seller has not dealt with any broker,
investment banker, agent or other person that may be entitled to any
commission or compensation in connection with the sale of the
Mortgage Loans.
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SUBSECTION 8.02. REPRESENTATIONS AND WARRANTIES REGARDING INDIVIDUAL
MORTGAGE LOANS.
The Seller hereby represents and warrants to the Purchaser that, as to
each Mortgage Loan, as of the Closing Date for such Mortgage Loan:
(a) Mortgage Loans as Described. The information set forth in the
Mortgage Loan Schedule is complete, true and correct in all material
respects;
(b) Payments Current; Status. All payments required to be made up
to, but not including, the Cut-off Date for the Mortgage Loan under
the terms of the Mortgage Note have been made and credited. No
payment required under the Mortgage Loan is delinquent nor has any
payment under the Mortgage Loan been 30 days or more delinquent more
than once within the period falling twelve (12) months prior to the
Cut-off Date. The Mortgage Loan is not, and has not been at any time
in the preceding twelve months, (i) classified, (ii) in nonaccrual
status or (iii) renegotiated due to the financial deterioration of
the Mortgagor;
(c) No Outstanding Charges. There are no defaults in complying
with the terms of the Mortgage, and all taxes, governmental
assessments, insurance premiums, water, sewer and municipal charges,
leasehold payments or ground rents which previously became due and
owing have been paid, or an escrow of funds has been established in
an amount sufficient to pay for every such item which remains unpaid
and which has been assessed but is not yet due and payable. The
Seller has not advanced funds, or induced, solicited or knowingly
received any advance of funds by a party other than the Mortgagor,
directly or indirectly, for the payment of any amount required under
the Mortgage Loan, except for interest accruing from the date of the
Mortgage Note or date of disbursement of the Mortgage Loan proceeds,
whichever is earlier, to the day which precedes by one month the Due
Date of the first installment of principal and interest;
(d) Original Terms Unmodified. The terms of the Mortgage Note
and Mortgage have not been impaired, waived, altered or modified in
any respect, from the date of origination except by a written
instrument which has been recorded, if necessary to protect the
interests of the Purchaser, and which has been delivered to the
Purchaser or its designee and the terms of which are reflected in
the Mortgage Loan Schedule, if applicable. The substance of any
such waiver, alteration or modification has been approved by the
title insurer, if any, to the extent required by the policy, and its
terms are reflected on the Mortgage Loan Schedule, if applicable. No
Mortgagor has been released, in whole or in part, except in
connection with an assumption agreement, which assumption agreement
is part of the Mortgage Loan File delivered to the Purchaser or its
designee and the terms of which are reflected in the Mortgage Loan
Schedule;
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(e) No Defenses. The Mortgage Loan is not subject to any right
of rescission, set-off, counterclaim or defense, including without
limitation the defense of usury, nor will the operation of any of
the terms of the Mortgage Note or the Mortgage, or the exercise of
any right thereunder, render either the Mortgage Note or the
Mortgage unenforceable, in whole or in part and no such right of
rescission, set-off, counterclaim or defense has been asserted with
respect thereto, and no Mortgagor is now or was, at the time of
origination of the related Mortgage Loan, a debtor in any state or
Federal bankruptcy or insolvency proceeding;
(f) Hazard Insurance. Pursuant to the terms of the Mortgage, all
buildings or other improvements upon the Mortgaged Property are
insured by a generally acceptable insurer against loss by fire,
hazards of extended coverage. If required by the Flood Disaster
Protection Act of 1973, as amended, the Mortgage Loan is covered by
a flood insurance policy, meeting the requirements of the Federal
Insurance Administration, as well as all additional requirements set
forth in Section 2.10 of the Servicing Agreement attached hereto as
Exhibit B. All individual insurance policies contain a standard
mortgagee clause naming the Seller and its successors and assigns as
mortgagee, and all premiums thereon have been paid. The Mortgage
obligates the Mortgagor thereunder to maintain the hazard insurance
policy at the Mortgagor's cost and expense, and on the Mortgagor's
failure to do so, authorizes the holder of the Mortgage to obtain
and maintain such insurance at such Mortgagor's cost and expense,
and to seek reimbursement therefor from the Mortgagor. Where
required by state law or regulation, the Mortgagor has been given an
opportunity to choose the carrier of the required hazard insurance.
The hazard insurance policy is the valid and binding obligation of
the insurer, is in full force and effect, and will be in full force
and effect and inure to the benefit of the Purchaser upon the
consummation of the transactions contemplated by this Agreement. The
Seller has not engaged in, and has no knowledge of the Mortgagor's
having engaged in, any act or omission which would impair the
coverage of any such policy, the benefits of the endorsement
provided for herein, or the validity and binding effect of either
including, without limitation, no unlawful fee, commission, kickback
or other unlawful compensation or value of any kind has been or will
be received, retained or realized by any attorney, firm or other
person or entity, and no such unlawful items have been received,
retained or realized by the Seller;
(g) Compliance with Applicable Laws. Any and all requirements of
any federal, state or local law including, without limitation,
usury, truth-in-lending, real estate settlement procedures, consumer
credit protection, fair housing, equal credit opportunity and
disclosure laws applicable to the Mortgage Loan have been complied
with, the consummation of the transactions contemplated hereby will
not involve the violation of any such laws or regulations, and the
Seller shall maintain in its possession, available for the
Purchaser's inspection, and shall deliver to the Purchaser upon
demand, evidence of compliance with all such requirements;
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(h) No Satisfaction of Mortgage. The Mortgage has not been
satisfied, canceled, subordinated or rescinded, in whole or in part,
and the Mortgaged Property has not been released from the lien of
the Mortgage, in whole or in part, nor has any instrument been
executed that would effect any such release, cancellation,
subordination or rescission. The Seller has not waived the
performance by the Mortgagor of any action, if the Mortgagor's
failure to perform such action would cause the Mortgage Loan to be
in default, nor has the Seller waived any default resulting from any
action or in action by the Mortgagor;
(i) Location and Type of Mortgaged Property. The Mortgaged
Property is located in the state identified in the Mortgage Loan
Schedule and consists of a single parcel of real property improved
by a commercial facility erected thereon.
(j) Valid First Lien. The Mortgage is a valid, subsisting,
enforceable and perfected first lien on the Mortgaged Property,
including all buildings and improvements on the Mortgaged Property
and all installations and mechanical, electrical, plumbing, heating
and air conditioning systems located in or annexed to such
buildings, and all additions, alterations and replacements made at
any time with respect to the foregoing. The lien of the Mortgage is
subject only to:
(1) the lien of current real property taxes and
assessments not yet due and payable;
(2) covenants, conditions and restrictions, rights of
way, easements and other matters of the public record as of
the date of recording acceptable to prudent mortgage lending
institutions generally and specifically referred to in the
lender's title insurance policy delivered to the originator of
the Mortgage Loan and (a) specifically referred to or
otherwise considered in the appraisal made for the originator
of the Mortgage Loan or (b) which do not adversely affect the
Appraised Value of the Mortgaged Property set forth in such
appraisal; and
(3) other matters to which like properties are
commonly subject which do not materially interfere with the
benefits of the security intended to be provided by the
Mortgage or the use, enjoyment, value or marketability of the
related Mortgaged Property.
Any security agreement, chattel mortgage or equivalent document related to
and delivered in connection with the Mortgage Loan establishes and creates a
valid, subsisting, enforceable and perfected first lien and first priority
security interest on the property described therein and the Seller has full
right to sell and assign the same to the Purchaser. The Mortgaged Property was
not, as of the date of origination of the Mortgage Loan, subject to a mortgage,
deed of trust, deed to secure debt or other security instrument creating a lien
subordinate to the lien of the Mortgage (except any such subordinate loan which
was created in connection with the origination of the related Mortgage Loan
details of which are contained in the related Mortgage File);
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(k) Validity of Mortgage Documents. The Mortgage Note and the
Mortgage and any other agreement executed and delivered by a
Mortgagor in connection with a Mortgage Loan are genuine, and each
is the legal, valid and binding obligation of the maker thereof
enforceable in accordance with its terms. All parties to the
Mortgage Note, the Mortgage and any other such related agreement had
legal capacity to enter into the Mortgage Loan and to execute and
deliver the Mortgage Note, the Mortgage and any such agreement, and
the Mortgage Note, the Mortgage and any other such related agreement
have been duly and properly executed by such parties. No fraud,
error, omission, misrepresentation, negligence or similar occurrence
with respect to a Mortgage Loan has taken place on the part of any
Person, including without limitation, the Mortgagor, any appraiser,
any builder or developer, or any other party involved in the
origination of the Mortgage Loan. The Seller has reviewed all of the
documents constituting the Servicing File and has made such
inquiries as it deems necessary to make and confirm the accuracy of
the representations set forth herein;
(l) Full Disbursement of Proceeds. The Mortgage Loan has been
closed and the proceeds of the Mortgage Loan have been fully
disbursed and there is no requirement for future advances
thereunder, and any and all requirements as to completion of any
on-site or off-site improvement and as to disbursements of any
escrow funds therefor have been complied with. All costs, fees and
expenses incurred in making or closing the Mortgage Loan and the
recording of the Mortgage were paid, and the Mortgagor is not
entitled to any refund of any amounts paid or due under the Mortgage
Note or Mortgage;
(m) Ownership. The Seller is the sole owner of record and holder
of the Mortgage Loan and the indebtedness evidenced by each Mortgage
Note, except for the assignments of mortgage which have been sent
for recording, and upon recordation the Seller will be the owner of
record of each Mortgage and the indebtedness evidenced by each
Mortgage Note, and upon the sale of the Mortgage Loans to the
Purchaser, the Seller will retain the Mortgage Files or any part
thereof with respect thereto not delivered to the Purchaser or its
designee in trust only for the purpose of servicing and supervising
the servicing of each Mortgage Loan. The Mortgage Loan is not
assigned or pledged, and the Seller has good, indefeasible and
marketable title thereto, and has full right to transfer and sell
the Mortgage Loan to the Purchaser free and clear of any
encumbrance, equity, participation interest, lien, pledge, charge,
claim or security interest, and has full right and authority subject
to no interest or participation of, or agreement with, any other
party, to sell and assign each Mortgage Loan pursuant to this
Agreement and following the sale of each Mortgage Loan, the
Purchaser will own such Mortgage Loan free and clear of any
encumbrance, equity, participation interest, lien, pledge, charge,
claim or security interest. The Seller intends to relinquish all
rights to possess, control and monitor the Mortgage Loan, except
indirectly for purposes of servicing the Mortgage Loan as set forth
in the Servicing Agreement. After the Closing Date, the Seller will
have no right to modify or alter the terms of the sale of
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the Mortgage Loan and the Seller will have no obligation or right to
repurchase the Mortgage Loan or substitute another Mortgage Loan,
except as provided in this Agreement;
(n) Doing Business. All parties which have had any interest in
the Mortgage Loan, whether as mortgagee, assignee, pledgee or
otherwise, are (or, during the period in which they held and
disposed of such interest, were) (1) in compliance with any and all
applicable licensing requirements of the laws of the state wherein
the Mortgaged Property is located, and (2) either (i) organized
under the laws of such state, or (ii) qualified to do business in
such state, or (iii) a federal savings and loan association, a
savings bank or a national bank having a principal office in such
state, or (3) not doing business in such state;
(o) LTV. No Conventional Loan has an LTV greater than 95%. The
original LTV of each Conventional Loan was not more than 80%;
(p) Title Insurance. The Mortgage Loan is covered by an ALTA
lender's title insurance policy or other generally acceptable form
of policy or insurance and each such title insurance policy is
issued by a title insurer qualified to do business in the
jurisdiction where the Mortgaged Property is located, insuring the
Seller, its successors and assigns, as to the first priority lien of
the Mortgage in the original principal amount of the Mortgage Loan,
subject only to the exceptions contained in clauses (1), (2) and
(3) of paragraph (j) of this Subsection 8.02, and against any loss
by reason of the invalidity or unenforceability of the lien
resulting from the provisions of the Mortgage providing for
adjustment to the Mortgage Interest Rate and Monthly Payment. Where
required by state law or regulation, the Mortgagor has been given
the opportunity to choose the carrier of the required mortgage title
insurance. Additionally, such lender's title insurance policy
affirmatively insures ingress and egress, and against encroachments
by or upon the Mortgaged Property or any interest therein. The
Seller, its successor and assigns, are the sole insurers of such
lender's title insurance policy, and such lender's title insurance
policy is valid and remains in full force and effect and will be in
force and effect upon the consummation of the transactions
contemplated by this Agreement. No claims have been made under such
lender's title insurance policy, and no prior holder of the related
Mortgage, including the Seller, has done, by act or omission,
anything which would impair the coverage of such lender's title
insurance policy, including without limitation, no unlawful fee,
commission, kickback or other unlawful compensation or value of any
kind has been or will be received, retained or realized by any
attorney, firm or other person or entity, and no such unlawful items
have been received, retained or realized by the Seller;
(q) No Defaults. There is no default, breach, violation or event
which would permit acceleration existing under the Mortgage or the
Mortgage Note and no event which, with the passage of time or with
notice and the expiration of any grace or cure period, would
constitute a default, breach, violation or event which would
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permit acceleration, and neither the Seller nor its predecessors have
waived any default, breach, violation or event which would permit
acceleration;
(r) No Mechanics' Liens. There are no mechanics' or similar liens
or claims which have been filed for work, labor or material (and no
rights are outstanding that under law could give rise to such liens)
affecting the related Mortgaged Property which are or may be liens
prior to, or equal or coordinate with, the lien of the related
Mortgage;
(s) Location of Improvements; No Encroachments. All improvements
which were considered in determining the Appraised Value of the
Mortgaged Property lay wholly within the boundaries and building
restriction lines of the Mortgaged Property, and no improvements on
adjoining properties encroach upon the Mortgaged Property. No
improvement located on or being part of the Mortgaged Property is in
violation of any applicable zoning law or regulation;
(t) Origination; Payment Terms. The Mortgage Loan was originated
by a savings and loan association, a savings bank, a commercial
bank, credit union, insurance company or similar institution which
is supervised and examined by a federal or state authority. The
documents, instruments and agreements submitted for loan
underwriting were not falsified and contain no untrue statement of
material fact or omit to state a material fact required to be stated
therein or necessary to make the information and statements therein
not misleading. Principal payments on the Mortgage Loan commenced no
more than sixty (60) days after funds were disbursed in connection
with the Mortgage Loan. The Mortgage Interest Rate for each Mortgage
Loan is as set forth on Exhibit J hereto. The Mortgage Note is
payable in equal monthly installments of principal and interest,
which installments of interest are subject to change if the Mortgage
Loan is an Variable Rate Mortgage Loan due to the adjustments to the
Mortgage Interest Rate on each Interest Rate Adjustment Date, with
interest calculated and payable in arrears, sufficient to amortize
the Mortgage Loan fully by the stated maturity date, over an
original term of not more than thirty years from commencement of
amortization. There is no negative amortization with respect to any
Mortgage Loan. Each Convertible Mortgage Loan contains a provision
allowing the Mortgagor to convert the Mortgage Note from an
adjustable interest rate Mortgage Note to a fixed interest rate
Mortgage Note in accordance with the terms of the Mortgage Note or a
rider to the related Mortgage Note;
(u) Customary Provisions. The Mortgage contains customary and
enforceable provisions such as to render the rights and remedies of
the holder thereof adequate for the realization against the
Mortgaged Property of the benefits of the security provided thereby,
including, (i) in the case of a Mortgage designated as a deed of
trust, by trustee's sale, and (ii) otherwise by judicial
foreclosure. Upon default by a Mortgagor on a Mortgage Loan and
foreclosure on, or trustee's sale of, the Mortgaged Property
pursuant to the proper procedures, the holder of the Mortgage
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Loan will be able to deliver good and merchantable title to the
Mortgaged Property. There is no homestead or other exemption
available to a Mortgagor which would interfere with the right to
sell the Mortgaged Property at a trustee's sale or the right to
foreclose the Mortgage, subject to applicable federal and state laws
and judicial precedent with respect to bankruptcy and right of
redemption or similar law;
(v) Conformance with Agency and Underwriting Standards. The
Mortgage Loan was underwritten in accordance with the underwriting
standards of the Seller (a copy of each of which is attached hereto
as Exhibit L), in effect at the time the Mortgage Loan was
originated. The Mortgage Note and Mortgage are on forms acceptable
to the Purchaser, in the Purchaser's sole discretion, as evidenced
by the Purchaser's purchase of the related Mortgage Loans, and, the
Seller has not made any representations to a Mortgagor that are
inconsistent with the mortgage instruments used. All Mortgage Loans
have full asset verification;
(w) Occupancy of the Mortgaged Property. As of the Closing Date,
the Mortgaged Property is lawfully occupied under applicable law.
All inspections, licenses and certificates required to be made or
issued with respect to all occupied portions of the Mortgaged
Property and, with respect to the use and occupancy of the same,
including but not limited to certificates of occupancy and fire
underwriting certificates, have been made or obtained from the
appropriate authorities;
(x) No Additional Collateral. The Mortgage Note is not and has
not been secured by any collateral except the lien of the
corresponding Mortgage and the security interest of any applicable
security agreement or chattel mortgage referred to in clause (j)
above;
(y) Deeds of Trust. In the event the Mortgage constitutes a deed
of trust, a trustee, authorized and duly qualified under applicable
law to serve as such, has been properly designated and currently so
serves and is named in the Mortgage, and no fees or expenses are or
will become payable by the Purchaser to the trustee under the deed
of trust, except in connection with a trustee's sale after default
by the Mortgagor;
(z) Acceptable Investment. There are no circumstances or
conditions with respect to the Mortgage, the Mortgaged Property, the
Mortgagor, the Mortgage File or the Mortgagor's credit standing that
can reasonably be expected to cause the Mortgage Loan to become
delinquent, or adversely affect the value or marketability of the
Mortgage Loan;
(aa) Delivery of Mortgage Documents. The Mortgage Note, the
Mortgage, the Assignment of Mortgage and any other Mortgage Loan
Documents for each Mortgage Loan have been delivered to the
Purchaser or its designee. The Seller is in possession of a
complete, true and accurate Mortgage File in compliance with
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Exhibit A hereto, except for such documents the originals of which
have been delivered to the Purchaser or its designee;
(bb) Transfer of Mortgage Loans. The Assignment of Mortgage with
respect to each Mortgage Loan is in recordable form and is
acceptable for recording under the laws of the jurisdiction in which
the Mortgaged Property is located;
(cc) Assumability. The Mortgage Loan Documents provide that a
related Mortgage Loan may only be assumed if the party assuming such
Mortgage Loan meets certain credit requirements stated in the
Mortgage Loan Documents.
(dd) No Buydown Provisions; No Graduated Payments or Contingent
Interests. The Mortgage Loan does not contain provisions pursuant to
which Monthly Payments are paid or partially paid with funds
deposited in any separate account established by the Seller, the
Mortgagor, or anyone on behalf of the Mortgagor, or paid by any
source other than the Mortgagor nor does it contain any other
similar provisions which may constitute a "buydown" provision. The
Mortgage Loan is not a graduated payment mortgage loan and the
Mortgage Loan does not have a shared appreciation or other
contingent interest feature;
(ee) RESERVED
(ff) Mortgaged Property Undamaged; No Condemnation Proceedings.
There is no proceeding pending or threatened for the total or
partial condemnation of the Mortgaged Property. The Mortgaged
Property is undamaged by waste, fire, earthquake or earth movement,
windstorm, flood, tornado or other casualty so as to affect
adversely the value of the Mortgaged Property as security for the
Mortgage Loan or the use for which the premises were intended and
each Mortgaged Property is in good repair. There have not been any
condemnation proceedings with respect to the Mortgaged Property and
the Seller has no knowledge of any such proceedings in the future;
(gg) Collection Practices; Escrow Deposits; Interest Rate
Adjustments. The origination and collection practices used by the
Seller with respect to the Mortgage Loan have been in all respects
in compliance with Accepted Servicing Practices, applicable laws and
regulations, and have been in all respects legal and proper. With
respect to escrow deposits and Escrow Payments, all such payments
are in the possession of, or under the control of, the Seller or the
Seller and there exist no deficiencies in connection therewith for
which customary arrangements for repayment thereof have not been
made. All Escrow Payments have been collected in full compliance
with state and federal law and the provisions of the related
Mortgage Note and Mortgage. An escrow of funds is not prohibited by
applicable law and has been established in an amount sufficient to
pay for every item that remains unpaid and has been assessed but is
not yet due and payable. No escrow deposits or Escrow
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Payments or other charges or payments due the Seller have been
capitalized under the Mortgage or the Mortgage Note. All Mortgage
Interest Rate adjustments to the Monthly Payment, if the Mortgage
Loan is an Variable Rate Mortgage Loan, have been made in strict
compliance with state and federal law and the terms of the related
Mortgage and Mortgage Note on the related Interest Rate Adjustment
Date. With respect to each Variable Rate Mortgage Loan, the Mortgage
Interest Rate adjusts annually as set forth herein. If, pursuant to
the terms of the Mortgage Note, another index was selected for
determining the Mortgage Interest Rate, the same index was used with
respect to each Mortgage Note which required a new index to be
selected, and such selection did not conflict with the terms of the
related Mortgage Note. The Seller executed and delivered any and all
notices required under applicable law and the terms of the related
Mortgage Note and Mortgage regarding the Mortgage Interest Rate and
the Monthly Payment adjustments. Any interest required to be paid
pursuant to state, federal and local law has been properly paid and
credited;
(hh) Other Insurance Policies. No action, inaction or event has
occurred and no state of facts exists or has existed that has
resulted or could result in the exclusion from, denial of, or
defense to coverage under any hazard insurance policy. In connection
with the placement of any such insurance, no commission, fee, or
other compensation has been or will be received by the Seller or by
any officer, director, or employee of the Seller or any designee of
the Seller or any corporation in which the Seller or any officer,
director, or employee had a financial interest at the time of
placement of such insurance;
(ii) No Violation of Environmental Laws. There is no pending
action or proceeding directly involving the Mortgaged Property in
which compliance with any environmental law, rule or regulation is
an issue; there is no violation of any environmental law, rule or
regulation with respect to the Mortgaged Property; and nothing
further remains to be done to satisfy in full all requirements of
each such law, rule or regulation constituting a prerequisite to use
and enjoyment of said property;
(jj) Appraisal. The Mortgage File contains an appraisal of the
related Mortgaged Property signed prior to the approval of the
Mortgage Loan application by a Qualified Appraiser (or approval is
subject to receipt of an appropriate appraisal) who had no interest,
direct or indirect in the Mortgaged Property or in any loan made on
the security thereof, and whose compensation is not affected by the
approval or disapproval of the Mortgage Loan, and the appraisal and
appraiser both satisfy the requirements of Title XI of the Federal
Institutions Reform, Recovery, and Enforcement Act of 1989 and the
regulations promulgated thereunder, all as in effect on the date the
Mortgage Loan was originated;
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(kk) Disclosure Materials. The Mortgagor has received all
disclosure materials required by and the Seller complied with all
applicable law with respect to the making of the Mortgage Loans;
(ll) Construction or Rehabilitation of Mortgaged Property. No
Mortgage Loan was made in connection with the construction or
rehabilitation of a Mortgaged Property or facilitating the trade-in
or exchange of a Mortgaged Property;
(mm) Value of Mortgaged Property. The Seller has no knowledge of
any circumstances existing that could reasonably be expected to
adversely affect the value or the marketability of any Mortgaged
Property or Mortgage Loan or to cause the Mortgage Loan to prepay
during any period materially faster or slower than mortgage loans
originated by the Seller generally;
(nn) No Defense to Insurance Coverage. No action has been taken or
failed to be taken, no event has occurred and no state of facts
exists or has existed on or prior to the Closing Date (whether or
not known to the Seller on or prior to such date) which has resulted
or will result in an exclusion from, denial of, or defense to
coverage under any primary mortgage insurance policy (including,
without limitation, any exclusions, denials or defenses which would
limit or reduce the availability of the timely payment of the full
amount of the loss otherwise due thereunder to the insured) whether
arising out of actions, representations, errors, omissions,
negligence, or fraud of the Seller, the related Mortgagor or any
party involved in the application for such coverage, including the
appraisal, plans and specifications and other exhibits or documents
submitted therewith to the insurer under such insurance policy, or
for any other reason under such coverage, but not including the
failure of such insurer to pay by reason of such insurer's breach of
such insurance policy or such insurer's financial inability to pay;
(oo) Escrow Analysis. With respect to each Mortgage, Seller has
within the last twelve months (unless such Mortgage was originated
within such twelve month period) analyzed the required Escrow
Payments for each Mortgage and adjusted the amount of such payments
so that, assuming all required payments are timely made, any
deficiency will be eliminated on or before the first anniversary of
such analysis, or any overage will be refunded to the Mortgagor, in
accordance with RESPA and any other applicable law; and
(pp) Prior Servicing. Each Mortgage Loan has been serviced in all
material respects in compliance with Accepted Servicing Practices;
provided that, in the event of any breach of the representation and
warranty set forth in this Subsection (pp), the Seller shall not be
required to repurchase any such Mortgage Loan unless such breach
had, and continues to have, a material and adverse effect on the
value of the related Mortgage Loan or the interest of the Purchaser
therein.
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SUBSECTION 8.03. REMEDIES FOR BREACH OF REPRESENTATIONS AND WARRANTIES.
It is understood and agreed that the representations and warranties set
forth in Subsections 8.01 and 8.02 shall survive the sale of the Mortgage Loans
to the Purchaser and shall inure to the benefit of the Purchaser,
notwithstanding any restrictive or qualified endorsement on any Mortgage Note
or Assignment of Mortgage or the examination or failure to examine any Mortgage
File. Upon discovery by either the Seller or the Purchaser of a breach of any
of the foregoing representations and warranties which materially and adversely
affects the value of the Mortgage Loans or the interest of the Purchaser (or
which materially and adversely affects the interests of the Purchaser in the
related Mortgage Loan in the case of a representation and warranty relating to
a particular Mortgage Loan), the party discovering such breach shall give
prompt written notice to the other.
The Seller, promptly after discovery of a breach of any representation or
warranty, shall notify the Purchaser of such breach and the details thereof.
Within sixty (60) days of the earlier of (i) notice by the Seller pursuant to
the immediately preceding sentence or (ii) notice by the Purchaser to the
Seller of any breach of a representation or warranty with respect to a Mortgage
Loan, the Seller shall use its best efforts promptly to cure such breach in all
material respects and, if such breach cannot be cured, the Seller shall, at the
Purchaser's option and subject to Subsection 8.04, repurchase such Mortgage
Loan at the Repurchase Price, unless the Seller elects to substitute a
Qualified Substitute Mortgage Loan for such Mortgage Loan pursuant to this
Subsection. In the event that a breach shall involve any representation or
warranty set forth in Subsection 8.01, and such breach cannot be cured within
sixty (60) days of the earlier of either discovery by or notice to the Seller
of such breach, all of the Mortgage Loans shall, at the Purchaser's option and
subject to Subsection 8.04, be repurchased by the Seller at the Repurchase
Price. However, if the breach shall involve a representation or warranty set
forth in Subsection 8.02 and the Seller discovers or receives notice of any
such breach within two (2) years of the Closing Date, the Seller may, at the
Seller's option and provided that the Seller has a Qualified Substitute
Mortgage Loan, rather than repurchase the Mortgage Loan as provided above,
remove such Mortgage Loan (a "Deleted Mortgage Loan") and substitute in its
place a Qualified Substitute Mortgage Loan or Loans, provided that any such
substitution shall be effected not later than two (2) years after the Closing
Date. If the Seller has no Qualified Substitute Mortgage Loan, it shall
repurchase the deficient Mortgage Loan. Any repurchase of a Mortgage Loan or
Loans pursuant to the foregoing provisions of this Subsection 8.03 shall be
accomplished by either (a) if the Servicing Agreement is in effect, deposit in
the Custodial Account of the amount of the Repurchase Price for distribution to
the Purchaser on the next scheduled Remittance Date, after deducting therefrom
any amount received in respect of such repurchased Mortgage Loan or Loans and
being held in the Custodial Account for future distribution or (b) if the
Servicing Agreement is no longer in effect, by direct remittance of the
Repurchase Price to the Purchaser or its designee in accordance with the
Purchaser's instructions.
At the time of repurchase or substitution, the Purchaser and the Seller
shall arrange for the reassignment of the Deleted Mortgage Loan to the Seller
and the delivery to the Seller of any documents held by the Purchaser or its
designee relating to the Deleted Mortgage Loan. In addition, upon any such
repurchase, all funds maintained in the Escrow Account with respect to
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such Deleted Mortgage Loan shall be transferred to the Seller. In the event of a
repurchase or substitution, the Seller shall, simultaneously with such
reassignment, give written notice to the Purchaser that such repurchase or
substitution has taken place, amend the Mortgage Loan Schedule to reflect the
withdrawal of the Deleted Mortgage Loan from this Agreement, and, in the case of
substitution, identify a Qualified Substitute Mortgage Loan and amend the
Mortgage Loan Schedule to reflect the addition of such Qualified Substitute
Mortgage Loan to this Agreement. In connection with any such substitution, the
Seller shall be deemed to have made as to such Qualified Substitute Mortgage
Loan the representations and warranties set forth in this Agreement except that
all such representations and warranties set forth in this Agreement shall be
deemed made as of the date of such substitution. The Seller shall effect such
substitution by delivering to the Purchaser or its designee for such Qualified
Substitute Mortgage Loan the documents required by Subsection 6.03, with the
Mortgage Note endorsed as required by Subsection 6.03. No substitution will be
made in any calendar month after the Determination Date for such month. The
Seller shall deposit in the Custodial Account the Monthly Payment, or in the
event that the Servicing Agreement is no longer in effect remit directly to the
Purchaser or its designee in accordance with the Purchaser's instructions the
Monthly Payment less the Servicing Fee due, if any, on such Qualified Substitute
Mortgage Loan or Loans in the month following the date of such substitution.
Monthly Payments due with respect to Qualified Substitute Mortgage Loans in the
month of substitution shall be retained by the Seller. For the month of
substitution, payments to the Purchaser shall include the Monthly Payment due on
any Deleted Mortgage Loan in the month of substitution, and the Seller shall
thereafter be entitled to retain all amounts subsequently received by the Seller
in respect of such Deleted Mortgage Loan.
For any month in which the Seller substitutes a Qualified Substitute
Mortgage Loan for a Deleted Mortgage Loan, the Seller shall determine the
amount (if any) by which the aggregate principal balance of all Qualified
Substitute Mortgage Loans as of the date of substitution is less than the
aggregate Stated Principal Balance of all Deleted Mortgage Loans (after
application of scheduled principal payments due in the month of substitution).
The amount of such shortfall shall be distributed by the Seller directly to the
Purchaser or its designee in accordance with the Purchaser's instructions
within two (2) Business Days of such substitution.
In addition to such repurchase or substitution obligation, the Seller
shall indemnify the Purchaser and hold it harmless against any losses, damages,
penalties, fines, forfeitures, reasonable and necessary legal fees and related
costs, judgments, and other costs and expenses resulting from any claim,
demand, defense or assertion based on or grounded upon, or resulting from, a
breach of the Seller representations and warranties contained in this
Agreement. It is understood and agreed that the obligations of the Seller set
forth in this Subsection 8.03 to cure, substitute for or repurchase a defective
Mortgage Loan and to indemnify the Purchaser as provided in this Subsection
8.03 constitute the sole remedies of the Purchaser respecting a breach of the
foregoing representations and warranties.
Any cause of action against the Seller relating to or arising out of the
breach of any representations and warranties made in Subsections 8.01 and 8.02
shall accrue as to any Mortgage Loan upon (i) discovery of such breach by the
Purchaser or notice thereof by the Seller to the Purchaser, (ii) failure by the
Seller to cure such breach or repurchase such Mortgage Loan as
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specified above, and (iii) demand upon the Seller by the Purchaser for
compliance with this Agreement.
SECTION 9. CLOSING.
The closing for the purchase and sale of the Mortgage Loans shall take
place on the Closing Date. At the Purchaser's option, the closing shall be
either: by telephone, confirmed by letter or wire as the parties shall agree,
or conducted in person, at such place as the parties shall agree.
The closing for the Mortgage Loans to be purchased on the Closing Date
shall be subject to each of the following conditions:
(a) all of the representations and warranties of the
Seller under this Agreement and under the Servicing Agreement
(with respect to each Mortgage Loan, as specified therein)
shall be true and correct as of the Closing Date and no event
shall have occurred which, with notice or the passage of time,
would constitute a default under this Agreement or an Event of
Default under the Servicing Agreement;
(b) the Purchaser shall have received, or the
Purchaser's attorneys shall have received in escrow, all
closing documents as specified in Section 10 of this
Agreement, in such forms as are agreed upon and acceptable to
the Purchaser, duly executed by all signatories other than the
Purchaser as required pursuant to the terms hereof;
(c) the Seller shall have delivered and released to
the Purchaser or its designee all Mortgage Loan Documents with
respect to each Mortgage Loan; and
(d) all other terms and conditions of this Agreement
shall have been complied with.
Subject to the foregoing conditions, the Purchaser shall pay to the Seller
on the Closing Date the Purchase Price, plus accrued interest pursuant to
Section 4 of this Agreement, by wire transfer of immediately available funds to
the account designated by the Seller.
SECTION 10. CLOSING DOCUMENTS.
The closing documents for the Mortgage Loans to be purchased on the
Closing Date shall consist of fully executed originals of the following
documents:
1. this Agreement;
2. the Servicing Agreement in the form of Exhibit B hereto;
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3. a Custodial Account Letter Agreement or a Custodial Account
Certification, as applicable, as required under the Servicing
Agreement;
4. an Escrow Account Letter Agreement or an Escrow Account
Certification, as applicable, as required under the Servicing
Agreement;
5. an Officer's Certificate, in the form of Exhibit C hereto,
including all attachments thereto;
6. an Opinion of Counsel of the Seller/Servicer (who may be an
employee of the Seller/Servicer), in the form of Exhibit D hereto;
7. a Security Release Certification, in the form of Exhibit E or
Exhibit F, if applicable, hereto executed by any person, as
requested by the Purchaser, if any of the Mortgage Loans have at any
time been subject to any security interest, pledge or hypothecation
for the benefit of such person;
8. a certificate or other evidence of merger or change of name,
signed or stamped by the applicable regulatory authority, if any, if
the Mortgage Loans were acquired by the Seller by merger or acquired
or originated by the Seller while conducting business under a name
other than its present name, if applicable; and
9. the underwriting guidelines of the Seller to be attached
hereto as Exhibit I.
The Seller shall bear the risk of loss of the closing documents until such
time as they are received by the Purchaser or its attorneys.
SECTION 11. COSTS.
The Purchaser shall pay the legal fees and expenses of its attorneys. All
other costs and expenses incurred in connection with the transfer and delivery
of the Mortgage Loans including recording fees, fees for recording Assignments
of Mortgage, fees for title policy endorsements and continuations, if
applicable, the Seller's attorney's fees, shall be paid by the Seller.
SECTION 12. MERGER OR CONSOLIDATION OF THE SELLER.
The Seller will keep in full effect its existence, rights and franchises
as a national bank, and will obtain and preserve its qualification to do
business as a foreign corporation in each jurisdiction in which such
qualification is or shall be necessary to protect the validity and
enforceability of this Agreement, or any of the Mortgage Loans and to perform
its duties under this Agreement.
Any Person into which the Seller may be merged or consolidated, or any
corporation resulting from any merger, conversion or consolidation to which the
Seller shall be a party, or any Person succeeding to the business of the
Seller, shall be the successor of the Seller hereunder,
27
<PAGE> 31
without the execution or filing of any paper or any further act on the part of
any of the parties hereto, anything herein to the contrary notwithstanding;
provided, however, that the successor or surviving Person shall have a tangible
net worth of at least $30,000,000.
SECTION 13. MANDATORY DELIVERY; GRANT OF SECURITY INTEREST.
The sale and delivery on the Closing Date of the Mortgage Loans described
on the Mortgage Loan Schedule is mandatory from and after the date of the
execution of this Agreement, it being specifically understood and agreed that
each Mortgage Loan is unique and identifiable on the date hereof and that an
award of money damages would be insufficient to compensate the Purchaser for
the losses and damages incurred by the Purchaser (including damages to
prospective purchasers of the Mortgage Loans) in the event of the Seller's
failure to deliver (i) each of the Mortgage Loans or (ii) one or more Qualified
Substitute Mortgage Loans or (iii) one or more Mortgage Loans otherwise
acceptable to the Purchaser on or before the Closing Date. The Seller hereby
grants to the Purchaser a lien on and a continuing security interest in each
Mortgage Loan and each document and instrument evidencing each such Mortgage
Loan to secure the performance by the Seller of its obligations under this
Agreement, and the Seller agrees that it shall hold such Mortgage Loans in
custody for the Purchaser subject to the Purchaser's (i) right to reject any
Mortgage Loan (or Qualified Substitute Mortgage Loan) under the terms of this
Agreement and to require another Mortgage Loan (or Qualified Substitute
Mortgage Loan) to be substituted therefor, and (ii) obligation to pay the
Purchase Price plus accrued interest as set forth in Section 4 hereof for the
Mortgage Loans. All rights and remedies of the Purchaser under this Agreement
are distinct from, and cumulative with, any other rights or remedies under this
Agreement or afforded by law or equity and all such rights and remedies may be
exercised concurrently, independently or successively.
SECTION 14. NOTICES.
All demands, notices and communications hereunder shall be in writing and
shall be deemed to have been duly given if mailed, by registered or certified
mail, return receipt requested, or, if by other means, when received by the
other party at the address as follows:
(i) if to the Seller:
Franklin Bank, N.A.
24725 West Twelve Mile Road
Southfield, Michigan 48034
Attention: President
28
<PAGE> 32
(ii) if to the Purchaser:
Franklin Finance Corporation
24725 West Twelve Mile Road
Southfield, Michigan 48034
Attention: President
or such other address as may hereafter be furnished to the other party by like
notice. Any such demand, notice or communication hereunder shall be deemed to
have been received on the date delivered to or received at the premises of the
addressee (as evidenced, in the case of registered or certified mail, by the
date noted on the return receipt).
SECTION 15. SEVERABILITY CLAUSE.
Any part, provision, representation or warranty of this Agreement which is
prohibited or unenforceable or is held to be void or unenforceable in any
jurisdiction shall be ineffective, as to such jurisdiction, to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction as to any Mortgage Loan shall not invalidate or render
unenforceable such provision in any other jurisdiction. To the extent permitted
by applicable law, the parties hereto waive any provision of law which
prohibits or renders void or unenforceable any provision hereof. If the
invalidity of any part, provision, representation or warranty of this Agreement
shall deprive any party of the economic benefit intended to be conferred by
this Agreement, the parties shall negotiate, in good faith, to develop a
structure the economic effect of which is nearly as possible the same as the
economic effect of this Agreement without regard to such invalidity.
SECTION 16. COUNTERPARTS.
This Agreement may be executed simultaneously in any number of
counterparts. Each counterpart shall be deemed to be an original, and all such
counterparts shall constitute one and the same instrument.
SECTION 17. GOVERNING LAW.
The Agreement shall be construed in accordance with the laws of the State
of Michigan and the obligations, rights and remedies of the parties hereunder
shall be determined-in accordance with the substantive laws of the Michigan
(without regard to conflicts of laws principles), except to the extent
preempted by Federal law.
SECTION 18. INTENTION OF THE PARTIES.
It is the intention of the parties that the Purchaser is purchasing, and
the Seller is selling the Mortgage Loans and not a debt instrument of the
Seller or another security. Accordingly, the parties hereto each intend to
treat the transaction for Federal income tax purposes as a sale by the Seller,
and a purchase by the Purchaser, of the Mortgage Loans.
29
<PAGE> 33
SECTION 19. SUCCESSORS AND ASSIGNS; ASSIGNMENT OF
PURCHASE AGREEMENT.
This Agreement shall bind and inure to the benefit of and be enforceable
by the Seller and the Purchaser and the respective permitted successors and
assigns of the Seller and the successors and assigns of the Purchaser. This
Agreement shall not be assigned, pledged or hypothecated by the Seller to a
third party without the consent of the Purchaser. This Agreement may be
assigned, pledged or hypothecated by the Purchaser without the prior consent of
the Seller. If the Purchaser assigns all or any of its rights as Purchaser
hereunder, the assignee of the Purchaser will become the "Purchaser" hereunder
to the extent of such assignment, provided that at no time shall there be more
than fifteen (15) persons having the status of "Purchaser" hereunder. Any
assignment by the Purchaser shall be accompanied by the delivery and execution
of an Assignment and Assumption Agreement (the "Assignment and Assumption
Agreement") substantially in the form attached hereto as Exhibit G. The Seller
shall be required to remit all amounts required to be remitted to the Purchaser
hereunder to said assignee commencing with the first Remittance Date falling
after receipt of said copy of the related Assignment and Assumption Agreement
provided that the Seller receives said copy no later than three (3) Business
Days immediately prior to the first day of the month of the related Remittance
Date.
SECTION 20. WAIVERS.
No term or provision of this Agreement may be waived or modified unless
such waiver or modification is in writing and signed by the party against whom
such waiver or modification is sought to be enforced.
SECTION 21. EXHIBITS.
The exhibits to this Agreement are hereby incorporated and made a part
hereof and are an integral part of this Agreement.
SECTION 22. GENERAL INTERPRETIVE PRINCIPLES.
For purposes of this Agreement, except as otherwise expressly provided or
unless the context otherwise requires:
(a) the terms defined in this Agreement have the meanings
assigned to them in this Agreement and include the plural as well as
the singular, and the use of any gender herein shall be deemed to
include the other gender;
(b) accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted
accounting principles;
(c) references herein to "Articles," "Sections," "Subsections,"
"Paragraphs," and other subdivisions without reference to a document
are to designated Articles, Sections, Subsections, Paragraphs and
other subdivisions of this Agreement;
30
<PAGE> 34
(d) reference to a Subsection without further reference to a
Section is a reference to such Subsection as contained in the same
Section in which the reference appears, and this rule shall also
apply to Paragraphs and other subdivisions;
(e) the words "herein," "hereof," "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any
particular provision; and
(f) the term "include" or "including" shall mean without
limitation by reason of enumeration.
SECTION 23. REPRODUCTION OF DOCUMENTS.
This Agreement and all documents relating thereto, including, without
limitation, (a) consents, waivers and modifications which may hereafter be
executed, (b) documents received by any party at the closing, and (c) financial
statements, certificates and other information previously or hereafter
furnished, may be reproduced by any photographic, photostatic, microfilm,
micro-card, miniature photographic or other similar process. The parties agree
that any such reproduction shall be admissible in evidence as the original
itself in any judicial or administrative proceeding, whether or not the
original is in existence and whether or not such reproduction was made by a
party in the regular course of business, and that any enlargement, facsimile or
further reproduction of such reproduction shall likewise be admissible in
evidence.
SECTION 24. FURTHER AGREEMENTS.
The Seller and the Purchaser each agree to execute and deliver to the
other such reasonable and appropriate additional documents, instruments or
agreements as may be necessary or appropriate to effectuate the purposes of
this Agreement.
SECTION 25. RECORDATION OF ASSIGNMENTS OF MORTGAGE.
To the extent permitted by applicable law, each of the Assignments of
Mortgage is subject to recordation in all appropriate public offices for real
property records in all the counties or their comparable jurisdictions in which
any or all of the Mortgaged Properties are situated, and in any other
appropriate public recording office or elsewhere, such recordation to be
effected at the Seller's expense for a single recordation with respect to each
Assignment of Mortgage in the event recordation is either necessary under
applicable law or requested by the Purchaser at its sole option.
31
<PAGE> 35
IN WITNESS WHEREOF, the parties have executed this Agreement under seal as
of the date and year first above written.
FRANKLIN FINANCE CORPORATION
(the Purchaser)
By:_________________________________
Name:_______________________________
Title:________________________________
FRANKLIN BANK, N.A.
(the Seller)
By:_________________________________
Name:_______________________________
Title:________________________________
32
<PAGE> 36
EXHIBIT A
CONTENTS OF EACH MORTGAGE FILE
With respect to each Mortgage Loan, the Mortgage File shall include each
of the following items, which shall be available for inspection by the
Purchaser and any prospective Purchaser, and which shall be delivered to the
Purchaser or its designee pursuant to Section 6.03 of the Mortgage Loan
Purchase and Warranties Agreement to which this Exhibit is attached (the
"Agreement"):
1. The original Mortgage Note (or, with respect to the Mortgage Loan
listed on Schedule I hereto, a lost note affidavit, executed by an officer of
the Seller, with a copy of the original note attached thereto) bearing all
intervening endorsements, endorsed "Pay to the order of Franklin Finance
Corporation, without recourse" and signed in the name of the Seller by an
authorized officer. To the extent that there is no room on the face of the
Mortgage Notes for endorsements, the endorsement may be contained on an
allonge, if state law so allows. If the Mortgage Loan was acquired by the
Seller in a merger, the endorsement must be by "[Seller], successor by merger
to [name of predecessor]". If the Mortgage Loan was acquired or originated by
the Seller while doing business under another name, the endorsement must be by
"[Seller], formerly known as [previous name]".
2. The original of any guarantee executed in connection with the Mortgage
Note.
3. The original Mortgage, with evidence of recording thereon. If in
connection with any Mortgage Loan, the Seller cannot deliver or cause to be
delivered the original Mortgage with evidence of recording thereon on or prior
to the Closing Date because of a delay caused by the public recording office
where such Mortgage has been delivered for recordation, a photocopy of such
Mortgage certified by the Seller to be true and correct will be delivered; if
such Mortgage has been lost or if such public recording office retains the
original recorded Mortgage, the Seller shall deliver or cause to be delivered
to the Purchaser, a photocopy of such Mortgage, certified by such public
recording office to be a true and complete copy of the original recorded
Mortgage.
4. The originals of all assumption, modification, consolidation or
extension agreements, if any, with evidence of recording thereon or certified
copies of such documents if the originals thereof are unavailable.
5. The original Assignment of Mortgage for each Mortgage Loan endorsed
"Pay to the order of Franklin Finance Corporation" and signed in the name of
the Seller by an authorized officer. If the Mortgage Loan was acquired by the
Seller in a merger, the Assignment of Mortgage must be made by "[Seller],
successor by merger to [name of predecessor]". If the Mortgage Loan was
acquired or originated by the Seller while doing business under another name,
the Assignment of Mortgage must be by "[Seller], formerly known as [previous
name]".
6. Originals of all intervening assignments of the Mortgage with evidence
of recording thereon if such intervening assignment has been recorded.
<PAGE> 37
7. The original mortgagee policy of title insurance or, in the event such
original title policy is unavailable, a certified true copy of the related
policy binder or commitment for title certified to be true and complete by the
title insurance company.
8. Any original security agreement executed in connection with the
Mortgage.
9. The original hazard insurance policy and, if required by law, flood
insurance policy, in accordance with Section 8.02(f) of the Agreement.
10. Mortgage Loan closing statement.
11. Credit report on the Mortgagor.
12. Appraisal report.
13. Photograph of the Mortgaged Property.
14. Survey of the Mortgaged Property, if any.
15. Copy of each instrument necessary to complete identification of any
exception set forth in the exception schedule in the title policy, i.e., map or
plat, restrictions, easements, sewer agreements, etc.
16. All required disclosure statements.
17. If available, termite report, structural engineer's report, water
potability and septic certification.
18. Sales contract.
19. Tax receipts, insurance premium receipts, ledger sheets, insurance
claim files, correspondence, current and historical computerized data files,
and all other processing, underwriting and closing papers and records which are
customarily contained in a mortgage loan file and which are required to
document the Mortgage Loan or to service the Mortgage Loan.
In the event that such original or copy of any document submitted for
recordation to the appropriate public recording office is not so delivered to
the Purchaser or its designee within 90 days following the Closing Date (other
than with respect to the Assignments of Mortgage which shall be delivered to
the Purchaser or its designee in blank), and in the event that the Seller does
not cure such failure within 30 days of discovery or receipt of written
notification of such failure from the Purchaser, the related Mortgage Loan
shall, upon the request of the Purchaser, be repurchased by the Seller at the
price and in the manner specified in Subsection 8.03 of the Agreement. The
foregoing repurchase obligation shall not apply in the event that the Seller
cannot deliver such original or copy of any document submitted for recordation
to the appropriate public recording office within the specified period due to a
delay caused by the recording office in the
A-2
<PAGE> 38
applicable jurisdiction; provided that the Seller shall instead deliver a
recording receipt of such recording office or, if such recording receipt is not
available, an officer's certificate of a servicing officer of the Seller,
confirming that all such documents have been accepted for recording; provided
that, upon request of the Purchaser and delivery by the Purchaser to the Seller
of a schedule of the related Mortgage Loans, the Seller shall reissue and
deliver to the Purchaser or its designee said officer's certificate relating to
the related Mortgage Loans.
A-3
<PAGE> 39
EXHIBIT B
[Servicing Agreement]
<PAGE> 40
EXHIBIT C
FORM OF SELLER'S/SERVICER'S OFFICER'S CERTIFICATE
I, _____________, hereby certify that I am the duly elected ______________
of Franklin Bank, N.A., a national bank (the "Seller") and further as follows:
1. Attached hereto as Exhibit 1 is a true, correct and complete
copy of the restated Articles of Association of the Seller which is
in full force and effect on the date hereof and which has been in
effect without amendment, waiver, rescission or modification since
[_________.]
2. Attached hereto as Exhibit 2 is a true, correct and complete
copy of the bylaws of the Seller which are in effect on the date
hereof and which have been in effect without amendment, waiver,
rescission or modification since [_________.]
3. Attached hereto as Exhibit 3 is an original certificate of
due incorporation and valid existence of the Seller issued within
ten days of the date hereof, and no event has occurred since the
date thereof which would impair such standing.
4. Attached hereto as Exhibit 4 is a true, correct and complete
copy of the corporate resolutions of the Board of Directors of the
Seller authorizing the Seller to execute and deliver each of the
Mortgage Loan Purchase and Warranties Agreements, dated as of
[__________], 1997, by and between Franklin Finance Corporation (the
"Purchaser") and the Seller (the "Purchase Agreement"), to endorse
the mortgage notes and execute the assignments of mortgages by
original [or facsimile] signature, and to execute and deliver each
of the Servicing Agreements dated as of [__________], 1997, by and
between Franklin Finance Corporation (the "Purchaser") and the
Seller as Servicer (the "Servicing Agreement") and such resolutions
are in effect on the date hereof and have been in effect without
amendment, waiver, rescission or modification since [_________.]
5. Either (i) no consent, approval, authorization or order of
any court or governmental agency or body is required for the
execution, delivery and performance by the Seller of or compliance
by the Seller with the Purchase Agreement and the Servicing
Agreement, the sale of the mortgage loans or the consummation of the
transactions contemplated by the Purchase Agreement and the
Servicing Agreement; or (ii) any required consent, approval,
authorization or order has been obtained by the Seller.
6. Neither the consummation of the transactions contemplated by,
nor the fulfillment of the terms of, the Purchase Agreement and the
Servicing Agreement conflicts or will conflict with or results or
will result in a breach of or constitutes or will constitute a
default under the Articles of Association or by-laws of the Seller,
the terms of any indenture or other agreement or instrument to which
the Seller is a
<PAGE> 41
party or by which it is bound or to which it is subject, or any
statute or order, rule, regulations, writ, injunction or decree of
any court, governmental authority or regulatory body to which the
Seller is subject or by which it is bound.
7. To the best of my knowledge, there is no action, suit,
proceeding or investigation pending or threatened against the Seller
which, in my judgment, either in any one instance or in the
aggregate, may result in any material adverse change in the
business, operations, financial condition, properties or assets of
the Seller or in any material impairment of the right or ability of
the Seller to carry on its business substantially as now conducted
or in any material liability on the part of the Seller or which
would draw into question the validity of the Purchase Agreement and
the Servicing Agreement or the mortgage loans or of any action taken
or to be taken in connection with the transactions contemplated
hereby, or which would be likely to impair materially the ability of
the Seller to perform under the terms of the Purchase Agreement and
the Servicing Agreement.
8. Each person listed on Exhibit 5 attached hereto who, as an
officer or representative of the Seller, signed the Purchase
Agreement and any other document delivered prior to or on the date
hereof in connection with any purchase described in the Purchase
Agreement was, at the respective times of such signing and delivery,
and is now, a duly elected or appointed, qualified and acting
officer or representative of the Seller, who holds the office set
forth opposite his or her name on Exhibit 5, and the signatures of
such persons appearing on such documents are their genuine
signatures. The person who, as an officer or representative of the
Seller, signed the Servicing Agreement and any other document
delivered prior to or on the date hereof in connection with any
servicing duties described in the Servicing Agreement was, at the
respective times of such signing and delivery, and is now, a duly
elected or appointed, qualified and acting officer or representative
of the Seller, who holds the office set forth beneath his or her
name on the Servicing Agreement and the signature of such person
appearing on such document is his or her genuine signature.
9. The Seller is duly authorized to engage in the transactions
described and contemplated in the Purchase Agreement and Servicing
Agreement.
C-2
<PAGE> 42
IN WITNESS WHEREOF, I have hereunto signed my name and affixed the seal of
the Seller.
Dated: ____________, 1997 By:__________________________
Name:_______________________
Title:
[Seal]
I, _________________________, an __________________ of Franklin Bank,
N.A., hereby certify that _____________________ is the duly elected, qualified
and acting ______________ of the Seller and that the signature appearing above
is his or her genuine signature.
IN WITNESS WHEREOF, I have hereunto signed my name.
Dated: ______________, 1997 By:_____________________________
Name:___________________________
Title:
C-3
<PAGE> 43
EXHIBIT 5
to Seller's/Servicer's Officer's Certificate
NAME TITLE SIGNATURE
<PAGE> 44
EXHIBIT D
FORM OF OPINION OF COUNSEL TO THE SELLER/SERVICER
_________________, 1997
Franklin Finance Corporation
24725 West Twelve Mile Road
Southfield, Michigan 48034
Dear Sirs:
You have requested my opinion, as [General] Counsel to Franklin Bank, N.A.
(the "Seller"), with respect to certain matters in connection with the sale by
the Seller of the Mortgage Loans pursuant to that certain Mortgage Loan
Purchase and Warranties Agreement by and between the Seller and Franklin
Finance Corporation (the "Purchaser"), dated as of __________, 1997 (the
"Purchase Agreement") which sale is in the form of whole loans, delivered
pursuant to a Purchase Agreement and serviced pursuant to an Servicing
Agreement, dated as of __________, 1997, by and between the Purchaser and the
Seller as Servicer (the "Servicing Agreement"). Capitalized terms not
otherwise defined herein have the meanings set forth in the Purchase Agreement
and the Servicing Agreement.
I have examined the following documents:
1. the Purchase Agreement;
2. the Servicing Agreement;
3. the form of Assignment of Mortgage;
4. the form of endorsement of the Mortgage Notes; and
5. such other documents, records and papers as we have deemed
necessary and relevant as a basis for this opinion.
To the extent I have deemed necessary and proper, I have relied upon the
representations and warranties of the Seller contained in the Purchase
Agreement and the Servicing Agreement. I have assumed the authenticity of all
documents submitted to me as originals, the genuineness of all signatures, the
legal capacity of natural persons and the conformity to the originals of all
documents.
Based upon the foregoing, it is my opinion that:
<PAGE> 45
1. The Seller is a national bank duly organized and validly
existing under the laws of the United States and is qualified to
transact business in, and is in good standing under, the laws of
Michigan.
2. The Seller has the power to engage in the transactions
contemplated by the Purchase Agreement and the Servicing Agreement
and all requisite power, authority and legal right to execute and
deliver the Purchase Agreement and the Servicing Agreement and to
perform and observe the terms and conditions of such agreements.
3. The Purchase Agreement and Servicing Agreement have been duly
authorized, executed and delivered by the Seller and are legal,
valid and binding agreements enforceable in accordance with their
respective terms against the Seller, subject to bankruptcy laws and
other similar laws of general application affecting rights of
creditors and subject to the application of the rules of equity,
including those respecting the availability of specific performance,
none of which will materially interfere with the realization of the
benefits provided thereunder or with the Purchaser's ownership of
the Mortgage Loans.
4. The Seller has been duly authorized to allow any of its
officers to execute any and all documents by original signature in
order to complete the transactions contemplated by the Purchase
Agreement and the Servicing Agreement and by original or facsimile
signature in order to execute the endorsements to the Mortgage Notes
and the Assignments of Mortgages, and the original or facsimile
signature of the officer at the Seller executing the endorsements to
the Mortgage Notes and the Assignments of Mortgages represents the
legal and valid signature of said officer of the Seller.
5. Either (i) no consent, approval, authorization or order of
any court or governmental agency or body is required for the
execution, delivery and performance by the Seller of or compliance
by the Seller with the Purchase Agreement and the Servicing
Agreement and the sale of the Mortgage Loans or the consummation of
the transactions contemplated by the Purchase Agreement and the
Servicing Agreement or (ii) any required consent, approval,
authorization or order has been obtained by the Seller.
6. Neither the consummation of the transactions contemplated by,
nor the fulfillment of the terms of, the Purchase Agreement and the
Servicing Agreement conflicts or will conflict with or results or
will result in a breach of or constitutes or will constitute a
default under the Articles of Association or by-laws of the Seller,
the terms of any indenture or other agreement or instrument to which
the Seller is a party or by which it is bound or to which it is
subject, or violates any statute or order, rule, regulations, writ,
injunction or decree of any court, governmental authority or
regulatory body to which the Seller is subject or by which it is
bound.
D-2
<PAGE> 46
7. There is no action, suit, proceeding or investigation pending
or, to the best of my knowledge, threatened against the Seller
which, in my judgment, either in any one instance or in the
aggregate, may result in any material adverse change in the
business, operations, financial condition, properties or assets of
the Seller or in any material impairment of the right or ability of
the Seller to carry on its business substantially as now conducted
or in any material liability on the part of the Seller or which
would draw into question the validity of the Purchase Agreement and
the Servicing Agreement or the Mortgage Loans or of any action taken
or to be taken in connection with the transactions contemplated
thereby, or which would be likely to impair materially the ability
of the Seller to perform under the terms of the Purchase Agreement
and the Servicing Agreement.
8. The sale of each Mortgage Note and Mortgage as and in the
manner contemplated by the Purchase Agreement is sufficient to fully
transfer to the Purchaser all right, title and interest of the
Seller thereto as noteholder and mortgagee.
9. The Mortgages have been duly assigned and the Mortgage Notes
have been duly endorsed as provided in the Purchase Agreement. The
Assignments of Mortgage are in recordable form, except for the
insertion of the name of the assignee, and upon the name of the
assignee being inserted, and to the best of my knowledge, with
respect to all other states, the Assignments of Mortgage are in
recordable form, except for the insertion of the name of the
assignee, and upon the name of the assignee being inserted, are
acceptable for recording under the laws of such other states. The
endorsement of the Mortgage Notes, the delivery to the Purchaser, or
its designee, of the Assignments of Mortgage, and the delivery of
the original endorsed Mortgage Notes to the Purchaser, or its
designee, are sufficient to permit the Purchaser to avail itself of
all protection available under applicable law against the claims of
any present or future creditors of the Seller, and are sufficient to
prevent any other sale, transfer, assignment, pledge or
hypothecation of the Mortgages and the Mortgage Notes by the Seller
from being enforceable.
This opinion is given to you for your sole benefit, and no other person or
entity is entitled to rely hereon except that the purchaser or purchasers to
which you initially and directly resell the Mortgage Loans may rely on this
opinion as if it were addressed to them as of its date.
Very truly yours,
[General] Counsel
D-3
<PAGE> 47
EXHIBIT E
______________________, 1997
Federal Home Loan Bank of Chicago (the "FHLB")
_____________________________
_____________________________
Attention: _____________________________
_____________________________
_____________________________
Re: Notice of Sale and Release of Collateral
Dear Sirs:
This letter serves as notice that Franklin Bank, N.A., a national bank
(the "Bank") has committed to sell to Franklin Finance Corporation under a
Mortgage Loan Purchase and Warranties Agreement, dated as of __________, 1997,
certain mortgage loans originated or owned by the Bank. The Bank warrants that
the mortgage loans to be sold to Franklin Finance Corporation are in addition
to and beyond any collateral required to secure advances made by the FHLB to
the Bank.
The Bank acknowledges that the mortgage loans to be sold to Franklin
Finance Corporation shall not be used as additional or substitute collateral
for advances made by the FHLB. Franklin Finance Corporation understands that
the balance of the Bank's mortgage loan portfolio may be used as collateral or
additional collateral for advances made by the FHLB, and confirms that it has
no interest therein.
Execution of this letter by the FHLB shall constitute a full and complete
release of any security interest, claim, or lien which the FHLB may have
against the mortgage loans to be sold to Franklin Finance Corporation.
Very truly yours,
_____________________________
By:_____________________________
Name:___________________________
Title:__________________________
Date:___________________________
Acknowledge and approved:
FEDERAL HOME LOAN BANK OF CHICAGO
By:_____________________________
Name:___________________________
Title:__________________________
Date:___________________________
<PAGE> 48
EXHIBIT F
FORM OF SECURITY RELEASE CERTIFICATION
I. RELEASE OF SECURITY INTEREST
The financial institution named below hereby relinquishes any and all
right, title and interest it may have in all Mortgage Loans to be purchased by
Franklin Finance Corporation from Franklin Bank, N.A., pursuant to that certain
Mortgage Loan Purchase and Warranties Agreement, dated as of [__________,
1997,] and certifies that all notes, mortgages, assignments and other documents
in its possession relating to such Mortgage Loans have been delivered and
released to Franklin Bank, N.A. or its designees, as of the date and time of
the sale of such Mortgage Loans to Franklin Finance Corporation.
Name and Address of Financial Institution
________________________________
(name)
________________________________
(Address)
By:_____________________________
II. CERTIFICATION OF RELEASE
Franklin Bank, N.A. hereby certifies to Franklin Finance Corporation that,
as of the date and time of the sale of the above-mentioned Mortgage Loans to
Franklin Finance Corporation, the security interests in the Mortgage Loans
released by the above-named financial institution comprise all security
interests relating to or affecting any and all such Mortgage Loans. The
Company warrants that, as of such time, there are and will be no other security
interests affecting any or all of such Mortgage Loans.
_________________________________
By: _____________________________
Title: __________________________
Date:____________________________
<PAGE> 49
EXHIBIT G
FORM OF ASSIGNMENT AND ASSUMPTION AGREEMENT
ASSIGNMENT AND ASSUMPTION AGREEMENT, dated [__________________,] between
Franklin Bank, N.A., a national bank ("Assignor") and Franklin Finance
Corporation, a Michigan corporation ("Assignee"):
For good and valuable consideration the receipt and sufficiency of which
hereby are acknowledged, and in consideration of the mutual covenants herein
contained, the parties hereto hereby agree as follows:
1. The Assignor hereby grants, transfers and assigns to
Assignee, as Purchaser, all of the right, title and interest of
Assignor with respect to the mortgage loans listed on Exhibit A
attached hereto (the "Mortgage Loans"), and with respect to such
Mortgage Loans, in, to and under (a) that certain Mortgage Loan
Purchase and Warranties Agreement dated [__________,] 1997 by and
between Franklin Bank, N.A. (the "Seller") and Franklin Finance
Corporation (the "Purchase Agreement"), and (b) that certain
Servicing Agreement dated as of [___________], by and between the
Purchaser and the Seller (the "Servicing Agreement"; the Servicing
Agreement and the Purchase Agreement are collectively referred to as
the "Agreements").
2. The Assignor warrants and represents to, and covenants with,
the Assignee that:
a. the Assignor is the lawful owner of the Mortgage
Loans with the full right to transfer the Mortgage Loans free
from any and all claims and encumbrances whatsoever;
b. the Assignor has not received notice of, and has no
knowledge of, any offsets, counterclaims or other defenses
available to the Seller with respect to the Agreements or the
Mortgage Loans;
c. the Assignor has not waived or agreed to any waiver
under, or agreed to any amendment or other modification of,
the Agreements. The Assignor has no knowledge of, and has
not received notice of, any waivers under or amendments or
other modifications of, or assignments of rights or
obligations under, the Agreements; and
d. Neither the Assignor nor anyone acting on its behalf
has offered, transferred, pledged, sold or otherwise disposed
of the Mortgage Loans or any interest in the Mortgage Loans,
or solicited any offer to buy or accept a transfer, pledge or
other disposition of the Mortgage Loans, or any interest in
the Mortgage Loans or otherwise approached or negotiated with
respect to the Mortgage Loans, or any interest in the
Mortgage with any
<PAGE> 50
person in any manner, or made any general solicitation by
means of general advertising or in any other manner, or taken
any other action which would constitute a distribution of the
Mortgage Loans under the Securities Act of 1933, as amended
(the "1933 Act") or which would render the disposition of the
Mortgage Loans a violation of Section 5 of the 1933 Act or
require registration pursuant thereto.
3. The Assignee warrants and represents to, and covenants
with, the Assignor and the Seller pursuant to the Agreements that:
a. the Assignee is a corporation duly organized, validly
existing and in good standing under the laws of the
jurisdiction of its incorporation, and has all requisite
corporate power and authority to acquire, own and purchase
the Mortgage Loans;
b. the Assignee has full corporate power and authority
to execute, deliver and perform under this Assignment and
Assumption Agreement, and to consummate the transactions set
forth herein. The execution, delivery and performance of the
Assignee of this Assignment and Assumption Agreement, and the
consummation by it of the transactions contemplated hereby,
have been duly authorized by all necessary corporate action
of the Assignee. This Assignment and Assumption Agreement
has been duly executed and delivered by the Assignee and
constitutes the valid and legally binding obligation of the
Assignee enforceable against the Assignee in accordance with
its respective terms;
c. To the best of Assignee's knowledge, no material
consent, approval, order or authorization of, or declaration,
filing or registration with, any governmental entity is
required to be obtained or made by the Assignee in connection
with the execution, delivery or performance by the Assignee
of this Assignment and Assumption Agreement, or the
consummation by it of the transactions contemplated hereby;
d. The Assignee agrees to be bound, as Purchaser, by all
of the terms, covenants and conditions of the Agreements, the
Mortgage Loans, and from and after the date hereof, the
Assignee assumes for the benefit of each of the Seller and
the Assignor all of the Assignor' s obligations as Purchaser
thereunder, including, without limitation, the limitation on
assignment set forth in Section 19 of the Purchase Agreement;
e. The Assignee understands that the Mortgage Loans have
not been registered under the 1933 Act or the securities laws
of any state;
G-2
<PAGE> 51
f. The purchase price being paid by the Assignee for the
Mortgage Loans is in excess of $250,000 and will be paid by
cash remittance of the full purchase price within sixty (60)
days of the sale;
g. The Assignee is acquiring the Mortgage Loans for
investment for its own account only and not for any other
person;
h. The Assignee considers itself a sophisticated institutional
investor having such knowledge and experience in financial
and business matters that it is capable of evaluating the
merits and risks of investment in the Mortgage Loans;
i. The Assignee has been furnished with all information
regarding the Mortgage Loans that it has requested from the
Assignor or the Seller;
j. Neither the Assignee nor anyone acting on its behalf
has offered, transferred, pledged, sold or otherwise disposed
of the Mortgage Loans or any interest in the Mortgage Loans,
or solicited any offer to buy or accept a transfer, pledge or
other disposition of the Mortgage Loans or any interest in
the Mortgage Loans, or otherwise approached or negotiated
with respect to the Mortgage Loans or any interest in the
Mortgage Loans with any person in any manner which would
constitute a distribution of the Mortgage Loans under the
1933 Act or which would render the disposition of the
Mortgage Loans a violation of Section 5 of the 1933 Act or
require registration pursuant thereto, nor will it act, nor
has it authorized or will it authorize any person to act, in
such manner with respect to the Mortgage Loans; and
k. Either: (1) the Assignee is not an employee benefit
plan ("Plan") within the meaning of section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended
("ERISA") or a plan (also "Plan") within the meaning of
section 4975(e)(1) of the Internal Revenue Code of 1986
("Code"), and the Assignee is not directly or indirectly
purchasing the Mortgage Loans on behalf of, investment
manager of, as named fiduciary of, as Trustee of, or with
assets of, a Plan; or (2) the Assignee's purchase of the
Mortgage Loans will not result in a prohibited transaction
under section 406 of ERISA or section 4975 of the Code.
4. (a) The Assignee's address for purposes of all notices and
correspondence related to the Mortgage Loans and the
Agreements is: 24725 West Twelve Mile Road, Southfield,
Michigan 48034.
The Assignee's wire instructions for purposes of all remittances and
payments related to the Mortgage Loans are to be confirmed in writing.
G-3
<PAGE> 52
(b) The Assignor's address for purposes for all notices
and correspondence related to the Mortgage Loans and this
Agreement is: 24725 West Twelve Mile Road, Southfield,
Michigan 48034.
5. This Agreement shall be construed in accordance with the
substantive laws of the State of Michigan (without regard to
conflicts of laws principles) and the obligations, rights and
remedies of the parties hereunder shall be determined in accordance
with such laws, except to the extent preempted by federal law.
6. This Agreement shall inure to the benefit of the successors
and assigns of the parties hereto. This Agreement may not be
assigned by the Assignee without the express written consent of the
Assignor. Any entity into which the Assignor or Assignee may be
merged or consolidated shall, without the requirement for any
further writing, be deemed the Assignor or Assignee, respectively,
hereunder.
7. No term or provision of this Agreement may be waived or
modified unless such waiver or modification is in writing and signed
by the party against whom such waiver or modification is sought to
be enforced.
8. This Agreement shall survive the conveyance of the Mortgage
Loans and the assignment of the Agreements by the Assignor.
9. Notwithstanding the assignment of the Agreements by either
the Assignor or Assignee, this Agreement shall not be deemed
assigned by the Assignor or the Assignee unless assigned by separate
written instrument.
10. For the purpose for facilitating the execution of this
Agreement as herein provided and for other purposes, this Agreement
may be executed simultaneously in any number of counterparts, each
of which counterparts shall be deemed to be an original, and such
counterparts shall constitute and be one and the same instrument.
G-4
<PAGE> 53
IN WITNESS WHEREOF, the parties have caused this Assignment and Assumption
Agreement to be executed by their duly authorized officers as of the date first
above written.
_________________________ _____________________________
Assignor Assignee
By:______________________ By:__________________________
Its:_____________________ Its:_________________________
Taxpayer Taxpayer
Identification No._______ Identification No.___________
G-5
<PAGE> 1
EXHIBIT 10.3
SERVICING AGREEMENT
BETWEEN
FRANKLIN FINANCE CORPORATION
PURCHASER
FRANKLIN BANK, N.A.
SERVICER
DATED AS OF [__________], 1997
CONVENTIONAL RESIDENTIAL MORTGAGE LOANS
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
ARTICLE I
<S> <C>
DEFINITIONS........................................................................................1
Section 1. Definitions..................................................................1
ARTICLE II
SERVICING..........................................................................................5
Section 2.01 Bank to Act as Servicer.....................................................5
Section 2.02 Liquidation of Mortgage Loans...............................................7
Section 2.03 Collection of Mortgage Loan Payments........................................8
Section 2.04 Establishment of and Deposits to Custodial Account..........................8
Section 2.05 Permitted Withdrawals From Custodial Account................................9
Section 2.06 Establishment of and Deposits to Escrow Account............................10
Section 2.07 Permitted Withdrawals From Escrow Account..................................11
Section 2.08 Payment of Taxes, Insurance and Other Charges, Tax Contracts...............12
Section 2.09 Protection of Accounts.....................................................12
Section 2.10 Maintenance of Hazard Insurance............................................12
Section 2.11 Maintenance of Mortgage Impairment Insurance...............................13
Section 2.12 Maintenance of Fidelity Bond and Errors and Omissions Insurance............14
Section 2.13 Inspections................................................................14
Section 2.14 Restoration of Mortgaged Property..........................................15
Section 2.15 Maintenance of PMI Policy, Claims..........................................15
Section 2.16 Deteriorating Mortgage Loans...............................................16
Section 2.17 Title, Management and Disposition of REO Property..........................16
Section 2.18 Permitted Withdrawals with respect to REO Property.........................17
Section 2.19 Real Estate Owned Reports..................................................18
Section 2.20 Liquidation Reports........................................................18
Section 2.21 Reports Of Foreclosures and Abandonments...................................18
Section 2.22 Notification of Adjustments................................................18
Section 2.23 Notification of Maturity Date..............................................18
ARTICLE III
PAYMENTS TO PURCHASER.............................................................................19
Section 3.01 Remittances................................................................19
Section 3.02 Statements to Purchaser....................................................19
Section 3.03 Advances by Servicer........................................................20
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE IV
GENERAL SERVICING PROCEDURES...................................................................21
Section 4.01 Transfers of Mortgaged Property.........................................21
Section 4.02 Satisfaction of Mortgages and Release of Mortgage Files.................21
Section 4.03 Servicing Compensation..................................................22
Section 4.04 Annual Statement as to Compliance.......................................22
Section 4.05 Annual Independent Public Accountants' Servicing Report.................22
Section 4.06 Right to Examine Seller Records.........................................23
ARTICLE V
SERVICER TO COOPERATE..........................................................................23
Section 5.01 Provision of Information................................................23
Section 5.02 Financial Statements; Servicing Facilities..............................23
ARTICLE VI
TERMINATION....................................................................................24
Section 6.01 Agency Suspensions......................................................24
Section 6.02 Damages.................................................................24
Section 6.03 Termination.............................................................24
Section 6.04 Termination Without Cause...............................................24
ARTICLE VII
BOOKS AND RECORDS..............................................................................24
Section 7.01 Possession of Servicing Files...........................................24
ARTICLE VIII
INDEMNIFICATION AND ASSIGNMENT.................................................................26
Section 8.01 Indemnification.........................................................26
Section 8.02 Limitation on Liability of Seller and Others............................26
Section 8.03 Limitation on Registration and Assignment by Seller.....................26
Section 8.04 Assignment by Purchaser.................................................27
Section 8.05 Merger or Consolidation of the Seller...................................27
Section 8.06 Successor to the Seller.................................................28
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
ARTICLE IX
REPRESENTATIONS, WARRANTIES AND COVENANTS OF PURCHASER...........................................29
Section 9.01 Due Organization and Authority............................................29
Section 9.02 No Conflicts..............................................................29
Section 9.03 Ability to Perform........................................................29
Section 9.04 No Litigation Pending.....................................................29
Section 9.05 No Consent Required.......................................................30
Section 9.06 Assistance................................................................30
ARTICLE X
REPRESENTATIONS AND WARRANTIES OF SELLER.........................................................30
Section 10.01 Due Organization and Authority...........................................30
Section 10.02 Ordinary Course of Business..............................................30
Section 10.03 No Conflicts.............................................................30
Section 10.04 Ability to Service.......................................................31
Section 10.05 Ability to Perform.......................................................31
Section 10.06 No Litigation Pending....................................................31
Section 10.07 No Consent Required......................................................31
Section 10.08 No Untrue Information....................................................31
Section 10.09 Reasonable Servicing Fee.................................................32
Section 10.10 Financial Statements.....................................................32
Section 10.11 Conflict of Interest.....................................................32
ARTICLE XI
DEFAULT..........................................................................................32
Section 11.01 Events of Default........................................................32
Section 11.02 Waiver of Defaults.......................................................34
ARTICLE XII
MISCELLANEOUS PROVISIONS.........................................................................34
Section 12.01 Notices..................................................................34
Section 12.02 Waivers..................................................................34
Section 12.03 Entire Agreement; Amendment..............................................35
Section 12.04 Execution; Binding Effect................................................35
Section 12.05 Headings.................................................................35
Section 12.06 Applicable Law...........................................................35
Section 12.07 Relationship of Parties..................................................35
Section 12.08 Severability of Provisions...............................................35
</TABLE>
iii
<PAGE> 5
<TABLE>
<S> <C>
Section 12.09 Recordation of Assignments of Mortgage...................................35
Section 12.10 Exhibits.................................................................36
</TABLE>
EXHIBITS
EXHIBIT 1 FORM OF MONTHLY REMITTANCE ADVICE
EXHIBIT 2 FORM OF CUSTODIAL ACCOUNT CERTIFICATION
EXHIBIT 3 FORM OF CUSTODIAL ACCOUNT LETTER AGREEMENT
EXHIBIT 4 FORM OF ESCROW ACCOUNT CERTIFICATION
EXHIBIT 5 FORM OF ESCROW ACCOUNT LETTER AGREEMENT
EXHIBIT 6 FORM OF CONFIDENTIALITY AGREEMENT
iv
<PAGE> 6
SERVICING AGREEMENT
This Servicing Agreement (the "Servicing Agreement" or the "Agreement")
is entered into as of [__________,] 1997, by and between FRANKLIN BANK, N.A.
(the "Seller" or "Servicer"), a national bank, and FRANKLIN FINANCE CORPORATION,
a Michigan corporation (the "Purchaser").
WHEREAS, the Purchaser and Seller entered into a Mortgage Loan Purchase
and Warranties Agreement dated as of [________,] 1997 (the "Purchase Agreement")
pursuant to which the Purchaser agreed to purchase from the Seller certain
conventional, residential, adjustable and fixed rate first mortgage loans (the
"Mortgage Loans") to be delivered as whole loans, with the Servicer retaining
servicing rights in connection with the purchase of such Mortgage Loans; and
WHEREAS, the Purchaser desires to have the Servicer service the
Mortgage Loans, the Servicer desires to service and administer the Mortgage
Loans on behalf of the Purchaser, and the parties desire to provide the terms
and conditions of such servicing by the Servicer.
NOW, THEREFORE, in consideration of the mutual promises and agreements
set forth herein and for other good and valuable consideration, the receipt and
the sufficiency of which are hereby acknowledged, the parties hereto hereby
agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1. Definitions. All capitalized terms not otherwise defined
herein have the respective meanings set forth in the Purchase Agreement. The
following terms are defined as follows:
"Accepted Servicing Practices" means, with respect to any Mortgage
Loan, those mortgage servicing practices of prudent mortgage lending
institutions which service mortgage loans of the same type as such Mortgage Loan
in the jurisdiction where the related Mortgaged Property is located.
"Ancillary Income" means all late charges, escrow account benefits,
reinstatement fees, and similar types of fees arising from or in connection with
any Mortgage Loan to the extent not otherwise payable to the Mortgagor under
applicable law or pursuant to the terms of the related Mortgage Note.
"Bank" means Franklin Bank, N.A.
"Best's" means Best's Key Rating Guide.
"BIF" means The Bank Insurance Fund, or any successor thereto.
1
<PAGE> 7
"Closing Date" means [_______], 1997, or such other date as is mutually
agreed upon by the parties hereto.
"Condemnation Proceeds" means all awards or settlements in respect of a
Mortgaged Property, whether permanent or temporary, partial or entire, by
exercise of the power of eminent domain or condemnation, to the extent not
required to be released to a Mortgagor in accordance with the terms of the
related Mortgage Loan Documents.
"Custodial Account" means the separate account or accounts created and
maintained pursuant to Section 2.04.
"Cut-off Date" means [__________], 1997.
"Due Period" means with respect to each Remittance Date, the period
commencing on the second day of the month preceding the month of the Remittance
Date and ending on the first day of the month of the Remittance Date.
"Errors and Omissions Insurance Policy" means an errors and omissions
insurance policy to be maintained by the Servicer pursuant to Section 2.12.
"Escrow Account" means the separate account or accounts created and
maintained pursuant to Section 2.06.
"Escrow Payment" means, with respect to any Mortgage Loan, the amounts
constituting taxes, assessments, water rates, sewer rents, municipal charges,
mortgage insurance premiums, fire and hazard insurance premiums, condominium
charges, and any other payments required to be escrowed by the Mortgagor with
the mortgagee pursuant to the Mortgage or any other document.
"Event of Default" means any one of the conditions or circumstances
enumerated in Section 11.01.
"FDIC" means The Federal Deposit Insurance Corporation, or any
successor thereto.
"FHLMC Guide" means the FHLMC Sellers' and Servicers' Guide and all
amendments or additions thereto.
"Fidelity Bond" means a fidelity bond to be maintained by the Servicer
pursuant to Section 2.12.
"FNMA Guides" means the FNMA Sellers' Guide and the FNMA Servicers'
Guide and all amendments or additions thereto.
2
<PAGE> 8
"Insurance Proceeds" means, with respect to each Mortgage Loan,
proceeds of insurance policies insuring the Mortgage Loan or the related
Mortgaged Property.
"Liquidation Proceeds" means cash received in connection with the
liquidation of a defaulted Mortgage Loan, whether through the sale or assignment
of such Mortgage Loan, trustee's sale, foreclosure sale or otherwise, or the
sale of the related Mortgaged Property if the Mortgaged Property is acquired in
satisfaction of the Mortgage Loan.
"Monthly Remittance Advice" means the monthly remittance advice, in the
form of Exhibit A annexed hereto, to be provided to the Purchaser pursuant to
Section 3.02.
"Mortgage Impairment Insurance Policy" means a mortgage impairment or
blanket hazard insurance policy as described in Section 2.11.
"Nonrecoverable Advance" means any advance of principal and interest
previously made or proposed to be made in respect of a Mortgage Loan which, in
the good faith judgment of the Servicer, will not or, in the case of a proposed
advance of principal and interest, would not, be ultimately recoverable from
related Insurance Proceeds, Liquidation Proceeds or otherwise. The determination
by the Servicer that it has made a Nonrecoverable Advance or that any proposed
advance of principal and interest, if made, would constitute a Nonrecoverable
Advance, shall be evidenced by an Officers' Certificate delivered to the
Purchaser.
"OCC" means Office of Comptroller of the Currency, or any successor
thereto.
"Officer's Certificate" means a certificate signed by the Chairman of
the Board or the Vice Chairman of the Board or a President or a Vice President
and by the Treasurer or the Secretary or one of the Assistant Treasurers or
Assistant Secretaries of the Servicer, and delivered to the Purchaser as
required by this Agreement.
"PMI Policy" means a policy of primary mortgage guaranty insurance
issued by a Qualified Insurer, as required by this Agreement with respect to
certain Mortgage Loans.
"Prime Rate" means the prime rate announced to be in effect from time
to time, as published as the average rate in The Wall Street Journal (Chicago
edition).
"Principal Prepayment" means any payment or other recovery of principal
on a Mortgage Loan which is received in advance of its scheduled Due Date,
including any prepayment penalty or premium thereon and which is not accompanied
by an amount of interest representing scheduled interest due on any date or
dates in any month or months subsequent to the month of prepayment.
"Purchase Agreement" means the Mortgage Loan Purchase and Warranties
Agreement between the Purchaser and the Seller related to the purchase of the
Mortgage Loans dated as of [__________,] 1997.
3
<PAGE> 9
"Qualified Depository" means a depository the accounts of which are
insured by the FDIC through the BIF or the SAIF.
"Qualified Insurer" means an insurance company duly qualified as such
under the laws of the states in which the Mortgaged Properties are located, duly
authorized and licensed in such states to transact the applicable insurance
business and to write the insurance provided, approved as an insurer by FNMA and
FHLMC with respect to primary mortgage insurance and, in addition, in the two
highest rating categories by Best's with respect to hazard and flood insurance.
"Remittance Date" means the 18th day (or if such 18th day is not a
Business Day, the first Business Day immediately following) of any month,
beginning with the first Remittance Date on [_______,] 1997.
"REO Property" means a Mortgaged Property acquired by the Servicer on
behalf of the Purchaser through foreclosure or by deed in lieu of foreclosure,
as described in Section 2.17.
"SAIF" means The Savings Association Insurance Fund, or any successor
thereto.
"Servicer Employees" has the meaning set forth in Section 2.12.
"Servicing Advances" means all customary, reasonable and necessary "out
of pocket" costs and expenses (including reasonable attorneys' fees and
disbursements) incurred in the performance by the Servicer of its servicing
obligations, including, but not limited to, the cost of (a) the preservation,
restoration and protection of the Mortgaged Property, (b) any enforcement or
judicial proceedings, including foreclosures, (c) the management and liquidation
of the Mortgaged Property if the Mortgaged Property is acquired in satisfaction
of the Mortgage and (d) compliance with the obligations under Section 2.08
(except with respect to any expenses incurred in connection with procuring or
transferring Tax Service Contracts, as provided therein).
"Servicing Agreement" means this agreement between the Purchaser and
the Servicer for the servicing and administration of the Mortgage Loans.
"Servicing Fee" means, with respect to each Mortgage Loan, the amount
of the annual fee the Purchaser shall pay to the Servicer, which shall, for a
period of one (1) full month, be equal to one-twelfth of the product of the
Servicing Fee Rate and the Stated Principal Balance of such Mortgage Loan.
Such fee shall be payable monthly, computed on the basis of the same
principal amount and period in respect of which any related interest payment on
a Mortgage Loan is computed and shall be pro rated for any portion of a month
during which the Mortgage Loan is serviced by the Servicer under this Agreement.
The obligation of the Purchaser to pay the Servicing Fee is limited to, and the
Servicing Fee is payable solely from, the interest portion (including recoveries
with respect to interest from Liquidation Proceeds, to the extent permitted by
Section 4.03) of such Monthly Payment collected by the Servicer, or as otherwise
provided under Section 4.03.
4
<PAGE> 10
"Servicing Fee Rate" means, with respect to each Mortgage Loan, the
rate specified in the Mortgage Loan Schedule with respect to such Mortgage Loan.
"Servicing File" means, with respect to each Mortgage Loan, the file
retained by the Servicer consisting of originals of all documents in the
Mortgage File which are not delivered to the Purchaser or its designee and
copies of the Mortgage Loan Documents listed on Exhibit A to the Purchase
Agreement.
"Termination Fee" means the amount paid by the Purchaser to the
Servicer in the event of the Servicer's termination, without cause, as servicer.
Such fee shall equal the percentage amount set forth in Section 6.04 hereof of
the then current aggregate unpaid principal balance of the related Mortgage
Loans.
ARTICLE II
SERVICING
SECTION 2.01 The Bank to Act as Servicer. From and after the Closing
Date, the Servicer, as an independent contractor, shall service and administer
the Mortgage Loans and shall have full power and authority, acting alone, to do
any and all things in connection with such servicing and administration which
the Servicer may deem necessary or desirable, consistent with the terms of this
Agreement and with Accepted Servicing Practices. Except as set forth in this
Agreement, the Servicer shall service the Mortgage Loans in strict compliance
with the servicing provisions of the FHLMC Guide. In the event of any conflict,
inconsistency or discrepancy between any of the servicing provisions of this
Agreement and any of the servicing provisions of the FHLMC Guide, the provisions
of this Agreement shall control and be binding upon the Purchaser and the
Servicer.
Consistent with the terms of this Agreement, the Servicer may waive,
modify or vary any term of any Mortgage Loan or consent to the postponement of
strict compliance with any such term or in any manner grant indulgence to any
Mortgagor if in the Servicer's reasonable and prudent determination such waiver,
modification, postponement or indulgence is not materially adverse to the
Purchaser, provided, however, that unless the Servicer has obtained the prior
written consent of the Purchaser, the Servicer shall not permit any modification
with respect to any Mortgage Loan that would change the Mortgage Interest Rate,
defer or forgive the payment of principal or interest, reduce or increase the
outstanding principal balance (except for actual payments of principal) or
change the final maturity date on such Mortgage Loan. In the event of any such
modification which permits the deferral of interest or principal payments on any
Mortgage Loan, the Servicer shall, on the Business Day immediately preceding the
Remittance Date in any month in which any such principal or interest payment has
been deferred, deposit in the Custodial Account from its own funds, in
accordance with Section 2.04, the difference between (a) such month's principal
and one (1) month's interest at the Mortgage Interest Rate on the unpaid
principal balance of such Mortgage Loan and (b) the amount paid by the
Mortgagor.
5
<PAGE> 11
The Servicer shall be entitled to reimbursement for such advances to
the same extent as for all other advances made pursuant to Section 2.05. Without
limiting the generality of the foregoing, the Servicer shall continue, and is
hereby authorized and empowered, to execute and deliver on behalf of itself and
the Purchaser, all instruments of satisfaction or cancellation, or of partial or
full release, discharge and all other comparable instruments, with respect to
the Mortgage Loans and with respect to the Mortgaged Properties. If reasonably
required by the Servicer, the Purchaser shall furnish the Servicer with any
powers of attorney and other documents necessary or appropriate to enable the
Servicer to carry out its servicing and administrative duties under this
Agreement.
In servicing and administering the Mortgage Loans, the Servicer shall
employ procedures (including collection procedures) and exercise the same care
that it customarily employs and exercises in servicing and administering
mortgage loans for its own account, giving due consideration to Accepted
Servicing Practices where such practices do not conflict with the requirements
of this Agreement, the FHLMC Guide and the Purchaser's reliance on the Servicer.
The Servicer shall keep at its servicing office books and records in
which, subject to such reasonable regulations as it may prescribe, the Servicer
shall note transfers of Mortgage Loans. No transfer of a Mortgage Loan may be
made unless such transfer is in compliance with the terms hereof. For the
purposes of this Agreement, the Servicer shall be under no obligation to deal
with any Person with respect to this Agreement or the Mortgage Loans unless the
Servicer has been notified of such transfers as provided in this Section 2.01.
The Purchaser may sell and transfer, in whole or in part, the Mortgage Loans,
provided that no such sale and transfer shall be binding upon the Servicer
unless such transferee shall agree in writing in the form of the Assignment and
Assumption Agreement attached to the Purchase Agreement as Exhibit G, to be
bound by the terms of this Agreement and the Purchase Agreement, and an executed
copy of the same shall have been delivered to the Servicer. Upon receipt
thereof, the Servicer shall mark its books and records to reflect the ownership
of the Mortgage Loans by such assignee, and the previous Purchaser shall be
released from its obligations hereunder. The Servicer shall be required to remit
all amounts required to be remitted to the Purchaser hereunder to said
transferee commencing with the first Remittance Date falling after receipt of
said copy of the related Assignment and Assumption Agreement provided that the
Servicer receives said copy no later than three (3) Business Days immediately
prior to the first day of the month of the related Remittance Date. This
Agreement shall be binding upon and inure to the benefit of the Purchaser and
the Servicer and their permitted successors, assignees and designees.
The Servicing File retained by the Servicer pursuant to this Agreement
shall be appropriately marked and identified in the Servicer's computer system
to clearly reflect the sale of the related Mortgage Loan to the Purchaser. The
Servicer shall release from its custody the contents of any Servicing File
retained by it only in accordance with this Agreement, except when such release
is required in connection with a repurchase of any such Mortgage Loan pursuant
to Section 8.03 of the Purchase Agreement.
The Servicer must have an internal quality control program that
verifies, on a regular basis, the existence and accuracy of the legal documents,
credit documents, property appraisals,
6
<PAGE> 12
and underwriting decisions. The program must be capable of evaluating and
monitoring the overall quality of its loan production and servicing activities.
The program is to ensure that the Mortgage Loans are serviced in accordance with
prudent mortgage banking practices and accounting principles; guard against
dishonest, fraudulent, or negligent acts; and guard against errors and omissions
by officers, employees, or other authorized persons.
SECTION 2.02 Liquidation of Mortgage Loans. In the event that any
payment due under any Mortgage Loan and not postponed pursuant to Section 2.01
is not paid when the same becomes due and payable, or in the event the Mortgagor
fails to perform any other covenant or obligation under the Mortgage Loan and
such failure continues beyond any applicable grace period, the Servicer shall
take such action as (1) the Servicer would take under similar circumstances with
respect to a similar mortgage loan held for its own account for investment, (2)
shall be consistent with Accepted Servicing Practices, (3) the Servicer shall
determine prudently to be in the best interest of Purchaser, and (4) is
consistent with any related PMI Policy. In the event that any payment due under
any Mortgage Loan is not postponed pursuant to Section 2.01 and remains
delinquent for a period of ninety (90) days or any other default continues for a
period of ninety (90) days beyond the expiration of any grace or cure period (or
such other period as is required by law in the jurisdiction where the related
Mortgaged Property is located), the Servicer shall commence foreclosure
proceedings in accordance with the FHLMC Guide, provided that, prior to
commencing foreclosure proceedings, the Servicer shall notify the Purchaser in
writing of the Servicer's intention to do so, and the Servicer shall not
commence foreclosure proceedings if the Purchaser objects to such action within
ten (10) Business Days of receiving such notice or, if the provisions of the
next two paragraphs apply, in any event without the prior written consent of
Purchaser. In such connection, the Servicer shall from its own funds make all
necessary and proper Servicing Advances, provided, however, that the Servicer
shall not be required to expend its own funds in connection with any foreclosure
or towards the restoration or preservation of any Mortgaged Property, unless it
shall determine (a) that such preservation, restoration and/or foreclosure will
increase the proceeds of liquidation of the Mortgage Loan to Purchaser after
reimbursement to itself for such expenses and (b) that such expenses will be
recoverable by it either through Liquidation Proceeds (in respect of which it
shall have priority for purposes of withdrawals from the Custodial Account
pursuant to Section 2.05) or through Insurance Proceeds (in respect of which it
shall have similar priority).
Notwithstanding anything to the contrary contained herein, in
connection with a foreclosure, in the event the Servicer has reasonable cause to
believe that a Mortgaged Property is contaminated by hazardous or toxic
substances or wastes, or if the Purchaser otherwise requests an environmental
inspection or review of such Mortgaged Property to be conducted by a qualified
inspector, the Servicer shall cause the Mortgaged Property to be so inspected at
the expense of the Purchaser. Upon completion of the inspection, the Servicer
shall promptly provide the Purchaser with a written report of the environmental
inspection.
After reviewing the environmental inspection report, the Purchaser
shall determine how the Servicer shall proceed with respect to the Mortgaged
Property. In the event (a) the environmental inspection report indicates that
the Mortgaged Property is contaminated by hazardous or toxic substances or
wastes and (b) the Purchaser directs the Servicer to proceed with
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foreclosure or acceptance of a deed in lieu of foreclosure, the Servicer shall
be reimbursed for all reasonable costs associated with such foreclosure or
acceptance of a deed in lieu of foreclosure and any related environmental clean
up costs, as applicable, from the related Liquidation Proceeds, or if the
Liquidation Proceeds are insufficient to fully reimburse the Servicer, the
Servicer shall be entitled to be reimbursed from amounts in the Custodial
Account pursuant to Section 2.05 hereof and to the extent amounts in the
Custodial Account are insufficient to fully reimburse the Servicer, the Servicer
shall be entitled to be reimbursed by the Purchaser for such deficiencies (upon
presentation of evidence of such deficiency). In the event the Purchaser directs
the Servicer not to proceed with foreclosure or acceptance of a deed in lieu of
foreclosure, the Servicer shall be reimbursed for all Servicing Advances made
with respect to the related Mortgaged Property from the Custodial Account
pursuant to Section 2.05 hereof.
SECTION 2.03 Collection of Mortgage Loan Payments. Continuously from
the Closing Date, the Servicer shall proceed diligently to collect all payments
due under each of the Mortgage Loans when the same shall become due and payable
and shall take special care in ascertaining and estimating Escrow Payments and
all other charges that will become due and payable with respect to the Mortgage
Loans and each related Mortgaged Property, to the end that the installments
payable by the Mortgagors will be sufficient to pay such charges as and when
they become due and payable.
SECTION 2.04 Establishment of and Deposits to Custodial Account. The
Servicer shall segregate and hold all funds collected and received pursuant to
the Mortgage Loans separate and apart from any of its own funds and general
assets and shall establish and maintain one or more Custodial Accounts, in the
form of time deposit or demand accounts, titled "Franklin Bank, N.A. in trust
for Purchaser of Conventional Residential Mortgage Loans, and various
Mortgagors". The Custodial Account shall be established with a Qualified
Depository acceptable to the Purchaser. Any funds deposited in the Custodial
Account shall at all times be fully insured to the full extent permitted under
applicable law. Funds deposited in the Custodial Account may be drawn on by the
Servicer in accordance with Section 2.05. The creation of any Custodial Account
shall be evidenced by a certification in the form of Exhibit 2 hereto, in the
case of an account established with the Servicer, or by a letter agreement in
the form of Exhibit 3 hereto, in the case of an account held by a depository
other than the Servicer. A copy of such certification or letter agreement shall
be furnished to the Purchaser and, upon request, to any subsequent Purchaser.
The Servicer shall deposit in the Custodial Account within one Business
Day of receipt, and retain therein, the following collections received by the
Servicer and payments made by the Servicer after the Cut-off Date, other than
payments of principal and interest due on or before the Cut-off Date, or
received by the Servicer prior to the Cut-off Date but allocable to a period
subsequent thereto:
(i) all payments on account of principal on the Mortgage Loans,
including all Principal Prepayments;
(ii) all payments on account of interest on the Mortgage;
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(iii) all Liquidation Proceeds and any amount received with respect
to REO Property;
(iv) all Insurance Proceeds including amounts required to be
deposited pursuant to Section 2.10 (other than proceeds to be
held in the Escrow Account and applied to the restoration or
repair of the Mortgaged Property or released to the Mortgagor
in accordance with Section 2.14), and Section 2.11;
(v) all Condemnation Proceeds which are not applied to the
restoration or repair of the Mortgaged Property or released to
the Mortgagor in accordance with Section 2.14;
(vi) any amount required to be deposited in the Custodial Account
pursuant to Section 2.01, 2.09, 2.15, 2.17, 3.01, 3.03 or
4.02;
(vii) any amounts payable in connection with the repurchase of any
Mortgage Loan pursuant to Section 8.03 of the Purchase
Agreement; and
(viii) any amounts required to be deposited by the Servicer pursuant
to Section 2.11 in connection with the deductible clause in
any blanket hazard insurance policy.
The foregoing requirements for deposit into the Custodial Account shall
be exclusive, it being understood and agreed that, without limiting the
generality of the foregoing, Ancillary Income need not be deposited by the
Servicer into the Custodial Account. Any interest paid on funds deposited in the
Custodial Account by the depository institution shall accrue to the benefit of
the Servicer and the Servicer shall be entitled to retain and withdraw such
interest from the Custodial Account pursuant to Section 2.05.
SECTION 2.05 Permitted Withdrawals From Custodial Account. Subject to
Section 2.17 hereof, the Servicer shall, from time to time, withdraw funds from
the Custodial Account for the following purposes:
(i) to make payments to the Purchaser in the amounts and in the
manner provided for in Section 3.01;
(ii) to pay to itself the Servicing Fee;
(iii) to reimburse itself for advances of the Servicer's funds made
pursuant to Section 3.03, the Servicer's right to reimburse
itself pursuant to this subclause (iii) being limited to
amounts received on the related Mortgage Loan which represent
late payments of principal and/or interest in respect of which
any such advance was made, it being understood that, in the
case of any such reimbursement, the Servicer's right thereto
shall be prior to the rights of Purchaser, except that, where
the Seller or the Servicer is required to repurchase a
Mortgage Loan pursuant to Section 8.03 of the Purchase
Agreement or Section 4.02 of this Agreement, respectively, the
Servicer's right to such reimbursement shall be subsequent to
the payment to the Purchaser of the Repurchase Price pursuant
to such sections and all
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other amounts required to be paid to the Purchaser
with respect to such Mortgage Loan;
(iv) to reimburse itself for unreimbursed Servicing Advances
(except to the extent reimbursed pursuant to Section
2.07), any accrued but unpaid Servicing Fees and for
unreimbursed advances of Servicer funds made pursuant to
Sections 2.15, 2.17 or 3.03, the Servicer's right to
reimburse itself pursuant to this subclause (iv) with respect
to any Mortgage Loan being limited to related Liquidation
Proceeds, Condemnation Proceeds, Insurance Proceeds and such
other amounts as may be collected by the Servicer from the
Mortgagor or otherwise relating to the Mortgage Loan, it
being understood that, in the case of any such reimbursement,
the Servicer's right thereto shall be prior to the rights of
the Purchaser except that, where the Seller or the Servicer
is required to repurchase a Mortgage Loan pursuant to Section
8.03 of the Purchase Agreement or Section 4.02 of this
Agreement, respectively, the Servicer's right to such
reimbursement shall be subsequent to the payment to the
Purchaser of the Repurchase Price pursuant to such sections
and all other amounts required to be paid to the Purchaser
with respect to such Mortgage Loan;
(v) to pay itself any interest earned on funds deposited in the
Custodial Account (all such interest to be withdrawn monthly
not later than each Remittance Date); and
(vi) to clear and terminate the Custodial Account upon the
termination of this Agreement.
In the event that the Custodial Account is interest bearing, on each
Remittance Date, the Servicer shall withdraw all funds from the Custodial
Account except for those amounts which, pursuant to Section 3.01, the Servicer
is not obligated to remit on such Remittance Date. The Servicer may use such
withdrawn funds only for the purposes described in this Section 2.05.
SECTION 2.06 Establishment of and Deposits to Escrow Account. The
Servicer shall segregate and hold all funds collected and received pursuant to a
Mortgage Loan constituting Escrow Payments separate and apart from any of its
own funds and general assets and shall establish and maintain one or more Escrow
Accounts, in the form of time deposit or demand accounts. The Escrow Account or
Accounts shall be established with a Qualified Depositary, in a manner which
shall provide maximum available insurance thereunder. Funds deposited in the
Escrow Accounts may be drawn on by the Servicer in accordance with Section 2.07.
The creation of any Escrow Account shall be evidenced by a certification in the
form of Exhibit 2 hereto, in the case of an account established with the
Servicer, or by a letter agreement in the form of Exhibit 5 hereto, in the case
of an account held by a depository other than the Servicer. A copy of such
certification shall be furnished to the Purchaser and, upon request, to any
subsequent Purchaser.
The Servicer shall deposit in the Escrow Account or Accounts within one
Business Day of receipt, and retain therein:
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(I) all Escrow Payments collected on account of the Mortgage
Loans, for the purpose of effecting timely payment of any such
items as required under the terms of this Agreement; and
(ii) all amounts representing Insurance Proceeds or Condemnation
Proceeds which are to be applied to the restoration or repair
of any Mortgaged Property.
The Servicer shall make withdrawals from the Escrow Account only to
effect such payments as are required under this Agreement, as set forth in
Section 2.07. The Servicer shall be entitled to retain any interest paid on
funds deposited in the Escrow Account by the depository institution, other than
interest on escrowed funds required by law to be paid to the Mortgagor. To the
extent required by law, the Servicer shall pay from its own funds interest on
escrowed funds to the Mortgagor notwithstanding that the Escrow Account may be
noninterest bearing or that interest paid thereon is insufficient for such
purposes.
SECTION 2.07 Permitted Withdrawals From Escrow Account. Withdrawals
from each Escrow Account may be made by the Servicer only:
(I) to effect timely payments of taxes, assessments, water rates,
mortgage insurance premiums, condominium charges, fire and
hazard insurance premiums or other items constituting Escrow
Payments for the related Mortgage;
(ii) to reimburse the Servicer for any Servicing Advance made by
the Servicer pursuant to Section 2.08 with respect to a
related Mortgage Loan, but only from amounts received on the
related Mortgage Loan which represent late collections of
Escrow Payments thereunder;
(iii) to refund to the related Mortgagor any funds found to be in
excess of the amounts required under the terms of the related
Mortgage Loan or applicable federal or state law or judicial
or administrative ruling;
(iv) for transfer to the Custodial Account and application to
reduce the principal balance of the Mortgage Loan in
accordance with the terms of the related Mortgage and Mortgage
Note;
(v) for application to restoration or repair of the related
Mortgaged Property in accordance with the procedures outlined
in Section 2.14;
(vi) to pay to the Servicer, or any Mortgagor to the extent
required by law, any interest paid on the funds deposited in
the Escrow Account; and
(vii) to clear and terminate the Escrow Account on the termination
of this Agreement.
SECTION 2.08 Payment of Taxes, Insurance and Other Charges, Tax
Contracts. With respect to each Mortgage Loan, the Servicer shall maintain
accurate records reflecting the status
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of taxes, assessments, water rates, sewer rents, and other charges, as
applicable, which are or may become a lien upon the Mortgaged Property and the
status of PMI Policy premiums and fire and hazard insurance coverage and shall
obtain, from time to time, all bills for the payment of such charges (including
renewal premiums) and shall effect payment thereof prior to the applicable
penalty or termination date, employing for such purpose deposits of the
Mortgagor in the Escrow Account which shall have been estimated and accumulated
by the Servicer in amounts sufficient for such purposes, as allowed under the
terms of the Mortgage. To the extent that a Mortgage does not provide for Escrow
Payments, the Servicer shall determine that any such payments relating to taxes
or maintaining insurance policies are made by the Mortgagor at the time they
first become due. The Servicer assumes full responsibility for the timely
payment of all such bills to the extent it has or should have notice of such
bills and shall effect timely payment of all such charges irrespective of each
Mortgagor's faithful performance in the payment of same or the making of the
Escrow Payments, and the Servicer shall make advances from its own funds to
effect such payments, such advances to be reimbursable to the same extent as
Servicing Advances.
SECTION 2.09 Protection of Accounts. The Servicer may transfer the
Custodial Account or the Escrow Account to a different Qualified Depository from
time to time. Such transfer shall be made only upon obtaining the consent of the
Purchaser, which consent shall not be withheld unreasonably. The Servicer shall
bear any expenses, losses or damages sustained by the Purchaser because the
Custodial Account and/or the Escrow Account are not demand deposit accounts.
SECTION 2.10 Maintenance of Hazard Insurance. The Servicer shall cause
to be maintained for each Mortgage Loan, hazard insurance such that all
buildings upon the Mortgaged Property are insured by a generally acceptable
insurer rated A:VI or better in the current Best's against loss by fire, hazards
of extended coverage and such other hazards as are required to be insured
pursuant to the FHLMC Guide, in an amount which is at least equal to the lesser
of (i) the maximum insurable value of the improvements securing such Mortgage
Loan and (ii) the greater of (a) the outstanding principal balance of the
Mortgage Loan and (b) an amount such that the proceeds thereof shall be
sufficient to prevent the Mortgagor or the loss payee from becoming a
co-insurer.
If required by the Flood Disaster Protection Act of 1973, as amended,
each Mortgage Loan is covered by a flood insurance policy meeting the
requirements of the current guidelines of the Federal Insurance Administration
in effect with a generally acceptable insurance carrier rated A:VI or better in
Best's in an amount representing coverage not less than the lesser of (i) the
outstanding principal balance of the related Mortgage Loan and (ii) the maximum
amount of insurance which is available under the Flood Disaster Protection Act
of 1973, as amended. If at any time during the term of the Mortgage Loan, the
Servicer determines in accordance with applicable law and pursuant to the FHLMC
Guide that a Mortgaged Property is located in a special flood hazard area and is
not covered by flood insurance or is covered in an amount less than the amount
required by the Flood Disaster Protection Act of 1973, as amended, the Servicer
shall notify the related Mortgagor that the Mortgagor must obtain such flood
insurance coverage, and if said Mortgagor fails to obtain the required flood
insurance coverage within forty five (45) days after such notification, the
Servicer shall immediately purchase the required flood insurance on the
Mortgagor's behalf.
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If a Mortgage is secured by a unit in a condominium project, the
Servicer shall verify that the coverage required of the owner's association,
including hazard, flood, liability, and fidelity coverage, is being maintained
in accordance with then current FNMA requirements, and secure from the owner's
association its agreement to notify the Servicer promptly of any change in the
insurance coverage or of any condemnation or casualty loss that may have a
material effect on the value of the Mortgaged Property as security.
The Servicer shall cause to be maintained on each Mortgaged Property
such other or additional insurance as may be required pursuant to such
applicable laws and regulations as shall at any time be in force and as shall
require such additional insurance, or pursuant to the requirements of any
primary mortgage guaranty insurer.
All policies required hereunder shall name the Servicer and its
successors and assigns as mortgagee and shall be endorsed with non-contributory
standard Michigan mortgagee clauses which shall provide for at least thirty (30)
days' prior written notice of any cancellation, reduction in amount or material
change in coverage.
The Servicer shall not interfere with the Mortgagor's freedom of choice
in selecting either his insurance carrier or agent, provided, however, that the
Servicer shall not accept any such insurance policies from insurance companies
unless such companies are rated A:VI or better in Best's and are licensed to do
business in the jurisdiction in which the Mortgaged Property is located. The
Servicer shall determine that such policies provide sufficient risk coverage and
amounts as required pursuant to the FHLMC Guide, or pursuant to Servicer's
underwriting guidelines, that they insure the property owner, and that they
properly describe the property address. To the extent reasonably possible the
Servicer shall furnish to the Mortgagor a formal notice of expiration of any
such insurance in sufficient time for the Mortgagor to arrange for renewal
coverage by the expiration date; provided, however, that in the event that no
such notice is furnished by the Servicer, the Servicer shall ensure that
replacement insurance policies are in place in the required coverages and the
Servicer shall be solely liable for any losses in the event such coverage is not
provided.
Pursuant to Section 2.04, any amounts collected by the Servicer under
any such policies (other than amounts to be deposited in the Escrow Account and
applied to the restoration or repair of the related Mortgaged Property, or
property acquired in liquidation of the Mortgage Loan, or to be released to the
Mortgagor, in accordance with the Servicer's normal servicing procedures as
specified in Section 2.14) shall be deposited in the Custodial Account subject
to withdrawal pursuant to Section 2.05.
SECTION 2.11 Maintenance of Mortgage Impairment Insurance. In the event
that the Servicer shall obtain and maintain a blanket policy insuring against
losses arising from fire and hazards covered under extended coverage on all of
the Mortgage Loans, then, to the extent such policy provides coverage in an
amount equal to the amount required pursuant to Section 2.10 and otherwise
complies with all other requirements of Section 2.10, it shall conclusively be
deemed to have satisfied its obligations as set forth in Section 2.10. Any
amounts collected by the Servicer under any such policy relating to a Mortgage
Loan shall be deposited in the Custodial
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Account subject to withdrawal pursuant to Section 2.05. Such policy may
contain a deductible clause, in which case, in the event that there shall not
have been maintained on the related Mortgaged Property a policy complying with
Section 2.10, and there shall have been a loss which would have been covered by
such policy, the Servicer shall deposit in the Custodial Account at the time of
such loss the amount not otherwise payable under the blanket policy because of
such deductible clause, such amount to be deposited from the Servicer's funds,
without reimbursement therefor. Upon request of the Purchaser, the Servicer
shall cause to be delivered to the Purchaser a certified true copy of such
policy and a statement from the insurer thereunder that such policy shall in no
event be terminated or materially modified without thirty (30) days' prior
written notice to the Purchaser.
SECTION 2.12 Maintenance of Fidelity Bond and Errors and Omissions
Insurance. The Servicer shall maintain with responsible companies, at its own
expense, a blanket Fidelity Bond and an Errors and Omissions Insurance Policy,
with broad coverage on all officers, employees or other persons acting in any
capacity requiring such persons to handle funds, money, documents or papers
relating to the Mortgage Loans ("Servicer Employees"). Any such Fidelity Bond
and Errors and Omissions Insurance Policy shall be in the form of the Mortgage
Banker's Blanket Bond and shall protect and insure the Servicer against losses,
including forgery, theft, embezzlement, fraud, errors and omissions and
negligent acts of such Servicer Employees. Such Fidelity Bond and Errors and
Omissions Insurance Policy also shall protect and insure the Servicer against
losses in connection with the release or satisfaction of a Mortgage Loan without
having obtained payment in full of the indebtedness secured thereby. No
provision of this Section 2.12 requiring such Fidelity Bond and Errors and
Omissions Insurance Policy shall diminish or relieve the Servicer from its
duties and obligations as set forth in this Agreement. The minimum coverage
under any such Fidelity Bond and Errors and Omissions Insurance Policy shall be
at least equal to the corresponding amounts required by FNMA in the FNMA
Mortgage-Backed Securities Selling and Servicing Guide or by FHLMC in the FHLMC
Guide. Upon the request of the Purchaser, the Servicer shall cause to be
delivered to the Purchaser a certified true copy of such Fidelity Bond and
Errors and Omissions Insurance Policy and a statement from the surety and the
insurer that such Fidelity Bond and Errors and Omissions Insurance Policy shall
in no event be terminated or materially modified without thirty (30) days' prior
written notice to the Purchaser. In the event that the surety or insurer charges
the Servicer a fee for providing such evidence, the Purchaser shall reimburse
the Servicer for the reasonable expense incurred by the Servicer in furnishing
such evidence.
SECTION 2.13 Inspections. The Servicer shall inspect the Mortgaged
Property as often as deemed necessary by the Servicer to assure itself that the
value of the Mortgaged Property is being preserved. In addition, if any Mortgage
Loan is more than sixty (60) days delinquent, the Servicer immediately shall
inspect the Mortgaged Property and shall conduct subsequent inspections in
accordance with Accepted Servicing Practices or as may be required by the
primary mortgage guaranty insurer. The Servicer shall keep a written report of
each such inspection.
SECTION 2.14 Restoration of Mortgaged Property. The Servicer need not
obtain the approval of the Purchaser prior to releasing any Insurance Proceeds
or Condemnation Proceeds to the Mortgagor to be applied to the restoration or
repair of the Mortgaged Property if such
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release is in accordance with Accepted Servicing Practices and the terms of this
Agreement. At a minimum, the Servicer shall comply with the following conditions
in connection with any such release of Insurance Proceeds or Condemnation
Proceeds:
(i) the Servicer shall receive satisfactory independent
verification of completion of repairs and issuance of any
required approvals with respect thereto;
(ii) the Servicer shall take all steps necessary to preserve the
priority of the lien of the Mortgage, including, but not
limited to requiring waivers with respect to mechanics' and
materialmen's liens;
(iii) the Servicer shall verify that the Mortgage Loan is not in
default; and
(iv) pending repairs or restoration, the Servicer shall place the
Insurance Proceeds or Condemnation Proceeds in the Escrow
Account.
If the Purchaser is named as an additional mortgagee, the Servicer is
hereby empowered to endorse any loss draft issued in respect of such a claim in
the name of the Purchaser.
SECTION 2.15 Maintenance of PMI Policy, Claims. With respect to each Mortgage
Loan with an LTV in excess of 90% (other than FHA insured or VA guaranteed
Mortgage Loans) the Servicer shall, without any cost to the Purchaser, maintain
or cause the Mortgagor to maintain in full force and effect a PMI Policy
insuring that portion of the Mortgage Loan in excess of 80% of value, and shall
pay or shall cause the Mortgagor to pay the premium thereon on a timely basis,
until the LTV of such Mortgage Loan is reduced to 90%. In the event that such
PMI Policy shall be terminated, the Servicer shall obtain from another
Qualified Insurer a comparable replacement policy, with a total coverage equal
to the remaining coverage of such terminated PMI Policy. If the insurer shall
cease to be a Qualified Insurer, the Servicer shall determine whether
recoveries under the PMI Policy are jeopardized for reasons related to the
financial condition of such insurer, it being understood that the Servicer
shall in no event have any responsibility or liability for any failure to
recover under the PMI Policy for such reason. If the Servicer determines that
recoveries are so jeopardized, it shall notify the Purchaser and the Mortgagor,
if required, and obtain from another Qualified Insurer a replacement insurance
policy. The Servicer shall not take any action which would result in
noncoverage under any applicable PMI Policy of any loss which, but for the
actions of the Servicer, would have been covered thereunder. In connection with
any assumption or substitution agreement entered into or to be entered into
pursuant to Section 4.01, the Servicer shall promptly notify the insurer under
the related PMI Policy, if any, of such assumption or substitution of liability
in accordance with the terms of such PMI Policy and shall take all actions
which may be required by such insurer as a condition to the continuation of
coverage under such PMI Policy. If such PMI Policy is terminated as a result of
such assumption or substitution of liability, the Servicer shall obtain a
replacement PMI Policy as provided above.
In connection with its activities as servicer, the Servicer agrees to
prepare and present, on behalf of itself and the Purchaser, claims to the
insurer under any PMI Policy, in a timely fashion in accordance with the terms
of such PMI Policy and, in this regard, to take such action as shall
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be necessary to permit recovery under any PMI Policy with respect to a
defaulted Mortgage Loan. Pursuant to Section 2.04, any amounts collected by the
Servicer under any PMI Policy shall be deposited in the Custodial Account,
subject to withdrawal pursuant to Section 2.05.
SECTION 2.16 Deteriorating Mortgage Loans. If, in the course of
carrying out its obligations under this Agreement, the Servicer discovers that a
Mortgage Loan (or an interest therein) (i) is or has been, at any time during
the preceding twelve months, (a) classified, (b) in nonaccrual status or (c)
renegotiated due to the financial deterioration of the Mortgagor or (ii) has
been, more than once during the preceding twelve months, more than 30 days past
due in the payment of principal and interest, the Servicer shall notify the
Purchaser as soon as possible and cooperate with the Purchaser in the
disposition of any such Mortgage Loan as soon as possible.
SECTION 2.17 Title, Management and Disposition of REO Property. In the
event that title to any Mortgaged Property is acquired in foreclosure or by deed
in lieu of foreclosure, the deed or certificate of sale shall be taken in the
name of the Purchaser, or in the event the Purchaser is not authorized or
permitted to hold title to real property in the state where the REO Property is
located, or would be adversely affected under the "doing business" or tax laws
of such state by so holding title, the deed or certificate of sale shall be
taken in the name of such Person or Persons as shall be consistent with an
Opinion of Counsel obtained by the Servicer from any attorney duly licensed to
practice law in the state where the REO Property is located. The Person or
Persons holding such title other than the Purchaser shall acknowledge in writing
that such title is being held as nominee for the Purchaser.
The Servicer shall manage, conserve, protect and operate each REO
Property for the Purchaser solely for the purpose of its prompt disposition and
sale. The Servicer, either itself or through an agent selected by the Servicer
and reasonably acceptable to the Purchaser, shall manage, conserve, protect and
operate the REO Property in the same manner that it manages, conserves, protects
and operates other foreclosed property for its own account, and in the same
manner that similar property in the same locality as the REO Property is
managed. The Servicer shall attempt to sell the same (and may temporarily rent
the same for a period not greater than one (1) year, except as otherwise
provided below) on such terms and conditions as the Servicer deems to be in the
best interest of the Purchaser.
The Servicer shall use its best efforts to dispose of the REO Property
as soon as possible and shall sell such REO Property in any event within one
year after title has been taken to such REO Property, unless the Servicer
determines, and gives an appropriate notice to the Purchaser to such effect,
that a longer period is necessary for the orderly liquidation of such REO
Property. If a period longer than one (1) year is permitted under the foregoing
sentence and is necessary to sell any REO Property, the Servicer shall report
monthly to the Purchaser as to the progress being made in selling such REO
Property.
The Servicer shall also maintain on each REO Property fire and hazard
insurance with extended coverage in an amount which is at least equal to the
maximum insurable value of the improvements which are a part of such property,
liability insurance and, to the extent required and
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available under the Flood Disaster Protection Act of 1973, as amended,
flood insurance in the amount required above.
The disposition of REO Property shall be carried out by the Servicer at
such price, and upon such terms and conditions, as the Servicer deems to be in
the best interests of the Purchaser. The proceeds of sale of the REO Property
shall be promptly deposited in the Custodial Account. As soon as practical
thereafter the expenses of such sale shall be paid and the Servicer shall
reimburse itself pursuant to Section 2.05(iii) or 2.05(iv) hereof, as
applicable, for any related unreimbursed Servicing Advances, unpaid Servicing
Fees and unreimbursed advances made pursuant to this Section, and on the
Remittance Date immediately following the Due Period in which such sale proceeds
are received the net cash proceeds of such sale remaining in the Custodial
Account shall be distributed to the Purchaser; provided that such distribution
shall, in any event, be made within ninety (90) days from and after the closing
of the sale of such REO Property.
In addition to the Servicer's obligations set forth in this Section
2.17, the Servicer shall deliver written notice to the Purchaser whenever title
to any Mortgaged Property is acquired in foreclosure or by deed in lieu of
foreclosure together with a copy of the drive-by appraisal of the related
Mortgaged Property obtained by the Servicer on or prior to the date of such
acquisition. Notwithstanding anything to the contrary contained herein, the
Purchaser may, at the Purchaser's sole option, terminate the Servicer as
servicer of any such REO Property without payment of any Termination Fee with
respect thereto, provided that (i) the Purchaser gives the Servicer notice of
such termination within ten (10) Business Days of receipt of said written notice
from the Servicer which termination shall be effective no more than fifteen (15)
Business Days from and after the date of said notice from the Purchaser and (ii)
the Servicer shall on the date said termination takes effect be reimbursed by
Purchaser for any unreimbursed advances of the Servicer's funds made pursuant
to Section 3.02 and any unreimbursed Servicing Advances in each case relating to
the Mortgage Loan underlying such REO Property. In the event of any such
termination, the provisions of Section 8.06 hereof shall apply to said
termination and the transfer of servicing responsibilities with respect to such
REO Property to the Purchaser or its designee.
With respect to each REO Property, the Servicer shall deposit all funds
collected and received in connection with the operation of the REO Property in
the Custodial Account. The Servicer shall cause to be deposited on a daily basis
upon the receipt thereof in the Custodial Account all revenues received with
respect to the conservation and disposition of the related REO Property.
SECTION 2.18 Permitted Withdrawals with respect to REO Property. For so
long as the Servicer is acting as servicer of any Mortgage Loan relating to any
REO Property, the Servicer shall withdraw funds on deposit in the Custodial
Account with respect to each related REO Property necessary for the proper
operation, management and maintenance of the REO Property, including the cost of
maintaining any hazard insurance pursuant to Section 2.10 and the fees of any
managing agent acting on behalf of the Servicer. The Servicer shall make monthly
distributions on each Remittance Date to the Purchaser of the net cash flow from
the REO Property (which shall equal the revenues from such REO Property net of
the expenses described
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in Section 2.17 and of any reserves reasonably required from time to
time to be maintained to satisfy anticipated liabilities for such expenses).
SECTION 2.19 Real Estate Owned Reports. For so long as the Servicer is
acting as servicer of any Mortgage Loan relating to any REO Property, the
Servicer shall furnish to the Purchaser on or before the 15th day of each month
a statement with respect to any REO Property covering the operation of such REO
Property for the previous month and the Servicer's efforts in connection with
the sale of such REO Property and any rental of such REO Property incidental to
the sale thereof for the previous month. That statement shall be accompanied by
such other information as the Purchaser shall reasonably request.
SECTION 2.20 Liquidation Reports. For so long as the Servicer is acting
as servicer of any Mortgage Loan relating to any REO Property, upon the
foreclosure sale of any Mortgaged Property or the acquisition thereof by the
Purchaser pursuant to a deed in lieu of foreclosure, the Servicer shall submit
to the Purchaser a liquidation report with respect to such Mortgaged Property.
SECTION 2.21 Reports Of Foreclosures and Abandonments. For so long as
the Servicer is acting as servicer of any Mortgage Loan relating to any REO
Property, following the foreclosure sale or abandonment of any Mortgaged
Property, the Servicer shall report such foreclosure or abandonment as required
pursuant to Section 6050J of the Internal Revenue Code of 1986, as amended
("Code").
SECTION 2.22 Notification of Adjustments. With respect to each
Adjustable Rate Mortgage Loan, the Servicer shall adjust the Mortgage Interest
Rate on the related Interest Rate Adjustment Date and shall adjust the Monthly
Payment accordingly in compliance with the requirements of applicable
law and the related Mortgage and Mortgage Note. If, pursuant to the terms of
the Mortgage Note, another index is selected for determining the Mortgage
Interest Rate, the same index will be used with respect to each Mortgage Note
which requires a new index to be selected, provided that such selection does
not conflict with the terms of the related Mortgage Note. The Servicer shall
execute and deliver any and all necessary notices required under applicable law
and the terms of the related Mortgage Note and Mortgage regarding the Mortgage
Interest Rate and the Monthly Payment adjustments. The Servicer shall promptly
upon written request therefor, deliver to the Purchaser such notifications and
any additional applicable data regarding such adjustments and the methods used
to calculate and implement such adjustments. Upon the discovery by the Servicer
or the Purchaser that the Servicer has failed to adjust a Mortgage Interest
Rate or a Monthly Payment pursuant to the terms of the related Mortgage Note
and Mortgage, the Servicer shall immediately deposit in the Custodial Account
from its own funds the amount of any interest loss caused the Purchaser
thereby.
SECTION 2.23 Notification of Maturity Date. With respect to each Fixed
Rate Mortgage Loan, the Purchaser shall execute and deliver to the Mortgagor any
and all necessary notices required under applicable law and the terms of the
related Mortgage Note and Mortgage regarding the maturity date if required under
applicable law.
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ARTICLE III
PAYMENTS TO PURCHASER
SECTION 3.01 Remittances. On each Remittance Date the Servicer shall
remit by wire transfer of immediately available funds to the Purchaser (a) all
amounts deposited in the Custodial Account as of the close of business on the
Determination Date, except Principal Prepayments received on or after the first
day of the month in which the Remittance Date occurs which shall be remitted to
the Purchaser on the next following Remittance Date; plus (b) an amount
representing compensating interest (up to a maximum amount equal to the
aggregate Servicing Fee for the Mortgage Loans held by the Purchaser with
respect to such Mortgage Loans) which, when added to all amounts allocable to
interest received in connection with such Principal Prepayment equals thirty
(30) days' interest at the Mortgage Interest Rate net of the Servicing Fee on
the amount of principal so prepaid (net of charges against or withdrawals from
the Custodial Account pursuant to Section 2.05), plus (c) all amounts, if any,
which the Servicer is obligated to distribute pursuant to Section 3.03 and minus
(d) any amounts attributable to Monthly Payments collected but due on a Due Date
or Dates subsequent to the first day of the month of the Remittance Date, which
amounts shall be remitted on the Remittance Date next succeeding the Due Period
for such amounts.
With respect to any remittance received by the Purchaser after the
second Business Day following the Business Day on which such payment was due,
the Servicer shall pay to the Purchaser interest on any such late payment at an
annual rate equal to the Prime Rate, adjusted as of the date of each change,
plus one (1) percentage point, but in no event greater than the maximum amount
permitted by applicable law. Such interest shall be deposited in the Custodial
Account by the Servicer on the date such late payment is made and shall cover
the period commencing with and including the day following such second Business
Day and ending with the Business Day on which such payment is made, exclusive of
such Business Day; provided, however, that in the event that the Servicer remits
such amounts after 11:00 A.M. (Michigan time) on any day, such period shall
include such day. Such interest shall be remitted along with the
distribution payable on the next succeeding Remittance Date. The payment by the
Servicer of any such interest shall not be deemed an extension of time for
payment or a waiver of any Event of Default by the Servicer.
SECTION 3.02 Statements to Purchaser. Not later than the twentieth day
of each month, the Servicer shall furnish by modem and/or diskette to the
Purchaser or its designee a listing of the outstanding Mortgage Loans, including
with respect to each Mortgage Loan: the Mortgage Loan number, the actual
balance, the actual paid-through dates and the Mortgage Interest Rate and
principal and interest payment, and with respect to Adjustable Rate Mortgage
Loans, the next Interest Rate Adjustment Date, the Mortgage Interest Rate and
the principal and interest payment effective as of the next Interest Rate
Adjustment Date (if available), and shall furnish to the Purchaser manually a
Monthly Remittance Advice, with a trial balance report attached thereto, in the
form of Exhibit 1 annexed hereto as to the preceding remittance and the period
ending on the preceding Determination Date.
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In addition, not more than sixty (60) days after the end of each
calendar year, the Servicer shall furnish to each Person who was a Purchaser at
any time during such calendar year an annual statement in accordance with the
requirements of applicable federal income tax law as to the aggregate of
remittances for the applicable portion of such year.
Such obligation of the Servicer shall be deemed to have been satisfied
to the extent that substantially comparable information shall be provided by the
Servicer pursuant to any requirements of the Code as from time to time are in
force.
The Servicer shall prepare and file, with respect to each Mortgage
Loan, any and all tax returns, information statements or other filings required
to be delivered to any governmental taxing authority or to the Purchaser
pursuant to any applicable law with respect to the Mortgage Loans and the
transactions contemplated hereby. In addition, the Servicer shall provide the
Purchaser with such information concerning the Mortgage Loans as is necessary
for the Purchaser to prepare its federal income tax return as the Purchaser may
reasonably request from time to time.
SECTION 3.03 Advances by Servicer. On the Business Day immediately
preceding each Remittance Date, the Servicer shall deposit in the Custodial
Account from its own funds an amount equal to all Monthly Payments which were
due on the Mortgage Loans during the applicable Due Period and which were
delinquent at the close of business on the immediately preceding Determination
Date or which were deferred pursuant to Section 2.01, provided that the Servicer
shall only be required to make such advances with respect to a Mortgage Loan
until such advances are, in the Servicer's good faith determination as evidenced
by an Officer's Certificate of the Servicer delivered to the Purchaser on the
Business Day next following the Determination Date on or prior to which said
determination is or was made, deemed to be a Nonrecoverable Advance. The
Servicer's obligation to make such advances as to any Mortgage Loan will
continue through the earlier of (i) the disposition of such Mortgage Loan and
(ii) the date of foreclosure sale with respect to such Mortgage Loan. Except as
otherwise provided herein, the Servicer shall be entitled to first priority
reimbursement pursuant to Section 2.05 hereof for principal and interest
advances and for servicing advances from recoveries from the related mortgagor
or from all Liquidation Proceeds and other payments or recoveries (including
Insurance Proceeds and Condemnation Proceeds) with respect to the related
Mortgage Loan.
ARTICLE IV
GENERAL SERVICING PROCEDURES
SECTION 4.01 Transfers of Mortgaged Property. The Servicer shall be
required to enforce any "due-on-sale" provision contained in any Mortgage or
Mortgage Note and to deny assumption by the person to whom the Mortgaged
Property has been or is about to be sold whether by absolute conveyance or by
contract of sale, whether or not the Mortgagor remains liable on the Mortgage
and the Mortgage Note. When the Mortgaged Property has been conveyed
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by the Mortgagor, the Servicer shall, to the extent it has knowledge of
such conveyance, exercise its rights to accelerate the maturity of such
Mortgage Loan under the "due-on-sale" clause applicable thereto, provided,
however, that the Servicer shall not exercise such rights if prohibited by law
from doing so or if the exercise of such rights would impair or threaten to
impair any recovery under the related PMI Policy, if any.
If the Servicer reasonably believes it is unable under applicable law
to enforce such "due-on-sale" clause, the Servicer, in the Purchaser's name,
shall, to the extent permitted by applicable law, enter into (i) an assumption
and modification agreement with the person to whom such property has been
conveyed, pursuant to which such person becomes liable under the Mortgage Note
and the original Mortgagor remains liable thereon or (ii) in the event the
Servicer is unable under applicable law to require that the original Mortgagor
remain liable under the Mortgage Note and the Servicer has the prior consent of
the primary mortgagee guaranty insurer, a substitution of liability agreement
with the purchaser of the Mortgaged Property pursuant to which the original
Mortgagor is released from liability and the purchaser of the Mortgaged Property
is substituted as Mortgagor and becomes liable under the Mortgage Note. In
connection with any such assumption, neither the Mortgage Interest Rate borne by
the related Mortgage Note, the term of the Mortgage Loan nor the outstanding
principal amount of the Mortgage Loan shall be changed.
To the extent that any Mortgage Loan is assumable, the Servicer shall
inquire diligently into the creditworthiness of the proposed transferee, and
shall use the underwriting criteria for approving the credit of the proposed
transferee which are used by FNMA with respect to underwriting mortgage loans of
the same type as the Mortgage Loans. If the credit of the proposed transferee
does not meet such underwriting criteria, the Servicer diligently shall, to the
extent permitted by the Mortgage or the Mortgage Note and by applicable law,
accelerate the maturity of the Mortgage Loan.
SECTION 4.02 Satisfaction of Mortgages and Release of Mortgage Files.
Upon the payment in full of any Mortgage Loan, or the receipt by the Servicer of
a notification that payment in full will be escrowed in a manner customary for
such purposes, the Servicer shall notify the Purchaser in the Monthly Remittance
Advice as provided in Section 3.02, and may request the release of any Mortgage
Loan Documents from the Purchaser in accordance with this Section 4.02 hereof.
The Servicer shall obtain discharge of the related Mortgage Loan as of record
within any related time limit required by applicable law.
If the Servicer satisfies or releases a Mortgage without first having
obtained payment in full of the indebtedness secured by the Mortgage or should
the Servicer otherwise prejudice any rights the Purchaser may have under the
mortgage instruments, upon written demand of the Purchaser, the Servicer shall
repurchase the related Mortgage Loan at the Repurchase Price by deposit thereof
in the Custodial Account within two (2) Business Days of receipt of such demand
by the Purchaser. Upon such repurchase, all funds maintained in the Escrow
Account with respect to such repurchased Mortgage Loan shall be transferred to
the Servicer. The Servicer shall maintain the Fidelity Bond and Errors and
Omissions Insurance Policy as provided for in Section
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2.12 insuring the Servicer against any loss it may sustain with respect
to any Mortgage Loan not satisfied in accordance with the procedures set forth
herein.
SECTION 4.03 Servicing Compensation. As consideration for servicing the
Mortgage Loans hereunder, the Servicer shall withdraw the Servicing Fee with
respect to each Mortgage Loan from the Custodial Account pursuant to Section
2.05 hereof. Such Servicing Fee shall be payable monthly, computed on the basis
of the same principal amount and period in respect of which any related interest
payment on a Mortgage Loan is computed. The Servicing Fee shall be pro-rated
when servicing is for less than one month. The obligation of the Purchaser to
pay, and the Servicer's right to withdraw, the Servicing Fee is limited to, and
the Servicing Fee is payable solely from, the interest portion (including
recoveries with respect to interest from Liquidation Proceeds, to the extent
permitted by Section 2.05), of such Monthly Payment collected by the Servicer,
or as otherwise provided under Section 2.05.
Additional servicing compensation in the form of Ancillary Income shall
be retained by the Servicer. The Servicer shall be required to pay all expenses
incurred by it in connection with its servicing activities hereunder and shall
not be entitled to reimbursement thereof except as specifically provided for
herein.
SECTION 4.04 Annual Statement as to Compliance. The Servicer shall
deliver to the Purchaser, on or before March 31 each year beginning March 31,
1998, an Officer's Certificate, stating that (i) a review of the activities of
the Servicer during the preceding calendar year and of performance under this
Agreement has been made under such officer's supervision, and (ii) the Servicer
has complied in all material respects with the provisions of Article II and
Article IV, and (iii) to the best of such officer's knowledge, based on such
review, the Servicer has fulfilled all its obligations under this Agreement
throughout such year or part thereof, or, if there has been a default in the
fulfillment of any such obligation, specifying each such default known to such
officer and the nature and status thereof and the action being taken by the
Servicer to cure such default.
SECTION 4.05 Annual Independent Public Accountants' Servicing Report.
On or before March 31 of each year, beginning with the first March 31 that
occurs at least six months after the Closing Date, the Servicer at its expense
shall cause a firm of independent public accountants (who may also render other
services to the Servicer or any affiliate thereof) which is a member of the
American Institute of Certified Public Accountants to furnish a statement to the
Purchaser to the effect that such firm has, as part of their examination of the
financial statements of the Servicer performed tests embracing the
records and documents relating to mortgage loans serviced by the Servicer in
accordance with the requirements of the Uniform Single Audit Program for
Mortgage Bankers and that their examination disclosed no exceptions that, in
their opinion were material, relating to mortgage loans serviced by the
Servicer.
SECTION 4.06 Right to Examine Servicer Records. The Purchaser, upon
reasonable notice, shall have the right to examine and audit any and all of the
books, records, or other information of the Servicer, whether held by the
Servicer or by another on its behalf, with respect
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to or concerning this Agreement or the Mortgage Loans, during business hours
or at such other times as may be reasonable under applicable circumstances,
upon reasonable advance notice.
ARTICLE V
SERVICER TO COOPERATE
SECTION 5.01 Provision of Information. During the term of this
Agreement, the Servicer shall furnish to the Purchaser such periodic, special,
or other reports or information, whether or not provided for herein, as shall be
necessary, reasonable, or appropriate with respect to the Purchaser or the
purposes of this Agreement. All such reports or information shall be provided by
and in accordance with all reasonable instructions and directions which the
Purchaser may give.
The Servicer shall execute and deliver all such instruments and take
all such action as the Purchaser may reasonably request from time to time, in
order to effectuate the purposes and to carry out the terms of this Agreement.
SECTION 5.02 Financial Statements; Servicing Facilities. In connection
with disposition of Mortgage Loans, the Purchaser may make available to a
prospective purchaser audited financial statements of the Servicer for the most
recently completed two (2) fiscal years for which such statements are available,
as well as a Consolidated Statement of Condition at the end of the last two (2)
fiscal years covered by any Consolidated Statement of Operations. If it has not
already done so, the Servicer shall furnish promptly to the Purchaser or a
prospective purchaser copies of the statements specified above; provided,
however, that prior to furnishing such statements or information to any
prospective purchaser, the Servicer may require such prospective purchaser to
execute a confidentiality agreement in form reasonably satisfactory to it.
The Servicer shall make available to the Purchaser or any prospective
Purchaser a knowledgeable financial or accounting officer for the purpose of
answering questions with respect to recent developments affecting the Servicer
or the financial statements of the Servicer, and to permit any prospective
purchaser to inspect the Servicer's servicing facilities for the purpose of
satisfying such prospective purchaser that the Servicer has the ability to
service the Mortgage Loans as provided in this Agreement.
ARTICLE VI
TERMINATION
SECTION 6.01 Agency Suspension. Should the Servicer at any time during
the term of this Agreement have its right to service temporarily or permanently
suspended by FNMA or FHLMC or otherwise cease to be an approved seller/servicer
of conventional residential mortgage loans for FNMA or FHLMC, then the Purchaser
may immediately terminate this Agreement and accelerate performance of the
provisions of the Purchase Agreement to require immediate transfer of the
Servicing Rights.
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SECTION 6.02 Damages. The Purchaser shall have the right at any time to
seek and recover from the Servicer any damages or losses suffered by it as a
result of any failure by the Servicer to observe or perform any duties,
obligations, covenants or agreements herein contained, or as a result of a
party's failure to remain an approved FNMA mortgage servicer.
SECTION 6.03 Termination. The respective obligations and
responsibilities of the Servicer shall terminate upon: (i) the later of the
final payment or other liquidation (or any advance with respect thereto) of the
last Mortgage Loan serviced by the Servicer or the disposition of all REO
Property serviced by the Servicer and the remittance of all funds due hereunder;
or (ii) by mutual consent of the Servicer and the Purchaser in writing, unless
earlier terminated pursuant to this Agreement.
SECTION 6.04 Termination Without Cause. The Purchaser may, at its sole
option, upon not less than thirty (30) days' prior written notice to the
Servicer terminate any rights the Servicer may have hereunder with respect to
any or all of the Mortgage Loans, without cause, upon written notice, provided
that the Servicer shall have an additional period of not more than sixty (60)
days from and after the date of said notice from the Purchaser within which to
effect the related transfer of servicing. Any such notice of termination shall
be in writing and delivered to the Servicer as provided in Section 12.01 of this
Agreement. In the event of such termination, the Servicer shall be entitled to a
Termination Fee, equal to 2.0% of the then current aggregate unpaid principal
balance of the related Mortgage Loans; provided, however, that the successor
servicer is not an Affiliate of the Servicer.
ARTICLE VII
BOOKS AND RECORDS
SECTION 7.01 Possession of Servicing Files. The contents of each
Servicing File are and shall be held in trust by the Servicer for the benefit of
the Purchaser as the owner thereof. The Servicer shall maintain in the Servicing
File a copy of the contents of each Mortgage File and the originals of the
documents in each Mortgage File not delivered to the Purchaser. The possession
of the Servicing File by the Servicer is at the will of the Purchaser for the
sole purpose of servicing the related Mortgage Loan, pursuant to this
Agreement, and such retention and possession by the Servicer is in its capacity
as Servicer only and at the election of the Purchaser. The Servicer shall
release its custody of the contents of any Servicing File only in accordance
with written instructions from the Purchaser or other termination of the
Servicer with respect to the related Mortgage Loans, unless such release is
required as incidental to the Servicer's servicing of the Mortgage Loans
pursuant to this Agreement, or is in connection with a repurchase of any
Mortgage Loan pursuant to Section 8.03 of the Purchase Agreement or Section
4.02 of this Agreement.
The Servicer shall be responsible for maintaining, and shall maintain,
a complete set of books and records for each Mortgage Loan which shall be marked
clearly to reflect the ownership
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of each Mortgage Loan by the Purchaser. In particular, the Servicer shall
maintain in its possession, available for inspection by the Purchaser or
its designee during normal business hours, and shall deliver to the Purchaser
or its designee upon reasonable notice, evidence of compliance with all
federal, state and local laws, rules and regulations, and requirements of FNMA
or FHLMC, including but not limited to documentation as to the method used in
determining the applicability of the provisions of the Flood Disaster
Protection Act of 1973, as amended, to the Mortgaged Property, documentation
evidencing insurance coverage and eligibility of any condominium project for
approval by FNMA and periodic inspection reports as required by Section 2.13
and the FHLMC Guide.
To the extent that original documents are not required for purposes of
realization of Liquidation Proceeds or Insurance Proceeds, documents maintained
by the Servicer may be in the form of microfilm or microfiche so long as the
Servicer complies with the requirements of the FHLMC Guide.
The Servicer shall keep at its servicing office books and records in
which, subject to such reasonable regulations as it may prescribe, the Servicer
shall note transfers of Mortgage Loans. No transfer of a Mortgage Loan may be
made unless such transfer is in compliance with the terms hereof. For the
purposes of this Agreement, the Servicer shall be under no obligation to deal
with any person with respect to this Agreement or the Mortgage Loans unless the
books and records show such person as the owner of the Mortgage Loan. The
Purchaser may, subject to the terms of this Agreement, sell or transfer one or
more of the Mortgage Loans. The Purchaser also shall advise the Servicer of the
transfer.
Upon receipt of notice of the transfer, the Servicer shall mark its
books and records to reflect the ownership of the Mortgage Loans of such
assignee, and shall release the Purchaser from its obligations hereunder with
respect to the Mortgage Loans sold or transferred.
ARTICLE VIII
INDEMNIFICATION AND ASSIGNMENT
SECTION 8.01 Indemnification. The Servicer agrees to indemnify and hold
the Purchaser harmless from any liability, claim, loss or damage (including,
without limitation, any reasonable legal fees, judgments or expenses relating to
such liability, claim, loss or damage) to the Purchaser directly or
indirectly resulting from the Servicer's failure to observe and perform any or
all of Servicer's duties, obligations, covenants, agreements, warranties or
representations contained in this Agreement or in the Purchase Agreement or the
Servicer's failure to comply with all applicable requirements with respect to
the transfer of Servicing Rights as set forth herein.
The Servicer shall notify the Purchaser as soon as reasonably possible
if a claim is made by a third party with respect to this Agreement.
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SECTION 8.02 Limitation on Liability of Servicer and Others. Neither
the Servicer nor any of the directors, officers, employees or agents of the
Servicer shall be under any liability to the Purchaser for any action taken or
for refraining from the taking of any action in good faith pursuant to this
Agreement, or for errors in judgment, provided, however, that this provision
shall not protect the Servicer or any such person against any breach of
warranties or representations made herein, or failure to perform its obligations
in material compliance with any standard of care set forth in this Agreement, or
any liability which would otherwise be imposed by reason of any breach of the
terms and conditions of this Agreement. The Servicer and any director, officer,
employee or agent of the Servicer may rely in good faith on any document of any
kind prima facie properly executed and submitted by any Person with respect to
any matter arising hereunder. The Servicer shall not be under any obligation to
appear in, prosecute or defend any legal action which is not incidental to its
duties to service the Mortgage Loans in accordance with this Agreement and which
in its opinion may involve it in any expense or liability, provided, however,
that the Servicer may, with the prior written consent of the Purchaser,
undertake any such action which it may deem necessary or desirable in respect to
this Agreement and the rights and duties of the parties hereto. In such event,
the Servicer shall be entitled to reimbursement from the Purchaser of the
reasonable legal expenses and costs of such action.
SECTION 8.03 Limitation on Registration and Assignment by Servicer. The
Purchaser has entered into this Agreement with the Servicer in reliance upon the
independent status of the Servicer, and the representations as to the adequacy
of its servicing facilities, plant, personnel, records and procedures, its
integrity, reputation and financial standing, and the continuance thereof.
Nonetheless, the Servicer may subcontract all or a portion of its servicing
obligations under the Agreement to one or more of its affiliates. However, if
none of its affiliates is engaged in the business of servicing mortgage loans,
the Servicer may subcontract all or a portion of its obligations under the
Servicing Agreement to an unrelated third party subject to approval of a
majority of the Independent Directors. Any delegation of such rights or duties
shall not release the Servicer from its obligations hereunder and the Servicer
shall remain responsible hereunder for all acts and omissions of any delegee as
if such acts or omissions were those of the Servicer and any such assignee or
designee shall satisfy the requirements for a successor or surviving Person set
forth in Section 8.05 and Section 8.06 hereof. The Servicer shall notify the
Purchaser in writing at least 30 days prior to selling or otherwise disposing of
all or substantially all of its assets and receipt of such notice shall entitle
the Purchaser to terminate this Agreement except as set forth in Section 8.05
hereof.
The Servicer shall not resign from the obligations and duties hereby
imposed on it, except by mutual consent of the Servicer and the Purchaser or
upon the determination that its duties hereunder are no longer permissible under
applicable law and such incapacity cannot be cured by the Servicer. Any such
determination permitting the resignation of the Servicer shall be evidenced
by an Opinion of Counsel to such effect delivered to the Purchaser which Opinion
of Counsel shall be in form and substance acceptable to the Purchaser. No such
resignation shall become effective until a successor shall have assumed the
Servicer's responsibilities and obligations hereunder in the manner provided in
Section 8.06.
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Without in any way limiting the generality of this Section 8.03, in the
event that the Servicer either shall assign this Agreement or the servicing
responsibilities hereunder or delegate its duties hereunder or any portion
thereof without satisfying the requirements set forth herein, then the Purchaser
shall have the right to terminate this Agreement as set forth in Section 6.04,
without any payment of any penalty or damages and without any liability
whatsoever to the Servicer (other than with respect to accrued but unpaid
Servicing Fees and Servicing Advances remaining unpaid) or any third party.
SECTION 8.04 Assignment by Purchaser. The Purchaser shall have the
right, without the consent of the Servicer, to assign, in whole or in part, its
interest under this Agreement with respect to some or all of the Mortgage Loans,
and designate any person to exercise any rights of the Purchaser hereunder, by
executing an Assignment and Assumption Agreement substantially in the form of
Exhibit G to the Purchase Agreement and the assignee or designee shall accede to
the rights and obligations hereunder of the Purchaser with respect to such
Mortgage Loans. All references to the Purchaser in this Agreement shall be
deemed to include its assignee or designee. Notwithstanding the foregoing, at
any one time there shall not be more than fifteen (15) separate Purchasers under
this Agreement.
SECTION 8.05 Merger or Consolidation of the Servicer. The Servicer will
keep in full effect its existence, rights and franchises as a corporation under
the laws of the state of its incorporation except as permitted herein, and will
obtain and preserve its qualification to do business as a foreign corporation in
each jurisdiction in which such qualification is or shall be necessary to
protect the validity and enforceability of this Agreement, or any of the
Mortgage Loans and to perform its duties under this Agreement.
Any Person into which the Servicer may be merged or consolidated, or
any corporation resulting from any merger, conversion or consolidation to which
the Servicer shall be a party, or any Person succeeding to the business of the
Servicer, shall be the successor of the Servicer hereunder, without the
execution or filing of any paper or any further act on the part of any of the
parties hereto, anything herein to the contrary notwithstanding; provided,
however, that the successor or surviving Person shall be an institution whose
deposits are insured by FDIC or a company whose business includes the
origination and servicing of mortgage loans, shall be qualified to service
mortgage loans on behalf of FNMA or FHLMC and shall satisfy the requirements of
Section 8.06 with respect to the qualifications of a successor to the Servicer.
SECTION 8.06 Successor to the Servicer. Prior to termination of
Servicer's responsibilities and duties under this Agreement pursuant to
Sections 2.17, 6.04, 8.03 or 11.01, the Purchaser shall (i) succeed to and
assume all of the Servicer's responsibilities, rights, duties and obligations
under this Agreement, or (ii) appoint a successor having a tangible net worth
of not less than $30,000,000 and which shall succeed to all rights and assume
all of the responsibilities, duties and liabilities of the Servicer under this
Agreement prior to the termination of Servicer's responsibilities, duties and
liabilities under this Agreement. Any successor to the Servicer shall be a
FNMA- or FHLMC-approved servicer in good standing. In connection with such
appointment and assumption, the Purchaser may make such arrangements for the
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compensation of such successor out of payments on Mortgage Loans as it
and such successor shall agree. In the event that the Servicer's duties,
responsibilities and liabilities under this Agreement should be terminated
pursuant to the aforementioned sections, the Servicer shall discharge such
duties and responsibilities during the period from the date it acquires
knowledge of such termination until the effective date thereof with the same
degree of diligence and prudence which it is obligated to exercise under this
Agreement, and shall take no action whatsoever that might impair or prejudice
the rights or financial condition of its successor. The resignation or removal
of Servicer pursuant to the aforementioned Sections shall not become effective
until a successor shall be appointed pursuant to Article X hereof this Section
and shall in no event relieve the Servicer of the representations, warranties
and covenants made pursuant to and the remedies available to the Purchaser with
respect thereto, it being understood and agreed that the provisions of such
Article X shall be applicable to the Servicer notwithstanding any such
resignation or termination of the Servicer, or the termination of this
Agreement.
Any successor appointed as provided herein shall execute, acknowledge
and deliver to the Servicer and to the Purchaser, an instrument accepting such
appointment, whereupon such successor shall become fully vested with all the
rights, powers, duties, responsibilities, obligations and liabilities of the
Servicer, with like effect as if originally named as a party to this Agreement.
Any termination of this Agreement pursuant to Section 2.17, 6.04, 8.03 or 11.01
shall not affect any claims that the Purchaser may have against the Servicer
arising prior to any such termination or resignation.
The Servicer shall timely deliver to the successor the funds in the
Custodial Account and the Escrow Account and the Mortgage Files and related
documents and statements held by it hereunder and the Servicer shall account for
all funds. The Servicer shall execute and deliver such instruments and do such
other things all as may reasonably be required to more fully and definitely vest
and confirm in the successor all such rights, powers, duties, responsibilities,
obligations and liabilities of the Servicer. The successor shall make
arrangements as it may deem appropriate to reimburse the Servicer for amounts
the Servicer actually expended pursuant to this Agreement which the successor is
entitled to retain hereunder and which would otherwise have been recovered by
the Servicer pursuant to this Agreement but for the appointment of the successor
servicer.
Upon a successor's acceptance of appointment as such, the Servicer
shall notify by mail the Purchaser of such appointment.
ARTICLE IX
REPRESENTATIONS, WARRANTIES AND COVENANTS OF PURCHASER
As of the Closing Date, the Purchaser warrants and represents to, and
covenants and agrees with, the Servicer as follows:
SECTION 9.01 Due Organization and Authority. The Purchaser is a
corporation duly organized, validly existing and in good standing under the laws
of the state of Michigan. The
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Purchaser has the full corporate power and authority to execute and
deliver this Agreement and to perform in accordance herewith; the execution,
delivery and performance of this Agreement by the Purchaser and the
consummation of the transactions contemplated hereby have been duly and validly
authorized; this Agreement evidences the valid, binding and enforceable
obligation of the Purchaser; and all requisite corporate action has been taken
by the Purchaser to make this Agreement valid and binding upon the Purchaser in
accordance with its terms.
SECTION 9.02 No Conflicts. Neither the execution and delivery of this
Agreement, nor the fulfillment of or compliance with the terms and conditions of
this Agreement, will conflict with or result in a breach of any of the terms,
conditions or provisions of the Purchaser's certificate of incorporation or
by-laws or any legal restriction or any agreement or instrument to which the
Purchaser is now a party or by which it is bound, or constitute a default or
result in an acceleration under any of the foregoing, or result in the violation
of any law, rule, regulation, order, judgment or decree to which the Purchaser
or its property is subject.
SECTION 9.03 Ability to Perform. The Purchaser does not believe, nor
does it have any reason or cause to believe, that it cannot perform each and
every covenant made by it in this Agreement.
SECTION 9.04 No Litigation Pending. There is no action, suit,
proceeding or investigation pending or threatened against the Purchaser, before
any court, administrative agency or other tribunal asserting the invalidity of
this Agreement, seeking to prevent the consummation of any of the transactions
contemplated by this Agreement or which, either in any one instance or in the
aggregate, may result in any material adverse change in the business,
operations, financial condition, properties or assets of the Purchaser, or in
any material impairment of the right or ability of the Purchaser to carry on its
business substantially as now conducted, or in any material liability on the
part of the Purchaser, or which would draw into question the validity of this
Agreement or of any action taken or to be taken in connection with the
obligations of the Purchaser contemplated herein.
SECTION 9.05 No Consent Required. No consent, approval, authorization
or order of any court or governmental agency or body is required for the
execution, delivery and performance by the Purchaser of, or compliance by the
Purchaser with, this Agreement as evidenced by the consummation of the
transactions contemplated by this Agreement, or if required, such approval has
been obtained prior to the Closing Date.
SECTION 9.06 Assistance. To the extent reasonably possible, the
Purchaser shall cooperate with and assist the Servicer as requested by the
Servicer, in carrying out Servicer's covenants, agreements, duties and
responsibilities under the Purchase Agreement and in connection therewith shall
execute and deliver all such papers, documents and instruments as nay be
necessary and appropriate in furtherance thereof.
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ARTICLE X
REPRESENTATIONS AND WARRANTIES OF SERVICER
As of the Closing Date, the Servicer warrants and represents to, and
covenants and agrees with, the Purchaser as follows:
SECTION 10.01 Due Organization and Authority. The Servicer is a
national bank duly organized and validly existing under the laws of the United
States and is licensed, qualified and in good standing in each state where a
Mortgaged Property is located if the laws of such state require licensing or
qualification in order to conduct business of the type conducted by the
Servicer, and in any event the Servicer is in compliance with the laws of any
such state to the extent necessary to ensure the enforceability of the related
Mortgage Loan in accordance with the terms of this Agreement; the Servicer has
the full corporate power and authority to execute and deliver this Agreement and
to perform in accordance herewith; the execution, delivery and performance of
this Agreement (including all instruments of transfer to be delivered pursuant
to this Agreement) by the Servicer and the consummation of the transactions
contemplated hereby have been duly and validly authorized; this Agreement
evidences the valid, legal, binding and enforceable obligation of the Servicer
subject to bankruptcy laws and other similar laws of general application
affecting rights of creditors and subject to the application of the rules of
equity, including those respecting the availability of specific performance,
none of which will materially interfere with the realization of the benefits
provided thereunder, regardless of whether such enforcement is sought in a
proceeding in equity or at law; and all requisite corporate action has been
taken by the Servicer to make this Agreement valid and binding upon the Servicer
in accordance with its terms.
SECTION 10.02 Ordinary Course of Business. The consummation of the
transactions contemplated by this Agreement are in the ordinary course of
business of the Servicer.
SECTION 10.03 No Conflicts. Neither the execution and delivery of this
Agreement, nor the fulfillment of or compliance with the terms and conditions of
this Agreement, will conflict with or result in a breach of any of the terms,
conditions or provisions of the Servicer's Articles of Association or by-laws or
any legal restriction or any agreement or instrument to which the Servicer is
now a party or by which it is bound, or constitute a default or result in an
acceleration under any of the foregoing, or result in the violation of any law,
rule, regulation, order, judgment or decree to which the Servicer or its
property is subject, or impair the ability of the Purchaser to realize on the
Mortgage Loans, impair the value of the Mortgage Loans, or impair the ability of
the Purchaser to realize the full amount of any mortgage insurance benefits
accruing pursuant to this Agreement.
SECTION 10.04 Ability to Service. The Servicer is an approved
seller/servicer of conventional residential mortgage loans for FNMA and FHLMC,
with the facilities, procedures, and experienced personnel necessary for the
sound servicing of mortgage loans of the same type as the Mortgage Loans. The
Servicer is duly qualified, licensed, registered and otherwise authorized under
all applicable federal, state and local laws, and regulations, if applicable,
meets
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the minimum capital requirements set forth by the OCC, and is in good
standing to enforce, originate, sell mortgage loans to, and service mortgage
loans in the jurisdiction wherein the Mortgaged Properties are located for,
either FNMA or FHLMC, and no event has occurred, including but not limited to a
change in insurance coverage, which would make the Servicer unable to
comply with either FNMA or FHLMC eligibility requirements or which would
require notification to FNMA or FHLMC.
SECTION 10.05 Ability to Perform. The Servicer does not believe, nor
does it have any reason or cause to believe, that it cannot perform each and
every covenant contained in this Agreement.
SECTION 10.06 No Litigation Pending. There is no action, suit,
proceeding or investigation pending or threatened against the Servicer, before
any court, administrative agency or other tribunal asserting the invalidity of
this Agreement, seeking to prevent the consummation of any of the transactions
contemplated by this Agreement or which, either in any one instance or in the
aggregate, may result in any material adverse change in the business,
operations, financial condition, properties or assets of the Servicer, or in any
material impairment of the right or ability of the Servicer to carry on its
business substantially as now conducted, or in any material liability on the
part of the Servicer, or which would draw into question the validity of this
Agreement or the Mortgage Loans or of any action taken or to be taken in
connection with the obligations of the Servicer contemplated herein, or which
would be likely to impair materially the ability of the Servicer to perform
under the terms of this Agreement.
SECTION 10.07 No Consent Required. No consent, approval, authorization
or order of any court or governmental agency or body is required for the
execution, delivery and performance by the Servicer of or compliance by the
Servicer with this Agreement or the servicing of the Mortgage Loans as evidenced
by the consummation of the transactions contemplated by this Agreement, or if
required, such approval has been obtained prior to the Closing Date.
SECTION 10.08 No Untrue Information. Neither this Agreement nor any
statement, tape, diskette, form, report or other document furnished or to be
furnished pursuant to this Agreement or in connection with the transactions
contemplated hereby contains any untrue statement of fact or omits to state a
fact necessary to make the statements contained therein not misleading.
SECTION 10.09 Reasonable Servicing Fee. The Servicer acknowledges and
agrees that the Servicing Fee represents reasonable compensation for performing
such services and that the entire Servicing Fee shall be treated by the
Servicer, for accounting and tax purposes, as compensation for the servicing and
administration of the Mortgage Loans pursuant to this Agreement.
SECTION 10.10 Financial Statements. The Servicer has delivered to the
Purchaser financial statements as to its last two complete fiscal years. All
such financial statements fairly present the pertinent results of operations and
changes in financial position for each of such periods and the financial
position at the end of each such period of the Servicer and its subsidiaries and
have been prepared in accordance with generally accepted accounting principles
consistently
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applied throughout the periods involved, except as set forth in the
notes thereto. There has been no change in the business, operations, financial
condition, properties or assets of the Servicer since the date of the
Servicer's financial statements that would have a material adverse effect on
its ability to perform its obligations under this Agreement.
SECTION 10.11 Conflict of Interest. The Servicer agrees that it shall
service the Mortgage Loans hereunder solely with a view toward the interests of
the Purchaser, and without regard to the interests of the Seller or its other
affiliates.
ARTICLE XI
DEFAULT
SECTION 11.01 Events of Default. The following shall constitute an
Event of Default under this Agreement on the part of the Servicer:
(a) any failure by the Servicer to remit to the Purchaser any
payment required to be made under the terms of this Agreement
which continues unremedied for a period of five (5) Business
Days after the date upon which written notice of such failure,
requiring the same to be remedied, shall have been given to
the Servicer by the Purchaser; or
(b) the failure by the Servicer duly to observe or perform in any
material respect any other of the covenants or agreements on
the part of the Servicer set forth in this Agreement which
continues unremedied for a period of thirty (30) days (except
that such number of days shall be fifteen (15) in the case of
a failure to pay any premium for any insurance policy required
to be maintained under this Agreement) after the date on which
written notice of such failure, requiring the same to be
remedied, shall have been given to the Servicer by the
Purchaser; or
(c) a decree or order of a court or agency or supervisory
authority having jurisdiction for the appointment of a
conservator or receiver or liquidator in any insolvency,
bankruptcy, readjustment of debt, marshaling of assets and
liabilities or similar proceedings, or for the winding-up or
liquidation of its affairs, shall have been entered against
the Servicer and such decree or order shall have remained in
force undischarged or unstayed for a period of sixty (60)
days; or
(d) the Servicer shall consent to the appointment of a conservator
or receiver or liquidator in any insolvency, bankruptcy,
readjustment of debt, marshaling of assets and liabilities or
similar proceedings of or relating to the Servicer or of or
relating to all or substantially all of its property; or
(e) the Servicer shall admit in writing its inability to pay its
debts generally as they become due, file a petition to take
advantage of any applicable insolvency or
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reorganization statute, make an assignment for the
benefit of its creditors, or voluntarily suspend payment of
its obligations; or
(f) the Servicer ceases to meet the qualifications of a FNMA or
FHLMC seller/servicer which continues unremedied for a period
of thirty (30) days after the date of such cessation; or
(g) the Servicer, without the consent of the Purchaser, attempts
to assign this Agreement or the servicing responsibilities
hereunder or to delegate any substantial part of its duties
hereunder or any portion thereof; or
(h) the Servicer fails to maintain its license to do business or
service residential mortgage loans in any jurisdiction where
the Mortgaged Properties are located and such failure results
in a material adverse effect on the Mortgage Loans, the
servicing of the Mortgage Loans, or the Purchaser's rights
with respect to the Mortgage Loans.
In each and every such case, so long as an Event of Default shall not
have been remedied, in addition to whatsoever rights the Purchaser may have at
law or equity to damages, including injunctive relief and specific performance,
the Purchaser, by notice in writing to the Servicer, may terminate without
compensation or reimbursement (other than Servicing Fees previously earned but
remaining unpaid and Servicing Advances remaining unreimbursed) all the rights
and obligations of the Servicer under this Agreement and in and to the Mortgage
Loans and the proceeds thereof.
Upon receipt by the Servicer of such written notice, all authority and
power of the Servicer under this Agreement, whether with respect to the Mortgage
Loans or otherwise, shall pass to and be vested in the successor appointed
pursuant to Section 8.06. Upon written request from the Purchaser, the Servicer
shall prepare, execute and deliver any and all documents and other instruments
reasonably requested by the Purchaser, place in such successor's possession all
Mortgage Files (to the extent not properly delivered to the Purchaser by the
Servicer previously), and do or accomplish all other acts or things necessary or
appropriate to effect the purposes of such notice of termination, whether to
complete the transfer and endorsement or assignment of the Mortgage Loans and
related documents, or otherwise, at the Servicer's sole expense. The Servicer
agrees to reasonably cooperate with the Purchaser and such successor in
effecting the termination of the Servicer's responsibilities and rights
hereunder, including, without limitation, the transfer to such successor for
administration by it of all cash amounts which shall at the time be credited by
the Servicer to the Custodial Account or Escrow Account or thereafter received
with respect to the Mortgage Loans.
SECTION 11.02 Waiver of Defaults. The Purchaser may waive any default
by the Servicer in the performance of its obligations hereunder and its
consequences. Upon any such waiver of a past default, such default shall cease
to exist, and any Event of Default arising therefrom shall be deemed to have
been remedied for every purpose of this Agreement. No such
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waiver shall extend to any subsequent or other default or impair any
right consequent thereon except to the extent expressly so waived.
ARTICLE XII
MISCELLANEOUS PROVISIONS
SECTION 12.01 Notices. All notices, requests, demands and other
communications which are required or permitted to be given under this Agreement
shall be in writing and shall be deemed to have been duly given upon
the delivery or mailing thereof, as the case may be, sent by registered or
certified mail, return receipt requested:
(a) If to Purchaser to:
Franklin Finance Corporation
24725 West Twelve Mile Road
Southfield, Michigan 48034
Attention: President
(b) If to Servicer to:
Franklin Bank, N.A.
24725 West Twelve Mile Road
Southfield, Michigan 48034
Attention: President
SECTION 12.02 Waivers. Either the Servicer or the Purchaser may upon
consent of all parties, by written notice to the others:
(a) Waive compliance with any of the terms, conditions or
covenants required to be complied with by the others
hereunder; and
(b) Waive or modify performance of any of the obligations of the
others hereunder.
The waiver by any party hereto of a breach of any provision of this
Agreement shall not operate or be construed as a waiver of any other subsequent
breach.
SECTION 12.03 Entire Agreement; Amendment. This Agreement and the
Purchase Agreement constitute the entire agreement between the parties with
respect to servicing of the Mortgage Loans. This Agreement may be amended and
any provision hereof waived, but, only in writing signed by the party against
whom such enforcement is sought.
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SECTION 12.04 Execution; Binding Effect. This Agreement may be executed
in one or more counterparts and by the different parties hereto on separate
counterparts, each of which, when so executed, shall be deemed to be an
original; such counterparts, together, shall constitute one and the same
agreement. Subject to Sections 8.03 and 8.04, this Agreement shall inure to the
benefit of and be binding upon the Servicer and the Purchaser and their
respective successors and assigns.
SECTION 12.05 Headings. Headings of the Articles and Sections in this
Agreement are for reference purposes only and shall not be deemed to have any
substantive effect.
SECTION 12.06 Applicable Law. This Agreement shall be construed in
accordance with the laws of the State of Michigan and the obligations, rights
and remedies hereunder shall be determined in accordance with the
substantive laws of the State of Michigan (without regard to conflicts of laws
principles), except to the extent preempted by Federal law.
SECTION 12.07 Relationship of Parties. Nothing herein contained shall
be deemed or construed to create a partnership or joint venture between the
parties. The duties and responsibilities of the Servicer shall be rendered by it
as an independent contractor and not as an agent of the Purchaser. The Servicer
shall have full control of all of its acts, doings, proceedings, relating to or
requisite in connection with the discharge of its duties and responsibilities
under this Agreement.
SECTION 12.08 Severability of Provisions. If any one or more of the
covenants, agreements, provisions or terms of this Agreement shall be held
invalid for any reason whatsoever, then such covenants, agreements, provisions
or terms shall be deemed severable from the remaining covenants, agreements,
provisions or terms of this Agreement and shall in no way affect the validity or
enforceability of the other provisions of this Agreement.
SECTION 12.09 Recordation of Assignments of Mortgage. To the extent
permitted by applicable law, each of the Assignments of Mortgage is subject to
recordation in all appropriate public offices for real property records in all
the counties or other comparable jurisdictions in which any or all of the
Mortgaged Properties are situated, and in any other appropriate public recording
office or elsewhere, such recordation to be effected by the Purchaser or the
Purchaser's designee, but in any event, at the Servicer's expense for a single
recordation relating to each Assignment of Mortgage in the event recordation is
either necessary under applicable law or requested by the Purchaser at its sole
option.
SECTION 12.10 Exhibits. The exhibits to this Agreement are hereby
incorporated and made a part hereof and are integral parts of this Agreement.
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IN WITNESS WHEREOF, the parties have executed this Agreement under seal
as of the date and year first above written.
FRANKLIN FINANCE CORPORATION
(the Purchaser)
By:_______________________________
Name:_____________________________
Title:____________________________
FRANKLIN BANK, N.A.
(the Servicer)
By:_______________________________
Name:_____________________________
Title:____________________________
36
<PAGE> 42
EXHIBIT 1
MONTHLY REMITTANCE ADVICE
37
<PAGE> 43
EXHIBIT 2
CUSTODIAL ACCOUNT CERTIFICATION
___________, 1997
_________________ hereby certifies that it has established the account
described below as a Custodial Account pursuant to Section 2.04 of the Servicing
Agreement, dated as of __________, 1997.
Title of "Franklin Bank, N.A., in trust for Purchaser of Residential Mortgage
Loans, and various Mortgagors."
Account Number: ________________________
Address of office or branch of the Servicer at which Account is
maintained:
------------------------------
------------------------------
------------------------------
------------------------------
------------------------------
FRANKLIN BANK, N.A.
By:_______________________
Name:_____________________
Title:____________________
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<PAGE> 44
EXHIBIT 3
CUSTODIAL ACCOUNT LETTER AGREEMENT
___________, 1997
To: ____________________
____________________
____________________
(the "Depository")
As Servicer under the Servicing Agreement, dated as of ______, 1997,
(the "Agreement"), we hereby authorize and request you to establish an account,
as a Custodial Account pursuant to Section 2.04 of the Agreement, to be
designated as Franklin Bank, N.A., in trust for Purchaser of Residential
Mortgage Loans, and various Mortgagors." All deposits in the account shall be
subject to withdrawal therefrom by order signed by the Servicer. You may refuse
any deposit which would result in violation of the requirement that the account
be fully insured as described below. This letter is submitted to you in
duplicate. Please execute and return one original to us.
FRANKLIN BANK, N.A.
By:_______________________
Name:_____________________
Title:____________________
The undersigned, as Depository, hereby certifies that the above
described account has been established under Account Number [_____], at the
office of the Depository indicated above, and agrees to honor withdrawals on
such account as provided above. The full amount deposited at any time in the
account will be insured by the Federal Deposit Insurance Corporation through the
Bank Insurance Fund ("BIF") or the Savings Association Insurance Fund ("SAIF").
_________________________
Depository
By:______________________
Name:____________________
Title:___________________
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<PAGE> 45
EXHIBIT 4
ESCROW ACCOUNT CERTIFICATION
_____________, 1997
____________________________hereby certifies that it has established
the account described below as an Escrow Account pursuant to Section 2.06 of the
Servicing Agreement, dated as of ________, 1997.
Title of Account: "Franklin Bank, N.A., in trust for Purchaser of Residential
Mortgage Loans, and various Mortgagors."
Account Number: _____________________________
Address of office or branch of the Servicer at which Account is maintained:
------------------------------
------------------------------
------------------------------
------------------------------
FRANKLIN BANK, N.A.
By:_______________________
Name:_____________________
Title:____________________
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<PAGE> 46
EXHIBIT 5
ESCROW ACCOUNT LETTER AGREEMENT
______________, 1997
To: __________________________
__________________________
__________________________
__________________________
(the "Depository")
As Servicer under the Servicing Agreement, dated as of ____________,
1997, (the "Agreement"), we hereby authorize and request you to establish an
account, as an Escrow Account pursuant to Section 2.06 of the Agreement, to be
designated as "Franklin Bank, N.A., in trust for the Purchaser of Residential
Mortgage Loans, and various Mortgagors." All deposits in the account shall be
subject to withdrawal therefrom by order signed by the Servicer. You may refuse
any deposit which would result in violation of the requirement that the account
be fully insured as described below. This letter is submitted to you in
duplicate. Please execute and return one original to us.
FRANKLIN BANK, N.A.
By:_______________________
Name:_____________________
Title:____________________
The undersigned, as Depository, hereby certifies that the above
described account has been established under Account Number ______________, at
the office of the Depository indicated above, and agrees to honor withdrawals on
such account as provided above. The full amount deposited at any time in the
account will be insured by the Federal Deposit Insurance Corporation through the
Bank Insurance Fund ("BIF") or the Savings Association Insurance Fund ("SAIF").
_________________________
Depository
By:______________________
Name:____________________
Title:___________________
41
<PAGE> 1
EXHIBIT 10.4
SERVICING AGREEMENT
BETWEEN
FRANKLIN FINANCE CORPORATION
PURCHASER
FRANKLIN BANK, N.A.
SELLER
DATED AS OF [___________], 1997
CONVENTIONAL COMMERCIAL MORTGAGE LOANS
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I
DEFINITIONS..................................................................................... 1
Section 1. Definitions............................................................... 1
ARTICLE II
SERVICING....................................................................................... 5
Section 2.01 Seller to Act as Servicer................................................ 5
Section 2.02 Liquidation of Mortgage Loans............................................ 6
Section 2.03 Collection of Mortgage Loan Payments..................................... 7
Section 2.04 Establishment of and Deposits to Custodial Account....................... 7
Section 2.05 Permitted Withdrawals From Custodial Account............................. 9
Section 2.06 Establishment of and Deposits to Escrow Account.......................... 10
Section 2.07 Permitted Withdrawals From Escrow Account................................ 10
Section 2.08 Payment of Taxes, Insurance and Other Charges, Tax Contracts............. 11
Section 2.09 Protection of Accounts................................................... 11
Section 2.10 Maintenance of Hazard Insurance.......................................... 11
Section 2.11 Maintenance of Mortgage Impairment Insurance............................. 12
Section 2.12 Maintenance of Fidelity Bond and Errors and Omissions
Insurance..................................................... 13
Section 2.13 Inspections.............................................................. 13
Section 2.14 Restoration of Mortgaged Property........................................ 13
Section 2.15 Deteriorating Mortgage Loans............................................. 14
Section 2.16 Title, Management and Disposition of REO Property........................ 14
Section 2.17 Permitted Withdrawals with respect to REO Property....................... 16
Section 2.18 Real Estate Owned Reports................................................ 16
Section 2.19 Liquidation Reports...................................................... 16
Section 2.20 Reports Of Foreclosures and Abandonments................................. 16
Section 2.21 Notification of Adjustments.............................................. 16
Section 2.22 Notification of Maturity Date............................................ 17
ARTICLE III
PAYMENTS TO PURCHASER........................................................................... 17
Section 3.01 Remittances.............................................................. 17
Section 3.02 Statements to Purchaser.................................................. 18
Section 3.03 Advances by Seller........................................................ 18
ARTICLE IV
GENERAL SERVICING PROCEDURES.................................................................... 19
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
Section 4.01 Transfers of Mortgaged Property.......................................... 19
Section 4.02 Satisfaction of Mortgages and Release of Mortgage Files.................. 19
Section 4.03 Servicing Compensation................................................... 20
Section 4.04 Annual Statement as to Compliance........................................ 20
Section 4.05 Annual Independent Public Accountants' Servicing Report.................. 20
Section 4.06 Right to Examine Seller Records.......................................... 21
ARTICLE V
SELLER TO COOPERATE............................................................................. 21
Section 5.01 Provision of Information................................................. 21
Section 5.02 Financial Statements; Servicing Facilities............................... 21
ARTICLE VI
TERMINATION..................................................................................... 22
Section 6.01 Damages.................................................................. 22
Section 6.02 Termination.............................................................. 22
Section 6.03 Termination Without Cause................................................ 22
ARTICLE VII
BOOKS AND RECORDS............................................................................... 22
Section 7.01 Possession of Servicing Files............................................ 22
ARTICLE VIII
INDEMNIFICATION AND ASSIGNMENT.................................................................. 23
Section 8.01 Indemnification.......................................................... 23
Section 8.02 Limitation on Liability of Seller and Others............................. 23
Section 8.03 Limitation on Registration and Assignment by Seller...................... 24
Section 8.04 Assignment by Purchaser.................................................. 24
Section 8.05 Merger or Consolidation of the Seller.................................... 25
Section 8.06 Successor to the Seller.................................................. 25
ARTICLE IX
REPRESENTATIONS, WARRANTIES AND COVENANTS OF PURCHASER.......................................... 26
Section 9.01 Due Organization and Authority........................................... 26
Section 9.02 No Conflicts............................................................. 26
Section 9.03 Ability to Perform....................................................... 27
Section 9.04 No Litigation Pending.................................................... 27
Section 9.05 No Consent Required...................................................... 27
Section 9.06 Assistance............................................................... 27
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
ARTICLE X
REPRESENTATIONS AND WARRANTIES OF SELLER........................................................ 27
Section 10.01 Due Organization and Authority.......................................... 27
Section 10.02 Ordinary Course of Business............................................. 28
Section 10.03 No Conflicts............................................................ 28
Section 10.05 Ability to Service...................................................... 28
Section 10.05 Ability to Perform...................................................... 28
Section 10.06 No Litigation Pending................................................... 28
Section 10.07 No Consent Required..................................................... 28
Section 10.08 No Untrue Information................................................... 29
Section 10.09 Reasonable Servicing Fee................................................ 29
Section 10.10 Financial Statements.................................................... 29
Section 10.11 Conflict of Interest.................................................... 29
ARTICLE XI
DEFAULT......................................................................................... 29
Section 11.01 Events of Default....................................................... 29
Section 11.02 Waiver of Defaults...................................................... 31
ARTICLE XII
MISCELLANEOUS PROVISIONS........................................................................ 31
Section 12.01 Notices................................................................. 31
Section 12.02 Waivers................................................................. 31
Section 12.03 Entire Agreement; Amendment............................................. 32
Section 12.04 Execution; Binding Effect............................................... 32
Section 12.05 Headings................................................................ 32
Section 12.06 Applicable Law.......................................................... 32
Section 12.07 Relationship of Parties................................................. 32
Section 12.08 Severability of Provisions.............................................. 32
Section 12.09 Recordation of Assignments of Mortgage.................................. 32
Section 12.10 Exhibits................................................................ 33
</TABLE>
EXHIBITS
EXHIBIT 1 FORM OF MONTHLY REMITTANCE ADVICE
EXHIBIT 2 FORM OF CUSTODIAL ACCOUNT CERTIFICATION
EXHIBIT 3 FORM OF CUSTODIAL ACCOUNT LETTER AGREEMENT
EXHIBIT 4 FORM OF ESCROW ACCOUNT CERTIFICATION
EXHIBIT 5 FORM OF ESCROW ACCOUNT LETTER AGREEMENT
EXHIBIT 6 FORM OF CONFIDENTIALITY AGREEMENT
<PAGE> 5
SERVICING AGREEMENT
This Servicing Agreement (the "Servicing Agreement" or the
"Agreement") is entered into as of [________,] 1997, by and between FRANKLIN
BANK, N.A. (the "Seller"), a national bank, and FRANKLIN FINANCE CORPORATION, a
Michigan corporation (the "Purchaser").
WHEREAS, the Purchaser and the Seller entered into a Mortgage Loan
Purchase and Warranties Agreement dated as of [________,] 1997 (the "Purchase
Agreement") pursuant to which the Purchaser agreed to purchase from the Seller
certain conventional, commercial, adjustable rate first mortgage loans (the
"Mortgage Loans") to be delivered as whole loans, with the Seller retaining
servicing rights in connection with the purchase of such Mortgage Loans; and
WHEREAS, the Purchaser desires to have the Seller service the Mortgage
Loans, the Seller desires to service and administer the Mortgage Loans on
behalf of the Purchaser, and the parties desire to provide the terms and
conditions of such servicing by the Seller.
NOW, THEREFORE, in consideration of the mutual promises and agreements
set forth herein and for other good and valuable consideration, the receipt and
the sufficiency of which are hereby acknowledged, the parties hereto hereby
agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1. Definitions. All capitalized terms not otherwise
defined herein have the respective meanings set forth in the Purchase
Agreement. The following terms are defined as follows:
"Accepted Servicing Practices" means, with respect to any Mortgage
Loan, those mortgage servicing practices of prudent mortgage lending
institutions which service mortgage loans of the same type as such Mortgage
Loan in the jurisdiction where the related Mortgaged Property is located.
"Ancillary Income" means all late charges, escrow account benefits,
reinstatement fees, and similar types of fees arising from or in connection
with any Mortgage Loan to the extent not otherwise payable to the Mortgagor
under applicable law or pursuant to the terms of the related Mortgage Note.
"Bank" means Franklin Bank, N.A.
"Best's" means Best's Key Rating Guide.
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<PAGE> 6
"BIF" means The Bank Insurance Fund, or any successor thereto.
"Closing Date" means [_______,] 1997, or such other date as is
mutually agreed upon by the parties hereto.
"Condemnation Proceeds" means all awards or settlements in respect of
a Mortgaged Property, whether permanent or temporary, partial or entire, by
exercise of the power of eminent domain or condemnation, to the extent not
required to be released to a Mortgagor in accordance with the terms of the
related Mortgage Loan Documents.
"Custodial Account" means the separate account or accounts created and
maintained pursuant to Section 2.04.
"Cut-off Date" means [__________,] 1997.
"Due Period" means with respect to each Remittance Date, the period
commencing on the second day of the month preceding the month of the Remittance
Date and ending on the first day of the month of the Remittance Date.
"Errors and Omissions Insurance Policy" means an errors and omissions
insurance policy to be maintained by the Seller pursuant to Section 2.12.
"Escrow Account" means the separate account or accounts created and
maintained pursuant to Section 2.06.
"Escrow Payment" means, with respect to any Mortgage Loan, any
payments required to be escrowed by the Mortgagor with the mortgagee pursuant
to the Mortgage or any other document, including without limitation the amounts
constituting ground rents, taxes, assessments, water rates, sewer rents,
municipal charges, mortgage insurance premiums, fire and hazard insurance
premiums.
"Event of Default" means any one of the conditions or circumstances
enumerated in Section 11.01.
"FDIC" means The Federal Deposit Insurance Corporation, or any
successor thereto.
"Fidelity Bond" means a fidelity bond to be maintained by the Seller
pursuant to Section 2.12.
"Insurance Proceeds" means, with respect to each Mortgage Loan,
proceeds of insurance policies insuring the Mortgage Loan or the related
Mortgaged Property.
"Liquidation Proceeds" means cash received in connection with the
liquidation of a defaulted Mortgage Loan, whether through the sale or
assignment of such Mortgage Loan,
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<PAGE> 7
trustee's sale, foreclosure sale or otherwise, or the sale of the related
Mortgaged Property if the Mortgaged Property is acquired in satisfaction of the
Mortgage Loan.
"Monthly Remittance Advice" means the monthly remittance advice, in
the form of Exhibit A annexed hereto, to be provided to the Purchaser pursuant
to Section 3.02.
"Mortgage Impairment Insurance Policy" means a mortgage impairment or
blanket hazard insurance policy as described in Section 2.11.
"Nonrecoverable Advance" means any advance of principal and interest
previously made or proposed to be made in respect of a Mortgage Loan which, in
the good faith judgment of the Seller, will not or, in the case of a proposed
advance of principal and interest, would not, be ultimately recoverable from
related Insurance Proceeds, Liquidation Proceeds or otherwise. The
determination by the Seller that it has made a Nonrecoverable Advance or that
any proposed advance of principal and interest, if made, would constitute a
Nonrecoverable Advance, shall be evidenced by an Officers' Certificate
delivered to the Purchaser.
"OCC" means Office of Comptroller of the Currency, or any successor
thereto.
"Officer's Certificate" means a certificate signed by the Chairman of
the Board or the Vice Chairman of the Board or a President or a Vice President
and by the Treasurer or the Secretary or one of the Assistant Treasurers or
Assistant Secretaries of the Seller, and delivered to the Purchaser as required
by this Agreement.
"Prime Rate" means the prime rate announced to be in effect from time
to time, as published as the average rate in The Wall Street Journal (Chicago
edition).
"Principal Prepayment" means any payment or other recovery of
principal on a Mortgage Loan which is received in advance of its scheduled due
date, including any prepayment penalty or premium thereon and which is not
accompanied by an amount of interest representing scheduled interest due on any
date or dates in any month or months subsequent to the month of prepayment.
"Purchase Agreement" means the Mortgage Loan Purchase and Warranties
Agreement between the Purchaser and the Seller related to the purchase of the
Mortgage Loans dated as of [_________], 1997.
"Qualified Depository" means a depository the accounts of which are
insured by the FDIC through the BIF or the SAIF.
"Qualified Insurer" means an insurance company duly qualified as such
under the laws of the states in which the Mortgaged Properties are located,
duly authorized and licensed in such states to transact the applicable
insurance business and to write the insurance provided, and in the two highest
rating categories by Best's with respect to hazard and flood insurance.
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<PAGE> 8
"Record Date" means the close of business of the last Business Day of
the month preceding the month of the related Remittance Date.
"Remittance Date" means the 18th day (or if such 18th day is not a
Business Day, the first Business Day immediately following) of any month,
beginning with the first Remittance Date on [________], 1997.
"REO Property" means a Mortgaged Property acquired by the Seller on
behalf of the Purchaser through foreclosure or by deed in lieu of foreclosure,
as described in Section 2.16.
"SAIF" means the Savings Association Insurance Fund, or any successor
thereto.
"Seller Employees" has the meaning set forth in Section 2.12.
"Servicing Advances" means all customary, reasonable and necessary
"out of pocket" costs and expenses (including reasonable attorneys' fees and
disbursements) incurred in the performance by the Seller of its servicing
obligations, including, but not limited to, the cost of (a) the preservation,
restoration and protection of the Mortgaged Property, (b) any enforcement or
judicial proceedings, including foreclosures, (c) the management and
liquidation of the Mortgaged Property if the Mortgaged Property is acquired in
satisfaction of the Mortgage and (d) compliance with the obligations under
Section 2.08 (except with respect to any expenses incurred in connection with
procuring or transferring Tax Service Contracts, as provided therein).
"Servicing Agreement" means this agreement between the Purchaser and
the Seller for the servicing and administration of the Mortgage Loans.
"Servicing Fee" means, with respect to each Mortgage Loan, the amount
of the annual fee the Purchaser shall pay to the Seller, which shall, for a
period of one (1) full month, be equal to one-twelfth of the product of the
Servicing Fee Rate and the Stated Principal Balance of such Mortgage Loan. Such
fee shall be payable monthly, computed on the basis of the same principal
amount and period in respect of which any related interest payment on a
Mortgage Loan is computed and shall be pro rated for any portion of a month
during which the Mortgage Loan is serviced by the Seller under this Agreement.
The obligation of the Purchaser to pay the Servicing Fee is limited to, and the
Servicing Fee is payable solely from, the interest portion (including
recoveries with respect to interest from Liquidation Proceeds, to the extent
permitted by Section 4.03) of such Monthly Payment collected by the Seller, or
as otherwise provided under Section 4.03.
"Servicing Fee Rate" means, with respect to each Mortgage Loan, the
rate specified in the Mortgage Loan Schedule with respect to such Mortgage
Loan.
"Servicing File" means, with respect to each Mortgage Loan, the file
retained by the Seller consisting of originals of all documents in the Mortgage
File which are not delivered to the Purchaser or its designee and copies of the
Mortgage Loan Documents listed on Exhibit A to the Purchase Agreement.
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<PAGE> 9
"Servicing Officer" means any officer of the Seller involved in or
responsible for, the administration and servicing of the Mortgage Loans whose
name appears on a list of servicing officers furnished by the Seller to the
Purchaser upon request, as such list may from time to time be amended.
"Termination Fee" means the amount paid by the Purchaser to the Seller
in the event of the Seller's termination, without cause, as servicer. Such fee
shall equal the percentage amount set forth in Section 6.03 hereof of the then
current aggregate unpaid principal balance of the related Mortgage Loans.
ARTICLE II
SERVICING
SECTION 2.01 Seller to Act as Servicer. From and after the Closing
Date, the Seller, as an independent contractor, shall service and administer
the Mortgage Loans and shall have full power and authority, acting alone, to do
any and all things in connection with such servicing and administration which
the Seller may deem necessary or desirable, consistent with the terms of this
Agreement and with Accepted Servicing Practices.
Consistent with the terms of this Agreement, the Seller may waive,
modify or vary any term of any Mortgage Loan or consent to the postponement of
strict compliance with any such term or in any manner grant indulgence to any
Mortgagor if in the Seller's reasonable and prudent determination such waiver,
modification, postponement or indulgence is not materially adverse to the
Purchaser, provided, however, that unless the Seller has obtained the prior
written consent of the Purchaser, the Seller shall not permit any modification
with respect to any Mortgage Loan that would change the Mortgage Interest Rate,
defer or forgive the payment of principal or interest, reduce or increase the
outstanding principal balance (except for actual payments of principal) or
change the final maturity date on such Mortgage Loan. In the event of any such
modification which permits the deferral of interest or principal payments on
any Mortgage Loan, the Seller shall, on the Business Day immediately preceding
the Remittance Date in any month in which any such principal or interest
payment has been deferred, deposit in the Custodial Account from its own funds,
in accordance with Section 2.04, the difference between (a) such month's
principal and one (1) month's interest at the Mortgage Interest Rate on the
unpaid principal balance of such Mortgage Loan and (b) the amount paid by the
Mortgagor. The Seller shall be entitled to reimbursement for such advances to
the same extent as for all other advances made pursuant to Section 2.05.
Without limiting the generality of the foregoing, the Seller shall continue,
and is hereby authorized and empowered, to execute and deliver on behalf of
itself and the Purchaser, all instruments of satisfaction or cancellation, or
of partial or full release, discharge and all other comparable instruments,
with respect to the Mortgage Loans and with respect to the Mortgaged
Properties. If reasonably required by the Seller, the Purchaser shall furnish
the Seller with any powers of attorney and other documents necessary or
appropriate to enable the Seller to carry out its servicing and administrative
duties under this Agreement.
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<PAGE> 10
In servicing and administering the Mortgage Loans, the Seller shall
employ procedures (including collection procedures) and exercise the same care
that it customarily employs and exercises in servicing and administering
mortgage loans for its own account, giving due consideration to Accepted
Servicing Practices where such practices do not conflict with the requirements
of this Agreement, and the Purchaser's reliance on the Seller. The Seller
shall keep at its servicing office books and records in which, subject to such
reasonable regulations as it may prescribe, the Seller shall note transfers of
Mortgage Loans. No transfer of a Mortgage Loan may be made unless such transfer
is in compliance with the terms hereof. For the purposes of this Agreement,
Seller shall be under no obligation to deal with any Person with respect to
this Agreement or the Mortgage Loans unless the Seller has been notified of
such transfers as provided in this Section 2.01. The Purchaser may sell and
transfer, in whole or in part, the Mortgage Loans, provided that no such sale
and transfer shall be binding upon the Seller unless such transferee shall
agree in writing in the form of the Assignment and Assumption Agreement
attached to the Purchase Agreement as Exhibit G, to be bound by the terms of
this Agreement and the Purchase Agreement, and an executed copy of the same
shall have been delivered to the Seller. Upon receipt thereof, the Seller shall
mark its books and records to reflect the ownership of the Mortgage Loans by
such assignee, and the previous Purchaser shall be released from its
obligations hereunder. The Seller shall be required to remit all amounts
required to be remitted to the Purchaser hereunder to said transferee
commencing with the first Remittance Date falling after receipt of said copy of
the related Assignment and Assumption Agreement provided that the Seller
receives said copy no later than three (3) Business Days immediately prior to
the first day of the month of the related Remittance Date. This Agreement shall
be binding upon and inure to the benefit of the Purchaser and the Seller and
their permitted successors, assignees and designees. The Servicing File
retained by the Seller pursuant to this Agreement shall be appropriately marked
and identified in the Seller's computer system to clearly reflect the sale of
the related Mortgage Loan to the Purchaser. The Seller shall release from its
custody the contents of any Servicing File retained by it only in accordance
with this Agreement, except when such release is required in connection with a
repurchase of any such Mortgage Loan pursuant to Section 8.03 of the Purchase
Agreement. The Seller must have an internal quality control program that
verifies, on a regular basis, the existence and accuracy of the legal
documents, credit documents, property appraisals, and underwriting decisions.
The program must be capable of evaluating and monitoring the overall quality of
its loan production and servicing activities. The program is to ensure that the
Mortgage Loans are serviced in accordance with prudent mortgage banking
practices and accounting principles; guard against dishonest, fraudulent, or
negligent acts; and guard against errors and omissions by officers, employees,
or other authorized persons.
SECTION 2.02 Liquidation of Mortgage Loans. In the event that any
payment due under any Mortgage Loan and not postponed pursuant to Section 2.01
is not paid when the same becomes due and payable, or in the event the
Mortgagor fails to perform any other covenant or obligation under the Mortgage
Loan and such failure continues beyond any applicable grace period, the Seller
shall take such action as (1) the Seller would take under similar circumstances
with respect to a similar mortgage loan held for its own account for
investment, (2) shall be consistent with Accepted Servicing Practices and (3)
the Seller shall determine prudently to be in the best interest of Purchaser.
In the event that any payment due under any Mortgage Loan is not postponed
pursuant to Section 2.01 and remains delinquent for a period of ninety (90)
days or any
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<PAGE> 11
other default continues for a period of ninety (90) days beyond the expiration
of any grace or cure period (or such other period as is required by law in the
jurisdiction where the related Mortgaged Property is located), the Seller shall
commence foreclosure proceedings, provided that, prior to commencing
foreclosure proceedings, the Seller shall notify the Purchaser in writing of
the Seller's intention to do so, and the Seller shall not commence foreclosure
proceedings if the Purchaser objects to such action within ten (10) Business
Days of receiving such notice or, if the provisions of the next two paragraphs
apply, in any event without the prior written consent of Purchaser. In such
connection, the Seller shall from its own funds make all necessary and proper
Servicing Advances, provided, however, that the Seller shall not be required to
expend its own funds in connection with any foreclosure or towards the
restoration or preservation of any Mortgaged Property, unless it shall
determine (a) that such preservation, restoration and/or foreclosure will
increase the proceeds of liquidation of the Mortgage Loan to Purchaser after
reimbursement to itself for such expenses and (b) that such expenses will be
recoverable by it either through Liquidation Proceeds (in respect of which it
shall have priority for purposes of withdrawals from the Custodial Account
pursuant to Section 2.05) or through Insurance Proceeds (in respect of which it
shall have similar priority). Notwithstanding anything to the contrary
contained herein, in connection with a foreclosure, in the event the Seller has
reasonable cause to believe that a Mortgaged Property is contaminated by
hazardous or toxic substances or wastes, or if the Purchaser otherwise requests
an environmental inspection or review of such Mortgaged Property to be
conducted by a qualified inspector, the Seller shall cause the Mortgaged
Property to be so inspected at 7 the expense of the Purchaser. Upon completion
of the inspection, the Seller shall promptly provide the Purchaser with a
written report of the environmental inspection. After reviewing the
environmental inspection report, the Purchaser shall determine how the Seller
shall proceed with respect to the Mortgaged Property. In the event (a) the
environmental inspection report indicates that the Mortgaged Property is
contaminated by hazardous or toxic substances or wastes and (b) the Purchaser
directs the Seller to proceed with foreclosure or acceptance of a deed in lieu
of foreclosure, the Seller shall be reimbursed for all reasonable costs
associated with such foreclosure or acceptance of a deed in lieu of foreclosure
and any related environmental clean up costs, as applicable, from the related
Liquidation Proceeds, or if the Liquidation Proceeds are insufficient to fully
reimburse the Seller, the Seller shall be entitled to be reimbursed from
amounts in the Custodial Account pursuant to Section 2.05 hereof and to the
extent amounts in the Custodial Account are insufficient to fully reimburse the
Seller, the Seller shall be entitled to be reimbursed by the Purchaser for such
deficiencies (upon presentation of evidence of such deficiency). In the event
the Purchaser directs the Seller not to proceed with foreclosure or acceptance
of a deed in lieu of foreclosure, the Seller shall be reimbursed for all
Servicing Advances made with respect to the related Mortgaged Property from the
Custodial Account pursuant to Section 2.05 hereof.
SECTION 2.03 Collection of Mortgage Loan Payments. Continuously from
the Closing Date the Seller shall proceed diligently to collect all payments
due under each of the Mortgage Loans when the same shall become due and payable
and shall take special care in ascertaining and estimating Escrow Payments and
all other charges that will become due and payable with respect to the Mortgage
Loans and each related Mortgaged Property, to the end that the installments
payable by the Mortgagors will be sufficient to pay such charges as and when
they become due and payable.
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<PAGE> 12
SECTION 2.04 Establishment of and Deposits to Custodial Account. The
Seller shall segregate and hold all funds collected and received pursuant to
the Mortgage Loans separate and apart from any of its own funds and general
assets and shall establish and maintain one or more Custodial Accounts, in the
form of time deposit or demand accounts, titled "Franklin Bank, N.A., in trust
for Purchaser of Conventional Commercial Mortgage Loans, and various
Mortgagors". The Custodial Account shall be established with a Qualified
Depository acceptable to the Purchaser. Any funds deposited in the Custodial
Account shall at all times be fully insured to the full extent permitted under
applicable law; provided, however, that to the extent the Custodial Account is
established with the Corporate Trust Department of the Seller, the Seller may
maintain the Custodial Account as a single account. Funds deposited in the
Custodial Account may be drawn on by the Seller in accordance with Section
2.05. The creation of any Custodial Account shall be evidenced by a
certification in the form of Exhibit 2 hereto, in the case of an account
established with the Seller, or by a letter agreement in the form of Exhibit 3
hereto, in the case of an account held by a depository other than the Seller. A
copy of such certification or letter agreement shall be furnished to the
Purchaser and, upon request, to any subsequent Purchaser.
The Seller shall deposit in the Custodial Account within one Business
Day of receipt, and retain therein, the following collections received by the
Seller and payments made by the Seller after the Closing Date, other than
payments of principal and interest due on or before the Closing Date, or
received by the Seller prior to the Closing Date but allocable to a period
subsequent thereto:
(i) all payments on account of principal on the Mortgage Loans,
including all Principal Prepayments;
(ii) all payments on account of interest on the Mortgage;
(iii) all Liquidation Proceeds and any amount received with respect
to REO Property;
(iv) all Insurance Proceeds including amounts required to be
deposited pursuant to Section 2.10 (other than proceeds to be
held in the Escrow Account and applied to the restoration or
repair of the Mortgaged Property or released to the Mortgagor
in accordance with Section 2.14), and Section 2.11;
(v) all Condemnation Proceeds which are not applied to the
restoration or repair of the Mortgaged Property or released to
the Mortgagor in accordance with Section 2.14;
(vi) any amount required to be deposited in the Custodial Account
pursuant to Section 2.01, 2.09, 2.14, 2.16, 3.01, 3.03 or 4.02;
(vii) any amounts payable in connection with the repurchase of any
Mortgage Loan pursuant to Section 8.03 of the Purchase
Agreement; and
(viii) any amounts required to be deposited by the Seller pursuant to
Section 2.11 in connection with the deductible clause in any
blanket hazard insurance policy. The
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<PAGE> 13
foregoing requirements for deposit into the Custodial
Account shall be exclusive, it being understood and agreed
that, without limiting the generality of the foregoing,
Ancillary Income need not be deposited by the Seller into the
Custodial Account. Any interest paid on funds deposited in the
Custodial Account by the depository institution shall accrue
to the benefit of the Seller and the Seller shall be entitled
to retain and withdraw such interest from the Custodial
Account pursuant to Section 2.05.
SECTION 2.05 Permitted Withdrawals From Custodial Account. Subject to
Section 2.16 hereof, the Seller shall, from time to time, withdraw funds from
the Custodial Account for the following purposes:
(i) to make payments to the Purchaser in the amounts and in the
manner provided for in Section 3.01;
(ii) to pay to itself the Servicing Fee;
(iii) to reimburse itself for advances of the Seller's funds made
pursuant to Section 3.03, the Seller's right to reimburse
itself pursuant to this subclause (iii) being limited to
amounts received on the related Mortgage Loan which represent
late payments of principal and/or interest in respect of which
any such advance was made, it being understood that, in the
case of any such reimbursement, the Seller's right thereto
shall be prior to the rights of Purchaser, except that, where
the Seller is required to repurchase a Mortgage Loan pursuant
to Section 8.03 of the Purchase Agreement or Section 4.02 of
this Agreement, respectively, the Seller's right to such
reimbursement shall be subsequent to the payment to the
Purchaser of the Repurchase Price pursuant to such sections
and all other amounts required to be paid to the Purchaser
with respect to such Mortgage Loan;
(iv) to reimburse itself for unreimbursed Servicing Advances
(except to the extent reimbursed pursuant to Section 2.07),
any accrued but unpaid Servicing Fees and for unreimbursed
advances of Seller funds made pursuant to Sections 2.16, 2.16
or 3.03, the Seller's right to reimburse itself pursuant to
this subclause (iv) with respect to any Mortgage Loan being
limited to related Liquidation Proceeds, Condemnation
Proceeds, Insurance Proceeds and such other amounts as may be
collected by the Seller from the Mortgagor or otherwise
relating to the Mortgage Loan, it being understood that, in
the case of any such reimbursement, the Seller's right thereto
shall be prior to the rights of the Purchaser except that,
where the Seller is required to repurchase a Mortgage Loan
pursuant to Section 8.03 of the Purchase Agreement or Section
4.02 of this Agreement, respectively, the Seller's right to
such reimbursement shall be subsequent to the payment to the
Purchaser of the Repurchase Price pursuant to such sections
and all other amounts required to be paid to the Purchaser
with respect to such Mortgage Loan;
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<PAGE> 14
(v) to pay itself any interest earned on funds deposited in the
Custodial Account (all such interest to be withdrawn monthly
not later than each Remittance Date); and
(vi) to clear and terminate the Custodial Account upon the
termination of this Agreement. In the event that the
Custodial Account is interest bearing, on each Remittance
Date, the Seller shall withdraw all funds from the Custodial
Account except for those amounts which, pursuant to Section
3.01, the Seller is not obligated to remit on such Remittance
Date. The Seller may use such withdrawn funds only for the
purposes described in this Section 2.05.
SECTION 2.06 Establishment of and Deposits to Escrow Account. The
Seller shall segregate and hold all funds collected and received pursuant to a
Mortgage Loan constituting Escrow Payments separate and apart from any of its
own funds and general assets and shall establish and maintain one or more
Escrow Accounts, in the form of time deposit or demand accounts. The Escrow
Account or Accounts shall be established with a Qualified Depository, in a
manner which shall provide maximum available insurance thereunder. Funds
deposited in the Escrow Accounts may be drawn on by the Seller in accordance
with Section 2.07. The creation of any Escrow Account shall be evidenced by a
certification in the form of Exhibit 2 hereto, in the case of an account
established with the Seller, or by a letter agreement in the form of Exhibit 5
hereto, in the case of an account held by a depository other than the Seller. A
copy of such certification shall be furnished to the Purchaser and, upon
request, to any subsequent Purchaser. The Seller shall deposit in the Escrow
Account or Accounts within one Business Day of receipt, and retain therein:
(i) all Escrow Payments collected on account of the Mortgage
Loans, for the purpose of effecting timely payment of any such
items as required under the terms of this Agreement; and
(ii) all amounts representing Insurance Proceeds or Condemnation
Proceeds which are to be applied to the restoration or repair
of any Mortgaged Property. The Seller shall make withdrawals
from the Escrow Account only to effect such payments as are
required under this Agreement, as set forth in Section 2.07.
The Seller shall be entitled to retain any interest paid on
funds deposited in the Escrow Account by the depository
institution, other than interest on escrowed funds required by
law to be paid to the Mortgagor. To the extent required by
law, the Seller shall pay from its own funds interest on
escrowed funds to the Mortgagor notwithstanding that the
Escrow Account may be noninterest bearing or that interest
paid thereon is insufficient for such purposes.
SECTION 2.07 Permitted Withdrawals From Escrow Account. Withdrawals
from each Escrow Account may be made by the Seller only:
(i) to effect timely payments of ground rents, taxes, assessments,
water rates, fire and hazard insurance premiums or other
items constituting Escrow Payments for the related Mortgage;
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(ii) to reimburse the Seller for any Servicing Advance made by the
Seller pursuant to Section 2.08 with respect to a related
Mortgage Loan, but only from amounts received on the related
Mortgage Loan which represent late collections of Escrow
Payments thereunder;
(iii) to refund to the related Mortgagor any funds found to be in
excess of the amounts required under the terms of the related
Mortgage Loan or applicable federal or state law or judicial
or administrative ruling;
(iv) for transfer to the Custodial Account and application to
reduce the principal balance of the Mortgage Loan in
accordance with the terms of the related Mortgage and Mortgage
Note;
(v) for application to restoration or repair of the related
Mortgaged Property in accordance with the procedures outlined
in Section 2.14;
(vi) to pay to the Seller, or any Mortgagor to the extent required
by law, any interest paid on the funds deposited in the Escrow
Account; and
(vii) to clear and terminate the Escrow Account on the termination
of this Agreement.
SECTION 2.08 Payment of Taxes, Insurance and Other Charges, Tax
Contracts. With respect to each Mortgage Loan, the Seller shall maintain
accurate records reflecting the status of ground rents, taxes, assessments,
water rates, sewer rents, and other charges, as applicable, which are or may
become a lien upon the Mortgaged Property and the status of fire and hazard
insurance coverage and shall obtain, from time to time, all bills for the
payment of such charges (including renewal premiums) and shall effect payment
thereof prior to the applicable penalty or termination date, employing for such
purpose deposits of the Mortgagor in the Escrow Account which shall have been
estimated and accumulated by the Seller in amounts sufficient for such
purposes, as allowed under the terms of the Mortgage. To the extent that a
Mortgage does not provide for Escrow Payments, the Seller shall determine that
any such payments relating to taxes or maintaining insurance policies are made
by the Mortgagor at the time they first become due. The Seller assumes full
responsibility for the timely payment of all such bills to the extent it has or
should have notice of such bills and shall effect timely payment of all such
charges irrespective of each Mortgagor's faithful performance in the payment of
same or the making of the Escrow Payments, and the Seller shall make advances
from its own funds to effect such payments, such advances to be reimbursable to
the same extent as Servicing Advances.
SECTION 2.09 Protection of Accounts. The Seller may transfer the
Custodial Account or the Escrow Account to a different Qualified Depository
from time to time. Such transfer shall be made only upon obtaining the consent
of the Purchaser, which consent shall not be withheld unreasonably. The Seller
shall bear any expenses, losses or damages sustained by the Purchaser because
the Custodial Account and/or the Escrow Account are not demand deposit
accounts.
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SECTION 2.10 Maintenance of Hazard Insurance. The Seller shall cause
to be maintained for each Mortgage Loan, hazard insurance such that all
buildings upon the Mortgaged Property are insured by a generally acceptable
insurer rated A:VI or better in the current Best's against loss by fire and
hazards of extended coverage, in an amount which is at least equal to the
lesser of (i) the maximum insurable value of the improvements securing such
Mortgage Loan and (ii) the greater of (a) the outstanding principal balance of
the Mortgage Loan and (b) an amount such that the proceeds thereof shall be
sufficient to prevent the Mortgagor or the loss payee from becoming a
co-insurer. If required by the Flood Disaster Protection Act of 1973, as
amended, each Mortgage Loan is covered by a flood insurance policy meeting the
requirements of the current guidelines of the Federal Insurance Administration
in effect with a generally acceptable insurance carrier rated A:VI or better in
Best's in an amount representing coverage not less than the lesser of (i) the
outstanding principal balance of the related Mortgage Loan and (ii) the maximum
amount of insurance which is available under the Flood Disaster Protection Act
of 1973, as amended. If at any time during the term of the Mortgage Loan, the
Seller determines in accordance with applicable law that a Mortgaged Property
is located in a special flood hazard area and is not covered by flood insurance
or is covered in an amount less than the amount required by the Flood Disaster
Protection Act of 1973, as amended, the Seller shall notify the related
Mortgagor that the Mortgagor must obtain such flood insurance coverage, and if
said Mortgagor fails to obtain the required flood insurance coverage within
forty five (45) days after such notification, the Seller shall immediately
purchase the required flood insurance on the Mortgagor's behalf. The Seller
shall cause to be maintained on each Mortgaged Property such other or
additional insurance as may be required pursuant to such applicable laws and
regulations as shall at any time be in force and as shall require such
additional insurance, or pursuant to the requirements of any primary mortgage
guaranty insurer. All policies required hereunder shall name the Seller and
its successors and assigns as mortgagee and shall be endorsed with
non-contributory standard Michigan mortgagee clauses which shall provide for at
least thirty (30) days' prior written notice of any cancellation, reduction in
amount or material change in coverage. The Seller shall not interfere with the
Mortgagor's freedom of choice in selecting either his insurance carrier or
agent, provided, however, that the Seller shall not accept any such insurance
policies from insurance companies unless such companies are rated A:VI or
better in Best's and are licensed to do business in the jurisdiction in which
the Mortgaged Property is located. The Seller shall determine that such
policies provide sufficient risk coverage and amounts, that they insure the
property owner, and that they properly describe the property address. To the
extent reasonably possible the Seller shall furnish to the Mortgagor a formal
notice of expiration of any such insurance in sufficient time for the Mortgagor
to arrange for renewal coverage by the expiration date; provided, however, that
in the event that no such notice is furnished by the Seller, the Seller shall
ensure that replacement insurance policies are in place in the required
coverages and the Seller shall be solely liable for any losses in the event
such coverage is not provided.
Pursuant to Section 2.04, any amounts collected by the Seller under
any such policies (other than amounts to be deposited in the Escrow Account and
applied to the restoration or repair of the related Mortgaged Property, or
property acquired in liquidation of the Mortgage Loan, or to be released to the
Mortgagor, in accordance with the Seller's normal servicing procedures as
specified in Section 2.14) shall be deposited in the Custodial Account subject
to withdrawal pursuant to Section 2.05.
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SECTION 2.11 Maintenance of Mortgage Impairment Insurance. In the
event that the Seller shall obtain and maintain a blanket policy insuring
against losses arising from fire and hazards covered under extended coverage on
all of the Mortgage Loans, then, to the extent such policy provides coverage in
an amount equal to the amount required pursuant to Section 2.11 and otherwise
complies with all other requirements of Section 2.11, it shall conclusively be
deemed to have satisfied its obligations as set forth in Section 2.11. Any
amounts collected by the Seller under any such policy relating to a Mortgage
Loan shall be deposited in the Custodial Account subject to withdrawal pursuant
to Section 2.05. Such policy may contain a deductible clause, in which case, in
the event that there shall not have been maintained on the related Mortgaged
Property a policy complying with Section 2.11, and there shall have been a loss
which would have been covered by such policy, the Seller shall deposit in the
Custodial Account at the time of such loss the amount not otherwise payable
under the blanket policy because of such deductible clause, such amount to be
deposited from the Seller's funds, without reimbursement therefor. Upon request
of the Purchaser, the Seller shall cause to be delivered to the Purchaser a
certified true copy of such policy and a statement from the insurer thereunder
that such policy shall in no event be terminated or materially modified without
thirty (30) days' prior written notice to the Purchaser.
SECTION 2.12 Maintenance of Fidelity Bond and Errors and Omissions
Insurance. The Seller shall maintain with responsible companies, at its own
expense, a blanket Fidelity Bond and an Errors and Omissions Insurance Policy,
with broad coverage on all officers, employees or other persons acting in any
capacity requiring such persons to handle funds, money, documents or papers
relating to the Mortgage Loans ("Seller Employees"). Any such Fidelity Bond and
Errors and Omissions Insurance Policy shall be in the form of the Mortgage
Banker's Blanket Bond and shall protect and insure the Seller against losses,
including forgery, theft, embezzlement, fraud, errors and omissions and
negligent acts of such Seller Employees. Such Fidelity Bond and Errors and
Omissions Insurance Policy also shall protect and insure the Seller against
losses in connection with the release or satisfaction of a Mortgage Loan
without having obtained payment in full of the indebtedness secured thereby. No
provision of this Section 2.12 requiring such Fidelity Bond and Errors and
Omissions Insurance Policy shall diminish or relieve the Seller from its duties
and obligations as set forth in this Agreement. Upon the request of the
Purchaser, the Seller shall cause to be delivered to the Purchaser a certified
true copy of such Fidelity Bond and Errors and Omissions Insurance Policy and a
statement from the surety and the insurer that such Fidelity Bond and Errors
and Omissions Insurance Policy shall in no event be terminated or materially
modified without thirty (30) days' prior written notice to the Purchaser. In
the event that the surety or insurer charges the Seller a fee for providing
such evidence, the Purchaser shall reimburse the Seller for the reasonable
expense incurred by the Seller in furnishing such evidence.
SECTION 2.13 Inspections. The Seller shall inspect the Mortgaged
Property as often as deemed necessary by the Seller to assure itself that the
value of the Mortgaged Property is being preserved. In addition, if any
Mortgage Loan is more than sixty (60) days delinquent, the Seller immediately
shall inspect the Mortgaged Property and shall conduct subsequent inspections
in accordance with Accepted Servicing Practices or as may be required by the
primary mortgage guaranty insurer. The Seller shall keep a written report of
each such inspection.
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SECTION 2.14 Restoration of Mortgaged Property. The Seller need not
obtain the approval of the Purchaser prior to releasing any Insurance Proceeds
or Condemnation Proceeds to the Mortgagor to be applied to the restoration or
repair of the Mortgaged Property if such release is in accordance with Accepted
Servicing Practices and the terms of this Agreement. At a minimum, the Seller
shall comply with the following conditions in connection with any such release
of Insurance Proceeds or Condemnation Proceeds:
(i) the Seller shall receive satisfactory independent verification
of completion of repairs and issuance of any required
approvals with respect thereto;
(ii) the Seller shall take all steps necessary to preserve the
priority of the lien of the Mortgage, including, but not
limited to requiring waivers with respect to mechanics' and
materialmen's liens;
(iii) the Seller shall verify that the Mortgage Loan is not in
default; and
(iv) pending repairs or restoration, the Seller shall place the
Insurance Proceeds or Condemnation Proceeds in the Escrow
Account.
If the Purchaser is named as an additional mortgagee, the Seller is
hereby empowered to endorse any loss draft issued in respect of such a claim in
the name of the Purchaser.
SECTION 2.15 Deteriorating Mortgage Loans. If, in the course of
carrying out its obligations under this Agreement, the Seller discovers that a
Mortgage Loan (or an interest therein) (i) is or has been, at any time during
the preceding twelve months, (a) classified, (b) in nonaccrual status or (c)
renegotiated due to the financial deterioration of the Mortgagor or (ii) has
been, more than once during the preceding twelve months, more than 30 days past
due in the payment of principal and interest, the Seller shall notify the
Purchaser as soon as possible and cooperate with the Purchaser in the
disposition of any such Mortgage Loan as soon as possible.
SECTION 2.16 Title, Management and Disposition of REO Property. In the
event that title to any Mortgaged Property is acquired in foreclosure or by
deed in lieu of foreclosure, the deed or certificate of sale shall be taken in
the name of the Purchaser, or in the event the Purchaser is not authorized or
permitted to hold title to real property in the state where the REO Property is
located, or would be adversely affected under the "doing business" or tax laws
of such state by so holding title, the deed or certificate of sale shall be
taken in the name of such Person or Persons as shall be consistent with an
Opinion of Counsel obtained by the Seller from any attorney duly licensed to
practice law in the state where the REO Property is located. The Person or
Persons holding such title other than the Purchaser shall acknowledge in
writing that such title is being held as nominee for the Purchaser.
The Seller shall manage, conserve, protect and operate each REO
Property for the Purchaser solely for the purpose of its prompt disposition and
sale. The Seller, either itself or through an agent selected by the Seller and
reasonably acceptable to the Purchaser, shall manage, conserve, protect and
operate the REO Property in the same manner that it manages, conserves,
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protects and operates other foreclosed property for its own account,
and in the same manner that similar property in the same locality as the REO
Property is managed. The Seller shall attempt to sell the same (and may
temporarily rent the same for a period not greater than one (1) year, except as
otherwise provided below) on such terms and conditions as the Seller deems to
be in the best interest of the Purchaser.
The Seller shall use its best efforts to dispose of the REO Property
as soon as possible and shall sell such REO Property in any event within one
year after title has been taken to such REO Property, unless the Seller
determines, and gives an appropriate notice to the Purchaser to such effect,
that a longer period is necessary for the orderly liquidation of such REO
Property. If a period longer than one (1) year is permitted under the foregoing
sentence and is necessary to sell any REO Property, the Seller shall report
monthly to the Purchaser as to the progress being made in selling such REO
Property.
The Seller shall also maintain on each REO Property fire and hazard
insurance with extended coverage in an amount which is at least equal to the
maximum insurable value of the improvements which are a part of such property,
liability insurance and, to the extent required and available under the Flood
Disaster Protection Act of 1973, as amended, flood insurance in the amount
required above. The disposition of REO Property shall be carried out by the
Seller at such price, and upon such terms and conditions, as the Seller deems
to be in the best interests of the Purchaser. The proceeds of sale of the REO
Property shall be promptly deposited in the Custodial Account. As soon as
practical thereafter the expenses of such sale shall be paid and the Seller
shall reimburse itself pursuant to Section 2.05(iii) or 2.05(iv) hereof, as
applicable, for any related unreimbursed Servicing Advances, unpaid Servicing
Fees and unreimbursed advances made pursuant to this Section, and on the
Remittance Date immediately following the Due Period in which such sale
proceeds are received the net cash proceeds of such sale remaining in the
Custodial Account shall be distributed to the Purchaser; provided that such
distribution shall, in any event, be made within ninety (90) days from and
after the closing of the sale of such REO Property.
In addition to the Seller's obligations set forth in this Section
2.16, the Seller shall deliver written notice to the Purchaser whenever title
to any Mortgaged Property is acquired in foreclosure or by deed in lieu of
foreclosure together with a copy of the drive-by appraisal of the related
Mortgaged Property obtained by the Seller on or prior to the date of such
acquisition. Notwithstanding anything to the contrary contained herein, the
Purchaser may, at the Purchaser's sole option, terminate the Seller as servicer
of any such REO Property without payment of any Termination Fee with respect
thereto, provided that (i) the Purchaser gives the Seller notice of such
termination within ten (10) Business Days of receipt of said written notice
from the Seller which termination shall be effective no more than fifteen (15)
Business Days from and after the date of said notice from the Purchaser and
(ii) the Seller shall on the date said termination takes effect be reimbursed
by Purchaser for any unreimbursed advances of the Seller's funds made pursuant
to Section 3.02 and any unreimbursed Servicing Advances in each case relating
to the Mortgage Loan underlying such REO Property. In the event of any such
termination, the provisions of Section 8.06 hereof shall apply to said
termination and the transfer of servicing responsibilities with respect to such
REO Property to the Purchaser or its designee.
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With respect to each REO Property, the Seller shall deposit all funds
collected and received in connection with the operation of the REO Property in
the Custodial Account. The Seller shall cause to be deposited on a daily basis
upon the receipt thereof in the Custodial Account all revenues received with
respect to the conservation and disposition of the related REO Property.
SECTION 2.17 Permitted Withdrawals with respect to REO Property. For
so long as the Seller is acting as servicer of any Mortgage Loan relating to
any REO Property, the Seller shall withdraw funds on deposit in the Custodial
Account with respect to each related REO Property necessary for the proper
operation, management and maintenance of the REO Property, including the cost
of maintaining any hazard insurance pursuant to Section 2.10 and the fees of
any managing agent acting on behalf of the Seller. The Seller shall make
monthly distributions on each Remittance Date to the Purchaser of the net cash
flow from the REO Property (which shall equal the revenues from such REO
Property net of the expenses described in Section 2.16 and of any reserves
reasonably required from time to time to be maintained to satisfy anticipated
liabilities for such expenses).
SECTION 2.18 Real Estate Owned Reports. For so long as the Seller is
acting as servicer of any Mortgage Loan relating to any REO Property, the
Seller shall furnish to the Purchaser on or before the 15th day of each month a
statement with respect to any REO Property covering the operation of such REO
Property for the previous month and the Seller's efforts in connection with the
sale of such REO Property and any rental of such REO Property incidental to the
sale thereof for the previous month. That statement shall be accompanied by
such other information as the Purchaser shall reasonably request.
SECTION 2.19 Liquidation Reports. For so long as the Seller is acting
as servicer of any Mortgage Loan relating to any REO Property, upon the
foreclosure sale of any Mortgaged Property or the acquisition thereof by the
Purchaser pursuant to a deed in lieu of foreclosure, the Seller shall submit to
the Purchaser a liquidation report with respect to such Mortgaged Property.
SECTION 2.20 Reports Of Foreclosures and Abandonments. For so long as
the Seller is acting as servicer of any Mortgage Loan relating to any REO
Property, following the foreclosure sale or abandonment of any Mortgaged
Property, the Seller shall report such foreclosure or abandonment as required
pursuant to Section 6050J of the Internal Revenue Code of 1986, as amended
("Code").
SECTION 2.21 Notification of Adjustments. With respect to each
Variable Rate Mortgage Loan, the Seller shall adjust the Mortgage Interest Rate
on the related Interest Rate Adjustment Date and shall adjust the Monthly
Payment accordingly in compliance with the requirements of applicable law and
the related Mortgage and Mortgage Note. If, pursuant to the terms of the
Mortgage Note, another index is selected for determining the Mortgage Interest
Rate, the same index will be used with respect to each Mortgage Note which
requires a new index to be selected, provided that such selection does not
conflict with the terms of the related Mortgage Note. The Seller shall execute
and deliver any and all necessary notices required under applicable law and the
terms of the related Mortgage Note and Mortgage regarding the Mortgage Interest
Rate and the Monthly Payment adjustments. The Seller shall promptly upon
written request therefor, deliver
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to the Purchaser such notifications and any additional applicable data
regarding such adjustments and the methods used to calculate and implement such
adjustments. Upon the discovery by the Seller or the Purchaser that the Seller
has failed to adjust a Mortgage Interest Rate or a Monthly Payment pursuant to
the terms of the related Mortgage Note and Mortgage, the Seller shall
immediately deposit in the Custodial Account from its own funds the amount of
any interest loss caused the Purchaser thereby.
SECTION 2.22 Notification of Maturity Date. With respect to each
Fixed Rate Mortgage Loan, the Purchaser shall execute and deliver to the
Mortgagor any and all necessary notices required under applicable law and the
terms of the related Mortgage Note and Mortgage regarding the maturity date if
required under applicable law.
ARTICLE III
PAYMENTS TO PURCHASER
SECTION 3.01 Remittances. On each Remittance Date the Seller shall
remit by wire transfer of immediately available funds to the Purchaser (a) all
amounts deposited in the Custodial Account as of the close of business on the
Determination Date, except Principal Prepayments received on or after the first
day of the month in which the Remittance Date occurs which shall be remitted to
the Purchaser on the next following Remittance Date; plus (b) an amount
representing compensating interest (up to a maximum amount equal to the
aggregate Servicing Fee for the Mortgage Loans held by the Purchaser with
respect to such Mortgage Loans) which, when added to all amounts allocable to
interest received in connection with such Principal Prepayment equals thirty
(30) days' interest at the Mortgage Interest Rate net of the Servicing Fee on
the amount of principal so prepaid (net of charges against or withdrawals from
the Custodial Account pursuant to Section 2.05), plus (c) all amounts, if any,
which the Servicer is obligated to distribute pursuant to Section 3.03 and
minus (d) any amounts attributable to Monthly Payments collected but due on a
Due Date or Dates subsequent to the first day of the month of the Remittance
Date, which amounts shall be remitted on the Remittance Date next succeeding
the Due Period for such amounts.
With respect to any Principal Prepayment in full, the Seller shall
remit such Principal Prepayment to the Purchaser within five (5) Business Days
of receipt of such Principal Prepayment by the Seller.
With respect to any remittance received by the Purchaser after the
second Business Day following the Business Day on which such payment was due,
the Seller shall pay to the Purchaser interest on any such late payment at an
annual rate equal to the Prime Rate, adjusted as of the date of each change,
plus one (1) percentage point, but in no event greater than the maximum amount
permitted by applicable law. Such interest shall be deposited in the Custodial
Account by the Seller on the date such late payment is made and shall cover the
period commencing with and including the day following such second Business Day
and ending with the Business Day on which such payment is made, exclusive of
such Business Day; provided, however, that in the event that
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the Seller remits such amounts after 11:00 A.M. (Michigan time) on any day,
such period shall include such day. Such interest shall be remitted along with
the distribution payable on the next succeeding Remittance Date. The payment by
the Seller of any such interest shall not be deemed an extension of time for
payment or a waiver of any Event of Default by the Seller.
SECTION 3.02 Statements to Purchaser. Not later than the twentieth
day of each month, the Seller shall furnish by modem and/or diskette to the
Purchaser or its designee a listing of the outstanding Mortgage Loans,
including with respect to each Mortgage Loan: the Mortgage Loan number, the
actual balance, the actual paid-through dates, the Mortgage Interest Rate and
principal and interest payment, and with respect to Variable Rate Mortgage
Loans, the next Interest Rate Adjustment Date, the Mortgage Interest Rate and
the principal and interest payment effective as of the next Interest Rate
Adjustment Date (if available), and shall furnish to the Purchaser manually a
Monthly Remittance Advice, with a trial balance report attached thereto, in the
form of Exhibit 1 annexed hereto as to the preceding remittance and the period
ending on the preceding Determination Date. In addition, not more than sixty
(60) days after the end of each calendar year, the Seller shall furnish to each
Person who was a Purchaser at any time during such calendar year an annual
statement in accordance with the requirements of applicable federal income tax
law as to the aggregate of remittances for the applicable portion of such year.
Such obligation of the Seller shall be deemed to have been satisfied
to the extent that substantially comparable information shall be provided by
the Seller pursuant to any requirements of the Code as from time to time are in
force.
The Seller shall prepare and file, with respect to each Mortgage Loan,
any and all tax returns, information statements or other filings required to be
delivered to any governmental taxing authority or to the Purchaser pursuant to
any applicable law with respect to the Mortgage Loans and the transactions
contemplated hereby. In addition, the Seller shall provide the Purchaser with
such information concerning the Mortgage Loans as is necessary for the
Purchaser to prepare its federal income tax return as the Purchaser may
reasonably request from time to time.
SECTION 3.03 Advances by Seller. On the Business Day immediately
preceding each Remittance Date, the Seller shall deposit in the Custodial
Account from its own funds an amount equal to all Monthly Payments which were
due on the Mortgage Loans during the applicable Due Period and which were
delinquent at the close of business on the immediately preceding Determination
Date or which were deferred pursuant to Section 2.01, provided that the Seller
shall only be required to make such advances with respect to a Mortgage Loan
until such advances are, in the Seller's good faith determination as evidenced
by an Officer's Certificate of the Seller delivered to the Purchaser on the
Business Day next following the Determination Date on or prior to which said
determination is or was made, deemed to be a Nonrecoverable Advance. The
Seller's obligation to make such advances as to any Mortgage Loan will continue
through the earlier of (i) the disposition of such Mortgage Loan and (ii) the
date of foreclosure sale with respect to such Mortgage Loan. Except as
otherwise provided herein, the Seller shall be entitled to first priority
reimbursement pursuant to Section 2.05 hereof for principal and interest
advances and for servicing advances from recoveries from the related mortgagor
or from all Liquidation
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Proceeds and other payments or recoveries (including Insurance Proceeds and
Condemnation Proceeds) with respect to the related Mortgage Loan.
ARTICLE IV
GENERAL SERVICING PROCEDURES
SECTION 4.01 Transfers of Mortgaged Property. The Seller shall be
required to enforce any "due-on-sale" provision contained in any Mortgage or
Mortgage Note and to deny assumption by the person to whom the Mortgaged
Property has been or is about to be sold whether by absolute conveyance or by
contract of sale, whether or not the Mortgagor remains liable on the Mortgage
and the Mortgage Note. When the Mortgaged Property has been conveyed by the
Mortgagor, the Seller shall, to the extent it has knowledge of such conveyance,
exercise its rights to accelerate the maturity of such Mortgage Loan under the
"due-on-sale" clause applicable thereto.
If the Seller reasonably believes it is unable under applicable law to
enforce such "due-on-sale" clause, the Seller, in the Purchaser's name, shall,
to the extent permitted by applicable law, enter into (i) an assumption and
modification agreement with the person to whom such property has been conveyed,
pursuant to which such person becomes liable under the Mortgage Note and the
original Mortgagor remains liable thereon or (ii) in the event the Seller is
unable under applicable law to require that the original Mortgagor remain
liable under the Mortgage Note, a substitution of liability agreement with the
purchaser of the Mortgaged Property pursuant to which the original Mortgagor is
released from liability and the purchaser of the Mortgaged Property is
substituted as Mortgagor and becomes liable under the Mortgage Note. In
connection with any such assumption, neither the Mortgage Interest Rate borne
by the related Mortgage Note, the term of the Mortgage Loan nor the outstanding
principal amount of the Mortgage Loan shall be changed.
To the extent that any Mortgage Loan is assumable, the Seller shall
inquire diligently into the creditworthiness of the proposed transferee, and
shall use the underwriting criteria for approving the credit of the proposed
transferee which are used by the Seller with respect to underwriting mortgage
loans of the same type as the Mortgage Loans. If the credit of the proposed
transferee does not meet such underwriting criteria, the Seller diligently
shall, to the extent permitted by the Mortgage or the Mortgage Note and by
applicable law, accelerate the maturity of the Mortgage Loan.
SECTION 4.02 Satisfaction of Mortgages and Release of Mortgage Files.
Upon the payment in full of any Mortgage Loan, or the receipt by the Seller of
a notification that payment in full will be escrowed in a manner customary for
such purposes, the Seller shall notify the Purchaser in the Monthly Remittance
Advice as provided in Section 3.02, and may request the release of any Mortgage
Loan Documents from the Purchaser in accordance with this Section 4.02 hereof.
The Seller shall obtain discharge of the related Mortgage Loan as of record
within any related time limit required by applicable law.
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If the Seller satisfies or releases a Mortgage without first having
obtained payment in full of the indebtedness secured by the Mortgage or should
the Seller otherwise prejudice any rights the Purchaser may have under the
mortgage instruments, upon written demand of the Purchaser, the Seller shall
repurchase the related Mortgage Loan at the Repurchase Price by deposit thereof
in the Custodial Account within two (2) Business Days of receipt of such demand
by the Purchaser. Upon such repurchase, all funds maintained in the Escrow
Account with respect to such repurchased Mortgage Loan shall be transferred to
the Seller. The Seller shall maintain the Fidelity Bond and Errors and
Omissions Insurance Policy as provided for in Section 2.12 insuring the Seller
against any loss it may sustain with respect to any Mortgage Loan not satisfied
in accordance with the procedures set forth herein.
SECTION 4.03 Servicing Compensation. As consideration for servicing
the Mortgage Loans hereunder, the Seller shall withdraw the Servicing Fee with
respect to each Mortgage Loan from the Custodial Account pursuant to Section
2.05 hereof. Such Servicing Fee shall be payable monthly, computed on the basis
of the same principal amount and period in respect of which any related
interest payment on a Mortgage Loan is computed. The Servicing Fee shall be
pro-rated when servicing is for less than one month. The obligation of the
Purchaser to pay, and the Seller's right to withdraw, the Servicing Fee is
limited to, and the Servicing Fee is payable solely from, the interest portion
(including recoveries with respect to interest from Liquidation Proceeds, to
the extent permitted by Section 2.05), of such Monthly Payment collected by the
Seller, or as otherwise provided under Section 2.05.
Additional servicing compensation in the form of Ancillary Income
shall be retained by the Seller. The Seller shall be required to pay all
expenses incurred by it in connection with its servicing activities hereunder
and shall not be entitled to reimbursement thereof except as specifically
provided for herein.
SECTION 4.04 Annual Statement as to Compliance. The Seller shall
deliver to the Purchaser, on or before March 31 each year beginning with March
31, 1998, an Officer's Certificate, stating that (i) a review of the activities
of the Seller during the preceding calendar year and of performance under this
Agreement has been made under such officer's supervision, and (ii) the Seller
has complied in all material respects with the provisions of Article II and
Article IV, and (iii) to the best of such officer's knowledge, based on such
review, the Seller has fulfilled all its obligations under this Agreement
throughout such year or part thereof, or, if there has been a default in the
fulfillment of any such obligation, specifying each such default known to such
officer and the nature and status thereof and the action being taken by the
Seller to cure such default.
SECTION 4.05 Annual Independent Public Accountants' Servicing Report.
On or before March 31 of each year, beginning with the first March 31 that
occurs at least six months after the Closing Date, the Seller at its expense
shall cause a firm of independent public accountants (who may also render other
services to the Seller, or any affiliate thereof) which is a member of the
American Institute of Certified Public Accountants to furnish a statement to
the Purchaser to the effect that such firm has, as part of their examination of
the financial statements of the Seller performed tests embracing the records
and documents relating to mortgage loans serviced by the
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Seller in accordance with the requirements of the Uniform Single Audit Program
for Mortgage Bankers and that their examination disclosed no exceptions that,
in their opinion were material, relating to mortgage loans serviced by the
Seller.
SECTION 4.06 Right to Examine Seller Records. The Purchaser, upon
reasonable notice, shall have the right to examine and audit any and all of the
books, records, or other information of the Seller, whether held by the Seller
or by another on its behalf, with respect to or concerning this Agreement or
the Mortgage Loans, during business hours or at such other times as may be
reasonable under applicable circumstances, upon reasonable advance notice.
ARTICLE V
SELLER TO COOPERATE
SECTION 5.01 Provision of Information. During the term of this
Agreement, the Seller shall furnish to the Purchaser such periodic, special, or
other reports or information, whether or not provided for herein, as shall be
necessary, reasonable, or appropriate with respect to the Purchaser or the
purposes of this Agreement. All such reports or information shall be provided
by and in accordance with all reasonable instructions and directions which the
Purchaser may give.
The Seller shall execute and deliver all such instruments and take all
such action as the Purchaser may reasonably request from time to time, in order
to effectuate the purposes and to carry out the terms of this Agreement.
SECTION 5.02 Financial Statements; Servicing Facilities. In
connection with disposition of Mortgage Loans, the Purchaser may make available
to a prospective purchaser audited financial statements of the Seller for the
most recently completed two (2) fiscal years for which such statements are
available, as well as a Consolidated Statement of Condition at the end of the
last two (2) fiscal years covered by any Consolidated Statement of Operations.
If it has not already done so, the Seller shall furnish promptly to the
Purchaser or a prospective purchaser copies of the statements specified above;
provided, however, that prior to furnishing such statements or information to
any prospective purchaser, the Seller may require such prospective purchaser to
execute a confidentiality agreement in form reasonably satisfactory to it.
The Seller shall make available to the Purchaser or any prospective
Purchaser a knowledgeable financial or accounting officer for the purpose of
answering questions with respect to recent developments affecting the Seller or
the financial statements of the Seller, and to permit any prospective purchaser
to inspect the Seller's servicing facilities for the purpose of satisfying such
prospective purchaser that the Seller has the ability to service the Mortgage
Loans as provided in this Agreement.
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ARTICLE VI
TERMINATION
SECTION 6.01 Damages. The Purchaser shall have the right at any time
to seek and recover from the Seller any damages or losses suffered by it as a
result of any failure by the Seller to observe or perform any duties,
obligations, covenants or agreements herein contained.
SECTION 6.02 Termination. The respective obligations and
responsibilities of the Seller shall terminate upon: (i) the later of the final
payment or other liquidation (or any advance with respect thereto) of the last
Mortgage Loan serviced by the Seller or the disposition of all REO Property
serviced by the Seller and the remittance of all funds due hereunder; or (ii)
by mutual consent of the Seller and the Purchaser in writing, unless earlier
terminated pursuant to this Agreement.
SECTION 6.03 Termination Without Cause. The Purchaser may, at its
sole option, upon not less than thirty (30) days' prior written notice to the
Seller terminate any rights the Seller may have hereunder with respect to any
or all of the Mortgage Loans, without cause, upon written notice, provided that
the Seller shall have an additional period of not more than sixty (60) days
from and after the date of said notice from the Purchaser within which to
effect the related transfer of servicing. Any such notice of termination shall
be in writing and delivered to the Seller as provided in Section 12.01 of this
Agreement. In the event of such termination, the Seller shall be entitled to a
Termination Fee, equal to 1.50% of the then current aggregate unpaid principal
balance of the related Mortgage Loans; provided, however, that the successor
servicer is not an Affiliate of the Seller.
ARTICLE VII
BOOKS AND RECORDS
SECTION 7.01 Possession of Servicing Files. The contents of each
Servicing File are and shall be held in trust by the Seller for the benefit of
the Purchaser as the owner thereof. The Seller shall maintain in the Servicing
File a copy of the contents of each Mortgage File and the originals of the
documents in each Mortgage File not delivered to the Purchaser. The possession
of the Servicing File by the Seller is at the will of the Purchaser for the
sole purpose of servicing the related Mortgage Loan, pursuant to this
Agreement, and such retention and possession by the Seller is in its capacity
as Seller only and at the election of the Purchaser. The Seller shall release
its custody of the contents of any Servicing File only in accordance with
written instructions from the Purchaser or other termination of the Seller with
respect to the related Mortgage Loans, unless such release is required as
incidental to the Seller's servicing of the Mortgage Loans pursuant to this
Agreement, or is in connection with a repurchase of any Mortgage Loan pursuant
to Section 8.03 of the Purchase Agreement or Section 4.02 of this Agreement.
The Seller shall be responsible for maintaining, and shall maintain, a complete
set of books and records for each Mortgage Loan which shall be marked clearly
to reflect the ownership of each Mortgage Loan by the Purchaser. In particular,
the Seller shall maintain in its possession, available for inspection by
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the Purchaser or its designee during normal business hours, and shall deliver
to the Purchaser or its designee upon reasonable notice, evidence of compliance
with all federal, state and local laws, rules and regulations, including but
not limited to documentation as to the method used in determining the
applicability of the provisions of the Flood Disaster Protection Act of 1973,
as amended, to the Mortgaged Property, documentation evidencing insurance
coverage and periodic inspection reports as required by Section 2.13. To the
extent that original documents are not required for purposes of realization of
Liquidation Proceeds or Insurance Proceeds, documents maintained by the Seller
may be in the form of microfilm or microfiche.
The Seller shall keep at its servicing office books and records in
which, subject to such reasonable regulations as it may prescribe, the Seller
shall note transfers of Mortgage Loans. No transfer of a Mortgage Loan may be
made unless such transfer is in compliance with the terms hereof. For the
purposes of this Agreement, the Seller shall be under no obligation to deal
with any person with respect to this Agreement or the Mortgage Loans unless the
books and records show such person as the owner of the Mortgage Loan. The
Purchaser may, subject to the terms of this Agreement, sell or transfer one or
more of the Mortgage Loans. The Purchaser also shall advise the Seller of the
transfer. Upon receipt of notice of the transfer, the Seller shall mark its
books and records to reflect the ownership of the Mortgage Loans of such
assignee, and shall release the Purchaser from its obligations hereunder with
respect to the Mortgage Loans sold or transferred.
ARTICLE VIII
INDEMNIFICATION AND ASSIGNMENT
SECTION 8.01 Indemnification. The Seller agrees to indemnify and hold
the Purchaser harmless from any liability, claim, loss or damage (including,
without limitation, any reasonable legal fees, judgments or expenses relating
to such liability, claim, loss or damage) to the Purchaser directly or
indirectly resulting from the Seller's failure to observe and perform any or
all of Seller's duties, obligations, covenants, agreements, warranties or
representations contained in this Agreement or in the Purchase Agreement or the
Seller's failure to comply with all applicable requirements with respect to the
transfer of Servicing Rights as set forth herein. The Seller shall notify the
Purchaser as soon as reasonably possible if a claim is made by a third party
with respect to this Agreement.
SECTION 8.02 Limitation on Liability of Seller and Others. Neither
the Seller nor any of the directors, officers, employees or agents of the
Seller shall be under any liability to the Purchaser for any action taken or
for refraining from the taking of any action in good faith pursuant to this
Agreement, or for errors in judgment, provided, however, that this provision
shall not protect the Seller or any such person against any breach of
warranties or representations made herein, or failure to perform its
obligations in material compliance with any standard of care set forth in this
Agreement, or any liability which would otherwise be imposed by reason of any
breach of the terms and conditions of this Agreement. The Seller and any
director, officer, employee or agent of the Seller may rely in good faith on
any document of any kind prima facie
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properly executed and submitted by any Person with respect to any matter
arising hereunder. The Seller shall not be under any obligation to appear in,
prosecute or defend any legal action which is not incidental to its duties to
service the Mortgage Loans in accordance with this Agreement and which in its
opinion may involve it in any expense or liability, provided, however, that the
Seller may, with the prior written consent of the Purchaser, undertake any such
action which it may deem necessary or desirable in respect to this Agreement
and the rights and duties of the parties hereto. In such event, the Seller
shall be entitled to reimbursement from the Purchaser of the reasonable legal
expenses and costs of such action.
SECTION 8.03 Limitation on Registration and Assignment by Seller. The
Purchaser has entered into this Agreement with the Seller in reliance upon the
independent status of the Seller, and the representations as to the adequacy of
its servicing facilities, plant, personnel, records and procedures, its
integrity, reputation and financial standing, and the continuance thereof.
Nonetheless, the Seller may subcontract all or a portion of its servicing
obligations under this Agreement to one or more of its affiliates. However, if
none of its affiliates is engaged in the business of servicing mortgage loans,
the Seller may subcontract all or a portion of its obligations under this
Agreement to an unrelated third party subject to approval of a majority of the
Independent Directors. Any delegation of such rights or duties shall not
release the Seller from its obligations hereunder and the Seller shall remain
responsible hereunder for all acts and omissions of any delegee as if such acts
or omissions were those of the Seller and (b) any such assignee or designee
shall satisfy the requirements for a successor or surviving Person set forth in
Section 8.05 and Section 8.06 hereof. The Seller shall notify the Purchaser in
writing at least 30 days prior to selling or otherwise disposing of all or
substantially all of its assets and receipt of such notice shall entitle the
Purchaser to terminate this Agreement except as set forth in Section 8.06
hereof.
The Seller shall not resign from the obligations and duties hereby
imposed on it except by mutual consent of the Seller and the Purchaser or upon
the determination that its duties hereunder are no longer permissible under
applicable law and such incapacity cannot be cured by the Seller. Any such
determination permitting the resignation of the Seller shall be evidenced by an
Opinion of Counsel to such effect delivered to the Purchaser which Opinion of
Counsel shall be in form and substance acceptable to the Purchaser. No such
resignation shall become effective until a successor shall have assumed the
Seller's responsibilities and obligations hereunder in the manner provided in
Section 8.06.
Without in any way limiting the generality of this Section 8.03, in
the event that the Seller either shall assign this Agreement or the servicing
responsibilities hereunder or delegate its duties hereunder or any portion
thereof without satisfying the requirements set forth herein, then the
Purchaser shall have the right to terminate this Agreement as set forth in
Section 6.03, without any payment of any penalty or damages and without any
liability whatsoever to the Seller (other than with respect to accrued but
unpaid Servicing Fees and Servicing Advances remaining unpaid) or any third
party.
SECTION 8.04 Assignment by Purchaser. The Purchaser shall have the
right, without the consent of the Seller, to assign, in whole or in part, its
interest under this Agreement with
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respect to some or all of the Mortgage Loans, and designate any person to
exercise any rights of the Purchaser hereunder, by executing an Assignment and
Assumption Agreement substantially in the form of Exhibit G to the Purchase
Agreement and the assignee or designee shall accede to the rights and
obligations hereunder of the Purchaser with respect to such Mortgage Loans. All
references to the Purchaser in this Agreement shall be deemed to include its
assignee or designee. Notwithstanding the foregoing, at any one time there
shall not be more than fifteen (15) separate Purchasers under this Agreement.
SECTION 8.05 Merger or Consolidation of the Seller. The Seller will
keep in full effect its existence, rights and franchises as a corporation under
the laws of the state of its incorporation except as permitted herein, and will
obtain and preserve its qualification to do business as a foreign corporation
in each jurisdiction in which such qualification is or shall be necessary to
protect the validity and enforceability of this Agreement, or any of the
Mortgage Loans and to perform its duties under this Agreement.
Any Person into which the Seller may be merged or consolidated, or any
corporation resulting from any merger, conversion or consolidation to which the
Seller shall be a party, or any Person succeeding to the business of the
Seller, shall be the successor of the Seller hereunder, without the execution
or filing of any paper or any further act on the part of any of the parties
hereto, anything herein to the contrary notwithstanding; provided, however,
that the successor or surviving Person shall be an institution whose deposits
are insured by FDIC or a company whose business includes the origination and
servicing of mortgage loans and shall satisfy the requirements of Section 8.06
with respect to the qualifications of a successor to the Seller.
SECTION 8.06 Successor to the Seller. Prior to termination of Seller's
responsibilities and duties under this Agreement pursuant to Sections 2.16,
6.03, 8.03 or 11.01, the Purchaser shall (i) succeed to and assume all of the
Seller's responsibilities, rights, duties and obligations under this Agreement,
or (ii) appoint a successor having a tangible net worth of not less than
$30,000,000 and which shall succeed to all rights and assume all of the
responsibilities, duties and liabilities of the Seller under this Agreement
prior to the termination of Seller's responsibilities, duties and liabilities
under this Agreement. In connection with such appointment and assumption, the
Purchaser may make such arrangements for the compensation of such successor out
of payments on Mortgage Loans as it and such successor shall agree. In the
event that the Seller's duties, responsibilities and liabilities under this
Agreement should be terminated pursuant to the aforementioned sections, the
Seller shall discharge such duties and responsibilities during the period from
the date it acquires knowledge of such termination until the effective date
thereof with the same degree of diligence and prudence which it is obligated to
exercise under this Agreement, and shall take no action whatsoever that might
impair or prejudice the rights or financial condition of its successor. The
resignation or removal of Seller pursuant to the aforementioned Sections shall
not become effective until a successor shall be appointed pursuant to Article X
hereof this Section and shall in no event relieve the Seller of the
representations, warranties and covenants made pursuant to and the remedies
available to the Purchaser with respect thereto, it being understood and agreed
that the provisions of such Article X shall be applicable to the Seller
notwithstanding any such resignation or termination of the Seller, or the
termination of this Agreement.
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Any successor appointed as provided herein shall execute, acknowledge
and deliver to the Seller and to the Purchaser, an instrument accepting such
appointment, whereupon such successor shall become fully vested with all the
rights, powers, duties, responsibilities, obligations and liabilities of the
Seller, with like effect as if originally named as a party to this Agreement.
Any termination of this Agreement pursuant to Section 2.16, 6.03, 8.03 or 11.01
shall not affect any claims that the Purchaser may have against the Seller
arising prior to any such termination or resignation.
The Seller shall timely deliver to the successor the funds in the
Custodial Account and the Escrow Account and the Mortgage Files and related
documents and statements held by it hereunder and the Seller shall account for
all funds. The Seller shall execute and deliver such instruments and do such
other things all as may reasonably be required to more fully and definitely
vest and confirm in the successor all such rights, powers, duties,
responsibilities, obligations and liabilities of the Seller. The successor
shall make arrangements as it may deem appropriate to reimburse the Seller for
amounts the Seller actually expended pursuant to this Agreement which the
successor is entitled to retain hereunder and which would otherwise have been
recovered by the Seller pursuant to this Agreement but for the appointment of
the successor servicer.
Upon a successor's acceptance of appointment as such, the Seller shall
notify by mail the Purchaser of such appointment.
ARTICLE IX
REPRESENTATIONS, WARRANTIES AND COVENANTS OF PURCHASER
As of the Closing Date, the Purchaser warrants and represents to, and
covenants and agrees with, the Seller as follows:
SECTION 9.01 Due Organization and Authority. The Purchaser is a
corporation duly organized, validly existing and in good standing under the
laws of the state of Michigan. The Purchaser has the full corporate power and
authority to execute and deliver this Agreement and to perform in accordance
herewith; the execution, delivery and performance of this Agreement by the
Purchaser and the consummation of the transactions contemplated hereby have
been duly and validly authorized; this Agreement evidences the valid, binding
and enforceable obligation of the Purchaser; and all requisite corporate action
has been taken by the Purchaser to make this Agreement valid and binding upon
the Purchaser in accordance with its terms.
SECTION 9.02 No Conflicts. Neither the execution and delivery of this
Agreement, nor the fulfillment of or compliance with the terms and conditions
of this Agreement, will conflict with or result in a breach of any of the
terms, conditions or provisions of the Purchaser's certificate of incorporation
or by-laws or any legal restriction or any agreement or instrument to which the
Purchaser is now a party or by which it is bound, or constitute a default or
result in an acceleration under any of the foregoing, or result in the
violation of any law, rule, regulation, order, judgment or decree to which the
Purchaser or its property is subject.
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SECTION 9.03 Ability to Perform. The Purchaser does not believe, nor
does it have any reason or cause to believe, that it cannot perform each and
every covenant made by it in this Agreement.
SECTION 9.04 No Litigation Pending. There is no action, suit,
proceeding or investigation pending or threatened against the Purchaser, before
any court, administrative agency or other tribunal asserting the invalidity of
this Agreement, seeking to prevent the consummation of any of the transactions
contemplated by this Agreement or which, either in any one instance or in the
aggregate, may result in any material adverse change in the business,
operations, financial condition, properties or assets of the Purchaser, or in
any material impairment of the right or ability of the Purchaser to carry on
its business substantially as now conducted, or in any material liability on
the part of the Purchaser, or which would draw into question the validity of
this Agreement or of any action taken or to be taken in connection with the
obligations of the Purchaser contemplated herein.
SECTION 9.05 No Consent Required. No consent, approval, authorization
or order of any court or governmental agency or body is required for the
execution, delivery and performance by the Purchaser of, or compliance by the
Purchaser with, this Agreement as evidenced by the consummation of the
transactions contemplated by this Agreement, or if required, such approval has
been obtained prior to the Closing Date.
SECTION 9.06 Assistance. To the extent reasonably possible, the
Purchaser shall cooperate with and assist the Seller as requested by the
Seller, in carrying out Seller's covenants, agreements, duties and
responsibilities under the Purchase Agreement and in connection therewith shall
execute and deliver all such papers, documents and instruments as nay be
necessary and appropriate in furtherance thereof.
ARTICLE X
REPRESENTATIONS AND WARRANTIES OF SELLER
As of the Closing Date, the Seller warrants and represents to, and
covenants and agrees with, the Purchaser as follows:
SECTION 10.01 Due Organization and Authority. The Seller is a
national bank duly organized and validly existing under the laws of the United
States and is licensed, qualified and in good standing in each state where a
Mortgaged Property is located if the laws of such state require licensing or
qualification in order to conduct business of the type conducted by the Seller,
and in any event the Seller is in compliance with the laws of any such state to
the extent necessary to ensure the enforceability of the related Mortgage Loan
in accordance with the terms of this Agreement; the Seller has the full
corporate power and authority to execute and deliver this Agreement and to
perform in accordance herewith; the execution, delivery and performance of this
Agreement (including all instruments of transfer to be delivered pursuant to
this Agreement) by the Seller and the consummation of the transactions
contemplated hereby have been duly and
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validly authorized; this Agreement evidences the valid, legal, binding and
enforceable obligation of the Seller subject to bankruptcy laws and other
similar laws of general application affecting rights of creditors and subject
to the application of the rules of equity, including those respecting the
availability of specific performance, none of which will materially interfere
with the realization of the benefits provided thereunder, regardless of whether
such enforcement is sought in a proceeding in equity or at law; and all
requisite corporate action has been taken by the Seller to make this Agreement
valid and binding upon the Seller in accordance with its terms.
SECTION 10.02 Ordinary Course of Business. The consummation of the
transactions contemplated by this Agreement are in the ordinary course of
business of the Seller.
SECTION 10.03 No Conflicts. Neither the execution and delivery of
this Agreement, nor the fulfillment of or compliance with the terms and
conditions of this Agreement, will conflict with or result in a breach of any
of the terms, conditions or provisions of the Seller's Articles of Association
or by-laws or any legal restriction or any agreement or instrument to which the
Seller is now a party or by which it is bound, or constitute a default or
result in an acceleration under any of the foregoing, or result in the
violation of any law, rule, regulation, order, judgment or decree to which the
Seller or its property is subject, or impair the ability of the Purchaser to
realize on the Mortgage Loans, or impair the value of the Mortgage Loans, or
impair the ability of the Purchaser to realize the full amount of any mortgage
insurance benefits accruing pursuant to this Agreement.
SECTION 10.04 Ability to Service. The Seller is duly qualified,
licensed, registered and otherwise authorized under all applicable federal,
state and local laws and regulations, meets the minimum capital requirements
set forth by OCC, and is in good standing to enforce, originate, sell mortgage
loans, and service mortgage loans in the jurisdiction wherein the Mortgaged
Properties are located.
SECTION 10.05 Ability to Perform. The Seller does not believe, nor
does it have any reason to believe, that it cannot perform each and every
covenant contained in this Agreement.
SECTION 10.06 No Litigation Pending. There is no action, suit,
proceeding or investigation pending or threatened against the Seller, before
any court, administrative agency or other tribunal asserting the invalidity of
this Agreement, seeking to prevent the consummation of any of the transactions
contemplated by this Agreement or which, either in any one instance or in the
aggregate, may result in any material adverse change in the business,
operations, financial condition, properties or assets of the Seller, or in any
material impairment of the right or ability of the Seller to carry on its
business substantially as now conducted, or in any material liability on the
part of the Seller, or which would draw into question the validity of this
Agreement or the Mortgage Loans or of any action taken or to be taken in
connection with the obligations of the Seller contemplated herein, or which
would be likely to impair materially the ability of the Seller to perform under
the terms of this Agreement.
SECTION 10.07 No Consent Required. No consent, approval,
authorization or order of any court or governmental agency or body is required
for the execution, delivery and performance
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by the Seller of or compliance by the Seller with this Agreement or the
servicing of the Mortgage Loans as evidenced by the consummation of the
transactions contemplated by this Agreement, or if required, such approval has
been obtained prior to the Closing Date.
SECTION 10.08 No Untrue Information. Neither this Agreement nor any
statement, tape, diskette, form, report or other document furnished or to be
furnished pursuant to this Agreement or in connection with the transactions
contemplated hereby contains any untrue statement of fact or omits to state a
fact necessary to make the statements contained therein not misleading.
SECTION 10.09 Reasonable Servicing Fee. The Seller acknowledges and
agrees that the Servicing Fee represents reasonable compensation for performing
such services and that the entire Servicing Fee shall be treated by the Seller,
for accounting and tax purposes, as compensation for the servicing and
administration of the Mortgage Loans pursuant to this Agreement.
SECTION 10.10 Financial Statements. The Servicer has delivered to the
Purchaser financial statements as to its last two complete fiscal years. All
such financial statements fairly present the pertinent results of operations
and changes in financial position for each of such periods and the financial
position at the end of each such period of the Servicer and its subsidiaries
and have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods involved, except as set
forth in the notes thereto. There has been no change in the business,
operations, financial condition, properties or assets of the Servicer since the
date of the Servicer's financial statements that would have a material adverse
effect on its ability to perform its obligations under this Agreement.
SECTION 10.11 Conflict of Interest. The Seller agrees that it shall
service the Mortgage Loans hereunder solely with a view toward the interests of
the Purchaser, and without regard to the interests of the Seller or its other
affiliates.
ARTICLE XI
DEFAULT
SECTION 11.01 Events of Default. The following shall constitute an
Event of Default under this Agreement on the part of the Seller:
(a) any failure by the Seller to remit to the Purchaser any
payment required to be made under the terms of this Agreement
which continues unremedied for a period of five (5) Business
Days after the date upon which written notice of such failure,
requiring the same to be remedied, shall have been given to
the Seller by the Purchaser; or
(b) the failure by the Seller duly to observe or perform in any
material respect any other of the covenants or agreements on
the part of the Seller set forth in this Agreement which
continues unremedied for a period of thirty (30) days (except
that
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such number of days shall be fifteen (15) in the case of
a failure to pay any premium for any insurance policy required
to be maintained under this Agreement) after the date on which
written notice of such failure, requiring the same to be
remedied, shall have been given to the Seller by the Purchaser;
or
(c) a decree or order of a court or agency or supervisory
authority having jurisdiction for the appointment of a
conservator or receiver or liquidator in any insolvency,
bankruptcy, readjustment of debt, marshaling of assets and
liabilities or similar proceedings, or for the winding-up or
liquidation of its affairs, shall have been entered against
the Seller and such decree or order shall have remained in
force undischarged or unstayed for a period of sixty (60)
days; or
(d) the Seller shall consent to the appointment of a conservator
or receiver or liquidator in any insolvency, bankruptcy,
readjustment of debt, marshaling of assets and liabilities or
similar proceedings of or relating to the Seller or of or
relating to all or substantially all of its property; or
(e) the Seller shall admit in writing its inability to pay its
debts generally as they become due, file a petition to take
advantage of any applicable insolvency or reorganization
statute, make an assignment for the benefit of its creditors,
or voluntarily suspend payment of its obligations; or
(f) the Seller, without the consent of the Purchaser, attempts to
assign this Agreement or the servicing responsibilities
hereunder or to delegate any substantial part of its duties
hereunder or any portion thereof; or
(g) the Seller fails to maintain its license to do business or
service commercial mortgage loans in any jurisdiction where
the Mortgaged Properties are located and such failure results
in a material adverse effect on the Mortgage Loans, the
servicing of the Mortgage Loans, or the Purchaser's rights
with respect to the Mortgage Loans.
In each and every such case, so long as an Event of Default shall not
have been remedied, in addition to whatsoever rights the Purchaser may have at
law or equity to damages, including injunctive relief and specific performance,
the Purchaser, by notice in writing to the Seller, may terminate without
compensation or reimbursement (other than Servicing Fees previously earned but
remaining unpaid and Servicing Advances remaining unreimbursed) all the rights
and obligations of the Seller under this Agreement and in and to the Mortgage
Loans and the proceeds thereof.
Upon receipt by the Seller of such written notice, all authority and
power of the Seller under this Agreement, whether with respect to the Mortgage
Loans or otherwise, shall pass to and be vested in the successor appointed
pursuant to Section 8.06. Upon written request from the Purchaser, the Seller
shall prepare, execute and deliver any and all documents and other instruments
reasonably requested by the Purchaser, place in such successor's possession all
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Mortgage Files (to the extent not properly delivered to the Purchaser by the
Seller previously), and do or accomplish all other acts or things necessary or
appropriate to effect the purposes of such notice of termination, whether to
complete the transfer and endorsement or assignment of the Mortgage Loans and
related documents, or otherwise, at the Seller's sole expense. The Seller
agrees to reasonably cooperate with the Purchaser and such successor in
effecting the termination of the Seller's responsibilities and rights
hereunder, including, without limitation, the transfer to such successor for
administration by it of all cash amounts which shall at the time be credited by
the Seller to the Custodial Account or Escrow Account or thereafter received
with respect to the Mortgage Loans.
SECTION 11.02 Waiver of Defaults. The Purchaser may waive any default
by the Seller in the performance of its obligations hereunder and its
consequences. Upon any such waiver of a past default, such default shall cease
to exist, and any Event of Default arising therefrom shall be deemed to have
been remedied for every purpose of this Agreement. No such waiver shall extend
to any subsequent or other default or impair any right consequent thereon
except to the extent expressly so waived.
ARTICLE XII
MISCELLANEOUS PROVISIONS
SECTION 12.01 Notices. All notices, requests, demands and other
communications which are required or permitted to be given under this Agreement
shall be in writing and shall be deemed to have been duly given upon the
delivery or mailing thereof, as the case may be, sent by registered or
certified mail, return receipt requested:
(a) If to Purchaser to:
Franklin Finance Corporation
24725 West Twelve Mile Road
Southfield, Michigan 48034
Attention: President
(b) If to Seller to:
Franklin Bank, N.A.
24725 West Twelve Mile Road
Southfield, Michigan 48034
Attention: President
SECTION 12.02 Waivers. Either the Seller or the Purchaser may upon
consent of all parties, by written notice to the others:
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<PAGE> 36
(a) Waive compliance with any of the terms, conditions or
covenants required to be complied with by the others
hereunder; and
(b) Waive or modify performance of any of the obligations of the
others hereunder.
The waiver by any party hereto of a breach of any provision of this
Agreement shall not operate or be construed as a waiver of any other subsequent
breach.
SECTION 12.03 Entire Agreement; Amendment. This Agreement and the
Purchase Agreement constitute the entire agreement between the parties with
respect to servicing of the Mortgage Loans. This Agreement may be amended and
any provision hereof waived, but, only in writing signed by the party against
whom such enforcement is sought.
SECTION 12.04 Execution; Binding Effect. This Agreement may be
executed in one or more counterparts and by the different parties hereto on
separate counterparts, each of which, when so executed, shall be deemed to be
an original; such counterparts, together, shall constitute one and the same
agreement. Subject to Sections 8.03 and 8.04, this Agreement shall inure to the
benefit of and be binding upon the Seller and the Purchaser and their
respective successors and assigns.
SECTION 12.05 Headings. Headings of the Articles and Sections in this
Agreement are for reference purposes only and shall not be deemed to have any
substantive effect.
SECTION 12.06 Applicable Law. This Agreement shall be construed in
accordance with the laws of the State of Michigan and the obligations, rights
and remedies hereunder shall be determined in accordance with the substantive
laws of the State of Michigan (without regard to conflicts of laws principles),
except to the extent preempted by Federal law.
SECTION 12.07 Relationship of Parties. Nothing herein contained shall
be deemed or construed to create a partnership or joint venture between the
parties. The duties and responsibilities of the Seller shall be rendered by it
as an independent contractor and not as an agent of the Purchaser. The Seller
shall have full control of all of its acts, doings, proceedings, relating to or
requisite in connection with the discharge of its duties and responsibilities
under this Agreement.
SECTION 12.08 Severability of Provisions. If any one or more of the
covenants, agreements, provisions or terms of this Agreement shall be held
invalid for any reason whatsoever, then such covenants, agreements, provisions
or terms shall be deemed severable from the remaining covenants, agreements,
provisions or terms of this Agreement and shall in no way affect the validity
or enforceability of the other provisions of this Agreement.
SECTION 12.09 Recordation of Assignments of Mortgage. To the extent
permitted by applicable law, each of the Assignments of Mortgage is subject to
recordation in all appropriate public offices for real property records in all
the counties or other comparable jurisdictions in which any or all of the
Mortgaged Properties are situated, and in any other appropriate public
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<PAGE> 37
recording office or elsewhere, such recordation to be effected by the Purchaser
or the Purchaser's designee, but in any event, at the Servicer's expense for a
single recordation relating to each Assignment of Mortgage in the event
recordation is either necessary under applicable law or requested by the
Purchaser at its sole option.
SECTION 12.10 Exhibits. The exhibits to this Agreement are hereby
incorporated and made a part hereof and are integral parts of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement under
seal as of the date and year first above written.
FRANKLIN FINANCE CORPORATION
(the Purchaser)
By:______________________________________________
Name:____________________________________________
Title:___________________________________________
FRANKLIN BANK, N.A.
(the Seller)
By:______________________________________________
Name:____________________________________________
Title:___________________________________________
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<PAGE> 38
EXHIBIT 1
MONTHLY REMITTANCE ADVICE
<PAGE> 39
EXHIBIT 2
CUSTODIAL ACCOUNT CERTIFICATION
___________, 1997
_________________ hereby certifies that it has established the account
described below as a Custodial Account pursuant to Section 2.04 of the
Servicing Agreement, dated as of _________, 1997.
Title of Account: "Franklin Bank, N.A., in trust for Purchaser of Commercial
Mortgage Loans, and various Mortgagors."
Account Number: ________________________
Address of office or branch of the Seller at which Account is maintained:
______________________________
______________________________
______________________________
______________________________
______________________________
FRANKLIN BANK, N.A.
By:___________________________________
Name:_________________________________
Title:________________________________
<PAGE> 40
EXHIBIT 3
CUSTODIAL ACCOUNT LETTER AGREEMENT
_____________, 1997
To: ____________________ ____________________ ____________________
(the "Depository"). As Seller under the Servicing Agreement, dated as of
______, 1997,(the "Agreement"), we hereby authorize and request you to
establish an account, as a Custodial Account pursuant to Section 2.04 of the
Agreement, to be designated as Franklin Bank, N.A., in trust for Purchaser of
Commercial Mortgage Loans, and various Mortgagors." All deposits in the account
shall be subject to withdrawal therefrom by order signed by the Seller. You may
refuse any deposit which would result in violation of the requirement that the
account be fully insured as described below. This letter is submitted to you in
duplicate. Please execute and return one original to us.
FRANKLIN BANK, N.A.
By:________________________________________
Name:______________________________________
Title:_____________________________________
The undersigned, as Depository, hereby certifies that the above
described account has been established under Account Number [_________ ], at
the office of the Depository indicated above, and agrees to honor withdrawals
on such account as provided above. The full amount deposited at any time in the
account will be insured by the Federal Deposit Insurance Corporation through
the Bank Insurance Fund ("BIF") or the Savings Association Insurance Fund
("SAIF").
___________________________________________
Depository
By:________________________________________
Name:______________________________________
Title:_____________________________________
<PAGE> 41
EXHIBIT 4
ESCROW ACCOUNT CERTIFICATION
_____________, 1997
_____________________________ hereby certifies that it has established
the account described below as an Escrow Account pursuant to Section 2.06 of
the Servicing Agreement, dated as of ________, 1997.
Title of Account: "Franklin Bank, N.A., in trust for Purchaser of
Commercial Mortgage Loans, and various Mortgagors."
Account Number: _____________________________
Address of office or branch of the Seller at which Account is
maintained:
______________________________
______________________________
______________________________
______________________________
______________________________
FRANKLIN BANK, N.A.
By:____________________________________
Name:__________________________________
Title:_________________________________
<PAGE> 42
EXHIBIT 5
ESCROW ACCOUNT LETTER AGREEMENT
______________, 1997
To: ____________________
____________________
____________________
(the "Depository")
As Seller under the Servicing Agreement, dated as of ____________,
1997, (the "Agreement"), we hereby authorize and request you to establish an
account, as an Escrow Account pursuant to Section 2.06 of the Agreement, to be
designated as "Franklin Bank, N.A., in trust for the Purchaser of Commercial
Mortgage Loans, and various Mortgagors." All deposits in the account shall be
subject to withdrawal therefrom by order signed by the Seller. You may refuse
any deposit which would result in violation of the requirement that the account
be fully insured as described below. This letter is submitted to you in
duplicate. Please execute and return one original to us.
FRANKLIN BANK, N.A.
By:___________________________________
Name:_________________________________
Title:________________________________
Date:____________________________
The undersigned, as Depository, hereby certifies that the above
described account has been established under Account Number [_______], at the
office of the Depository indicated above, and agrees to honor withdrawals on
such account as provided above. The full amount deposited at any time in the
account will be insured by the Federal Deposit Insurance Corporation through
the Bank Insurance Fund ("BIF") or the Savings Association Insurance Fund
("SAIF").
______________________________________
Depository
By:___________________________________
Name:_________________________________
Title:________________________________
<PAGE> 1
EXHIBIT 10.5
ADVISORY AGREEMENT
THIS AGREEMENT is made this [__] day of [________], 1997 between FRANKLIN
FINANCE CORPORATION, a Michigan corporation (the "Company"), and FRANKLIN BANK,
N.A., a national bank (the "Advisor"). Capitalized terms used herein shall
have the meanings set forth in Section 1 of this Agreement.
WHEREAS, the Company intends to qualify as a "real estate investment
trust" ("REIT") under the Internal Revenue Code of 1986, as amended (the
"Code"); and
WHEREAS, the Company desires to avail itself of the experience and
assistance of the Advisor and to have the Advisor undertake, on the Company's
behalf, the duties and responsibilities hereinafter set forth, subject to the
control and supervision of the Board of Directors of the Company (the "Board of
Directors") as provided for herein; and
WHEREAS, the Advisor desires to render such services for the Company
subject to the control and supervision of the Board of Directors, on the terms
and conditions hereinafter set forth.
NOW THEREFORE, the parties hereto agree as follows:
SECTION 1. Definitions. As used herein, the following terms shall have
the respective meanings set forth below:
"Advisor" has the meaning set forth in the forepart of this Agreement.
"Advisor Termination Date" means the date on which this Agreement
terminates.
"Agreement" means this Advisory Agreement, as amended, modified and
supplemented from time to time.
"Board of Directors" has the meaning set forth in the forepart of this
Agreement.
"Code" has the meaning set forth in the forepart of this Agreement.
"Company" has the meaning set forth in the forepart of this Agreement.
"Gross Mortgage Assets" means for any month the weighted average book
value of the real estate mortgage assets held by the Company, before reserves
for depreciation or bad debts or other similar noncash reserves, computed at
the end of such month.
"Independent Directors" means the members of the Board of Directors of the
Company who are either (i) not current officers or employees of the Company
(except as set forth in (iii) below), and not current directors, officers or
employees of the Advisor or any affiliate of the Advisor other than the
Company; (ii) owners of not more than one percent of the outstanding
<PAGE> 2
common stock of the Advisor; or (iii) persons elected by the holders of the
preferred stock of the Company.
"Operating Expenses" for any period means all of the operating expenses of
the Company (with the exception of those expenses to be borne by the Advisor in
accordance with Section 4 hereof), including without limitation the following:
(a) interest, taxes and other expenses incurred in connection
with the mortgage assets of the Company;
(b) expenses related to the officers, directors and employees of
the Company, including without limitation any fees or expenses of
the directors;
(c) fees and expenses payable to accountants, appraisers,
auditors, consultants, attorneys, collection and paying agents and
all other Persons who contract with or are retained by the Company
or by the Advisor on behalf of the Company;
(d) legal and other expenses incurred in connection with advice
concerning, obtaining or maintaining the Company's status as a REIT,
the determination of the Company's taxable income, any formal or
informal administrative action or legal proceedings which involve a
challenge to the REIT status of the Company or any claim that the
activities of the Company, any member of the Board of Directors or
any officer were improper;
(e) expenses relating to communications and reports to
stockholders of the Company, including without limitation the costs
of preparing, printing, duplicating and mailing the certificates for
the stock of the Company, proxy solicitation materials and reports
to stockholders, and the costs of arranging meetings of
stockholders;
(f) the costs of insurance described in Section 2 hereof,
including directors and officers liability insurance covering the
directors and officers of the Company;
(g) expenses relating to the acquisition, disposition and
ownership of mortgage assets, including without limitation and to
the extent not paid by others, legal fees and other expenses for
professional services and fees;
(h) expenses connected with the payments of dividends or interest
or distributions in cash or any other form made or caused to be made
by the Board of Directors to the stockholders of the Company;
(i) expenses connected with any office or office facilities
maintained by the Company separate from the office of the Advisor,
including without limitation rent, telephone, utilities, office
furniture and equipment and machinery; and
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<PAGE> 3
(j) other miscellaneous expenses of the Company which are not
expenses of the Advisor under Section 4.
"Person" means and includes individuals, corporations, limited
partnerships, general partnerships, joint stock companies or associations,
limited liability companies, joint ventures, associations, consortia,
companies, trusts, banks, savings institutions, trust companies, land trusts,
common law trusts, business trusts or other entities, governments and agencies
and political subdivisions thereof.
"REIT" has the meaning set forth in the forepart of this Agreement.
SECTION 2. Duties of Advisor. The Advisor shall consult with the Board of
Directors and the officers of the Company and shall, at the request of the
Board of Directors or the officers of the Company, furnish advice and
recommendations with respect to all aspects of the business and affairs of the
Company. Subject to the control and discretion and at the request of the Board
of Directors, the Advisor shall:
(a) administer the day-to-day operations and affairs of the
Company, including without limitation the performance or supervision
of the functions described in this Section 2;
(b) monitor the credit quality of the mortgage loans and other
real estate mortgage assets held by the Company;
(c) advise the Company with respect to the acquisition,
management, financing, disposition of the Company's mortgage loans
and other real estate mortgage assets;
(d) represent the Company in its day-to-day dealings with Persons
with whom the Company interacts, including without limitation
stockholders of the Company, transfer agent, consultants,
accountants, attorneys, servicers of the Company's mortgage loans,
custodians, insurers and banks;
(e) establish and provide necessary services for the Company,
including executive, administrative, accounting, stockholder
relations, secretarial, recordkeeping, copying, telephone, mailing
and distribution facilities;
(f) provide the Company with office space, conference room
facilities, office equipment and personnel necessary for the
services to be performed by the Advisor hereunder;
(g) arrange, schedule and coordinate the regular and special
matters of the Board of Directors required for the conduct of the
affairs of the Company or for timely action on any matters the
Company is required to act upon and implement all decisions of the
Board of Directors, unless otherwise instructed, with regard to the
Company and its assets;
3
<PAGE> 4
(h) maintain communications and relations with the stockholders
of the Company, including, but not limited to, responding to
inquiries, proxy solicitations, providing reports to stockholders
and arranging and coordinating all meetings of stockholders;
(i) arrange for the investment and management of any short-term
investments of the Company;
(j) arrange for the services of third parties to collect and
distribute funds of the Company and to perform such functions as the
Board of Directors shall from time to time require;
(k) monitor and supervise the performance of all parties who have
contracts to perform services for the Company, provided that the
Advisor shall have no duty to assume the obligations or guarantee
the performance of such parties under such contracts;
(l) establish and maintain such bank accounts in the name of the
Company as may be required by the Company and approved by the Board
of Directors and ensure that all funds collected by the Advisor in
the name or on behalf of the Company shall be held in trust and
shall not be commingled with the Advisor's own funds or accounts;
(m) make payment on behalf of the Company of all Operating
Expenses;
(n) arrange for the execution and delivery of such documents and
instruments by the officers of the Company as may be required in
order to perform the functions herein described and to take any
other required action;
(o) arrange for insurance for the Company including liability
insurance, errors and omissions policies and officers and directors
policies which shall cover and insure the Company, members of the
Board of Directors and the officers of the Company in amounts and
with deductibles and insurers approved by the Board of Directors;
(p) maintain proper books and records of the Company's affairs
and furnish or cause to be furnished to the Board of Directors such
periodic reports and accounting information as may be required from
time to time by the Board of Directors, including, but not limited
to quarterly reports of all income and expenses of and distribution
of the Company;
(q) consult and work with legal counsel for the Company in
implementing Company decisions and undertaking measures consistent
with all pertinent Federal, state and local laws and rules or
regulations of governmental or quasi-governmental agencies,
including, but not limited to, Federal and state securities laws,
the Code, as it relates to the Company's qualification as a REIT,
and the regulations promulgated under each of the foregoing;
4
<PAGE> 5
(r) consult and work with accountants for the Company in
connection with the preparation of financial statements, annual
reports and tax returns;
(s) arrange for an annual audit of the books and records of the
Company by the accounting firm designated for such purposes by the
Board of Directors;
(t) prepare and distribute in consultation with the accountants
for the Company, annual reports to stockholders which will contain
audited financial statements;
(u) furnish reports to the Board of Directors and provide
research, economical and statistical data in connection with the
Company's investments; and
(v) as reasonably requested by the Company, make reports to the
Company of its performance of the foregoing services and furnish
advice and recommendations with respect to other aspects of the
business of the Company.
SECTION 3. Compensation. The Company shall pay to the Advisor, for
services rendered by the Advisor hereunder, a management fee payable monthly in
arrears in an amount equal to $10,416.67.
SECTION 4. Expenses of the Advisor.
(a) Without regard to the compensation received pursuant to
Section 3, the Advisor will bear the following expenses:
(i) employment expenses of the personnel employed by
the Advisor, including without limitation salaries, wages,
payroll taxes and the cost of employee benefit plans; and
(ii) rent, telephone equipment, utilities, office
furniture and equipment and machinery and other office
expenses of the Advisor incurred in connection with the
maintenance of any office facility of the Advisor.
(b) The Company shall reimburse the Advisor within 30 days of a
written request by the Advisor, for any Operating Expenses paid or
incurred by the Advisor on behalf of the Company.
SECTION 5. Records. The Advisor shall maintain appropriate books of
account and records relating to services performed hereunder, and such books of
account an records shall be accessible for inspection by the Board of Directors
or representatives of the Company at all times.
SECTION 6. REIT Qualification and Compliance. The Advisor shall consult
and work with the Company's legal and tax counsel in maintaining the Company's
qualification as a REIT. Notwithstanding any other provisions of this Agreement
to the contrary, the Advisor shall refrain from any action which, in its
reasonable judgment or in the judgment of the Board of Directors
5
<PAGE> 6
(of which the Advisor has received written notice), would adversely affect the
qualification of the Company as a REIT or which would violate any law, rule or
regulation of any governmental body or agency having jurisdiction over the
Company or its securities, or which would otherwise not be permitted by the
certificate of incorporation or by-laws of the Company. Furthermore, the
Advisor shall take any action which, in its judgment or the judgment of the
Board of Directors (of which the Advisor has received written notice), may be
necessary to maintain the qualification of the Company as a REIT or prevent the
violation of any law or regulation of any governmental body or agency having
jurisdiction over the Company or its securities.
SECTION 7. Term; Termination. This Agreement shall be in full force and
effect for a term beginning on the date hereof with an initial term of five
years, and will be renewed automatically for additional five year periods
unless the Company delivers a notice of nonrenewal to the Advisor not less than
90 days prior to the expiration of the initial term of this Agreement or 90
days prior to the expiration of any renewal term. Notwithstanding the
foregoing, at any time after the initial term, the Company may terminate this
Agreement at any time upon 90 days' prior notice.
SECTION 8. Other Activities of the Advisor.
(a) Nothing herein contained shall prevent the Advisor, an
affiliate of the Advisor or an officer, a director, employee or
stockholder of the Advisor from engaging in any activity, including
without limitation originating, purchasing and managing mortgage
loans and other real estate assets, rendering of services and
investment advice with respect to real estate investment
opportunities to any other Person (including other REITs) and
managing other investments (including the investments of the Advisor
and its affiliates).
(b) Directors, officers, stockholders, employees and agents of
the Advisor or of the affiliates of the Advisor may serve as
directors, officers, employees or agents of the Company but shall
receive no compensation (other than reimbursement for expenses) from
the Company for such service.
SECTION 9. Binding Effect; Assignment. This Agreement shall inure to the
benefit of and shall be binding upon the parties hereto and their respective
successors and assigns. Neither party may assign this Agreement or any of its
respective rights hereunder (other than an assignment to a successor
organization which acquires substantially all of the property of such party or,
in the case of the Advisor, to an affiliate of the Advisor) without the prior
written consent of the other party to this Agreement.
SECTION 10. Subcontracting. The Advisor may at any time subcontract all
or a portion of its obligations under this Agreement to any affiliate of the
Advisor without the consent of the Company or if no affiliate of the Advisor is
engaged in the business of managing mortgage assets to an unaffiliated third
party with the approval of a majority of the Board of Directors as well as a
majority of the Independent Directors. Notwithstanding the foregoing, the
Advisor will not, in
6
<PAGE> 7
connection with subcontracting any of its obligations under this Agreement, be
relieved or discharged in any respect from its obligations under this
Agreement.
SECTION 11. Liability and Indemnity of the Advisor. The Advisor assumes
no responsibilities under this Agreement other than to perform the services
called for hereunder in good faith. Neither the Advisor nor any of its
affiliates, stockholders, directors, officers or employees will have any
liability to the Company, or stockholders of the Company, or others except by
reason of acts or omissions constituting gross negligence or willful breach of
any of its material obligations under this agreement. The Company shall
indemnify and reimburse (if necessary) the Advisor, its stockholders,
directors, officers, employees and agents for any and all expenses (including
without limitation attorneys' fees), losses, damages, liabilities, demands and
charges of any nature whatsoever in respect of or arising from any acts or
omissions by the Advisor pursuant to this Agreement, provided that the conduct
against which the claim is made was determined by such person, in good faith,
to be in the best interest of the Company and was not the result of gross
negligence by such person or willful breach of any of such person's material
obligations by such person. The Advisor agrees that any such indemnification is
recoverable only from the assets of the Company and not from the stockholders.
SECTION 12. Action Upon Notice of Non-Renewal or Termination. Forthwith
upon giving of notice of non-renewal of this Agreement by the Company or of
termination of this Agreement by the Company, the Advisor shall not be entitled
to compensation after the Advisor Termination Date for further services under
this Agreement but shall be paid all compensation accruing to the Advisor
Termination Date and shall be reimbursed for all expenses of the Company paid
or incurred by the Advisor as of the Advisor Termination Date which are
reimbursable by the Company under this Agreement. The Advisor shall promptly
after the Advisor Termination Date:
(i) deliver to the Company all assets and documents
of the Company then in the custody of the Advisor; and
(ii) cooperate with the Company and take all
reasonable steps requested to assist the Board of Directors in
making an orderly transfer of the administrative functions of
the Company.
SECTION 13. No Joint Venture or Partnership. Nothing in this Agreement
shall be deemed to create a partnership or joint venture between the parties,
whether for purposes of taxation or otherwise.
SECTION 14. Notices. Unless expressly provided otherwise herein, all
notices, request, demands and other communications required or permitted under
this Agreement shall be in writing and shall be made by hand delivery,
certified mail, overnight courier service, telex or telecopier. Any notice
shall be duly addressed to the parties as follows:
7
<PAGE> 8
If to the Company:
Franklin Finance Corporation
24725 West Twelve Mile Road
Southfield, Michigan 48034
Attention: Chairman
If to the Advisor:
Franklin Bank, N.A.
24725 West Twelve Mile Road
Southfield, Michigan 48034
Attention: Chairman
Either party may alter the address to which communications or copies are
to be sent by giving notice of such change of address in conformity with the
provisions of this Section 14 for the giving of notice.
SECTION 15. Severability. If any term or provision of this Agreement or
the application thereof with respect to any Person or circumstance shall, to
any extent, be invalid or unenforceable, the remainder of this Agreement, or
the application of that term or provision to persons or circumstances other
than those as to which it is held invalid or unenforceable, shall not be
affected thereby, and each term and provision of this Agreement shall be valid
and be enforced to the fullest extent permitted by law.
SECTION 16. Governing Law. This Agreement and all questions relating to
its validity, interpretation, performance and enforcement shall be governed by
and construed, interpreted and enforced in accordance with the laws of the
State of Michigan.
SECTION 17. Amendments. This Agreement shall not be amended changed,
modified, terminated or discharged in whole or in part except by an instrument
in writing signed by both parties hereto or their respective successors or
assigns, or otherwise as provided herein.
SECTION 18. Headings. The section headings herein have been inserted for
convenience of reference only and shall not be construed to affect the meaning,
construction or effect of this Agreement.
8
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers thereunto duly authorized as of the day and year
first above written.
FRANKLIN FINANCE CORPORATION
By: _____________________________________
Name:
Title:
FRANKLIN BANK, N.A.
By: ______________________________________
Name:
Title:
9
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated October 6, 1997, accompanying the
balance sheet of Franklin Finance Corporation contained in the Registration
Statement on Form S-11 and Prospectus. We consent to the use of the
aforementioned report in the Registration Statement and Prospectus, and to the
use of our name as it appears under the caption "Experts".
We have also issued our report dated January 31, 1997, accompanying the
consolidated financial statements of Franklin Bank, N.A. contained in Annex I
of Prospectus constituting part of the Registration Statement on Form S-11. We
consent to the use of the aforementioned report in the Registration Statement
and Annex I of the Prospectus, and to the use of our name as it appears under
the caption "Experts".
/S/ GRANT THORNTON LLP
Southfield, Michigan
October 8, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion in Annex I of the Prospectus
constituting part of this Registration Statement on Form S-11 of our report
dated March 22, 1996 relating to the financial statements of Franklin Bank,
N.A., which appears in Annex I of such Prospectus. We also consent to the
reference to us under the heading "Experts" in Annex I of such Prospectus.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
October 8, 1997
<PAGE> 1
EXHIBIT 23.4
CONSENT OF COUNSEL
We consent to the use of our opinions, to the incorporation by
reference of such opinions as an exhibit to the Form S-11 and to the reference
to our firm under the heading "Certain Legal Matters" in the Prospectus included
in this Form S-11. In giving this consent, we do not admit that we are within
the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder.
SILVER, FREEDMAN & TAFF, L.L.P.
Washington, D.C.
October 8, 1997
<PAGE> 1
EXHIBIT 23.5
CONSENT OF COUNSEL
We consent to the reference to our firm under the heading "Certain
Legal Matters" in the Prospectus included in this Form S-11. In giving this
consent, we do not admit that we are within the category of persons whose
consent is required under Section 7 of the Securities Act of 1933, as amended,
or the rules and regulations of the Securities and Exchange Commission
thereunder.
/S/ Honigman Miller Schwartz & Cohn
HONIGMAN MILLER SCHWARTZ & COHN
Detroit, Michigan
October 8, 1997
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned, in his or her
capacity as an officer or director of FRANKLIN FINANCE CORPORATION, a Michigan
corporation (the "Corporation"), hereby constitutes and appoints, DAVID F. SIMON
and READ P. DUNN, and each of them severally, his or her true and lawful
attorneys-in-fact and agents, with full power to act with or without the others
and with full power of substitution and resubstitution for and on behalf of him
or her and in his or her name, place and stead, in any and all capacities, to
perform any and all acts and do all things and to execute any and all
instruments which said attorneys-in-fact and agents and each of them may deem
necessary or desirable to enable the Corporation to comply with the Securities
Act of 1933, as amended (the "Act"), and any rules, regulations and requirements
of the Securities and Exchange Commission (the "SEC") thereunder in connection
with the filing of the accompanying registration statement under the Act for the
registration of shares of Noncumulative Exchangeable Series A Preferred Stock,
("Preferred Stock"), of the Corporation on Form S-11 or such other Form or Forms
as are then appropriate for the registration of Preferred Stock of the
Corporation including without limiting the generality of the foregoing, power
and authority to sign such registration statement, and any and all amendments,
including post-effective amendments, supplements and exhibits thereto
(collectively, the "Registration Statement") to be filed with the SEC, and to
sign any and all instruments or documents to be filed as a part of or in
connection with such Registration Statement, whether such instruments or
documents are filed before or after the effective date of such Registration
Statement, to file such Registration Statement so signed, together with any and
all instruments or documents to be filed as a part of or in connection with such
Registration Statement, with the SEC, and to appear before the SEC in connection
with any matter relating thereto, hereby granting to such attorneys-in-fact and
agents, and each of them, full power to do and perform any and all acts and
things requisite and necessary to be done in connection therewith as the
undersigned might or could do in person, and hereby ratifying and confirming all
that said attorneys-in-fact and agents and each of them may lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
as of October 8, 1997
/s/David F. Simon
- --------------------------------------------------
David F. Simon
Director and Secretary
/s/David L. Shelp
- --------------------------------------------------
David L. Shelp
Director, Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/Edward J. Shehab
- --------------------------------------------------
Edward J. Shehab
Director and Senior Vice President
/s/Read P. Dunn
- --------------------------------------------------
Read P. Dunn
President and Chief Executive Officer
(Principal Executive Officer)
