<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C., 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE PERIOD ENDED SEPTEMBER 30, 1994
OR
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________ to __________
Commission file number 0-7186
MICHIGAN NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Michigan 38-0111135
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
27777 Inkster Road, Farmington Hills, MI 48334
(Address of principal executive offices)
(810) 473-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Common stock outstanding at September 30, 1994 - 15,314,943 SHARES
<PAGE> 2
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION (UNAUDITED)
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF INCOME:
THREE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993 1
NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993 3
CONSOLIDATED STATEMENT OF CONDITION:
SEPTEMBER 30, 1994 AND DECEMBER 31, 1993 5
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY:
NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993 7
CONSOLIDATED STATEMENT OF CASH FLOWS:
NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 20
CONDITION AND RESULTS OF OPERATIONS
PART I EXHIBIT 62
PART II. OTHER INFORMATION 63
ITEM 1. LEGAL PROCEEDINGS 63
ITEM 6.(A) EXHIBITS 63
SIGNATURES 64
<PAGE> 3
<TABLE>
<CAPTION>
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED INCREASE
SEPTEMBER 30 (DECREASE)
(IN THOUSANDS, EXCEPT PER SHARE) 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Federal funds sold and resale agreements $1,946 $2,823 ($877)
Interest-bearing deposits with banks 2,023 282 1,741
Money market investments 144 63 81
Investment securities available for sale (Note C) 4,249 59 4,190
Investment securities held to maturity (Note C) 17,072 22,548 (5,476)
Trading securities 895 1,792 (897)
Loans and lease financing, including related fees 132,896 142,863 (9,967)
Note receivable-FDIC 4,038 5,623 (1,585)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 163,263 176,053 (12,790)
INTEREST EXPENSE
Money market accounts 14,267 15,461 (1,194)
Savings deposits 5,436 7,675 (2,239)
Time deposits < $100,000 32,680 38,984 (6,304)
Time deposits > $100,000 6,968 7,728 (760)
Short-term borrowings 5,776 4,460 1,316
Long-term debt 1,513 1,574 (61)
FDIC assistance (3,105) (3,236) 131
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 63,535 72,646 (9,111)
NET INTEREST INCOME 99,728 103,407 (3,679)
PROVISION FOR POSSIBLE CREDIT LOSSES 6,000 8,000 (2,000)
- ------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE CREDIT LOSSES 93,728 95,407 (1,679)
- ------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Service charges 26,783 33,443 (6,660)
Trust and investment services income 4,322 4,619 (297)
Mortgage banking gains, net 22 16,984 (16,962)
Other gains, net (Note B) 67,096 67,096
Other income 11,469 10,920 549
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 109,692 65,966 43,726
NON-INTEREST EXPENSE
Salaries and wages 42,201 47,489 (5,288)
Other employee benefits 12,103 12,198 (95)
Net occupancy expense 6,921 7,460 (539)
Equipment expense 8,567 9,748 (1,181)
Outside services 8,732 8,795 (63)
Defaulted loan expense, net 3,320 6,026 (2,706)
Amortization of purchased mortgage servicing rights 2,034 14,154 (12,120)
Other expenses 25,554 29,982 (4,428)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 109,432 135,852 (26,420)
- ------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 93,988 25,521 68,467
Income tax (benefit) (Note I) (16,060) (1,506) (14,554)
- ------------------------------------------------------------------------------------------------------------------------------
NET INCOME $110,048 $27,027 $83,021
===============================================================================================================================
</TABLE>
The Consolidated Statement of Income is continued on the next page.
1
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<TABLE>
<CAPTION>
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME
continued (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED INCREASE
SEPTEMBER 30 (DECREASE)
(IN THOUSANDS, EXCEPT PER SHARE) 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME PER COMMON SHARE - PRIMARY $6.99 $1.77 $5.22
- ------------------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE - FULLY DILUTED $6.99 1.76 $5.23
- ------------------------------------------------------------------------------------------------------------------------------
AVERAGE COMMON SHARES AND COMMON STOCK EQUIVALENTS OUTSTANDING - PRIMARY 15,744 15,289 455
- ------------------------------------------------------------------------------------------------------------------------------
AVERAGE COMMON SHARES AND COMMON STOCK EQUIVALENTS OUTSTANDING - FULLY DILUTED 15,744 15,324 420
- ------------------------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS DECLARED PER COMMON SHARE $0.50 $0.50
==============================================================================================================================
</TABLE>
2
<PAGE> 5
<TABLE>
<CAPTION>
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED INCREASE
SEPTEMBER 30 (DECREASE)
(IN THOUSANDS, EXCEPT PER SHARE) 1994 1993
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Federal funds sold and resale agreements $9,171 $9,619 ($448)
Interest-bearing deposits with banks 8,616 2,476 6,140
Money market investments 327 157 170
Investment securities available for sale (Note C) 12,117 2,608 9,509
Investment securities held to maturity (Note C) 51,598 68,603 (17,005)
Trading securities 2,868 5,071 (2,203)
Loans and lease financing, including related fees 389,238 418,663 (29,425)
Note receivable-FDIC 11,745 17,557 (5,812)
Guaranteed yield on covered assets 32 (32)
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 485,680 524,786 (39,106)
INTEREST EXPENSE
Money market accounts 43,082 45,980 (2,898)
Savings deposits 18,076 22,407 (4,331)
Time deposits < $100,000 101,288 123,932 (22,644)
Time deposits > $100,000 19,645 25,270 (5,625)
Short-term borrowings 12,763 12,748 15
Long-term debt 4,616 4,839 (223)
FDIC assistance (9,730) (10,170) 440
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 189,740 225,006 (35,266)
NET INTEREST INCOME 295,940 299,780 (3,840)
PROVISION FOR POSSIBLE CREDIT LOSSES 18,000 33,000 (15,000)
- -------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE CREDIT LOSSES 277,940 266,780 11,160
- -------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Service charges 91,081 96,486 (5,405)
Trust and investment services income 13,874 14,599 (725)
Mortgage banking gains, net 9,174 22,663 (13,489)
Gains from sale of mortgage servicing rights 53 (53)
Investments available-for-sale gains, net 6,140 (6,140)
Other gains, net (Note B) 67,096 67,096
Other income 33,878 33,126 752
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 215,103 173,067 42,036
NON-INTEREST EXPENSE
Salaries and wages 134,933 136,635 (1,702)
Other employee benefits 41,282 38,445 2,837
Net occupancy expense 22,218 22,326 (108)
Equipment expense 29,403 31,062 (1,659)
Outside services 24,793 24,566 227
Defaulted loan expense, net 787 12,325 (11,538)
Amortization of purchased mortgage servicing rights 10,447 95,148 (84,701)
Other expenses 77,171 89,715 (12,544)
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 341,034 450,222 (109,188)
- -------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 152,009 (10,375) 162,384
Income tax (benefit) (Note I) (39,617) (1,506) (38,111)
- -------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) 191,626 (8,869) 200,495
===============================================================================================================================
</TABLE>
The Consolidated Statement of Income is continued on the next page.
3
<PAGE> 6
<TABLE>
<CAPTION>
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME
continued (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED INCREASE
SEPTEMBER 30 (DECREASE)
(IN THOUSANDS, EXCEPT PER SHARE) 1994 1993
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME (LOSS) PER COMMON SHARE - PRIMARY $12.31 ($0.59) $12.90
- -------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER COMMON SHARE - FULLY DILUTED $12.22 ($0.59) $12.81
- -------------------------------------------------------------------------------------------------------------------------------
AVERAGE COMMON SHARES AND COMMON STOCK EQUIVALENTS OUTSTANDING - PRIMARY 15,570 15,057 513
- -------------------------------------------------------------------------------------------------------------------------------
AVERAGE COMMON SHARES AND COMMON STOCK EQUIVALENTS OUTSTANDING - FULLY DILUTED 15,681 15,057 624
- -------------------------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS DECLARED PER COMMON SHARE $1.50 $1.50
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 7
<TABLE>
<CAPTION>
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CONDITION
(UNAUDITED)
- -------------------------------------------------------------------------------------------------------------
September 30, December 31,
(IN THOUSANDS EXCEPT SHARE AMOUNTS) 1994 1993
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $585,211 $518,080
Federal funds sold and resale agreements 500,518 483,000
- -------------------------------------------------------------------------------------------------------------
Total Cash and Cash Equivalents 1,085,729 1,001,080
Interest-bearing deposits with banks 32,211 121,445
Money market investments 14,724 11,513
Investment securities available for sale (amortized cost of
$249,289 and $893 at 09/30/94 and 12/31/93, respectively) (Note C)
Mortgage-backed securities 112,854
U.S. Government and other securities 138,215 893
Investment securities held to maturity, (market value of $1,020,933
and $1,343,657 at 09/30/94 and 12/31/93, respectively) (Note C)
Mortgage-backed securities 639,156 983,765
U.S. Government and other securities 397,313 330,008
Trading securities 36,522 70,113
Residential mortgages held for sale (Note D) 108,783 583,056
Loans and lease financing (Note D) 6,092,697 6,106,829
- -------------------------------------------------------------------------------------------------------------
Total Loans and Lease Financing 6,201,480 6,689,885
Unearned income (25,076) (18,619)
Allowance for possible credit losses (185,731) (190,992)
- -------------------------------------------------------------------------------------------------------------
Net Loans and Lease Financing 5,990,673 6,480,274
Note receivable-FDIC 462,535
Premises and equipment, net 174,585 199,142
Due from customers on acceptances 711 612
Accrued income receivable 70,543 77,347
Purchased mortgage servicing rights, net 49,389
Capitalized excess service fees, net 6,869
Property from defaulted loans and other real estate owned, net 49,152 98,066
Other assets 464,918 279,757
- -------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $9,207,306 $10,172,808
=============================================================================================================
</TABLE>
The Consolidated Statement of Condition is continued on the next page.
5
<PAGE> 8
<TABLE>
<CAPTION>
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CONDITION
continued (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------
September 30, December 31,
(IN THOUSANDS EXCEPT SHARE AMOUNTS) 1994 1993
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES
Non-interest bearing demand deposits $1,701,003 $1,995,940
Interest-bearing deposits:
Money market accounts 1,857,955 2,195,670
Savings deposits 1,035,628 1,183,280
Time deposits < $100,000 2,375,391 2,699,512
Time deposits > $100,000 542,972 650,677
- -------------------------------------------------------------------------------------------------------------
Total Deposits 7,512,949 8,725,079
Short-term borrowings (Note E) 401,036 293,293
Customer acceptances outstanding 711 612
Accrued liabilities 224,290 261,112
Long-term debt 70,779 77,122
- -------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 8,209,765 9,357,218
Contingencies and Commitments (Note F and G)
SHAREHOLDERS' EQUITY
Common stock, $10 par value, authorized 50,000,000 shares 153,151 151,764
Surplus 203,310 195,466
Retained earnings 652,348 483,572
Net unrealized gains on investment
securities available-for-sale (Note C) 1,144
Note receivable-ESOP (12,412) (15,212)
- -------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 997,541 815,590
- -------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $9,207,306 $10,172,808
=============================================================================================================
Common stock outstanding 15,314,943 15,176,336
=============================================================================================================
</TABLE>
Certain prior period amounts have been reclassified in order to conform to
current period presentation.
6
<PAGE> 9
<TABLE>
<CAPTION>
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDER'S EQUITY (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------------
Net unrealized
gain on
investment
Convertible securities Note
Preferred Common Retained available Receivable
(in thousands) Stock Stock Surplus Earnings for sale ESOP Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993 $6,000 $149,079 $185,759 $482,949 ($18,012) $805,775
Net income (8,869) (8,869)
Unrealized loss on marketable
equity securities 14 14
Common stock issued, net 984 3,401 4,385
Conversion of preferred stock (6,000) 1,200 4,800
ESOP payment 2,800 2,800
Cash dividends
Common stock (22,618) (22,618)
Convertible preferred stock (90) (90)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1993 $151,263 $193,960 $451,386 ($15,212) $781,397
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1994 $151,764 $195,466 $483,572 ($15,212) 815,590
Net income 191,626 191,626
Net unrealized gain/(loss) on securities
classified as available for sale (Note C) 1,760 1,760
Tax effect of unrealized gain/(loss) on
investment securities classified as
available for sale (616) (616)
Common stock issued, net 1,387 7,844 9,231
ESOP payment 2,800 2,800
Cash dividends
Common stock (22,850) (22,850)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1994 $153,151 $203,310 $652,348 $1,144 ($12,412) $997,541
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 10
<TABLE>
<CAPTION>
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30 (in thousands) 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $191,626 ($8,869)
Adjustments to reconcile net income to net cash
(used) provided by operating activities:
Provision for possible credit losses 18,000 33,000
Depreciation and amortization expense 39,780 129,451
Net amortization associated with investment securities 4,113 795
Write-downs of property from defaulted loans 4,930 8,249
Net deferred income taxes (77,634) (29,830)
Gain from sale of investment securities available for sale (6,140)
Loss from sale of premises and equipment 234 776
Gain from sale of mortgage servicing rights (53)
Gains from sale of subsidiaries and mortgage servicing portfolio (62,008)
Net gain from sale of property from defaulted loans (9,953) (2,793)
(Increase) decrease in operating assets:
Trading account securities 33,591 (23,390)
Accrued interest receivable 2,683 (8,059)
Residential mortgages held for sale 474,273 35,437
Pending investment and trading securities sales 47,721 (151,931)
Capitalized excess service fees 5,103
Other assets (107,460) (266,275)
Increase (decrease) in operating liabilities:
Accrued interest payable 573 (9,404)
Pending investment and trading securities purchases (39,302) 38,042
Accrued liabilities (25,210) 72,046
Other, net (321) 2,500
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities $495,636 ($181,345)
- ------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Payments for:
Purchase of investment securities available for sale ($129,436) ($1,193)
Purchase of investment securities held to maturity (526,009) (371,577)
Purchase of premises and equipment (10,825) (21,699)
Purchase of mortgage servicing rights (1,976) (10,588)
Capital expenditures on property from defaulted loans (1,642) (4,604)
Purchase of subsidiary, net of cash and cash equivalents acquired (727)
Proceeds from:
Sale of investment securities held to maturity 22,528
Sale of investment securities available for sale 483 219,168
Principal collection of investment securities available for sale 23,435 21,323
Principal collection of investment securities held to maturity 409,823 309,531
Principal collection of note receivable - FDIC 462,535 162,293
Sale of premises and equipment 1,495 108
Sale of mortgage servicing rights 117,958
Sale proceeds receivable from Norwest (57,913)
Sale and principal collection of property
from defaulted loans 57,734 33,866
Sale of subsidiaries, net of cash and cash equivalents sold 41,381
Net decrease (increase) in:
Interest-bearing deposits with banks 89,234 103,968
Money market investments (37,511) (3,018)
Loans and lease financing (237,355) 34,338
Covered assets and FDIC assistance 18,410
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities $201,411 $512,127
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Consolidated Statement of Cash Flows is continued on the next page.
8
<PAGE> 11
<TABLE>
<CAPTION>
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED) (continued)
- ------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30 (in thousands) 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCING ACTIVITIES
Payments for:
Long-term debt ($3,955) ($4,138)
Common stock dividends (22,850) (22,618)
Preferred stock dividends (90)
Proceeds from issuance of:
Common stock 9,231 4,385
Payments on note receivable -- ESOP 2,800 2,800
Net (decrease)increase in:
Deposits (705,367) (517,796)
Short-term borrowings 107,743 28,338
- ------------------------------------------------------------------------------------------------------------------------
Net cash (used) by financing activities ($612,398) ($509,119)
- ------------------------------------------------------------------------------------------------------------------------
Net increase decrease in cash and cash equivalents $84,649 ($178,337)
Cash and cash equivalents at beginning of year 1,001,080 1,013,995
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at September 30 $1,085,729 $835,658
=======================================================================================================================
Supplemental disclosures of cash flow information:
a.) Cash transactions:
Interest paid $189,167 $234,413
Federal income taxes paid (net of refunds) 16,711 10,016
State taxes paid (net of refunds) 213 634
Cash payments to FDIC in connection with Assistance Agreement
and Termination Agreement 17,956
b.) Non-cash transactions in loans and lease financing:
Transfer from loans to property from defaulted loans 12,677 12,546
Loans originated to finance sales of property from defaulted loans 8,150 5,288
Transfer to loans from assets held for sale 84
Transfer to loans from covered assets 114
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
April 1, 1993
Supplemental Schedule of Acquisition (In Thousands)
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Cash paid for common stock 16,746
Fair Market value of assets acquired 117,920
Fair Market value of liabilities assumed 105,293
- ----------------------------------------------------------------------------------------------
Fair market value of net assets 12,627
- ----------------------------------------------------------------------------------------------
Cost in excess of fair value of net assets
acquired ("goodwill") 4,119
- ----------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
Certain prior period amounts have been reclassified in order to conform to
current year presentation.
9
<PAGE> 12
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
NOTES TO FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION
The unaudited consolidated financial statements of Michigan National
Corporation and subsidiaries (Corporation) are prepared in accordance with
generally accepted accounting principles for interim financial information,
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and Item
303(b) of Regulation S-K.
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments of a normal recurring nature necessary to
present fairly the consolidated operating results of the Corporation for the
three and nine months ended September 30, 1994 and 1993, its financial position
at September 30, 1994, and December 31, 1993, and cash flows for the nine
months ended September 30, 1994, and 1993. Certain prior period amounts were
reclassified to conform with the current period presentation. The operating
results for the three and nine months ended September 30, 1994, are not
necessarily indicative of operating results to be expected for the year ending
December 31, 1994.
The Corporation uses the equity method to account for its 49% investment in
Bloomfield Hills Bancorp, Inc., which is not materially different than
consolidation. The amount of accumulated retained earnings from this
subsidiary included in consolidated retained earnings was approximately $326
thousand at September 30, 1994. At December 31, 1993, accumulated retained
earnings of approximately $184 thousand from this subsidiary were included in
consolidated retained earnings.
These financial statements and related notes should be read in conjunction with
the Michigan National Corporation 1993 Annual Report (1993 Annual Report).
Terms used in this report are defined on page 6 of the 1993 Annual Report.
10
<PAGE> 13
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
NOTES TO FINANCIAL STATEMENTS
B. OTHER GAINS, NET
The Corporation and the FDIC reached an agreement to terminate the Assistance
Agreement (Termination Agreement) as of the close of business September 30,
1994, resulting in the recognition of $9.7 million in non-recurring income and
tax benefits of $41.7 million. The relevant terms of the termination are as
follows:
- The FDIC paid off the outstanding principal balance of the Note Receivable
- FDIC, dated December 31, 1988, of $348.9 million. The note was
scheduled to mature on December 31, 1998.
- IOBOC's obligation to return to the FDIC a portion of the realized tax
benefits resulting from the assisted acquisition is discontinued, except
for any future realization of IOBOC's December 31, 1988, (pre-acquisition)
net operating loss carryforwards and tax credit carryforwards. Under SFAS
No. 109, Accounting for Income Taxes, the Corporation previously
recognized deferred tax assets arising from post 1988 tax benefits. To
the extent such benefits were recognized, the Corporation recorded a
liability to the FDIC for their share of the benefit to be paid when the
benefit was realized. With IOBOC's obligation to share these realized tax
benefits canceled, the liability to pay the FDIC was reversed, resulting
in a reduction of 1994 income tax expense of $41.7 million (net of deposit
spread discount of $13.7 million and payment to the FDIC of $7.0 million
discussed below).
- The Assistance Agreement provided the FDIC the right to receive a payment
at March 31, 1999, of up to 20% of IOBOC's December 31, 1998 equity. This
right was canceled at the termination. Accordingly, the Corporation
reversed the liability it accrued related to this obligation, resulting in
a non-recurring gain of $10.3 million.
- Under the Assistance Agreement, IOBOC received a cost of funds subsidy
from the FDIC related to certain fixed term deposit liabilities which
limited the interest expense on those deposits to the FHLBB COF. The
Termination Agreement reached with the FDIC discontinues this subsidy as
of October 1, 1994. As a result of the termination, IOBOC established a
deposit spread discount of $13.7 million, determined on the basis of
current interest rates. The recording of the discount created goodwill
which was immediately written off against post-1988 tax benefits. This
deposit spread discount will be accreted into income over the remaining
life of the time deposits, preserving the current market rate cost of
these deposits.
11
<PAGE> 14
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
NOTES TO FINANCIAL STATEMENTS
- The Assistance Agreement provided indemnification for certain claims and
any challenges to the assisted acquisition. As a result of the
termination, the FDIC will continue to indemnify IOBOC for all costs
associated with claims which have been specifically identified as of
September 30, 1994, and for any environmental claim which may arise
against IOBOC through December 31, 1998, the original term of the
Assistance Agreement.
- All other interpretative disputes which arose under the Assistance
Agreement, principally relating to tax sharing matters, were resolved
with the termination. As a result, IOBOC agreed to pay the FDIC
$7.0 million, as part of the settlement. This payment was recognized as
income tax expense. In addition, $0.6 million previously recorded as
income was reversed and charged against other gains, net.
On August 11, 1994, the Corporation's principal banking subsidiary, Michigan
National Bank (MNB) and its mortgage banking subsidiary, Independence One
Mortgage Corporation (IOMC), entered into an agreement with Norwest Mortgage,
Inc. (Norwest) to sell certain of its assets, including its $8.6 billion
mortgage servicing rights portfolio, its mortgage servicing operation and
non-Michigan loan origination business. Norwest will also assume certain
liabilities including the lease obligations of 20 branch production offices and
a large portion of IOMC's national servicing facility. The transaction was
completed in September and resulted in a pre-tax gain of $42.3 million. The
gain is net of PMSR and ESF assets of $44.9 million written off in the sale and
net of transaction costs of $28.8 million.
On May 6, 1994, the Corporation entered into an agreement with International
Bank of Commerce to sell First State Bank and Trust Company (First State) for a
cash purchase price of approximately $28 million. The transaction was
completed August 31, 1994, and resulted in a pre-tax gain, net of transaction
costs, of $5.4 million.
On April 5, 1994, the Corporation entered into an agreement with Comerica
Incorporated to sell Lockwood Banc Group, Inc. (Lockwood) and its wholly owned
subsidiary, Lockwood National Bank of Houston for a cash purchase price of $44
million. The transaction was completed August 4, 1994, and resulted in a
pre-tax gain, net of transaction costs, of $14.2 million. The transaction was
completed August 4, 1994, and resulted in a pre-tax gain, net of transaction
costs, of $14.2 million.
12
<PAGE> 15
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
NOTES TO FINANCIAL STATEMENTS
As a result of these sales, the number of active participants in the
Corporation's pension and postretirement benefit plans was significantly
reduced, resulting in a plan curtailment under SFAS No. 88, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans
and for Termination Benefits", and SFAS No. 106, "Employer's Accounting for
Postretirement Benefits Other Than Pension". The plan curtailment resulted in
a loss of $4.3 million for post retirement benefits and $0.2 million for
pension benefits which was charged against other gains, net.
C. INVESTMENT SECURITIES
For the nine months ended September 30, 1993, gross gains of $6.6 million and
gross losses of $0.6 million were realized from sales of securities classified
as available for sale.
Effective January 1, 1994, the Corporation adopted SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities". This Statement
requires investments in equity and debt securities be classified in three
categories and accounted for as follows: (i) debt securities that the
Corporation has the positive intent and ability to hold to maturity are
classified as held-to-maturity securities and reported at amortized cost; (ii)
debt and equity securities that are bought and held principally for the purpose
of selling them in the near term are classified as trading securities and
reported at fair value, with unrealized gains and losses included in earnings;
(iii) debt and equity securities not classified as either held-to-maturity
securities or trading securities are classified as available-for-sale
securities and reported at fair value, with unrealized gains and losses
excluded from earnings and reported in a separate component of shareholders'
equity on an after-tax basis.
Upon initial application of this Statement, the Corporation transferred
securities with a book value of approximately $135.6 million and a market value
of approximately $144.7 million to the Available-for-Sale portfolio from the
Held-to-Maturity portfolio.
13
<PAGE> 16
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
C. INVESTMENT SECURITIES (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
The following summarizes the book value, estimated market value, and gross unrealized gains and losses of investment securities at
September 30, 1994 and December 31, 1993.
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands) 9/30/94 12/31/93
- ------------------------------------------------------------------------------------------------------------------------------------
Estimated Estimated
Market Market
Gross Gross Value Gross Gross Value
Amortized Unrealized Unrealized (Carrying Amortized Unrealized Unrealized (Carrying
Cost Gains Losses Value) Cost Gains Losses Value)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities
available-for-sale:
Mutual Fund Securities $1,130 ($13) $1,117
Mortgage-backed securities 108,996 $3,858 112,854
U.S. Treasury, Government agencies
and corporations 100,767 (2,065) 98,702 $893 $893
Other securities 38,396 38,396
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities
available-for-sale $249,289 $3,858 ($2,078) $251,069 $893 $893
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Amortized Amortized
Cost Gross Gross Estimated Cost Gross Gross Estimated
(Carrying Unrealized Unrealized Market (Carrying Unrealized Unrealized Market
Value) Gains Losses Value Value) Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities
held-to-maturity:
Mortgage-backed securities $639,156 $2,509 ($15,033) $626,632 $983,765 $25,900 ($2,526) $1,007,139
U.S. Treasury, Government agencies
and corporations 288,414 (3,489) 284,925 275,484 4,351 (12) 279,823
State and municipal securities 24,506 775 (11) 25,270 38,918 2,181 (12) 41,087
Other securities 84,393 (287) 84,106 15,606 2 15,608
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities
held-to-maturity $1,036,469 $3,284 ($18,820) $1,020,933 $1,313,773 $32,434 ($2,550) $1,343,657
====================================================================================================================================
</TABLE>
At September 30, 1994, $98 million of treasury securities-available for sale,
$149 million of treasury securities-held to maturity, $450 million of
mortgaged-backed investment securities held to maturity and $24 million of
state and municipal securities held for investment were pledged to
collateralize deposits of public funds and for other purposes required or
permitted by law.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
The following summarizes interest and dividend income from investment securities for the three and nine month periods ended
September 30, 1994 and 1993.
- -----------------------------------------------------------------------------------------------------------------------------------
1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
3 Months 9 Months 3 Months 9 Months
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Mortgage-backed securities $2,470 $8,184 $1,767
U.S. Treasury, Government agencies
and corporations 1,208 2,910 $59 841
Other securities 571 1,023
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities available-for-sale $4,249 $12,117 $59 $2,608
===================================================================================================================================
Mortgage-backed securities $10,176 $32,716 $18,092 $55,565
U.S. Treasury, Government agencies
and corporations 5,140 15,183 3,556 10,459
State and municipal securities 443 1,580 596 1,879
Other securities 1,313 2,119 304 700
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities held-to-maturity $17,072 $51,598 $22,548 $68,603
===================================================================================================================================
</TABLE>
Income from Other Securities includes dividends of $571 thousand and $175
thousand for the three months ended September, 1994 and 1993, respectively, and
$1.2 million and $484 thousand for the nine months ended September 30, 1994 and
1993, respectively.
14
<PAGE> 17
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
D. LOANS AND LEASE FINANCING (UNAUDITED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
The following summarizes loans and lease financing at September 30, 1994 and December 31, 1993.
- ---------------------------------------------------------------------------------------------------------------
(in thousands) 9/30/94 12/31/93
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial, financial & agricultural secured by real estate $892,899 $971,917
Other commercial, financial & agricultural 2,405,015 2,373,707
Commercial real estate-mortgage 1,142,931 1,238,177
Residential real estate-mortgage
mortgages held for sale 108,783 583,056
mortgages held for investment 401,402 465,904
Short-term real estate-construction 145,609 159,594
Installment 959,028 780,532
Lease financing 145,813 116,998
- ---------------------------------------------------------------------------------------------------------------
Total 6,201,480 6,689,885
Unearned income (25,076) (18,619)
- ---------------------------------------------------------------------------------------------------------------
Total $6,176,404 $6,671,266
===============================================================================================================
</TABLE>
15
<PAGE> 18
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
NOTES TO FINANCIAL STATEMENTS
E. SHORT-TERM BORROWINGS
Effective May 31, 1994, the Corporation canceled a $25 million, three year line
of credit. The original commitment period would have expired April 30, 1995.
The commitment period of a second facility, a $20 million 364 day line of
credit, expired March 10, 1994. These two facilities were established in the
second quarter of 1992 to support the Corporation's commercial paper program
and for a variety of general corporate purposes. The facilities are no longer
necessary because the Corporation has not issued commercial paper for several
years and has sufficient sources of liquidity available to fund its operations.
The following summarizes short-term borrowings at September 30,
1994 and December 31, 1993.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
(in thousands) 9/30/94 12/31/93
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Federal funds purchased and repurchase agreements $279,045 $133,925
Other short-term borrowings 121,991 159,368
- ----------------------------------------------------------------------------------------------
Total short-term borrowings $401,036 $293,293
==============================================================================================
</TABLE>
16
<PAGE> 19
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
NOTES TO FINNCIAL STATEMENTS
F. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Corporation is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers,
to reduce its own exposure to fluctuations in interest rates, and to realize
profits.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
The following summarizes financial instruments with off-balance sheet risk at September 30, 1994 and December 31, 1993.
(UNAUDITED)
(in thousands) CONTRACT OR NOTIONAL AMOUNT
- ----------------------------------------------------------------------------------------------------------------------------
9/30/94 12/31/93
<S> <C> <C>
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend credit $3,553,675 $3,431,721
Standby and other letters of credit 281,203 221,580
Other assets sold with recourse 102,328 115,681
Financial instruments whose contract or notional
amounts exceed the amount of credit risk:
Forward and futures contracts
Commitments to sell 88,500 701,478
Foreign exchange contracts 17,647 4,565
Interest rate swap contracts 2,799,812 2,514,207
Interest rate caps 40,750 10,000
============================================================================================================================
</TABLE>
17
<PAGE> 20
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
NOTES TO FINANCIAL STATEMENTS
G. LEGAL PROCEEDINGS
A class action lawsuit was filed by Thomas Bradford against Independence One
Mortgage Corporation (IOMC) in the Supreme Court of New York for Monroe County
and subsequently removed to the U.S. District Court for the Western District of
New York and subsequently transferred to the U.S. District Court for Northern
District of Illinois (Civil Action File No. 93-CV-6423T). The Plaintiff
alleges that IOMC requires its mortgagors to deposit excessive funds into their
escrow accounts for the payment of property taxes, insurance and other
obligations. The Plaintiffs seek a refund to current mortgagors from their
escrow accounts and the payment of interest on the alleged "excess" funds held
by IOMC. Management and legal counsel believe that there are numerous valid
defenses to this claim. Based upon the substantial defenses available, it is
believed that the ultimate outcome of this claim will not have a material
adverse impact on the financial condition of the Corporation. The ultimate
outcome and liability with respect to this lawsuit, if any, is not presently
determinable.
Other than that which is stated above, there have been no material developments
in any previously reported legal proceedings brought against the Corporation,
nor any new material legal proceedings brought against the Corporation during
the period January 1, 1994 through September 30, 1994.
H. POSTEMPLOYMENT BENEFITS
In November 1992, the Financial Accounting Standards Board issued SFAS No. 112,
Employer's Accounting for Postemployment Benefits. This Statement requires
accrual of the estimated cost of benefits provided by an employer to former or
inactive employees after employment but before retirement (e.g., salary
continuation, severance and disability benefits, job training and counseling
and continuation of benefits such as health care and life insurance coverage).
Postemployment benefit expense recognized under these requirements will replace
the "pay-as-you- go" method of accounting previously utilized by the
Corporation for certain postemployment benefits. The Corporation adopted this
Statement effective January 1, 1994, and recognized $1.5 million of personnel
benefit expense upon adoption.
18
<PAGE> 21
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
NOTES TO FINANCIAL STATEMENTS
I. INCOME TAXES
As discussed in Note B., during the third quarter the Corporation reached a
settlement with the FDIC to terminate the Assistance Agreement. Under the
terminated Assistance Agreement, the Corporation was obligated to share certain
tax benefits it realized with the FDIC. To the extent such benefits were
recognized in prior periods for financial statement purposes, the Corporation
also recorded a liability to the FDIC for its share of such benefits, reducing
the benefit reflected in income tax expense for that period. The settlement to
terminate the agreement relieved IOBOC and the Corporation from this
obligation, and accordingly, the accrued liability was reversed. This has
resulted in a reduction of 1994 income tax expense of approximately $41.7
million.
In the second quarter, tax benefits associated with the IOBOC acquisition of
$42.8 million were recognized, $40.2 million of which were reflected in
earnings, and $2.6 million of which were added directly to shareholders' equity
- - surplus. The ability of the Corporation to realize these benefits was
challenged by the U.S. Treasury Department in a report issued in March 1991 to
Congress. Congress addressed this matter in the Revenue Reconciliation Bill of
1993, and denied recognition of certain tax benefits occurring after March 3,
1991. As a result of this Congressional action and discussions during in the
second quarter 1994 with the Federal government concerning the Corporation's
tax returns, the Corporation recognized pre-March 3, 1991 tax benefits in its
financial statements.
The Corporation's projection of its 1994 effective income tax rate, excluding
the $41.7 million reduction in tax expense resulting from the termination
settlement and the $40.2 million from tax benefits associated with the IOBOC
acquisition, is 28.5%. The difference between this effective tax rate and the
federal statutory rate of 35% is principally due to tax exempt income received
by IOBOC during 1994 from the FDIC note receivable and other FDIC assistance
prior to the termination settlement, as well as, tax exempt interest income
from municipal obligations held principally by MNB.
The increase in the effective income tax rate from (9.2%) in 1993 to 28.5% for
1994 (excluding the one-time benefits described above) is due to higher
projected pre-tax earnings in 1994 and lower amounts of tax exempt FDIC
interest income and assistance. This change has the effect of increasing the
ratio of projected taxable income relative to total projected pre-tax financial
income, resulting in a higher effective tax rate.
19
<PAGE> 22
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSION AND ANALYSIS
<TABLE>
<CAPTION>
1994 1994 1994 1993 1993 1993
- -----------------------------------------------------------------------------------------------------------------------------------
TABLE 1 SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Third Second First Fourth Third Second
(in thousands) Quarter Quarter Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS
Interest income $163,263 $164,000 $158,417 $169,447 $176,053 $177,591
Interest expense 63,535 63,068 63,137 67,616 72,646 73,682
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 99,728 100,932 95,280 101,831 103,407 103,909
Provision for possible credit losses 6,000 6,000 6,000 7,000 8,000 12,494
Non-interest income 109,692 51,893 53,518 67,763 65,966 55,674
Non-interest expense 109,432 113,512 118,090 130,463 135,852 138,187
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 93,988 33,313 24,708 32,131 25,521 8,902
Income tax provision (benefit) (16,060) (29,981) 6,424 (501) (1,506)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $110,048 $63,294 $18,284 $32,632 $27,027 $8,902
===================================================================================================================================
PER COMMON SHARE
Net income $6.99 $4.06 $1.19 $2.13 $1.77 $0.58
Cash dividends declared 0.50 0.50 0.50 (1) (1) 0.50 0.50
Book value end-of-period 65.14 58.32 54.70 53.74 51.66 50.19
Market value end-of-period 76.25 72.00 61.50 57.50 58.88 56.50
Closing market value: high 79.25 79.00 65.25 62.75 59.88 61.63
Closing market value: low 72.25 59.63 55.00 57.50 54.50 52.00
===================================================================================================================================
SELECTED PERIOD-END BALANCES (IN MILLIONS)
Total assets $9,207 $10,036 $10,129 $10,173 $10,395 $10,517
Earning assets 8,048 9,097 9,151 9,135 8,932 9,388
Total loans and lease financing, net of unearned income 6,176 6,405 6,295 6,671 6,697 6,929
Non-performing assets 195 193 235 255 276 290
Deposits 7,513 8,156 8,504 8,725 8,657 8,710
Long-term debt 71 76 77 77 78 81
Shareholders' equity 998 892 832 816 781 759
===================================================================================================================================
SELECTED AVERAGE BALANCES (IN MILLIONS)
Total assets $9,462 $9,950 $9,973 $10,249 $10,390 $10,372
Earning assets 8,540 8,996 9,001 9,156 9,292 9,255
Total loans and lease financing, net of unearned income 6,281 6,280 6,399 6,681 6,880 6,742
Deposits 7,782 8,392 8,521 8,811 8,710 8,814
Long-term debt 72 76 77 77 79 82
Shareholders' equity 900 834 817 791 770 766
===================================================================================================================================
SELECTED FINANCIAL RATIOS
Return on average shareholders' equity 48.90% 30.36% 8.95% 16.50% 14.04% 4.65%
Return on average total assets 4.65 2.54 0.73 1.27 1.04 0.34
Average equity to average total assets 9.51 8.38 8.19 7.72 7.41 7.38
Allowance to period-end loans 3.01 2.94 3.09 2.86 2.82 2.68
Non-performing assets to total loans (net of unearned
income) plus property from defaulted loans, net 3.14 2.98 3.69 3.77 4.05 4.11
Net interest spread 4.06 3.97 3.79 3.82 3.89 4.00
Net interest margin 4.85 4.71 4.50 4.64 4.65 4.74
Equity to asset ratio (period end) 10.83 8.89 8.21 8.02 7.51 7.22
Leverage ratio 9.13 8.20 7.84 7.56 7.09 6.90
Tier 1 risk based capital ratio 11.00 10.09 9.85 9.57 9.01 8.79
Total risk based capital ratio 13.12 12.26 12.03 11.73 11.16 10.99
Dividend payout ratio 7.15 12.32 42.02 (1) (1) 28.25 86.21
===================================================================================================================================
</TABLE>
(1) A fourth quarter 1993 dividend of $0.50 per share was declared January 19,
1994, payable to shareholders of record as of February 1, 1994. This did
not represent a change in the Corporation's dividend policy, but rather a
change only in the timing of the dividend declaration.
Certain prior period amounts were reclassified to conform to current period
presentation.
20
<PAGE> 23
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL REVIEW
Net income for the third quarter of 1994 was $110.0 million or $6.99 per share,
compared to $27.0 million or $1.76 per share for the same period in 1993.
Included in third quarter 1994 results were net other gains of $43.6 million
(after tax) related to the previously announced divestitures and corporate
restructuring and $41.7 million of non-recurring tax benefits. Excluding these
items, the improvement in earnings was primarily attributable to lower
amortization expense for mortgage servicing assets.
Earnings for the first nine months of 1994 were $191.6 million or $12.22 per
share, which included the above third quarter net other gains and non-recurring
tax benefits and $40.2 million of one-time tax benefits in the second quarter,
compared to a loss of $8.9 million or $0.59 per share for the same period in
1993.
The third quarter other gains include gains from the sale of Lockwood, First
State and servicing rights to Norwest and income in connection with the
Termination Agreement. Further discussion of other gains is included in the
Non-interest Income and Non-interest Expense section. The one-time tax benefit
was also recognized in connection with the Termination Agreement and is
discussed further in the Income Taxes section. The Corporation previously
announced that it is in the process of selling the remaining banking assets of
IOBOC and expects the sale to be completed in the first quarter of 1995.
The profitable sale of these out-of-state businesses gives the Corporation the
ability to restructure its balance sheet, focus on its core Michigan banking
franchise and further enhance shareholder value.
Michigan-based loan growth for the first nine months of the year continued to
exceed management's expectations. Commercial and industrial loan period-end
balances grew 8.4% from year-end 1993, and direct installment loans increased
by 17.3% during the same period.
Non-performing assets increased slightly from $193 million at the end of the
prior quarter to $195 million at September 30, 1994, due to the purchase of
$17.7 million of non-performing Veteran's Administration (VA) residential
mortgage loans as a condition to the sale of the mortgage servicing rights
portfolio to Norwest Mortgage, Inc. The Corporation intends to sell the
Non-performing Loans purchased from the servicing portfolio. Non-performing
Assets declined by 29% or $81 million, from September 30, 1993. The
non-performing asset ratio increased from 2.98% to 3.14% during the quarter, as
Non-performing Assets remained flat and total loans plus REO decreased from the
sale of two bank subsidiaries in Texas. In addition, the non-performing loan
ratio increased from 2.12% to 2.37%.
21
<PAGE> 24
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
Annualized net charge-offs in the first nine months of 1994 were .44% of
average loans, versus .40% in the first three quarters of 1993. Charge-offs
for the first nine months of 1994 included $8.4 million or .18%, associated
with the sale of $22.2 million of non-performing commercial loans secured by
real estate sold in the second and third quarters. The Corporation's allowance
for credit losses was $185.7 million at the end of the third quarter,
representing 3.01% of total loans and 127.0% of Non-performing Loans.
In June 1994 the Corporation initiated "Project Streamline", a comprehensive
program to re-engineer internal operating processes to strengthen the
Corporation's financial performance. The advisory firm of New York based
Tandon Capital Associates, Inc. was retained to assist in the effort. On
October 20, 1994, the results of Project Streamline were announced. Once fully
implemented, the project is expected to result in an $85 million improvement in
the Corporation's pre-tax income from a reduction in operating expenses and
increases in non-interest income. The efficiency ratio is expected to improve
to less than 55% by the end of the fourth quarter of 1995. All Project
Streamline initiatives will be implemented within 12 months and most within the
next few quarters. The Corporation expects that the implementation of Project
Streamline will result in the elimination of 1,000 staff positions.
Implementation costs related to Project Streamline of approximately $62 million
are expected to be recorded in the fourth quarter of 1994. Included in the
implementation costs are costs associated with job eliminations, excess
facilities and advisory services.
During October 1994, the Office of the Comptroller of the Currency, the
principal regulator of national banks, terminated the Memorandum of
Understanding it entered into with MNB in August 1993.
22
<PAGE> 25
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
NET INTEREST INCOME
OVERVIEW
Net Interest Income for the third quarter 1994 decreased $3.7 million and Net
Interest Income on a Fully Taxable Equivalent Basis decreased $4.5 million
compared to the same period in 1993. For the nine months ended September 30,
1994, Net Interest Income decreased $3.8 million and Net Interest Income on a
Fully Taxable Equivalent Basis decreased $6.9 million compared to the same
period last year. These decreases were due primarily to a lower average
balance in interest-earning assets in the three and nine months ended September
30, 1994.
The Net Interest Rate Spread and Net Interest Margin in both the third quarter
and first nine months of 1994 remained above five year historical ratios. The
Net Interest Rate Spread and Net Interest Margin increased seventeen and twenty
Basis Points, respectively, in the third quarter 1994 compared to the same
period last year. For the first nine months of 1994, the Net Interest Rate
Spread increased seven Basis Points and the Net Interest Margin increased nine
Basis Points compared to the same period in 1993. This performance is the
result of assets repricing upward due to four prime interest rate increases
since March 24, 1994, while the interest rates on deposits did not reprice as
rapidly.
Please refer to Tables 2 through 7 for a presentation of various Net Interest
Margin related information.
INTEREST RATE RISK MANAGEMENT
The Corporation's Asset/Liability Committee, with the review of the Board of
Directors, sets policies regarding the management of the Net Interest Margin
and the interest rate risk of the Corporation. Policies implemented by the
Asset/Liability Committee utilize both on and off-balance sheet strategies to
manage such risk. At September 30, 1994, the Corporation was hedging the
interest rate risk associated with a portion of its prime-based, variable-rate
commercial loans with approximately $1.9 billion of interest rate swap
agreements.
The Corporation measures forecasted interest rate risk through the use of an
income forecasting simulation model. The model facilitates the forecasting of
Net Interest Income under a variety of interest rate scenarios. At September
30, 1994, the Corporation estimated that forecasted annual Net Interest Income
would increase $5.9 million for a 100 Basis Point increase in the prime rate.
Conversely, forecasted annual Net Interest Income would decrease $6.8 million
for a 100 Basis Point decrease in the prime rate.
23
<PAGE> 26
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
BALANCE SHEET COMPOSITION
In the third quarter of 1994 the average balance of total interest-earning
assets decreased $751.4 million, or 8.09%, from the same period in 1993, and
the average balance of interest-bearing liabilities decreased $731.5 million,
or 9.83%. During the first nine months of 1994 the average balance of total
earning assets decreased $377.2 million, or 4.09%, from the same period last
year and interest bearing liabilities decreased $542.1 million, or 7.21%. In
addition, the average balance of non-interest bearing demand deposits decreased
$249.9 million and $32.5 million in the third quarter and first nine months of
1994 compared to the same periods in 1993.
24
<PAGE> 27
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
EARNING ASSETS
Reductions in the average balances of loans and lease financing and the Note
Receivable-FDIC along with the sales of the Corporation's Texas subsidiaries
contributed to the decrease in earning assets in both the third quarter and
first nine months of 1994. Rising residential mortgage interest rates during
1994 and the resulting slow-down in lending activity contributed to a $583.9
million decrease in the average balance of residential mortgage loans in the
third quarter and a $220.2 million decrease in the FCSI mortgage warehouse
lending portfolio. The average balance of the Note Receivable-FDIC declined as
a result of a $114 million principal payment in January, 1994. (In connection
with the Termination Agreement, the FDIC paid off the balance of the Note
Receivable - FDIC on September 30, 1994.) In addition, the sales of Lockwood
and First State resulted in a $274.5 decrease in the average balance of earning
assets, including $19.2 million in money market funds, $119.6 million in
investments and $135.7 million in loans.
For the nine months ended September 30, 1994, residential mortgage loans and
the mortgage warehouse lending portfolio decreased $389.9 million and $115.9
million, respectively. The sales of Lockwood and First State resulted in a
$73.3 million decrease in the average balance of earning assets. Also
contributing to the decrease in residential mortgage loans was the September
1993 sale of approximately $300 million of prime plus mortgage loans.
Partially offsetting the decrease in residential loans was the purchase of
Federal Housing Administration (FHA) insured residential mortgage loans
beginning in the third quarter 1993, and an increase in the average balance of
installment loans. The average balance of FHA insured loans increased $68.1
million and $109.1 million in the third quarter and nine months ended September
30, 1994, respectively. For further discussion of the activity in the
residential mortgage loan portfolio during 1993, refer to the Loans and Lease
Financing Portfolio and Credit Risk Analysis section on page 21 of the 1993
Annual Report.
In addition, the average balance of installment loans increased $164.2 million
and $137.3 million in the third quarter and nine months ended September
30, 1994, respectively, primarily due to low interest rates, bulk purchases,
resumption of indirect dealer lending and aggressive marketing of Capital
Reserve and Equimoney loan products.
The Corporation used the liquidity provided by the decreases in earning
assets to pay down higher cost funding sources and to purchase money market
investments. Money market investments provide the Corporation a ready source
of liquidity with which to fund future origination of loans and maturing
deposit liabilities. The proceeds of the payoff of the Note Receivable-FDIC
were primarily used to pay down discretionary funding sources.
INTEREST-BEARING LIABILITIES
The Corporation's funding mix continued to shift during the first nine months
of 1994 as it did throughout 1993 as a result of the liquidity provided by the
decrease in total earning assets, the current low interest rate environment and
the sale of its Texas subsidiaries. As mentioned above, the Corporation used
some of the liquidity provided by the decrease in interest-earning assets to
reduce higher cost discretionary funding sources, primarily time deposits
greater than $100,000. The average balances of lower cost savings and money
market accounts grew as a percentage of total interest-bearing liabilities
while higher cost time deposits greater than $100,000 decreased.
Customer preferences for shorter term and more liquid deposit products in the
current interest rate environment have contributed to the shift in deposit mix.
The low interest environment of the past year has also induced some customers
to seek higher returns elsewhere (including non-bank financial products),
contributing to the decrease in time deposits less than $100,000.
The sales of Lockwood and First State resulted in a $211.3 million decrease in
the average balance of interest bearing liabilities in the third quarter of
1994 compared to the same period last year, including $56.8 million in savings
deposits, $50.2 million in insured money market accounts and $104.3 million in
time deposits.
25
<PAGE> 28
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
EFFECT OF BALANCE SHEET COMPOSITION ON NET INTEREST MARGIN
The Net Interest Rate Spread and Net Interest Margin improved in both the first
nine months and third quarter of 1994. For the first nine months of 1994, the
decline in the average rate paid on interest-bearing liabilities resulting from
the favorable change in funding mix was moderately larger than a decline in the
average yield received on interest earning assets due to decreases in certain
higher yielding assets and the resulting change in asset mix. The same factors
which affected the Net Interest Rate Spread and Net Interest Margin in the
first nine months of 1994 also influenced these ratios in the third quarter.
However, in the third quarter 1994, the average yield received on interest
earning assets increased slightly, while the rate paid on interest bearing
liabilities declined. The effect of the increases in the prime interest rate
(discussed below) on the average yield on earning assets was more significant
in the third quarter than in the first nine months of 1994.
The contribution to Net Interest Margin of non-interest bearing demand deposits
related to the Corporation's off-balance sheet mortgage servicing portfolios
decreased significantly during the third quarter and first nine months of 1994.
The decrease is due to a significant decline in the volume of payoffs from the
Corporation's off-balance sheet mortgage servicing portfolios which were
temporarily held and invested before being remitted to investors. In addition,
a smaller servicing portfolio resulting from sales of servicing has reduced
mortgage escrow balances.
The average balance of non-interest bearing demand deposits is expected to
decrease further as the result of the October 1994, transfer to Norwest of
approximately $180 million of mortgage escrow balances associated with the
servicing rights sale.
During the third quarter, Lockwood and First State combined had
interest-earning assets with an average balance of $254.4 million, yielding
6.57%; interest-bearing liabilities with an average balance of $202.2 million,
yielding 3.48%; and non-interest bearing demand deposits of $48.6 million.
INTEREST RATE ENVIRONMENT
Interest rates declined steadily throughout 1993 before increasing during the
first nine months of 1994. In addition, the spread between the prime rate and
money market borrowing rates began to narrow during the first quarter of 1994
as money market rates increased, and, widened again in the second and third
quarters as a result of increases in the prime interest rate.
As discussed above and on page 9 of the 1993 Annual Report, the Corporation
utilizes interest rate swap agreements to hedge the interest rate risk
associated with a portion of its prime-based, variable rate commercial loans.
The rate the Corporation pays on the notional value of substantially all its
interest rate swap agreements varies with LIBOR. The narrowing of the spread
between the prime interest rate and LIBOR that occurred during the first
quarter had the effect of reducing the level of net interest income that the
Corporation received on its hedged positions.
Four prime lending rate increases since March 24, 1994, totalling 175 Basis
Points pushed the prime rate to 7.75% at September 30, 1994, and helped to
offset the negative effects that the increase in the LIBOR had on the
Corporation's hedged positions. Increases in the prime lending rate have a
positive effect on net interest income because of the Corporation's overall
asset sensitive position.
Further contraction of the spreads between prime and money market rates could
have the effect of reducing Net Interest Income.
26
<PAGE> 29
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
TABLE 2 SUMMARY OF CONSOLIDATED NET INTEREST INCOME (FULLY TAXABLE EQUIVALENT) (UNAUDITED)
THREE MONTHS ENDED September 30, 1994 June 30, 1994 March 31, 1994
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
(in thousands) BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold and resale agreements $163,586 $1,946 4.72% $258,420 $2,473 3.84% $600,261 $4,752 3.21%
Interest-bearing deposits with banks 197,563 2,023 4.06% 462,420 4,318 3.75% 245,968 2,276 3.75%
Money market funds 14,976 144 3.81% 14,268 110 3.09% 10,695 73 2.77%
- -----------------------------------------------------------------------------------------------------------------------------------
Total money market investments 376,125 4,113 4.34% 735,108 6,901 3.77% 856,924 7,101 3.36%
Investment securities available for sale
Investment securities-taxable 254,373 4,249 6.63% 261,404 4,336 6.65% 174,704 3,532 8.20%
Investment securities held to maturity
Investment securities-taxable 1,175,485 16,630 5.61% 1,243,998 17,611 5.68% 1,085,285 15,778 5.90%
Investment securities-tax-exempt 29,122 654 8.91% 36,544 788 8.65% 38,673 815 8.55%
Trading securities 76,118 955 4.98% 86,516 1,048 4.86% 92,551 1,123 4.92%
- -----------------------------------------------------------------------------------------------------------------------------------
Sub-total investment securities 1,535,098 22,488 5.81% 1,628,462 23,783 5.86% 1,391,213 21,248 6.19%
Mark-to-market securities adjustment 3,027 3,767 862
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment securities 1,538,125 22,488 1,632,229 23,783 1,392,075 21,248
Loans and lease financing 6,280,715 133,379 8.43% 6,280,037 130,276 8.32% 6,398,873 126,947 8.05%
Note receivable-FDIC 345,137 6,211 7.14% 348,930 5,873 6.75% 352,717 5,984 6.88%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 8,540,102 166,191 7.72% 8,996,304 166,833 7.44% 9,000,589 161,280 7.27%
Allowance for possible credit losses (188,542) (195,642) (192,948)
Cash and due from banks 510,266 535,494 511,378
Other assets 600,184 613,515 654,256
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $9,462,010 $9,949,671 $9,973,275
===================================================================================================================================
LIABILITIES
Money market accounts $2,001,760 $14,267 2.83% $2,164,867 $14,662 2.72% $2,187,184 $14,153 2.62%
Savings deposits 1,099,672 5,436 1.96% 1,191,567 5,865 1.97% 1,194,861 6,776 2.30%
Time deposits < $100,000 2,448,196 27,905 4.52% 2,566,196 28,477 4.45% 2,657,334 29,957 4.57%
Time deposits > $100,000 576,990 6,968 4.79% 650,358 6,477 3.99% 698,963 6,184 3.59%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 6,126,618 54,576 3.53% 6,572,988 55,481 3.39% 6,738,342 57,070 3.43%
Fed funds purchased & repo agreements 434,680 4,961 4.53% 333,217 3,278 3.95% 194,893 1,475 3.07%
Other short-term borrowings 74,425 815 4.34% 100,398 947 3.78% 142,320 1,287 3.67%
Subordinated notes 55,400 1,168 8.36% 57,240 1,199 8.40% 57,482 1,201 8.47%
Long-term debt 12,972 245 7.49% 15,352 265 6.92% 15,352 228 6.02%
Capital lease obligations 3,755 100 10.57% 3,879 103 10.65% 4,005 107 10.84%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 6,707,850 61,865 3.66% 7,083,074 61,273 3.47% 7,152,394 61,368 3.48%
Demand deposits 1,655,294 1,819,038 1,782,393
Other liabilities 198,619 213,517 221,335
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 8,561,763 9,115,629 9,156,122
Shareholders' equity 900,247 834,042 817,153
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $9,462,010 $9,949,671 $9,973,275
===================================================================================================================================
Net interest income (fully taxable equivalent basis) $104,326 $105,560 $99,912
Tax equivalent adjustment 4,598 4,628 4,632
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income $99,728 $100,932 $95,280
===================================================================================================================================
Net interest rate spread 4.06% 3.97% 3.79%
===================================================================================================================================
Net interest margin 4.85% 4.71% 4.50%
===================================================================================================================================
</TABLE>
Certain prior period amounts were reclassified to conform to current period
presentation.
27
<PAGE> 30
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
TABLE 2 SUMMARY OF CONSOLIDATED NET INTEREST INCOME (FULLY TAXABLE EQUIVALENT) (UNAUDITED)
THREE MONTHS ENDED December 31, 1993 September 30, 1993
- ------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
(in thousands) BALANCE INTEREST RATE BALANCE INTEREST RATE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold and resale agreements $498,375 $3,842 3.06% $365,674 $2,823 3.06%
Interest-bearing deposits with banks 110,324 955 3.43% 31,809 282 3.52%
Money market funds 10,031 67 2.65% 9,201 62 2.67%
- ------------------------------------------------------------------------------------------------------
Total money market investments 618,730 4,864 3.12% 406,684 3,167 3.09%
Investment securities available for sale
Investment securities-taxable 891 7 3.12% 7,503 59 3.12%
Investment securities held to maturity
Investment securities-taxable 1,247,769 20,355 6.47% 1,327,220 21,953 6.56%
Investment securities-tax-exempt 39,099 797 8.09% 39,575 848 8.50%
Trading securities 105,976 1,260 4.72% 168,314 1,881 4.43%
- ------------------------------------------------------------------------------------------------------
Sub-total investment securities 1,393,735 22,419 6.38% 1,542,612 24,741 6.36%
Mark-to-market securities adjustment
- ------------------------------------------------------------------------------------------------------
Total investment securities 1,393,735 22,419 1,542,612 24,741
Loans and lease financing 6,680,501 137,499 8.17% 6,879,707 143,368 8.27%
Note receivable-FDIC 462,535 8,259 7.08% 462,535 8,519 7.31%
- ------------------------------------------------------------------------------------------------------
Total interest-earning assets 9,155,501 173,041 7.50% 9,291,538 179,795 7.68%
Allowance for possible credit losses (191,301) (188,908)
Cash and due from banks 568,373 543,804
Other assets 716,491 743,659
- ------------------------------------------------------------------------------------------------------
TOTAL ASSETS $10,249,064 $10,390,093
======================================================================================================
LIABILITIES
Money market accounts $2,127,503 $14,986 2.79% $2,117,822 $15,461 2.90%
Savings deposits 1,161,392 7,637 2.61% 1,134,487 7,675 2.68%
Time deposits < $100,000 2,727,057 32,516 4.73% 2,798,119 34,090 4.83%
Time deposits > $100,000 716,042 6,867 3.80% 754,192 7,721 4.06%
- ------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 6,731,994 62,006 3.65% 6,804,620 64,947 3.79%
Fed funds purchased & repo agreements 220,977 1,696 3.04% 410,691 3,282 3.17%
Other short-term borrowings 89,828 734 3.24% 145,466 1,178 3.21%
Subordinated notes 57,709 1,205 8.28% 58,446 1,220 8.28%
Long-term debt 15,354 233 6.02% 15,808 240 6.02%
Capital lease obligations 4,148 110 10.52% 4,356 114 10.38%
- ------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 7,120,010 65,984 3.68% 7,439,387 70,981 3.79%
Demand deposits 2,079,388 1,905,196
Other liabilities 258,502 275,539
- ------------------------------------------------------------------------------------------------------
Total Liabilities 9,457,900 9,620,122
Shareholders' equity 791,164 769,971
- ------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $10,249,064 $10,390,093
======================================================================================================
Net interest income (fully taxable equivalent basis) $107,057 $108,814
Tax equivalent adjustment 5,226 5,406
- ------------------------------------------------------------------------------------------------------
Net interest income $101,831 $103,408
======================================================================================================
Net interest rate spread 3.82% 3.89%
======================================================================================================
Net interest margin 4.64% 4.65%
======================================================================================================
</TABLE>
Certain prior period amounts were reclassified to conform to current period
presentation.
28
<PAGE> 31
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
TABLE 3 CHANGE IN NET INTEREST INCOME (FULLY TAXABLE EQUIVALENT)(UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------
Quarter-to-Date Change in Change in Change in
Average Balance Interest Average Rate
(in thousands) 9/30/94 vs 6/30/94 9/30/94 vs 6/30/94 9/30/94 vs 6/30/94
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Federal funds sold and resale agreements ($94,834) ($527) 0.88%
Interest-bearing deposits with banks (264,857) (2,295) 0.31%
Money market funds 708 34 0.72%
- -----------------------------------------------------------------------------------------------------------------------------
Total money market investments (358,983) (2,788) 0.57%
Investment securities available for sale
Investment securities-taxable (7,031) (87) -0.02%
Investment securities held to maturity
Investment securities-taxable (68,513) (981) -0.07%
Investment securities-tax-exempt (7,422) (134) 0.26%
Trading securities (10,398) (93) 0.12%
- -----------------------------------------------------------------------------------------------------------------------------
Sub-total investment securities (93,364) (1,295) -0.05%
Mark-to-market adjustment (740)
- -----------------------------------------------------------------------------------------------------------------------------
Total investment securities (94,104) (1,295)
Loans and lease financing 678 3,103 0.11%
Note receivable-FDIC (3,793) 338 0.39%
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets (456,202) (642) 0.28%
Allowance for possible credit losses 7,100
Cash and due from banks (25,228)
Other assets (13,331)
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS ($487,661)
============================================================================================================================
LIABILITIES
Money market accounts ($163,107) ($395) 0.11%
Savings deposits (91,895) (429) -0.01%
Time deposits < $100,000 (118,000) (572) 0.07%
Time deposits > $100,000 (73,368) 491 0.80%
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits (446,370) (905) 0.14%
Fed funds purchased & repo agreements 101,463 1,683 0.58%
Other short-term borrowings (25,973) (132) 0.56%
Subordinated notes (1,840) (31) -0.04%
Long-term debt (2,380) (20) 0.57%
Capital lease obligations (124) (3) -0.08%
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities (375,224) 592 0.19%
Demand deposits (163,744)
Other liabilities (14,898)
- -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities (553,866)
Shareholders' equity 66,205
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY ($487,661)
============================================================================================================================
Net interest income (fully taxable equivalent basis) ($1,234)
Tax equivalent adjustment (30)
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income ($1,204)
============================================================================================================================
Net interest rate spread 0.09%
============================================================================================================================
Net interest margin 0.14%
============================================================================================================================
</TABLE>
29
<PAGE> 32
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
TABLE 3 CHANGE IN NET INTEREST INCOME (FULLY TAXABLE EQUIVALENT)(UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------
Quarter-to-Date Change in Change in Change in
Average Balance Interest Average Rate
(in thousands) 9/30/94 vs 9/30/93 9/30/94 vs 9/30/93 9/30/94 vs 9/30/93
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Federal funds sold and resale agreements ($202,088) ($877) 1.66%
Interest-bearing deposits with banks 165,754 1,741 0.54%
Money market funds 5,775 82 1.14%
- -----------------------------------------------------------------------------------------------------------------------------
Total money market investments (30,559) 946 1.25%
Investment securities available for sale
Investment securities-taxable 246,870 4,190 3.51%
Investment securities held to maturity
Investment securities-taxable (151,735) (5,323) -0.95%
Investment securities-tax-exempt (10,453) (194) 0.41%
Trading securities (92,196) (926) 0.55%
- -----------------------------------------------------------------------------------------------------------------------------
Sub-total investment securities (7,514) (2,253) -0.55%
Mark-to-market adjustment $3,027
- -----------------------------------------------------------------------------------------------------------------------------
Total investment securities (4,487) (2,253)
Loans and lease financing (598,992) (9,989) 0.16%
Note receivable-FDIC (117,398) (2,308) -0.17%
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets (751,436) (13,604) 0.04%
Allowance for possible credit losses 366
Cash and due from banks (33,538)
Other assets (143,475)
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS ($928,083)
=============================================================================================================================
LIABILITIES
Money market accounts ($116,062) ($1,194) -0.07%
Savings deposits (34,815) (2,239) -0.72%
Time deposits < $100,000 (349,923) (6,185) -0.31%
Time deposits > $100,000 (177,202) (753) 0.73%
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits (678,002) (10,371) -0.26%
Fed funds purchased & repo agreements 23,989 1,679 1.36%
Other short-term borrowings (71,041) (363) 1.13%
Subordinated notes (3,046) (52) 0.08%
Long-term debt (2,836) 5 1.47%
Capital lease obligations (601) (14) 0.19%
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities (731,537) (9,116) -0.13%
Demand deposits (249,902)
Other liabilities (76,920)
- -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities (1,058,359)
Shareholders' equity 130,276
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY ($928,083)
=============================================================================================================================
Net interest income (fully taxable equivalent basis) ($4,488)
Tax equivalent adjustment (808)
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income ($3,680)
=============================================================================================================================
Net interest rate spread 0.17%
=============================================================================================================================
Net interest margin 0.20%
=============================================================================================================================
</TABLE>
30
<PAGE> 33
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
TABLE 4 VOLUME/RATE ANALYSIS (FULLY TAXABLE EQUIVALENT) (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------
Quarter-to-Date 9/30/94 vs 6/30/94
Change in Interest Due to:
(in thousands) Average Balance Average Rate Net Change
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Federal funds sold and resale agreements ($3,123) $2,597 ($526)
Interest-bearing deposits with banks (4,511) 2,216 (2,295)
Money market funds 6 28 34
- ------------------------------------------------------------------------------------------------------------------------------
Total money market investments (7,628) 4,840 (2,787)
Investment securities available for sale
Investment securities-taxable (79) (8) (87)
Investment securities held to maturity
Investment securities-taxable (802) (179) (981)
Investment securities-tax-exempt (282) 148 (134)
Trading securities (249) 156 (93)
- ------------------------------------------------------------------------------------------------------------------------------
Sub-total investment securities (1,412) 117 (1,295)
Mark-to-market adjustment
- ------------------------------------------------------------------------------------------------------------------------------
Total investment securities (1,412) 117 (1,295)
Loans and lease financing 25 3,078 3,103
Note receivable-FDIC (377) 715 338
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets (9,391) 8,749 (641)
Allowance for possible credit losses
Cash and due from banks
Other assets
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS ($9,391) $8,749 ($641)
==============================================================================================================================
LIABILITIES
Money market accounts ($3,356) $2,961 ($395)
Savings deposits (403) (26) (429)
Time deposits < $100,000 (3,103) 2,531 (572)
Time deposits > $100,000 (3,570) 4,061 491
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits (10,431) 9,526 (905)
Fed funds purchased & repo agreements 1,134 549 1,683
Other short-term borrowings (799) 667 (132)
Subordinated notes (27) (4) (31)
Long-term debt (128) 108 (20)
Capital lease obligations (2) (1) (3)
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities (10,254) 10,846 592
Demand deposits
Other liabilities
- ------------------------------------------------------------------------------------------------------------------------------
Total Liabilities (10,254) 10,846 592
Shareholders' equity
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY ($10,254) $10,846 $592
==============================================================================================================================
Net interest income (fully taxable equivalent basis) ($1,233)
Tax equivalent adjustment (30)
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income ($1,204)
==============================================================================================================================
Net interest rate spread 0.09%
==============================================================================================================================
Net interest margin 0.14%
==============================================================================================================================
</TABLE>
31
<PAGE> 34
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
TABLE 4 VOLUME/RATE ANALYSIS (FULLY TAXABLE EQUIVALENT) (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------
Quarter-to-Date 9/30/94 vs 9/30/93
Change in Interest Due to:
(in thousands) Average Balance Average Rate Net Change
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Federal funds sold and resale agreements ($6,569) $5,692 ($877)
Interest-bearing deposits with banks 1,693 48 1,741
Money market funds 49 33 82
- --------------------------------------------------------------------------------------------------------------------
Total money market investments (4,827) 5,773 946
Investment securities available for sale
Investment securities-taxable 4,052 138 4,190
Investment securities held to maturity
Investment securities-taxable (2,351) (2,972) (5,323)
Investment securities-tax-exempt (438) 244 (194)
Trading securities (2,265) 1,339 (926)
- --------------------------------------------------------------------------------------------------------------------
Sub-total investment securities (1,003) (1,251) (2,253)
Mark-to-market adjustment
- --------------------------------------------------------------------------------------------------------------------
Total investment securities (1,003) (1,251) (2,253)
Loans and lease financing (26,191) 16,202 (9,989)
Note receivable-FDIC (2,115) (193) (2,308)
- --------------------------------------------------------------------------------------------------------------------
Total interest-earning assets (34,135) 20,531 (13,604)
Allowance for possible credit losses
Cash and due from banks
Other assets
- --------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS ($34,135) $20,531 ($13,604)
====================================================================================================================
LIABILITIES
Money market accounts ($830) ($364) ($1,194)
Savings deposits (226) (2,013) (2,239)
Time deposits < $100,000 (4,084) (2,101) (6,185)
Time deposits > $100,000 (6,665) 5,912 (753)
- --------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits (11,805) 1,434 (10,371)
Fed funds purchased & repo agreements 200 1,479 1,679
Other short-term borrowings (2,121) 1,758 (363)
Subordinated notes (123) 71 (52)
Long-term debt (195) 200 5
Capital lease obligations (27) 13 (14)
- --------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities (14,072) 4,956 (9,116)
Demand deposits
Other liabilities
- --------------------------------------------------------------------------------------------------------------------
Total Liabilities (14,072) 4,956 (9,116)
Shareholders' equity
- --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY ($14,072) $4,956 ($9,116)
====================================================================================================================
Net interest income (fully taxable equivalent basis) ($4,488)
Tax equivalent adjustment (808)
- --------------------------------------------------------------------------------------------------------------------
Net interest income ($3,680)
====================================================================================================================
Net interest rate spread 0.17%
====================================================================================================================
Net interest margin 0.20%
====================================================================================================================
</TABLE>
32
<PAGE> 35
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
TABLE 5 SUMMARY OF CONSOLIDATED NET INTEREST INCOME (FULLY TAXABLE EQUIVALENT) (UNAUDITED)
NINE MONTHS ENDED September 30, 1994 September 30, 1993
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
(in thousands) BALANCE INTEREST RATE BALANCE INTEREST RATE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold and resale agreements $339,156 $9,171 3.62% $423,941 $9,619 3.03%
Interest-bearing deposits with banks 301,807 8,616 3.82% 99,758 2,476 3.32%
Money market funds 13,329 327 3.28% 8,145 157 2.58%
- -----------------------------------------------------------------------------------------------------------------------------------
Total money market investments 654,292 18,114 3.70% 531,844 12,252 3.08%
Investment securities available for sale
Investment securities-taxable 234,373 12,117 6.91% 64,865 2,608 5.38%
Investment securities held to maturity
Investment securities-taxable 1,164,665 50,018 5.74% 1,267,739 66,724 7.04%
Investment securities-tax-exempt 34,745 2,257 8.68% 40,553 2,635 8.69%
Trading securities 85,001 3,126 4.92% 150,885 5,451 4.83%
- -----------------------------------------------------------------------------------------------------------------------------------
Sub-total investment securities 1,518,784 67,518 5.94% 1,524,042 77,418 6.79%
Mark-to-market securities adjustment 2,560
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment securities 1,521,344 67,518 1,524,042 77,418
Loans and lease financing 6,319,443 390,603 8.26% 6,699,588 420,205 8.39%
Covered assets and FDIC assistance 837
Note receivable-FDIC 348,900 18,069 6.92% 464,913 26,600 7.65%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 8,843,979 494,304 7.47% 9,221,224 536,475 7.78%
Allowance for possible credit losses (192,361) (184,417)
Cash and due from banks 519,042 516,849
Other assets 622,453 752,312
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $9,793,113 $10,305,968
===================================================================================================================================
LIABILITIES
Money market accounts $2,117,257 $43,081 2.72% $2,112,736 $45,982 2.91%
Savings deposits 1,161,685 18,076 2.08% 1,086,834 22,408 2.76%
Time deposits < $100,000 2,556,170 86,339 4.52% 2,917,201 108,550 4.98%
Time deposits > $100,000 641,657 19,629 4.09% 812,109 25,246 4.16%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 6,476,769 167,125 3.45% 6,928,880 202,186 3.90%
Federal funds purchased & repurchase agreements 321,809 9,714 4.04% 329,451 7,728 3.14%
Dollar repurchase agreements 51,922 1,761 4.53%
Other short-term borrowings 105,466 3,049 3.87% 130,152 3,259 3.35%
Subordinated notes 56,699 3,567 8.41% 58,729 3,671 8.36%
Long-term debt 14,550 739 6.79% 17,385 783 6.02%
Capital lease obligations 3,879 310 10.68% 4,795 385 10.74%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 6,979,172 184,504 3.53% 7,521,314 219,773 3.91%
Demand deposits 1,751,776 1,784,250
Other liabilities 211,382 218,710
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 8,942,330 9,524,274
Shareholders' equity 850,783 781,694
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $9,793,113 $10,305,968
===================================================================================================================================
Net interest income (fully taxable equivalent basis) $309,800 $316,702
Tax equivalent adjustment 13,860 16,922
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income $295,940 $299,780
===================================================================================================================================
Net interest rate spread 3.94% 3.87%
===================================================================================================================================
Net interest margin 4.68% 4.59%
===================================================================================================================================
</TABLE>
Certain prior period amounts have been reclassified to conform to current
period presentation.
33
<PAGE> 36
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
TABLE 6 CHANGE IN NET INTEREST INCOME (FULLY TAXABLE EQUIVALENT)(UNAUDITED)
Change in Change in Change in
Year-to-Date Average Balance Interest Average Rate
9/30/94 vs 9/30/94 vs 9/30/94 vs
(in thousands) 9/30/93 9/30/93 9/30/93
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Federal funds sold and resale agreements ($84,785) ($448) 0.59%
Interest-bearing deposits with banks 202,049 6,140 0.50%
Money market funds 5,184 170 0.70%
- -------------------------------------------------------------------------------------------------------------------------------
Total money market investments 122,448 5,862 0.62%
Investment securities available for sale
Investment securities-taxable 169,508 9,509 1.54%
Investment securities held to maturity
Investment securities-taxable (103,074) (16,706) -1.30%
Investment securities-tax-exempt (5,808) (378) -0.01%
Trading securities (65,884) (2,325) 0.09%
- -------------------------------------------------------------------------------------------------------------------------------
Sub-total investment securities (5,258) (9,900) -0.85%
Mark-to-market securities adjustment 2,560
- -------------------------------------------------------------------------------------------------------------------------------
Total investment securities (2,698) (9,900)
Loans and lease financing (380,145) (29,602) -0.13%
Covered assets and FDIC assistance (837)
Note receivable-FDIC (116,013) (8,531) -0.73%
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets (377,245) (42,171) -0.31%
Allowance for possible credit losses ($7,944)
Cash and due from banks 2,193
Other assets (129,859)
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS ($512,855)
===============================================================================================================================
LIABILITIES
Money market accounts $4,521 ($2,901) -0.19%
Savings deposits 74,851 (4,332) -0.68%
Time deposits < $100,000 (361,031) (22,211) -0.46%
Time deposits > $100,000 (170,452) (5,617) -0.07%
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits (452,111) (35,061) -0.45%
Federal funds purchased & repurchase agreements (7,642) 1,986 0.90%
Dollar repurchase agreements (51,922) (1,761) -4.53%
Other short-term borrowings (24,686) (210) 0.52%
Subordinated notes (2,030) (104) 0.05%
Long-term debt (2,835) (44) 0.77%
Capital lease obligations (916) (75) -0.06%
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities (542,142) (35,269) -0.38%
Demand deposits (32,474)
Other liabilities (7,328)
- -------------------------------------------------------------------------------------------------------------------------------
Total Liabilities (581,944)
Shareholders' equity 69,089
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY ($512,855)
===============================================================================================================================
Net interest income (fully taxable equivalent basis) ($6,902)
Tax equivalent adjustment (3,062)
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income ($3,840)
===============================================================================================================================
Net interest rate spread 0.07%
===============================================================================================================================
Net interest margin 0.09%
===============================================================================================================================
</TABLE>
34
<PAGE> 37
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
TABLE 7 VOLUME/RATE ANALYSIS (FULLY TAXABLE EQUIVALENT(UNAUDITED)
9/30/94 vs 9/30/93
Year-to-Date Change in Interest Due to:
Average Average Net
(in thousands) Balance Rate Change
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Federal funds sold and resale agreements ($2,762) $2,314 ($448)
Interest-bearing deposits with banks 5,715 425 6,140
Money market funds 119 51 170
- ----------------------------------------------------------------------------------------------------------------
Total money market investments 3,072 2,790 5,862
Investment securities available for sale
Investment securities-taxable 8,570 939 9,509
Investment securities held to maturity
Investment securities-taxable (5,105) (11,601) (16,706)
Investment securities-tax-exempt (375) (3) (378)
Trading securities (2,491) 166 (2,325)
- ----------------------------------------------------------------------------------------------------------------
Sub-total investment securities 599 (10,499) (9,900)
Mark-to-market securities adjustment
- ----------------------------------------------------------------------------------------------------------------
Total investment securities 599 (10,499) (9,900)
Loans and lease financing (23,247) (6,355) (29,602)
Covered assets and FDIC assistance
Note receivable-FDIC (6,172) (2,359) (8,531)
- ----------------------------------------------------------------------------------------------------------------
Total interest-earning assets (25,748) (16,423) (42,171)
Allowance for possible credit losses
Cash and due from banks
Other assets
- ----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS ($25,748) ($16,423) ($42,171)
================================================================================================================
LIABILITIES
Money market accounts $163 ($3,064) ($2,901)
Savings deposits 2,282 (6,614) (4,332)
Time deposits < $100,000 (12,715) (9,496) (22,211)
Time deposits > $100,000 (5,200) (417) (5,617)
- ----------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits (15,470) (19,591) (35,061)
Federal funds purchased & repurchase agreements (295) 2,281 1,986
Dollar repurchase agreements (881) (880) (1,761)
Other short-term borrowings (860) 650 (210)
Subordinated notes (138) 34 (104)
Long-term debt (175) 131 (44)
Capital lease obligations (73) (2) (75)
- ----------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities (17,892) (17,377) (35,269)
Demand deposits
Other liabilities
- ----------------------------------------------------------------------------------------------------------------
Total Liabilities (17,892) (17,377) (35,269)
Shareholders' equity
- ----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY ($17,892) ($17,377) ($35,269)
================================================================================================================
Net interest income (fully taxable equivalent basis) ($6,902)
================================================================================================================
</TABLE>
35
<PAGE> 38
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
LOANS AND LEASE FINANCING PORTFOLIO AND CREDIT RISK ANALYSIS
The Corporation's total loans and lease financing, net of unearned income, at
September 30, 1994, decreased $494.9 million, or 7.4%, from December 31, 1993.
Please refer to Table 8 for a presentation of the Corporation's loans and lease
financing portfolio for the five most recent quarters, and Tables 8a and 8b,
respectively, for a presentation of the Corporation's commercial real estate
loans outstanding and commercial, financial and agricultural loans outstanding
at September 30, 1994, by geographic area. Watch Credits for the five most
recent quarters are presented in Table 8.
The decrease in total loans outstanding was primarily due to decreases in the
residential real estate-mortgage loan portfolios and the sale of the
Corporation's Texas subsidiaries. The balance of the residential real
estate-mortgage loan portfolios decreased due to a slow down in mortgage
lending volume in the first nine months of 1994 resulting from higher
residential mortgage interest rates. Lower residential loan demand also
contributed to a $198.8 million decrease in the balance of FCSI's warehouse
loan portfolio, which is included in commercial loans. This decrease in the
warehouse loan portfolio was offset by other commercial loan growth in the
Corporation's Michigan business.
The sale of Lockwood and First State also contributed to the decrease in the
balance of loans and lease financing at September 30, 1994. Combined, these
two banks had loans and lease financing of $231.5 million at December 31, 1993.
In addition, the Corporation sold $22.2 million of non-performing commercial
loans secured by real estate during 1994 ($7.9 million in the third quarter).
These transactions resulted in charge-offs of $8.4 million ($1.4 million in the
third quarter) against the allowance for loan losses.
The level of Non-performing Assets and Watch Credits at September 30, 1994,
decreased from their level at December 31, 1993. However, total Non-performing
Assets increased $2.6 million from their balance at June 30, 1994. This
increase was primarily due to the purchase of $16.3 million (balance at
September 30, 1994) of VA insured Non-performing Loans from IOMC's off-balance
sheet loan servicing portfolios as a condition of the sale of servicing rights
to Norwest. Please refer to Table 9 for a presentation of Non-performing
Assets for the five most recent quarters and to Table 9a for a presentation of
the changes in commercial and commercial real estate Non-performing Assets
during the nine months ended September 30, 1994.
36
<PAGE> 39
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
TABLE 8 LOANS AND LEASE FINANCING PORTFOLIO (UNAUDITED)
Balance at:
(in thousands) 09/30/94 06/30/94 03/31/94 12/31/93 9/30/93
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial, financial & agricultural
secured by real estate (Table 8a) $892,899 $926,081 $927,047 $971,917 $913,554
Other commercial, financial & agricultural (Table 8a) 2,405,015 2,392,341 2,295,503 2,373,707 2,537,150
Commerical real estate-mortgage (Table 8b) 1,142,931 1,183,585 1,201,482 1,238,177 1,229,197
Residential real estate-mortgage
Mortgages held for sale 108,783 331,300 342,061 583,056 635,363
Mortgages held for investment 401,402 436,257 459,674 465,904 386,680
Short-term real estate-construction (Table 8b) 145,609 149,843 159,106 159,594 156,639
Installment 959,028 870,703 803,193 780,532 751,069
Lease financing 145,813 141,855 133,216 116,998 105,122
- ----------------------------------------------------------------------------------------------------------------------------
Total 6,201,480 6,431,965 6,321,282 6,689,885 6,714,774
Unearned income (25,076) (26,706) (25,868) (18,619) (18,192)
- ----------------------------------------------------------------------------------------------------------------------------
Total $6,176,404 $6,405,259 $6,295,414 $6,671,266 $6,696,582
============================================================================================================================
============================================================================================================================
Watch Credits (in millions) (1) $319 $351 $356 $387 $450
============================================================================================================================
</TABLE>
(1) Loans classified as Watch Credits are included in the above loan balances.
37
<PAGE> 40
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
TABLE 8 a. COMMERCIAL, FINANCIAL AND AGRICULTURAL LOANS OUTSTANDING
September 30, 1994 (in thousands) (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------
Other Other
Industry (1) Michigan Midwest Northeast South States Total
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial, Financial and Agricultural Loans
Secured by Real Estate Outstanding:
Service $232,891 $15,267 $13,091 $9,392 $845 $271,486
Finance, insurance and real estate 229,790 14,312 3,399 3,539 40 251,080
Retail Trade 90,780 863 52,362 2,872 146,877
Manufacturing 64,087 961 1,762 1,249 68,059
Automotive 61,305 1,436 62,741
Wholesale Trade 38,550 52 38,602
Transportation/utilities 15,416 315 1,687 17,418
Other 22,395 27 14,214 36,636
- ------------------------------------------------------------------------------------------------------------------------------
Total 755,214 33,233 68,852 17,565 18,035 892,899
- ------------------------------------------------------------------------------------------------------------------------------
Other Commercial, Financial and
Agricultural Loans Outstanding:
Service 438,501 15,254 1,825 8,122 7,918 471,620
Finance, insurance and real estate 263,147 562 65 18,550 145,215 427,539
Manufacturing 240,966 24,455 16,779 7,107 5,486 294,793
Wholesale Trade 265,619 11,355 5,203 282,177
Transportation/utilities 267,542 3,621 791 800 272,754
Retail Trade 237,287 9,330 3,096 8,982 8,325 267,020
Automotive 235,251 4,298 2,744 242,293
Other 105,282 568 3,304 37,665 146,819
- ------------------------------------------------------------------------------------------------------------------------------
Total 2,053,595 69,443 22,556 49,609 209,812 2,405,015
- ------------------------------------------------------------------------------------------------------------------------------
Total Commercial, Financial and
Agricultural Loans Outsatnding $2,808,809 $102,676 $91,408 $67,174 $227,847 $3,297,914
==============================================================================================================================
Percentage of geographic location to
total Commercial, Financial and
Agricultural Loans outstanding 85.17% 3.11% 2.77% 2.04% 6.91% 100.00%
==============================================================================================================================
</TABLE>
(1) The industrial categories are internally developed definitions based on the
primary market in which the borrower operates.
38
<PAGE> 41
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
TABLE 8 b. SHORT-TERM COMMERCIAL REAL ESTATE - CONSTRUCTION AND COMMERCIAL REAL ESTATE - MORTGAGE LOANS OUTSTANDING
September 30, 1994 (in thousands) (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------------
Other Other
Collateral Type Michigan Midwest Northeast South States Total
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Short-term Commercial
Real Estate-Construction:
Land development/acquisition $22,001 $118 $54,216 $76,335
Retail 9,459 9,459
Residential > 4 family 1,540 6,932 8,472
Office 1,932 1,932
Other 45,503 2,009 $1,899 49,411
- -------------------------------------------------------------------------------------------------------------------------------
Total 80,435 118 63,157 1,899 145,609
- -------------------------------------------------------------------------------------------------------------------------------
Commercial Real Estate-Mortgage:
Retail 256,622 1,125 24,170 731 282,648
Office 215,113 3,705 5,347 1,131 225,296
Residential > 4 family 163,719 1,272 3,000 30,311 198,302
Mobile home parks 85,788 12,412 $530 14,658 9,262 122,650
Hotels 61,004 124 17,514 3,850 32,656 115,148
Industrial 104,292 4,719 1,601 4,266 114,878
Warehouse 23,856 4,155 575 28,586
Other 26,691 448 246 3,122 24,916 55,423
- -------------------------------------------------------------------------------------------------------------------------------
Total 937,085 27,960 18,290 55,748 103,848 1,142,931
- -------------------------------------------------------------------------------------------------------------------------------
Total Commercial
Real Estate Loans Outstanding $1,017,520 $28,078 $18,290 $118,905 $105,747 $1,288,540
===============================================================================================================================
Percentage of geographic location to
Total Commercial Real Estate Loans
outstanding 78.97% 2.18% 1.42% 9.23% 8.21% 100.00%
================================================================================================================================
</TABLE>
(1) The industrial categories are internally developed definitions based on the
primary markets in which the borrower operates.
39
<PAGE> 42
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
TABLE 9 NON-PERFORMING ASSETS (UNAUDITED)
(in thousands) 09/30/94 06/30/94 03/31/94 12/31/93 9/30/93
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans
Commercial, financial & agricultural secured by real estate $17,287 $18,875 $37,045 $36,872 $37,538
Other commercial, financial & agricultural 27,950 28,168 29,939 32,243 28,346
Commerical real estate-mortgage 13,863 11,796 12,443 8,886 14,046
Residential real estate-mortgage 31,166 21,950 19,437 22,271 17,627
Short-term real estate-construction 52,781 52,913 53,588 55,189 53,760
Installment 1,750 1,771 1,421 1,002 1,876
Lease financing 1,118 22
- -----------------------------------------------------------------------------------------------------------------------------
Total 145,915 135,473 153,895 156,463 153,193
Renegotiated Loans
Commercial, financial & agricultural secured by real estate 41 44 47 23
Other commercial, financial & agricultural 85
Commerical real estate-mortgage 331 338
Short-term real estate-construction 283 290 300 313 325
- -----------------------------------------------------------------------------------------------------------------------------
Total 283 331 675 698 433
- -----------------------------------------------------------------------------------------------------------------------------
Total Non-performing Loans 146,198 135,804 154,570 157,161 153,626
- -----------------------------------------------------------------------------------------------------------------------------
Property from defaulted loans
Commercial, financial & agricultural secured by real estate 9,844 10,368 17,344 18,998 19,832
Other commercial, financial & agricultural 5,903 6,560 6,963 7,299 4,407
Commerical real estate-mortgage 8,974 10,214 11,971 13,193 15,558
Residential real estate-mortgage 5,677 5,589 6,635 6,242 5,099
Short-term real estate-construction 17,826 23,401 37,091 51,084 76,535
Installment 922 818 917 937 706
Other real estate owned, net 6 7 7 313 314
- -----------------------------------------------------------------------------------------------------------------------------
Property from defaulted loans and other real estate owned 49,152 56,957 80,928 98,066 122,451
- -----------------------------------------------------------------------------------------------------------------------------
Total Non-performing Assets $195,350 $192,761 $235,498 $255,227 $276,077
=============================================================================================================================
Non-performing Assets to total loans (net of unearned
income) plus property from defaulted loans and other
real estate owned, net 3.14% 2.98% 3.69% 3.77% 4.05%
=============================================================================================================================
Non-performing loans to total loans, net of unearned income 2.37% 2.12% 2.46% 2.36% 2.29%
=============================================================================================================================
Allowance for possible credit losses to
Non-performing Loans 127% 139% 126% 122% 123%
=============================================================================================================================
</TABLE>
Loans 90 days or more past due and still accruing at September 30, 1994, June
30, 1994, March 31, 1994, December 31, 1993, and September 30, 1993 amounted
to $94,848, $99,956, $115,967, $118,363, and $88,139. At September 30, 1994,
96.3% of loans 90 days or more past due and still accruing were insured by the
FHA.
40
<PAGE> 43
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
TABLE 9 a. CHANGES IN COMMERCIAL AND COMMERCIAL REAL ESTATE NON-PERFORMING ASSETS (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------
Commercial Short-Term Commercial Other
Real Estate- Commercial Loans Secured Commercial
Mortgage Real Estate- By Real Estate Total
(in thousands) Construction
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-performing Assets at
December 31, 1993 $22,417 $106,586 $55,917 $39,542 $224,462
Activity during 1994:
Additions 6,188 3,360 6,322 22,234 38,104
Pay-downs (1,827) (2,248) (14,490) (13,502) (32,067)
Disposition of assets (4,341) (32,137) (7,182) (2,075) (45,735)
Charge-offs (527) (9,284) (9,263) (19,074)
Write-downs (875) (2,156) (268) (3,299)
Return to accrual (1) (823) (618) (1,041) (1,983) (4,465)
Other(2) 1,750 (3,178) (955) (832) (3,215)
- --------------------------------------------------------------------------------------------------------------------------
Net activity during 1994 420 (35,696) (28,786) (5,689) (69,751)
- --------------------------------------------------------------------------------------------------------------------------
Non-performing Assets at
September 30, 1994 $22,837 $70,890 $27,131 $33,853 $154,711
==========================================================================================================================
Percentage of Non-Performing Asset
category to Total 14.76% 45.82% 17.54% 21.88% 100.00%
==========================================================================================================================
</TABLE>
(1)Loans are returned to performing status after a reasonable period of
sustained performance and the borrower's financial condition has improved to
a point where doubt as to repayment of principal and interest no longer
exists.
(2)Represents net activity for assets with a carrying value generally less than
$250 thousand.
41
<PAGE> 44
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
ALLOWANCE AND PROVISION FOR POSSIBLE CREDIT LOSSES
Provisions are made to the allowance for possible loan losses in amounts
necessary to maintain the allowance at a level considered by management to be
sufficient to provide for risk of loss inherent in the loan portfolio.
Determining the adequacy of the allowance for possible loan losses involves a
disciplined quarterly analysis. The analysis ensures that all relevant factors
affecting loan collectability are consistently applied. The analysis of the
allowance relies mainly on historical loss ratios, current general economic and
industry trends, and the current and projected financial condition of certain
individual borrowers. Specific allocations of the allowance are assigned to
individual loans where serious doubt of full principal repayment exists.
General allocations of the allowance are assigned to the remaining portfolio on
the basis of historical loss factors. The historical loss factors are
determined on the basis of past charge-off experience identified by portfolio
type and, within each portfolio type, identified by risk rating. A migration
analysis is utilized to support the calculation of the allowance and evaluate
the overall reasonableness. Management believes the allowance for possible
loan loss at September 30, 1994, is adequate based on the risks identified in
the various loan categories.
The Corporation places more emphasis on estimates of a property's net
realizable values and the borrowers' equity position in the collateral, and
less emphasis on secondary collateral values and personal guarantees when
assessing the need for charge-off. The Corporation's Appraisal Review
Department is responsible for establishing and maintaining property appraisal
policies in accordance with regulatory guidelines. The frequency of
re-appraisal is based upon several factors including the loan's risk rating.
For the nine month period ended September 30, 1994, the provision was $18.0
million, a decrease of $15.0 million from the same period in 1993. The
decrease is attributable to improvement in the area of credit quality. The
improvement in credit quality is evidenced by reductions in Watch Credits,
Non-performing Assets and net charge-offs during 1993 and the first nine months
of 1994.
As mentioned above, the Corporation sold $22.2 million of non-performing
commercial loans secured by real estate during 1994. These transactions
resulted in charge-offs of $1.4 million in the third quarter and $7.0 million
in the second quarter against the allowance for loan losses.
While the provision for possible credit losses decreased year-over-year, the
allowance for possible credit losses as a percentage of Non-performing Loans
improved to 127% at September 30, 1994, from 123% at September 30 of last year.
The allowance for possible credit losses as a percentage of total period-end
loans improved to 3.01% at September 30, 1994, from 2.82% at September 30 last
year.
42
<PAGE> 45
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
TABLE 10 ANALYSIS OF THE ALLOWANCE FOR POSSIBLE CREDIT LOSSES (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------
(in thousands) Three Months Ended 09/30/94 06/30/94 03/31/94 12/31/93 9/30/93
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Beginning balance $188,585 $194,521 $190,992 $189,055 $185,399
Charge-offs
Commercial, financial & agricultural secured by real-estate 1,716 7,308 260 1,190 716
Other commercial, financial & agricultural 4,190 3,927 1,178 2,718 233
Commerical real estate-mortgage 40 40 447 276 463
Residential real estate-mortgage 428 493 440 284 258
Short-term real estate-construction 3,000
Installment 2,044 1,879 1,903 2,054 2,187
Lease financing 20 15 51
- -------------------------------------------------------------------------------------------------------------------------
Total 8,418 13,667 4,228 6,537 6,908
Recoveries
Commercial, financial & agricultural secured by real-estate 102 173 76 100 704
Other commercial, financial & agricultural 497 744 1,030 683 577
Commerical real-estate--mortgage 124 240 173 268 396
Residential real-estate--mortgage 39 4
Short-term real-estate--construction 502 9 1 1 361
Installment 632 526 473 417 526
Lease financing 2 5
- -------------------------------------------------------------------------------------------------------------------------
Total 1,859 1,731 1,757 1,474 2,564
Net charge-offs 6,559 11,936 2,471 5,063 4,344
Additions:
Provisions charged to operating expense 6,000 6,000 6,000 7,000 8,000
Less:
Allowance of subsidiaries sold 2,295
- -------------------------------------------------------------------------------------------------------------------------
Ending balance $185,731 $188,585 $194,521 $190,992 $189,055
=========================================================================================================================
Allowance for possible credit losses to period-end loans 3.01% 2.94% 3.09% 2.86% 2.82%
=========================================================================================================================
CHARGE-OFF RATIOS
- -------------------------------------------------------------------------------------------------------------------------
Quarter-to-Date 09/30/94 06/30/94 03/31/94 12/31/93 9/30/93
- -------------------------------------------------------------------------------------------------------------------------
Annualized net charge-offs to average
loans, net of unearned income 0.42% 0.76% 0.15% 0.30% 0.25%
=========================================================================================================================
Year-to-Date 9/30/94 9/30/93
- -------------------------------------------------------------------------------------------------------------------------
Annualized net charge-offs to average loans, net of unearned income 0.44% 0.40%
=========================================================================================================================
</TABLE>
43
<PAGE> 46
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
NON-INTEREST INCOME AND NON-INTEREST EXPENSE
Non-interest income for the third quarter and first nine months of 1994
increased $43.7 million and $42.0 million, respectively, over the same periods
in 1993 principally as the result of non-recurring net other gains discussed
below. Non-interest expenses for the third quarter and first nine months of
1994 decreased $26.4 million and $109.2 million over the same periods in 1993.
During the third quarter 1994, the Corporation recognized other gains totalling
$67.1 million. This included gains in connection with the sale of Lockwood,
$14.2 million; First State, $5.4 million; and servicing rights to Norwest,
$42.3 million; and gains in connection with the Termination Agreement, $9.7
million. Partially offsetting these gains was a $4.5 million loss recognized
in connection with the curtailment of pension and postretirement benefits. In
connection with the Termination Agreement, the Corporation reversed $10.3
million in previously accrued expense for the amount the FDIC had the right to
receive under the Assistance Agreement at March 31, 1999, of up to 20% of
IOBOC's equity at December 31, 1998. For more information regarding this
"right", refer to Note E, FDIC Assistance, on page 46 of the 1993 Annual
Report. Certain interpretative disputes which arose under the Assistance
Agreement were also resolved with the Termination Agreement. This resulted in
a charge against other gains of $0.6 million. As a result of the Norwest,
Lockwood and First State transactions, the number of active participants in the
Corporation's pension and postretirement benefit plans was significantly
reduced, resulting in a plan curtailment under SFAS No. 88, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans
and for Termination Benefits", and SFAS No. 106, "Employer's Accounting for
Postretirement Benefits Other Than Pension". The plan curtailment resulted in
a loss of $4.3 million for post retirement benefits and $0.2 million for
pension benefits which were charged against other gains in the third quarter
1994.
Effective July 31, 1994, IOMC sold its entire portfolio of mortgage servicing
rights to Norwest. This included both the rights to service off-balance sheet
investor loans as well as the rights to service MNB and affiliate owned loans
formerly serviced by IOMC.
MNB will continue to originate residential mortgage loans in Michigan through
its branch network. The loans will be originated in MNB's name and sold to
Norwest and other mortgage banking businesses under correspondent lending
arrangements.
Cash proceeds of the sale were received in two installments, 50% on the closing
date of September 22, 1994, and the remaining 50% in October 1994.
44
<PAGE> 47
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
PMSR and ESF assets of $44.9 million were written-off against the sale
proceeds.
IOMC acted as interim servicer during the period between the effective date
(July 31, 1994) and the transfer dates of the servicing rights to Norwest
(September 30 - October 17, 1994). During this period IOMC received an interim
servicing fee of $6 per loan, per month, for each loan serviced plus normal
ancillary loan servicing income.
Approximately $180 million of escrow balances related to the loans in the
mortgage servicing portfolio (included in non-interest bearing demand deposits
at September 30, 1994) were transferred to Norwest during October, 1994.
Norwest also purchased the leasehold improvements, furniture, fixtures and
equipment of most of IOMC's non-Michigan branch locations and its national
servicing, processing and tele-marketing center located in Southfield,
Michigan. Norwest also assumed the lease obligations for these facilities.
Norwest will service MNB and affiliate owned performing residential mortgage
loans for a monthly servicing fee of one-twelfth of 37.5 Basis Points of the
outstanding principal balance. Residential mortgage Non-performing Loans will
be serviced by Norwest at a cost of $55 per loan per month.
Excluding other gains, discussed above, and ESF amortization expense,
non-interest income for the third quarter 1994 was $27.1 million lower than in
the same period last year due principally to reductions in mortgage servicing
fees of $9.8 million and mortgage banking gains of $17.0 million. As discussed
above, in accordance with the terms of the sale of servicing rights to Norwest,
IOMC was paid a sub-servicing fee of $6 per loan for the period August 1
through September 30, 1994. This fee was less than IOMC's normal servicing
fee. Also contributing to the decline in mortgage servicing fees was a fourth
quarter 1993 sale of servicing rights for approximately $2.5 billion of loans
and accelerated prepayments in the servicing portfolio throughout 1993.
Rising residential mortgage interest rates during 1994 and the resulting
slow-down in lending activity was the primary contributor to the reduction in
mortgage banking secondary marketing gains.
The sale of Lockwood and First State resulted in a $0.9 million decrease in
total non-interest income in the third quarter 1994, including a $0.8 million
decrease in service charges on deposit accounts.
For the nine months ended September 30, 1994, non-interest income, excluding
third quarter 1994 other gains, ESF
45
<PAGE> 48
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
amortization expense and security gains, decreased $33.3 million compared to
the same period last year. Contributing to this decline were reductions in
mortgage servicing income of $22.2 million, mortgage banking secondary
marketing gains of $13.5 million and trading profits of $1.6 million.
Partially offsetting these reductions were increases in merchant fee income of
$2.0 million and other income of $2.4 million. The sale of Lockwood and First
State resulted in a $0.3 million decrease in total non-interest income in the
first nine months of 1994 (excluding security gains of $1.1 million). This
decrease was primarily due to a $0.4 million decrease in service charges on
deposit accounts.
Substantial write-downs of mortgage servicing intangible assets throughout 1993
and 1994 resulted in significant decreases in the net book value of those
assets. This lower book value resulted in reductions in ESF and PMSR
amortization expense. During the third quarter and nine months ended September
30, 1994, ESF amortization decreased $4.1 million and $14.8 million,
respectively, and PMSR amortization decreased $12.1 million and $84.7 million,
respectively, compared to the same periods last year.
During the third quarter 1994, non-interest expense, excluding PMSR
amortization expense, was $14.3 million lower than the same quarter last year.
Contributing to this reduction were cost cutting initiatives implemented in
1994; a decrease in uncollected interest due to investors for loans in IOMC's
off-balance sheet servicing portfolio that have paid off early; and a decrease
in defaulted loan expense.
In the category of salaries and wages, which decreased $5.3 million, base
salaries declined $4.8 million due primarily to cost cutting initiatives
implemented during 1994. Decreases in incentive and other compensation were
partially offset by accruals for performance bonuses.
A $3.2 million decrease in uncollected interest due to investors was
attributable to a slow down in loan refinancings resulting from increases in
residential mortgage interest rates during 1994 and a smaller servicing
portfolio.
The decrease in defaulted loan expense of $2.7 million was primarily due to a
smaller portfolio of property from defaulted loans and a reduction in
writedowns.
In addition, the sale of Lockwood and First State resulted in a $1.5 million
decrease in non-interest expense during the third quarter 1994 (excluding a
$0.9 million decrease in salaries and wages).
Partially offsetting the above decreases, were increases in
46
<PAGE> 49
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan single business tax and goodwill amortization. The increase in
Michigan single business tax expense was principally attributable to the other
gains recognized during the quarter. Goodwill amortization expense increased
due to a $1.0 million write-off of the remaining goodwill associated with the
December 1986 acquisition of Morison International, Inc. The write-off was
taken as a result of a significant decline in the size and earnings
contribution of the acquired business.
Excluding PMSR amortization and a one-time write-down (discussed below) in the
second quarter 1993, non-interest expense for the first nine months of 1994
decreased $19.9 million. Contributing to this improvement was a reduction in
defaulted loan expense primarily due to gains on the sale of property from
defaulted loans during 1994; a reduction in uncollected interest due investors
on payoffs of loans in IOMC's off-balance sheet servicing portfolio; and
recent cost cutting initiatives.
In the category of salaries and wages, which decreased $1.7 million during the
first nine months of 1994, base salaries declined $5.5 million primarily due to
cost cutting initiatives. Partially offsetting this improvement were costs
associated with termination benefits and accruals for performance bonuses.
In addition, excluding $0.2 million in salaries and wages, total non-interest
expense of Lockwood and First State decreased $0.4 million in the first nine
months of 1994.
Partially offsetting these reductions were increases in other employee
benefits, $2.8 million; goodwill amortization, $1.0 million; and Michigan
single business tax, $1.5 million. The increase in other employee benefits was
due to the recognition of $1.5 million of expense in connection with the
adoption of SFAS No. 112, Employer's Accounting for Postemployment Benefits,
during the first quarter 1994. Also contributing to the increase in employee
benefit costs was a change in the discount rate from 8.5% at December 31, 1992,
to 7.0% at December 31, 1993, used in determining the actuarial present value
of projected pension and postretirement benefit obligations. Cost savings from
a change in the retiree health insurance plan adopted April 1, 1994, partially
offset the increases resulting from this change in discount rate.
The Corporation recognized a one-time write-down, referred to above, of $4.6
million in the second quarter 1993, of the assets of its Dallas, Texas software
subsidiary, BancA. The Corporation sold substantially all the assets and
liabilities of BancA in the fourth quarter 1993.
The major components of the Corporation's non-interest income and non-interest
expense are presented in Table 11 and Table 12, respectively, for the five most
recent quarters, and in Table 13 and Table 14, respectively, for the comparable
nine month periods. Also, refer to Table 15 and 16 Business Review for summary
financial information regarding the Corporation's principal subsidiaries.
47
<PAGE> 50
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
TABLE 11 NON-INTEREST INCOME (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------------
Three Months Ended
(in thousands) 9/30/94 6/30/94 3/31/94 12/31/93 9/30/93
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Service charges on deposit accounts $13,897 $15,196 $15,113 $15,117 $15,176
Merchant card processing fees 5,024 4,866 4,515 4,943 4,578
Mortgage servicing fees 5,696 10,062 10,741 14,297 15,482
Amortization of capitalized excess service fees (579) (789) (1,056) (1,750) (4,711)
Loan service charges 2,745 2,133 3,517 3,058 2,918
- ---------------------------------------------------------------------------------------------------------------------------------
Service charges 26,783 31,468 32,830 35,665 33,443
Trust and investment services income 4,322 4,472 5,080 4,923 4,619
Mortgage banking gains, net 22 4,406 4,746 6,919 16,984
Gains from sale of mortgage servicing rights 9,273
Other gains, net 67,096
Other Income:
Trading profits (losses) 510 210 (379) 405 195
Other 10,959 11,337 11,241 10,578 10,725
- ---------------------------------------------------------------------------------------------------------------------------------
Other income 11,469 11,547 10,862 10,983 10,920
- ---------------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income $109,692 $51,893 $53,518 $67,763 $65,966
=================================================================================================================================
</TABLE>
48
<PAGE> 51
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
TABLE 12 NON-INTEREST EXPENSE (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------------
Three Months Ended
(in thousands) 9/30/94 6/30/94 3/31/94 12/31/93 9/30/93
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Salaries and wages $42,201 $46,625 $46,107 $45,663 $47,489
Other employee benefits 12,103 13,971 15,208 12,760 12,198
Net occupancy 6,921 7,645 7,652 7,615 7,460
Equipment 8,567 10,517 10,319 10,570 9,748
Outside services 8,732 8,306 7,755 9,652 8,795
Defaulted loan expense, net
Writedowns and losses from sale 2,263 2,544 1,900 4,451 4,379
Gains from sale (925) (7,628) (3,234) (1,451) (1,077)
Other operating expenses, net 1,982 2,622 1,263 3,177 2,724
Amortization of purchased mortgage servicing rights 2,034 3,027 5,386 9,850 14,154
Other Expenses:
FDIC Insurance 5,017 5,384 5,386 5,392 5,406
Assets held for sale, net (income)loss (51) (60) 64 (378) 8
Communications 1,996 2,287 2,321 2,180 2,434
Stationery and supplies 1,875 2,055 2,249 2,831 2,264
Advertising 1,792 1,608 1,619 2,218 1,971
Michigan single business tax 3,402 1,988 2,181 583 1,827
Postage 1,141 1,243 1,567 1,546 1,470
Amortization of goodwill 1,244 305 311 314 300
Uncollected interest on early payoffs of loans serviced 400 1,428 1,799 3,588 3,648
Provision for foreclosure costs on loans serviced 750 1,125 975 580 873
Other 7,988 8,520 7,262 9,322 9,781
- ---------------------------------------------------------------------------------------------------------------------------------
Other expenses 25,554 25,883 25,734 28,176 29,982
- ---------------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense $109,432 $113,512 $118,090 $130,463 $135,852
=================================================================================================================================
Net overhead ratio (1) -0.01% 2.74% 2.87% 2.74% 3.01%
Efficiency ratio (2) 51.13% 72.09% 76.96% 74.63% 77.73%
=================================================================================================================================
</TABLE>
(1) Non-interest expense less non-interest income divided by average earning
assets.
(2) Non-interest expense divided by the sum of net interest income on a fully
taxable basis and non-interest income.
49
<PAGE> 52
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
TABLE 13 NON-INTEREST INCOME (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------
Nine Months Ended
(in thousands) 09/30/94 09/30/93
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Service charges on deposit accounts $44,206 $44,426
Merchant card processing fees 14,405 12,362
Mortgage servicing fees 26,499 48,650
Amortization of capitalized excess service fees (2,424) (17,177)
Loan service charges 8,395 8,225
- --------------------------------------------------------------------------------------------------------------------
Service charges 91,081 96,486
Trust and investment services income 13,874 14,599
Mortgage banking gains, net 9,174 22,663
Gains from sale of mortgage servicing rights 53
Investments available for sale gains, net 6,140
Other gains, net 67,096
Other income:
Trading profits 341 1,963
Other 33,537 31,163
- --------------------------------------------------------------------------------------------------------------------
Other income 33,878 33,126
- --------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income $215,103 $173,067
====================================================================================================================
</TABLE>
50
<PAGE> 53
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
TABLE 14 NON-INTEREST EXPENSE (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------
Nine Months Ended
(in thousands) 09/30/94 09/30/93
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Salaries and wages $134,933 $136,635
Other employee benefits 41,282 38,445
Net occupancy 22,218 22,326
Equipment 29,403 31,062
Outside services 24,793 24,566
Defaulted loan expense, net
Writedowns and losses from sale 6,707 9,824
Gains from sale (11,787) (4,054)
Other operating expenses, net 5,867 6,555
Amortization of purchased mortgage servicing rights 10,447 95,148
Other Expenses:
FDIC Insurance 15,787 16,406
Assets held for sale, net (income)expense (47) (213)
Communications 6,604 7,197
Stationery and supplies 6,179 7,112
Advertising 5,019 5,937
Michigan single business tax 7,571 6,098
Postage 3,951 4,690
Amortization of goodwill 1,860 823
Uncollected interest on early payoffs of loans serviced 3,627 8,376
Provision for foreclosure costs on loans serviced 2,850 3,695
Other 23,770 29,594
- --------------------------------------------------------------------------------------------------------------------
Other expenses 77,171 89,715
- --------------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense $341,034 $450,222
====================================================================================================================
Net overhead ratio (1) 1.90% 4.01%
Efficiency ratio (2) 64.97% 91.93%
====================================================================================================================
</TABLE>
(1) Non-interest expense less non-interest income, annualized, divided by
average earning assets.
(2) Non-interest expense divided by the sum of net interest income on a fully
taxable basis and non-interest income.
51
<PAGE> 54
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
TABLE 15 BUSINESS REVIEW (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------
MNB
Three Months Ended September 30 (excluding IOMC) IOMC IOBOC
(in thousands) 1994 1993 1994 1993 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income after
provision for possible credit losses $83,869 $74,138 $2,336 $8,247 $4,608 $7,004
Non-interest income 27,869 33,262 10,987 33,153 791 1,011
Gains from sale of mortgage servicing rights
Other gains, net 37,768
Amortization of capitalized excess service fees (579) (4,711)
Amortization of purchased mortgage servicing right (2,034) (14,154)
Other non-interest expense (81,112) (83,578) (15,911) (20,980) (4,093) (4,778)
------- ------- ------- ------- ------- -------
Income before taxes $30,626 $23,822 $32,567 $1,555 $1,306 $3,237
======= ======= ======= ======= ======= ========
At September 30
Total assets $8,640,143 $8,908,801 $557,625 $1,274,126 $482,466 $1,001,480
Total Liabilities $7,987,804 $8,270,987 $513,063 $1,251,265 $436,511 $871,969
Total Equity $652,339 $637,814 $44,562 $22,861 $45,955 $129,511
Mortgage Servicing Portfolio :
(in millions)
Originated Servicing $4,223
Purchased Servicing $6,567
-------
Total $10,790
========
</TABLE>
Certain prior period amounts have been reclassified to conform to current
period presentation.
52
<PAGE> 55
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
TABLE 15 BUSINESS REVIEW (UNAUDITED) (Continued)
- ---------------------------------------------------------------------------------------------------------------------------------
Texas Bank Holding Company and Consolidated
Three Months Ended September 30 Subsidiaries other operations (1) MNC
(in thousands) 1994 1993 1994 1993 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income after
provision for possible credit losses $2,295 $6,193 $620 ($175) $93,728 $95,407
Non-interest income 616 1,486 2,912 1,765 43,175 70,677
Gains from sale of mortgage servicing rights
Other gains, net 29,328 67,096
Amortization of capitalized excess service fees (579) (4,711)
Amortization of purchased mortgage servicing rights (2,034) (14,154)
Other non-interest expense (2,617) (5,001) (3,665) (7,361) (107,398) (121,698)
------- ------- ------- ------- ------- -------
Income before taxes $294 $2,678 $29,195 ($5,771) $93,988 $25,521
======== ======== ======== ======== ======== ========
At September 30
Total assets $576,526 ($472,928) ($1,365,523) $9,207,306 $10,395,410
Total Liabilities $529,066 ($727,613) ($1,309,274) $8,209,765 $9,614,013
Total Equity $47,460 $254,685 ($56,249) $997,541 $781,397
</TABLE>
(1) Amounts include intercompany eliminations.
Certain prior period amounts have been reclassified to conform to current
period presentation.
53
<PAGE> 56
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
TABLE 16 BUSINESS REVIEW (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------
MNB
Nine Months Ended September 30 (excluding IOMC) IOMC IOBOC
(in thousands) 1994 1993 1994 1993 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income after
provision for possible credit losses $239,784 $213,672 $9,393 $17,723 $15,033 $19,152
Non-interest income 95,854 101,512 42,903 73,277 1,837 2,278
Gains from sale of mortgage servicing rights 53
Other gains, net 37,768
Amortization of capitalized excess service fees (2,424) (17,176)
Amortization of purchased mortgage servicing right (10,447) (95,148)
Other non-interest expense (239,707) (242,834) (54,903) (61,750) (13,626) (14,014)
------- ------- ------- ------- ------- -------
Income before taxes $95,931 $72,350 $22,290 ($83,021) $3,244 $7,416
======= ======= ======= ======= ====== =======
</TABLE>
54
<PAGE> 57
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
TABLE 16 BUSINESS REVIEW (UNAUDITED) (Continued)
- ---------------------------------------------------------------------------------------------------------------------------------
Texas Bank Holding Company and Consolidated
Nine Months Ended September 30 Subsidiaries other operations (1) MNC
(in thousands) 1994 1993 1994 1993 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income after
provision for possible credit losses $13,387 $16,677 $343 ($444) $277,940 $266,780
Non-interest income 3,606 5,015 6,231 8,108 150,431 190,190
Gains from sale of mortgage servicing rights 53
Other gains, net 29,328 67,096
Amortization of capitalized excess service fees (2,424) (17,176)
Amortization of purchased mortgage servicing rights (10,447) (95,148)
Other non-interest expense (13,025) (13,642) (9,326) (22,834) (330,587) (355,074)
------- ------- ------- ------- ------- -------
Income before taxes $3,968 $8,050 $26,576 ($15,170) $152,009 ($10,375)
======= ======= ======= ======= ======== ========
</TABLE>
(1) Amounts include intercompany eliminations.
55
<PAGE> 58
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
INCOME TAX PROVISION
During the third quarter the Corporation reached a settlement with the FDIC to
terminate the Assistance Agreement. Under the terminated Assistance Agreement,
the Corporation was obligated to share certain tax benefits it realized with
the FDIC. To the extent such benefits were recognized in prior periods for
financial statement purposes, the Corporation also recorded a liability to the
FDIC for its share of such benefits, reducing the benefit reflected in income
tax expense for that period. The settlement to terminate the agreement
relieved IOBOC and the Corporation from this obligation, and accordingly, the
accrued liability was reversed. This has resulted in a reduction of 1994
income tax expense of approximately $41.7 million.
In the second quarter, tax benefits associated with the IOBOC acquisition of
$42.8 million were recognized, $40.2 million of which were reflected in
earnings, and $2.6 million of which were added directly to shareholders' equity
- - surplus. The ability of the Corporation to realize these benefits was
challenged by the U.S. Treasury Department in a report issued in March 1991 to
Congress. Congress addressed this matter in the Revenue Reconciliation Bill of
1993, and denied recognition of certain tax benefits occurring after March 3,
1991. As a result of this Congressional action and discussions during the
second quarter 1994 with the Federal government concerning the Corporation's
tax returns, the Corporation recognized pre-March 3, 1991 tax benefits in its
financial statements.
The Corporation's projection of its 1994 effective income tax rate, excluding
the $41.7 million reduction in tax expense resulting from the termination
settlement and the $40.2 million from tax benefits associated with the IOBOC
acquisition, is 28.5%. The difference between this effective tax rate and the
federal statutory rate of 35% is principally due to tax exempt income received
by IOBOC during 1994 from the FDIC note receivable and other FDIC assistance
prior to the termination settlement, as well as, tax exempt interest income
from municipal obligations held principally by MNB.
The increase in the effective income tax rate from (9.2%) in 1993 to 28.5% for
1994 (excluding the one-time benefits described above) is due to higher
projected pre-tax earnings in 1994 and lower amounts of tax exempt FDIC
interest income and assistance. This change has the effect of increasing the
ratio of projected taxable income relative to total projected pre-tax financial
income, resulting in a higher effective tax rate.
56
<PAGE> 59
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
CAPITAL RESOURCES
The capital position of the Corporation continues to be an important factor in
developing corporate strategies and achieving established goals. Management
reviews the various capital measures weekly and takes appropriate action to
ensure that they are within established internal and external guidelines.
Management believes the Corporation's capital position, which exceeds
guidelines established by industry regulators, is adequate to support its
various businesses.
The Corporation's capital position was strengthened further by the income
recorded in connection with the Termination Agreement, the sale of servicing
rights and the sales of Lockwood and First State. The Corporation is
considering various alternatives in which to best utilize the excess capital
created by these transactions.
The Office of the Comptroller of the Currency announced proposed rulemaking to
amend the agency's capital adequacy rules to explicitly include in the Tier 1
capital ratio net unrealized gains and losses on securities classified as
available-for-sale resulting from the adoption of SFAS No. 115. Under SFAS No.
115, which the Corporation adopted effective January 1, 1994, these net
unrealized holding gains and losses are reported as a separate component of
stockholders' equity. Current capital adequacy rules exclude these net
unrealized gains and losses from stockholders' equity. The proposed rulemaking
would amend the definition of stockholders' equity to include adjustments for
both unrealized gains and losses on available-for-sale securities under SFAS
No. 115.
57
<PAGE> 60
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
TABLE 17 CAPITAL RATIOS (UNAUDITED)
Quarter Ended
(in thousands) 9/30/94 6/30/94 3/31/94 12/31/93 9/30/93
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Tier 1:
Common shareholders' equity $996,382 $889,930 $827,323 $815,590 $753,822
Intangible assets (3,245) (13,430) (13,901) (14,279) (14,239)
PMSR Capital Limitation (1,697) (403)
SFAS 109 Capital Limitation (121,310) (59,584) (33,886) (21,876)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Tier 1 capital $871,827 $816,916 $777,839 $779,032 $739,583
- -----------------------------------------------------------------------------------------------------------------------------------
Tier 2:
Allowance for possible credit losses (1) $101,672 $103,042 $100,508 $103,149 $103,718
Equity commitment note 12,412 15,212 15,212 15,212 15,212
Equity contract note 54,587 57,246 57,475 57,715 57,944
- -----------------------------------------------------------------------------------------------------------------------------------
Total Tier 2 capital $168,671 $175,500 $173,195 $176,076 $176,874
- -----------------------------------------------------------------------------------------------------------------------------------
Total qualifying capital $1,040,498 $992,416 $951,034 $955,108 $916,457
- -----------------------------------------------------------------------------------------------------------------------------------
Risk-weighted assets $6,965,560 $7,088,791 $6,980,006 $7,233,972 $7,389,159
Risk-weighted off-balance sheet exposure 1,171,444 1,167,978 1,074,546 1,032,619 922,510
- -----------------------------------------------------------------------------------------------------------------------------------
Less: disallowance for loan loss & intangibles 209,210 160,123 146,200 124,880 101,496
===================================================================================================================================
Total risk-weighted assets and off-balance sheet exposure $7,927,794 $8,096,646 $7,908,352 $8,141,711 $8,210,173
===================================================================================================================================
===================================================================================================================================
Tier 1 risk-based capital ratio 11.00% 10.09% 9.85% 9.57% 9.01%
===================================================================================================================================
Total risk-based capital ratio 13.12% 12.26% 12.03% 11.73% 11.16%
===================================================================================================================================
Leverage ratio 9.13% 8.20% 7.84% 7.56% 7.09%
===================================================================================================================================
</TABLE>
(1) The allowance for possible credit losses is limited to 1.25% of the total
risk-weighted assets and off-balance sheet exposure.
58
<PAGE> 61
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY
The purpose of liquidity management is to ensure sufficient cash flow to meet
all financial commitments and enable the Corporation to capitalize on
opportunities for business expansion. The parent company manages its liquidity
position to provide the cash necessary to service debt, pay dividends, invest
in subsidiaries and satisfy other operating requirements. The subsidiary banks
and subsidiary savings and loan manage liquidity to meet the needs of borrowers
and to satisfy the need for deposit withdrawals. The Corporation is managing
the asset/liability process toward a prudent level of liquidity thereby
enhancing balance sheet strength. Management believes the Corporation's
liquidity position is strong and is adequate to support its various businesses.
Proceeds from the pay-off of the note receivable - FDIC, the sale of servicing
rights to Norwest, and the sales of Lockwood and First State have significantly
increased the Corporation's liquidity position. The Corporation is considering
a variety of alternatives to best utilize this excess liquidity.
59
<PAGE> 62
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE 18 SOURCES OF FUNDS (UNAUDITED)
Michigan National Corporation
<TABLE>
<CAPTION>
Three Months Ended
(in thousands) 9/30/94 6/30/94 3/31/94 12/31/93 9/30/93
- --------------------------------------------------------------------------------------------------------------------------------
% of % of % of % of % of
Total Total Total Total Total
Asset Asset Asset Asset Asset
Balance Funding Balance Funding Balance Funding Balance Funding Balance Funding
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Core deposits $6,802,399 74% $7,338,660 73% $7,644,987 76% $7,872,824 77% $7,662,174 74%
Discretionary deposits (1) 710,550 8% 816,867 8% 858,732 8% 852,255 8% 994,072 9%
Short-term borrowings 401,036 4% 709,301 7% 418,733 4% 293,293 3% 556,432 5%
Long-term debt 70,779 1% 76,400 1% 76,752 1% 77,122 1% 77,998 1%
Equity 997,541 11% 891,835 9% 831,553 8% 815,590 8% 781,397 8%
Other liabilities 225,001 2% 203,303 2% 297,918 3% 261,724 3% 323,337 3%
- --------------------------------------------------------------------------------------------------------------------------------
Total $9,207,306 100% $10,036,366 100% $10,128,675 100% $10,172,808 100% $10,395,410 100%
- ---------------------------------------------------------------------------------------------------------------------------------
Parent Company:
(in millions)
Subsidiaries' retained
earnings available for
dividends (2) $30 $65 $45 $33 $52
=================================================================================================================================
</TABLE>
(1) Discretionary deposits consist of time deposits > $100,000 plus all
brokered deposits.
(2) Retained earnings available for dividends is calculated based on current
year-to-date net income plus two years' prior income less certain
adjustments.
Certain prior period amounts have been reclassified to conform to current
period presentation.
60
<PAGE> 63
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
EARNINGS PER SHARE
Earnings per share presented in the Consolidated Statement of Income for the
three and nine months ended September 30, 1994, reflect the use of the
"treasury stock" method to calculate the common stock equivalents attributable
to the Corporation's 8% Redeemable Subordinated Debentures (Debentures). Refer
to Note N - Long-term Debt and Note O - Capital on pages 56 and 57 of the 1993
Annual Report for further information on these Debentures. Increasing interest
rates during 1994 have resulted in a significant narrowing of the premium value
of the fixed income feature of the Debentures and it appears likely that the
fixed income feature could be valued at a discount in the near future. If and
when that occurs, under the requirements of Accounting Principles Board Opinion
No. 15 - Earnings per Share, the "if converted" method will be used to
calculate the common stock equivalents of the Debentures.
The "if converted method" would result in an approximate 800,000 share increase
in common stock equivalents. In addition, interest expense on the Debentures
would be added back to income for purposes of calculating earnings per share
under the "if converted" method.
61
<PAGE> 64
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
PART 1 EXHIBIT
EXHIBIT (11) COMPUTATION OF EARNINGS PER COMMON SHARE (UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
- ------------------------------------------------------------------------------------------------------------------------------------
1994 1993 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(in thousands, except per share)
PRIMARY
Net Income $110,048 $27,027 $191,626 ($8,869)
------------------------------------------------------------------------
Average common shares outstanding 15,305 15,135 15,242 15,057
Common stock equivalents 439 154 328
------------------------------------------------------------------------
AVERAGE PRIMARY SHARES OUTSTANDING 15,744 15,289 15,570 15,057
========================================================================
PRIMARY EARNINGS PER SHARE $6.99 $1.77 $12.31 ($0.59)
========================================================================
FULLY DILUTED
Net Income $110,048 $27,027 $191,626 ($8,869)
------------------------------------------------------------------------
Average common shares outstanding 15,305 15,135 15,242 15,057
Common stock equivalents 439 189 439
------------------------------------------------------------------------
AVERAGE FULLY DILUTED SHARES OUTSTANDING 15,744 15,324 15,681 15,057
========================================================================
FULLY DILUTED EARNINGS PER SHARE $6.99 $1.76 $12.22 ($0.59)
========================================================================
</TABLE>
62
<PAGE> 65
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
PART II. OTHER INFORMATION
Item 1. - Legal Proceedings
See note G. of the Notes to Consolidated Financial Statements and Note U.
of the 1993 Annual Report
Item 6.(a) - Exhibits
Exhibit (10) - Material contracts
a) Purchase and Sale Agreement by and among Michigan National Bank,
Independence One Mortgage Corporation and Norwest Mortgage, Inc.,
dated as of August 11, 1994.
b) Termination Agreement by and among Federal Deposit Insurance
Corporation, as manager of the FSLIC Resolution Fund, Michigan
National Corporation and Independence One Bank of California, FSB,
dated as of September 29, 1994.
Exhibit (11) - Statement regarding computation of per share earnings.
See Part I Exhibit.
Exhibit 27. - Financial Data Schedule
63
<PAGE> 66
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICHIGAN NATIONAL CORPORATION
(Registrant)
October 28, 1994 /s/ Joseph J. Whiteside
--------------------------------
Joseph J. Whiteside
Executive Vice President
(Chief Financial Officer)
October 28, 1994 /s/ Robert V. Panizzi
--------------------------------
Robert V. Panizzi
First Vice President and Controller
(Chief Accounting Officer)
64
<PAGE> 67
Exhibit Index
Exhibit 10(A) Purchase And Sale Agreement
Exhibit 10(B) Termination Agreement
Exhibit 27 Financial Data Schedule
<PAGE> 1
EXHIBIT 10(a)
PURCHASE AND SALE AGREEMENT
BY AND AMONG
MICHIGAN NATIONAL BANK
AND
INDEPENDENCE ONE MORTGAGE CORPORATION
Seller
AND
NORWEST MORTGAGE, INC.
Purchaser
DATED
As of August 11, 1994
<PAGE> 2
2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I.............................................................................. 6
DEFINITIONS............................................................................ 6
Section 1.1 Definitions......................................................... 14
Section 1.2 General............................................................. 14
ARTICLE II
SALE OF SERVICING RIGHTS AND RELATED ITEMS.......................................... 14
Section 2.1 Closing Date........................................................ 14
Section 2.2 Items to be Sold.................................................... 15
Section 2.3 Evidence of Sale.................................................... 15
Section 2.4 Employees........................................................... 15
Section 2.5 Leases.............................................................. 16
Section 2.6 No Other Liabilities................................................ 16
Section 2.7 Tax Treatment....................................................... 16
Section 2.8 Interim Servicing Fee............................................... 16
Section 2.9 Other Payments to Seller........................................... 17
Section 2.10 Accounts Receivable................................................. 17
ARTICLE III............................................................................ 17
CONSIDERATION AND PAYMENTS............................................................. 17
Section 3.1 Amounts Due Purchaser............................................... 17
Section 3.2 Payment of Purchase Price by Purchaser.............................. 17
Section 3.3 Verification of Purchase Price and Other Amounts to be Transferred . 22
Section 3.4 Purchaser Covenants................................................. 22
Section 3.5 Seller Covenants.................................................... 23
Section 3.6 Intentionally Omitted............................................... 26
Section 3.7 Expense Proration................................................... 26
Section 3.8 Leased Locations.................................................... 26
Section 3.9 Exhibits............................................................ 27
ARTICLE IV............................................................................. 27
REPRESENTATIONS AND WARRANTIES OF SELLER............................................... 27
Section 4.1 Due Incorporation and Good Standing................................. 27
Section 4.2 Authority and Capacity.............................................. 27
Section 4.3 Effective Agreement................................................. 27
Section 4.4 No Conflict......................................................... 28
Section 4.5 Approvals and Compliance............................................ 28
Section 4.6 Filing of Reports................................................... 28
Section 4.7 Related Escrow Accounts............................................. 28
Section 4.8 Accounts Receivable................................................. 29
Section 4.9 Investor Remittances and Reporting.................................. 29
Section 4.10 Intentionally Omitted............................................... 29
Section 4.11 The Mortgage Loans.................................................. 29
Section 4.12 Insurance........................................................... 35
Section 4.13 Litigation.......................................................... 35
Section 4.14 No Accrued Liabilities.............................................. 36
Section 4.15 Facts and Omissions................................................. 36
Section 4.16 Qualifications to Representations................................... 36
Section 4.17 Indictments and Related Matters..................................... 36
Section 4.18 Title to FF&E; No Default On Leases................................. 37
Section 4.19 Financial Statements................................................ 37
</TABLE>
<PAGE> 3
3
<TABLE>
<S> <C>
Section 4.20 Material Adverse Change............................................. 37
Section 4.21 Assets.............................................................. 37
Section 4.22 Certain Labor Matters............................................... 37
Section 4.23 Leased Locations.................................................... 37
Section 4.24 Software............................................................ 38
ARTICLE V.............................................................................. 38
REPRESENTATIONS AND WARRANTIES OF PURCHASER............................................ 38
Section 5.1 Due Incorporation and Good Standing................................. 38
Section 5.2 Authority and Capacity.............................................. 38
Section 5.3 Effective Agreement................................................. 38
Section 5.4 No Conflict......................................................... 38
Section 5.5 Approvals and Compliance............................................ 39
ARTICLE VI............................................................................. 39
INVESTOR CONSENT....................................................................... 39
Section 6.1 Investor Consent.................................................... 39
Section 6.2 FNMA Consent, FNMA Transfer Date.................................... 39
Section 6.3 GNMA Consent, GNMA Transfer Date.................................... 40
Section 6.4 FHLMC Consent, FHLMC Transfer Date.................................. 40
Section 6.5 Other Institutional Investor Consent, Other Institutional Investor
Transfer Date..................................................... 40
Section 6.6 GMAC Consent, GMAC Transfer Date.................................... 40
ARTICLE VII............................................................................ 40
CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER....................................... 40
Section 7.1 Correctness of Representations and Warranties....................... 41
Section 7.2 Compliance with Conditions.......................................... 41
Section 7.3 Corporate Resolution................................................ 41
Section 7.4 Officer's Certification............................................. 41
Section 7.5 Consents............................................................ 41
Section 7.6 Legal Opinion....................................................... 41
Section 7.7 No Injunction....................................................... 41
Section 7.8 Regulatory Approvals................................................ 42
Section 7.9 Environmental Matters............................................... 42
Section 7.10 No Material Adverse Change.......................................... 42
ARTICLE VIII........................................................................... 42
CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER.......................................... 42
Section 8.1 Correctness of Representations and Warranties....................... 42
Section 8.2 Compliance with Conditions.......................................... 42
Section 8.3 Corporate Resolution................................................ 42
Section 8.4 Officer's Certification............................................. 43
Section 8.5 Consents............................................................ 43
ARTICLE IX............................................................................. 43
INDEMNIFICATION........................................................................ 43
Section 9.1 Indemnification of Seller........................................... 43
Section 9.2 Repurchase of Mortgage Loans and Servicing Rights................... 43
Section 9.3 Indemnification of Purchaser........................................ 45
Section 9.4 Notice and Settlement of Claims..................................... 45
Section 9.5 Exclusions from Liability........................................... 46
Section 9.6 Notification of Losses.............................................. 46
Section 9.7 Special Indemnification for Seller's Escrow or Arm Adjustment
Practices......................................................... 47
</TABLE>
<PAGE> 4
4
<TABLE>
<S> <C>
ARTICLE X.............................................................................. 48
TERMINATION............................................................................ 48
Section 10.1 Termination......................................................... 48
Section 10.2 Effect of Termination............................................... 48
ARTICLE XI............................................................................. 48
MISCELLANEOUS.......................................................................... 48
Section 11.1 Notification of Mortgagors, Insurance Companies, etc................ 49
Section 11.2 Supplementary Information........................................... 49
Section 11.3 Access to Information............................................... 49
Section 11.4 No Broker's Fees.................................................... 49
Section 11.5 Further Assurances.................................................. 50
Section 11.6 Solicitation of Refinancing and Correspondents...................... 50
Section 11.7 Survival............................................................ 51
Section 11.8 Governmental Authorities; Laws and Severability..................... 51
Section 11.9 Form of Payment to be Made.......................................... 51
Section 11.10 Successors and Assigns.............................................. 51
Section 11.11 Payment of Costs.................................................... 51
Section 11.12 Purchaser's Review.................................................. 51
Section 11.13 Notices............................................................. 52
Section 11.14 Entire Agreement; Construction...................................... 52
Section 11.15 Binding Effect...................................................... 52
Section 11.16 Headings............................................................ 53
Section 11.17 Applicable Laws..................................................... 53
Section 11.18 Counterparts........................................................ 53
Section 11.19 Time of Essence..................................................... 53
</TABLE>
<PAGE> 5
5
PURCHASE AND SALE AGREEMENT
PURCHASE AND SALE AGREEMENT, dated as of the 11th day of August, 1994
(the "Agreement"), between NORWEST MORTGAGE, INC., a Minnesota corporation (the
"Purchaser"), having its principal office at 405 S.W. 5th Street, Des Moines,
Iowa 50309, and MICHIGAN NATIONAL BANK ("MNB") and INDEPENDENCE ONE MORTGAGE
CORPORATION a Michigan Corporation ("IOMC") (jointly and severally the
"Seller"), having its principal office at 300 Galleria Officentre, Southfield,
Michigan 48034.
WITNESSETH:
WHEREAS, Seller owns the right to service certain one-to-four family,
residential mortgage loans with an aggregate outstanding principal balance, as
of July 31, 1994, of approximately $8.6 Billion (the "Mortgage Loans"), which
Mortgage Loans are pooled in order to back securities, the timely payment of
principal and interest on which is guaranteed by the Government National
Mortgage Association ("GNMA") or the Federal National Mortgage Association
("FNMA") or the Federal Home Loan Mortgage Company ("FHLMC") or are held as
interests in Participation Certificates or as whole loans by MNB and its
affiliates or other institutional investors (GNMA, FHLMC, FNMA, MNB and the
individual institutional investors are sometimes referred to in this Agreement
individually as an "Investor" and collectively as the "Investors"); and
WHEREAS, on the terms and conditions set forth herein, Seller desires
to sell, transfer and assign to Purchaser all of Seller's right, title and
interest to service the Mortgage Loans pursuant to the Servicing Agreements
between Seller and the Investors relating to such Mortgage Loans (the
"Servicing Rights"), and Purchaser desires to purchase and assume all right,
title and interest in and to such Servicing Rights and Servicing Agreements
from Seller: and
WHEREAS, Seller also owns the leasehold improvements, furniture,
fixtures and equipment listed on Exhibit 1 attached, located or used in certain
branch mortgage origination offices plus the servicing center and national
processing and telemarketing center ("FF&E") and has entered into certain
contracts as selected by Purchaser (to be listed on Exhibit 1 ) relating to the
FF&E and to the operations of its business at the Leased Locations (the "FF&E
Contracts"), and Seller is the tenant in the Leased Locations listed on Exhibit
2 attached; and
WHEREAS, on the terms and conditions set forth herein, Seller desires
to sell, transfer and assign to Purchaser all of Seller's right, title and
interest in the FF&E and the FF&E Contracts and to assign or sublet the
Seller's interest in the Leased Locations to Purchaser; and
WHEREAS, on the terms and conditions set forth herein, Seller desires
to sell, transfer and assign to Purchaser all of Seller's right, title and
interest in the Seller's warehouse of closed loans and pipeline of unclosed
loans (which meet the definition of Mortgage Loans except for timing) which
have had their related servicing rights previously sold to a third party.
NOW, THEREFORE, in consideration of the mutual promises, covenants and
conditions and for other good and valuable considerations, the receipt and
sufficiency of which are hereby acknowledged, and upon the terms and subject to
the conditions set forth herein, the parties hereto agree as follows:
ARTICLE I
<PAGE> 6
6
DEFINITIONS
SECTION 1.1 DEFINITIONS.
As used in this Agreement, the following terms shall have the meanings
specified below.
"ACCOUNTS RECEIVABLE" means, with respect to the Servicing Rights, the
outstanding moneys which have been advanced by Seller prior to the applicable
Transfer Date from its funds in connection with its servicing of the Mortgage
Loans in accordance with Applicable Requirements (including, without
limitation, principal, interest, taxes, ground rents, assessments, insurance
premiums and other costs, fees and expenses pertaining to the acquisition of
title to and preservation and repair of the Mortgaged Properties) and for which
Seller has a right of reimbursement from Mortgagors, the Insurers, Investors or
otherwise.
"AGREEMENT"means this Purchase and Sale Agreement and all Exhibits
hereto as the same may from time to time be amended or supplemented by one or
more instruments executed by all Parties hereto.
"ANCILLARY FEES" means late Mortgagor payment charges, charges for
dishonored checks, pay-off fees, assumption fees, commissions and
administrative fees on insurance and similar fees and charges collected from or
assessed against the Mortgagor, other than those charges payable to any
Investor under the terms of the Servicing Agreements.
"APPLICABLE REQUIREMENTS" means and includes, as of the time of
reference, with respect to the Mortgage Loans and the Servicing Rights, all of
the following: (i) all contractual obligations of Seller and any Originator or
Prior Servicers with respect to the Servicing Rights, including without
limitation those contractual obligations contained herein, in the Servicing
Agreements, in any agreement with any Insurer or Investor or in the Mortgage
Loan Documents for which Seller or any Originator or Prior Servicer is
responsible or at any time was responsible; (ii) all applicable federal, state
and local legal and regulatory requirements (including statutes, rules,
regulations and ordinances) binding upon Seller or any Originator or Prior
Servicer; (iii) all other applicable requirements and guidelines of each
governmental agency, board, commission, instrumentality and other governmental
or quasi-governmental body or office having jurisdiction, including without
limitation those of any Investor and any Insurer; (iv) all other applicable
judicial and administrative judgments, orders, stipulations, awards, writs and
injunctions; and (v) the reasonable and customary mortgage servicing practices
of prudent mortgage lending institutions that service mortgage loans of the
same type as the Mortgage Loans in the jurisdiction in which the related
Mortgaged Properties are located.
"ASSIGNMENTS OF MORTGAGE INSTRUMENTS" means a written instrument that,
when recorded in the appropriate office of the local jurisdiction in which the
related Mortgaged Property is located, will reflect the transfer of the
Mortgage Instrument identified therein from the transferor to the transferee
named therein.
"BASIS POINT" means 1/100 of one percent.
"BROKER" means Cohane Rafferty Securities, Inc.
<PAGE> 7
7
"BUSINESS DAY" means any day other than a Saturday, Sunday, or other
legal holiday on which banking institutions in the State of Iowa is required
by law or by executive order to be closed.
"BUYDOWN" means the waiver by Purchaser (or Seller during the Interim
Period) of a portion of the indebtedness of a Mortgage Loan, which can take the
form of a reduction of the principal, a credit to escrow or unapplied funds
accounts, the forgiveness of accrued interest or any combination of the
foregoing, and which causes the VA to pay off the remaining amount of the
indebtedness owed and acquire the Mortgaged Property.
"BUYDOWN LOSS" means that portion, if any, of the indebtedness waived
by Purchaser (or Seller during the Interim Period) in order to effect a
Buydown.
"CLAIM" means any claim, demand or litigation.
"CLOSING DATE" means the date on which the closing occurs.
"DOCUMENTATION" means all material related to or in support of
Software set forth in Schedule P, including, but not limited to, operating
instructions, input information, format specifications, instructional and other
documentation, including all guides and manuals.
"EFFECTIVE DATE" means the date as of which the economic rights to
the Servicing Rights are transferred to Purchaser. The Effective Date shall be
July 31, 1994.
"EMPLOYEE TRANSFER DATE" means October 1, 1994, if closing has
occurred prior to such date, or 5 business days after closing, if the closing
occurs later than October 1, 1994..
"EXECUTION DATE" means the date of this Agreement.
"EXCLUDED LOANS" means any Mortgage Loan with respect to which, as of
the Effective Date:
(i) the Mortgage Loan is more than two (2) months past
due (for purposes of this Agreement a Mortgage Loan is more than two months
"past due" if a Mortgage Loan Payment due on the first day of a month is not
paid by the Mortgagor on or before the last calendar day of the second
succeeding month);
(ii) the first action necessary to be taken to commence
proceedings in Foreclosure, or a sale under power of sale, or other acquisition
of title to the Mortgaged Property based upon a default by the Mortgagor under
the Mortgage Loan Documents, under the law of the state wherein the Mortgaged
Property is located, has been taken or may be taken under the terms of the
Mortgage Loan Documents and Servicing Agreement;
(iii) a legal action in Foreclosure of a Mortgage Loan, or
for a deficiency thereunder, in which the sale of the Mortgaged Property in
foreclosure (whether by action, power of sale or otherwise) has been delayed by
reason of the defense of such action by the Mortgagor, or any other litigation
is pending relating to a Mortgage Loan and materially adversely affecting the
value of the related Servicing Rights or subjecting the Servicer to potential
material liability or cost; or
<PAGE> 8
8
(iv) the Mortgagor thereof has sought relief under or has
otherwise been subjected to the federal bankruptcy laws (including, without
limitation, chapter 7) or any other similar federal or state laws of general
application for the relief of debtors, through the institution of appropriate
proceedings, and such proceedings are continuing.
"FF&E" means the furniture, fixtures and equipment identified on
Exhibit 1 to be completed and delivered as of the Employee Transfer Date.
"FF&E CONTRACTS" means the contracts or leases entered into regarding
non-owned FF&E identified on Exhibit 1 to be completed and delivered as of the
Employee Transfer Date.
"FHA" means the Federal Housing Administration of the Department of
Housing and Urban Development of the United States of America, or any successor
thereto.
"FHLMC" means the Federal Home Loan Mortgage Corporation, or any
successor thereto.
"FHLMC PORTFOLIO" means that portion of the Servicing Rights that
relates to Mortgage Loans that back mortgage-backed securities on which the
payment of principal and interest is guaranteed by FHLMC or that relates to
Mortgage Loans which are owned by FHLMC, as identified as such on the computer
tape provided by the Seller.
"FHLMC PURCHASE PRICE PERCENTAGE" means 1.072%
"FHLMC TRANSFER DATE" means, with respect to the FHLMC Portfolio, the
date on which after the Closing Date, pursuant to the applicable Investor
Consent, Purchaser shall commence servicing the Mortgage Loans in FHLMC Pools
and acquire all of Seller's legal right, title and interest in and to the
Servicing Rights related to the FHLMC Portfolio.
"FLOAT BENEFIT" means the net economic benefit resulting from escrow
and custodial deposits held for the account of Servicer relating to the
Servicing Rights. The Float Benefit is based on Seller's selection of the
investment facility or interest rate swap or other arrangement offered from
time to time by the financial institution(s) holding custodial deposits.
"FNMA" means the Federal National Mortgage Association, or any
successor thereto.
"FNMA PORTFOLIO" means that portion of the Servicing Rights that
relates to Mortgage Loans that back mortgage-backed securities on which the
payment of principal and interest is guaranteed by FNMA or that relates to
Mortgage Loans owned by FNMA, identified as such on the computer tape provided
by the Seller.
"FNMA PURCHASE PRICE PERCENTAGE" means 1.550%
"FNMA TRANSFER DATE" means, with respect to the FNMA Portfolio, the
date on which after the Closing Date, pursuant to the applicable Investor
Consent, Purchaser shall commence servicing the Mortgage Loans in FNMA Pools
and acquire all of Seller's legal right, title and interest in and to the
Servicing Rights related to the FNMA Portfolio.
<PAGE> 9
9
"FORECLOSURE" means the procedure pursuant to which a lienholder
acquires title to a Mortgaged Property in a foreclosure sale or pursuant to any
other comparable procedure allowed under Applicable Requirements, when a
Mortgage Loan is in default.
"GMAC PORTFOLIO" means the portion of the Other Investor Portfolio
owned by GMAC Mortgage Corporation ("GMAC").
"GMAC TRANSFER DATE" means, with respect to the GMAC Portfolio, the
date on which after the Closing Date, pursuant to the GMAC Consent, Purchaser
shall commence servicing the Mortgage Loans in GMAC Portfolio and acquire all
of Seller's legal right, title and interest in and to the Servicing Rights
related to the GMAC Portfolio.
"GNMA" means the Government National Mortgage Association or any
successor thereto.
"GNMA PORTFOLIO" means that portion of the Servicing Rights that
relates to Mortgage Loans that back mortgage-backed securities on which the
payment of principal and interest is guaranteed by GNMA, identified as such on
the computer tape provided by the Seller.
"GNMA PURCHASE PRICE PERCENTAGE" means 1.694%. With respect to that
portion of the Servicing Rights that relates to the VA Mortgage Loans, the
purchase price percentage is 1.494%.
"GNMA TRANSFER DATE" means, with respect to the GNMA Portfolio, the
date on which after the Closing Date, pursuant to the applicable Investor
Consent, Purchaser shall commence servicing the Mortgage Loans in GNMA Pools
and acquire all of Seller's legal right, title and interest in and to the
Servicing Rights related to the GNMA Portfolio.
"INSURER" or "INSURERS" means or mean FHA, VA or any private mortgage
insurer, pool insurance insurer and any insurer or guarantor under any standard
hazard insurance policy, any federal flood insurance policy, any title
insurance policy, any earthquake insurance policy, and any successor thereto.
"INTERIM PERIOD" means the period of time between the Effective Date
and the related Transfer Date, or the Employee Transfer Date, whichever comes
first.
"INVESTOR" or "INVESTORS" means GNMA , FNMA, FHLMC, MNB or its
affiliates or Other Institutional Investors who are the owners (legal or
equitable) of the Mortgage Loans as applicable.
"INVESTOR CONSENT" means, as to the GNMA Portfolio, receipt of both a
letter from GNMA approving the transfer of all of the Servicing Rights with
respect to the GNMA Portfolio from Seller to Purchaser and an Assignment
Agreement (Appendix 52 of the GNMA MBS Guide) executed by a duly authorized
GNMA official, and as to the FNMA Portfolio, receipt of a Consent for Transfer
of Servicing Portfolio Agreement Guaranteed Mortgage Backed Securities Pools
and MBS Portfolio Loans (Form 629 and attachments) executed by a duly
authorized FNMA official and as to the FHLMC Portfolio, receipt of a Consent
for Transfer of Servicing Portfolio Agreement (Form 981, Agreement for
Subsequent Transfer of Servicing) executed by a duly authorized FHLMC official,
and as to any Other Institutional Investors, receipt of the form of consent
required in the applicable Servicing Agreement.
<PAGE> 10
10
"IOMC WAREHOUSE PORTFOLIO" means those mortgage loans which at the
Employee Transfer Date had been closed and funded, but not delivered to an
Investor, the Servicing Rights to which Seller wishes to sell and Purchaser
wishes to purchase. The maximum amount of the IOMC Warehouse Portfolio that
Purchaser will agree to purchase shall be $500 million.
"IOMC WAREHOUSE PURCHASE PRICE PERCENTAGE" means Purchaser's AA
corespondent lender service release premium matrix (attached as Exhibit A-2 for
the Mortgage Loans eligible for delivery to Purchaser's correspondent program,
and .996% for all other Mortgage Loans which meet the MNB Portfolio criteria.
"LEASED LOCATIONS" means the locations leased by Seller at the addresses and
on the terms set forth on Exhibit 2 as of the Execution Date, provided however,
any such location may be removed from Exhibit 2 as of the Closing Date if it
does not satisfy Section 7.5 or 7.9 hereof on such date.
"LOSS" or "LOSSES" means any and all actual and consequential
losses, damages, deficiencies, claims, costs or expenses, including reasonable
attorneys' fees and disbursements.
"MNB" means Michigan National Bank.
"MNB OTHER LOAN PORTFOLIO" means that portion of the Servicing Rights
that relates to "irregular" Mortgage Loans owned by MNB or its affiliates as
identified as such on the computer tape provided by the Seller as mutually
agreed by the Parties. There are no REO or commercial loans permitted in the
MNB Other Loan Portfolio.
"MNB PORTFOLIO" means that portion of the Servicing Rights that
relates to regular Mortgage Loans owned by MNB or its affiliates (either as
whole loans, participation interests, or interests in private mortgage backed
securities) identified as such on the computer tape provided by the Seller.
MNB Other Loan Portfolio coded loans and MNB Portfolio coded Mortgage Loans are
as of the Effective Date, but additional Mortgage Loans may be added to the
appropriate Portfolio as they are repurchased by Seller from other Investors
until the related Transfer Date.
"MNB PURCHASE PRICE PERCENTAGE" means .996%
"MNB TRANSFER DATE"means with respect to the MNB Portfolio, the date
on which after the Closing Date Purchaser shall commence servicing the Mortgage
Loans in the MNB Portfolio and acquire all of Seller's legal right, title and
interest in and to the Servicing Rights related to the MNB Portfolio.
"MORTGAGE ESCROW PAYMENTS" means the portion, if any, of the Mortgage
Loan Payment in connection with a Mortgage Loan that, pursuant to the related
Mortgage Loan Documents, must be made by a Mortgagor for deposit in a Related
Escrow Account for the payment of real estate taxes and assessments, insurance
premiums, ground rents, and similar items.
"MORTGAGE FILE" means the file containing the photostatic copies, and,
to the extent required by Applicable Requirements, original documents, of
Mortgage Loan Documents with respect to each Mortgage Loan, as well as the
related credit and closing packages, disclosures, custodial documents, and all
other files, books, records and documents necessary to (i) establish the
eligibility of the Mortgage Loans for insurance by an Insurer or sale to the
Investor, (ii) service the Mortgage Loans in accordance with Applicable
Requirements and (iii) comply with Applicable Requirements regarding the
Mortgage Loan documentation to be maintained by the Servicer of the Mortgage
Loans.
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"MORTGAGE INSTRUMENT" means any deed of trust, security deed,
mortgage, security agreement or any other instrument which constitutes a
first-lien on real estate (or shares of stock in the case of cooperatives)
securing payment by a Mortgagor of a Mortgage Note.
"MORTGAGE LOANS" means the one-to-four family, residential mortgage
loans as to which Seller is the owner of the Servicing Rights, including the
Pools on which related securities may be based and by which such securities may
be backed, subtotaled and identified by code on Exhibit A attached hereto. The
computer tape provided the Broker shall set forth the applicable
characteristics of each Mortgage Loan.
"MORTGAGE LOAN DOCUMENTS" means the Mortgage Instruments and Mortgage
Notes.
"MORTGAGE LOAN PAYMENT" means with respect to a Mortgage Loan, the
amount of each monthly installment on such Mortgage Loan, whether principal and
interest or interest alone or escrow or other payment, required or permitted to
be paid by the Mortgagor in accordance with the terms of the Mortgage Loan
Documents.
"MORTGAGE NOTE" means the mortgage note, deed of trust note, security
deed note or other form of promissory note executed by a Mortgagor and secured
by a Mortgage Instrument evidencing the indebtedness of the Mortgagor under a
Mortgage Loan.
"MORTGAGED PROPERTY" means any one- to four-family residence (at the
time of origination) that is encumbered by a Mortgage Instrument, including all
buildings and fixtures thereon and all accessions thereto including
installations of mechanical, electrical, plumbing, heating and air conditioning
systems located in or affixed to such buildings, and all alterations, additions
and replacements.
"MORTGAGOR" means any obligor under a Mortgage Note and Mortgage
Instrument.
"NO BID" means a delinquent Mortgage Loan with respect to which the
VA has notified Purchaser (or Seller) that the VA intends to exercise its
option to pay the amount guaranteed by the VA (and leave the Mortgaged Property
with Purchaser or Seller).
"NON RECOURSE LOAN" means a Mortgage Loan for which the Investor bears
the ultimate risk of loss in the event the Mortgagor defaults.
"OTHER INSTITUTIONAL INVESTOR" means institutional investors other
than GNMA, FNMA, FHLMC or MNB and its affiliates.
"OTHER INSTITUTIONAL INVESTOR PORTFOLIO" means that portion of the
Servicing Rights that relates to Mortgage Loans owned by Other Institutional
Investors (either as whole loans, participation interests, or interests in
private mortgage backed securities) identified as such on the computer tape
provided by the Seller.
"OTHER INSTITUTIONAL INVESTOR PURCHASE PRICE PERCENTAGE" means the
percentage shown on Exhibit A-1 for each respective Investor.
"OTHER INSTITUTIONAL INVESTOR TRANSFER DATE" means, with respect to
the Other Institutional Investor Portfolio other than the GMAC portfolio, the
date on which after the Closing Date, pursuant to the applicable Investor
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Consent, Purchaser shall commence servicing the Mortgage Loans in Other
Institutional Investor Pools and acquire all of Seller's legal right, title and
interest in and to the Servicing Rights related to the Other Institutional
Investor Portfolio.
"ORIGINATOR" means, with respect to any Mortgage Loan, the entity(ies)
that (i) took the Mortgagor's loan application, (ii) processed the Mortgagor's
loan application, and (iii) closed and/or funded the Mortgagor's Mortgage Loan.
"PARTIES" means Seller and Purchaser.
"POOL" means one or more Mortgage Loans that have been aggregated
pursuant to the requirements of the applicable Investor.
"PREPAID LOANS" means any Mortgage Loan which is paid in full between
the Effective Date and the close of business on the 60th day after the
Effective Date.
"PRIOR SERVICER" means any party that was a Servicer of any Mortgage
Loan before Seller became the Servicer of the Mortgage Loan.
"PURCHASER" means Norwest Mortgage, Inc.
"RECOURSE LOAN" means a Mortgage Loan not in the GNMA Portfolio for
which the Servicer is ultimately liable for payment in the event the Mortgagor
defaults.
"RELATED ESCROW ACCOUNTS" means all funds held by Seller with respect
to the Mortgage Loans, including, but not limited to, all principal and
interest funds and all buydown funds and all tax and insurance funds and other
mortgage escrow and impound amounts (including interest accrued thereon for the
benefit of the Mortgagors under the Mortgage Loans) maintained by Seller
relating to the Servicing Rights.
"SELLER" means Michigan National Bank and Independence One Mortgage
Corporation, jointly and severally, their successors and assigns.
"SELLER'S KNOWLEDGE" means the actual knowledge of the current senior
officers and directors of Seller, and that knowledge that current management,
officers and directors of Seller reasonably should have in the prudent conduct
of the mortgage banking business. For purposes of the definition of "Seller's
Knowledge" the current senior officers and directors of Seller shall be deemed
to have knowledge of all information contained in, or ascertainable from the
Mortgage Files.
"SERVICER" means the party contractually obligated to administer the
Servicing Rights under the Servicing Agreements.
"SERVICING AGREEMENTS" means contracts, and all applicable rules,
regulations, procedures and guidelines incorporated therein, defining the
rights and obligations of the Investors and Servicer, with respect to the
servicing of the Mortgage Loans to which the Servicing Rights pertain. A list
of all Servicing Agreements is attached as Exhibit C. The MNB Portfolio will
be serviced pursuant to the Servicing Agreement set forth as Exhibit D hereto.
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"SERVICING FEE" means the amount to be paid to Servicer under the
applicable Servicing Agreement related to a Mortgage Loan, as consideration for
servicing the Mortgage Loan.
"SERVICING RIGHTS" means the rights and obligations of Servicer
pursuant to the Servicing Agreements to administer, collect the payments for
the reduction of principal and application of interest, collect payments on
account of taxes and insurance, pay taxes and insurance, remit collected
payments, provide foreclosure services, provide full escrow administration and
any other obligations required by any Investor or Insurer in, of, for or in
connection with the Mortgage Loans pursuant to the Servicing Agreements,
together with the right to receive the Servicing Fee and any Ancillary Fees
arising from or connected to the Mortgage Loans, and all rights, powers and
privileges incident to any of the foregoing. Servicing Rights include the
Related Escrow Accounts, the Mortgage Files, and the exclusive right to enter
into arrangements with third parties that generate Ancillary Fees with respect
to the Mortgage Loans.
"SOFTWARE" means the Software owned by and developed by or provided
by Seller identified in and meeting the specifications of Exhibit N, in
machine-readable or interpreted form, usable on or with Seller's computer
systems, including object code, source code, and generated code, and including
all enhancements, improvements, modifications and additions thereto which
Purchaser has identified and Seller has agreed to sell.
"TRANSFER DATE" means the FNMA Transfer Date, the GNMA Transfer Date,
the FHLMC Transfer Date, the MNB Transfer Date, GMAC Transfer Date or the Other
Institutional Investor Transfer Date, or all, as the context may permit or
require.
"UNRECOVERABLE ADVANCES" means those advances made in accordance with
Applicable Requirements which Servicer does not reasonably expect to recover
from Mortgagors, Investors, Insurers or otherwise.
"VA" means the United States Department of Veterans Affairs or any
successor thereto.
SECTION 1.2 GENERAL.
The terms defined herein include the plural as well as the singular
and the singular as well as the plural.
ARTICLE II
SALE OF SERVICING RIGHTS AND RELATED ITEMS
SECTION 2.1 CLOSING DATE.
Subject to the terms and conditions set forth herein, the Closing Date
shall take place on the day following the satisfaction or waiver of all
conditions precedent to the Closing Date set forth in Articles VII and VIII
hereof, or on such other date to which the parties may agree. Each of the
parties agree to use its best efforts to cause the closing to be completed as
soon as practicable after the receipt of any applicable final regulatory
approval of the transactions and the expiration of all waiting periods.
SECTION 2.2 ITEMS TO BE SOLD.
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Subject to, and upon the terms and conditions of this Agreement, and
subject to Applicable Requirements, on the Closing Date Seller shall, effective
as of the Effective Date, sell, transfer and assign to Purchaser, and Purchaser
shall purchase and assume from Seller, all beneficial right, title, interest
and obligation of Seller in and to the Servicing Rights, and effective as of
the Employee Transfer Date Seller shall sell, transfer and assign to Purchaser,
and Purchaser shall purchase and assume from Seller, all beneficial right,
title, interest and obligation of Seller in and to (i) the FF&E, (ii) the FF&E
Contracts, (iii) the Leased Locations, and (iv) the closed loans in the
warehouse and unclosed loans in pipeline that are eligible to be sold to
Purchaser servicing released.
SECTION 2.3 EVIDENCE OF SALE.
Prior to the Transfer Date, Purchaser and Seller shall execute and
deliver the documents required by each Investor in connection with the transfer
of the Servicing Rights hereunder, in form and substance reasonably
satisfactory to Purchaser and Seller, and shall execute and deliver such other
instruments or documents as Purchaser and Seller shall reasonably determine are
necessary to evidence the transactions contemplated hereby. On the Employee
Transfer Date, Seller shall provide Purchaser with a Bill of Sale for the FF&E
and assignments of the FF&E Contracts and the lease or subleases for the Leased
Locations which have been consented to by the respective landlords if and as
required by the original lease agreements.
SECTION 2.4 EMPLOYEES.
All employees of Seller employed as of the Execution Date in the
conduct of the business of the assets which are the subject of this Agreement
are listed on Exhibit 3. Purchaser agrees it will offer employment to: (a) a
significant number of existing servicing employees, (b) all sales
representatives with broker or builder relationships, (c) all branch managers
(either management or sales positions), (d) all Regional Managers (either
retained in current type position or offered other assignments), (e) support
personnel in accordance with Purchaser's post purchase needs, and (f) wholesale
account executives. As early as practicable, but not later than 30 days
following the Execution Date Purchaser will notify Seller of the names of the
employees to whom Purchaser intends to offer employment on the Employee
Transfer Date provided said employees are employees of Seller at the end of the
business day immediately prior to the Employee Transfer Date. Seller shall use
its best efforts to assist Purchaser in obtaining the employment of those
employees to whom Purchaser desires to offer continued employment. It is
mutually agreed that Seller's provision of notice under the "Plant Closing
Act" to all of IOMC's employees in Southfield, Michigan shall not be deemed to
be a failure to use its best efforts to assist Purchaser in obtaining the
employment of those employees to whom Purchaser desires to offer continued
employment. All severance pay, unemployment compensation, COBRA benefits or any
other expenses associated with any employees related to their employment by
Seller prior to the Employee Transfer Date shall be the sole responsibility of
Seller. Any compensation (including management bonuses) due any employee for
loans closed or originated prior to the Employee Transfer Date, whether or not
purchased by Purchaser shall be the responsibility of Seller. Any employees
accepting employment with Purchaser shall be employed as new hires and on an
employment at will basis with no credit for previous service with Seller.
Purchaser is not assuming, and it shall have no responsibility for the
continuation of, or any liabilities under or in connection with, any of the
following; (i) any employment contract, collective bargaining agreement, or
plan or arrangement providing for insurance coverage, deferred compensation,
bonuses, stock options or other forms of incentive compensation or
post-retirement compensation or benefits which is entered into or maintained,
as the case may be, by Seller; (ii) any "employee benefit plan" as defined in
Section 3(3) of the Employee Retirement Income Security Act ("ERISA") which is
subject to any provision of ERISA, is maintained, administered or contributed
to by
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Seller and covered any employee hired by Purchaser; or (iii) any notices
required to be given to Seller's employees pursuant to the "Plant Closing Act"
or any other applicable federal or state law.
Seller agrees that, for a period of two years after the Closing Date
neither Seller nor its affiliates will directly or indirectly solicit
employment of any employee hired pursuant to this Agreement (not including
solicitations directed to the general public). Any non-competition agreements
between an employee hired by Purchaser pursuant to this Agreement and Seller or
any of its affiliates shall terminate as of the time such employee commences
employment with the Purchaser.
SECTION 2.5 LEASES.
Provided any necessary landlord's consent is obtained by Seller,
Purchaser shall assume Seller's obligations arising on or after the Employee
Transfer Date under existing leases for the Leased Locations on the same terms
and conditions as are in force and effect as of the date of this Agreement, as
well as the FF&E Contracts. Seller shall provide Purchaser with a copy of any
such leases or maintenance agreements prior to or on the Closing Date.
Purchaser shall pay to Seller on and as of the Employee Transfer Date the
amount of any deposit and/or prepaid rent, and Seller hereby assigns to
Purchaser all its right, title and interest in the deposit and/or prepaid
rents.
SECTION 2.6 NO OTHER LIABILITIES.
Purchaser assumes no liabilities or obligations of the Seller other
than as specifically provided herein. This Agreement shall not be construed as
creating rights or remedies against the Purchaser by third parties.
SECTION 2.7 TAX TREATMENT.
Purchaser and Seller agree that, for income tax purposes, the sale of
the Servicing Rights shall be treated as the sale of original issue debt
instruments.
SECTION 2.8 INTERIM SERVICING FEE.
As partial consideration for Seller's performance of servicing
obligations pursuant to this Agreement and subject to the terms and conditions
of this Agreement, during the Interim Period, Purchaser shall pay to Seller an
amount equal to Six Dollars ($6.00) per month beginning in the month after the
Effective Date for each Mortgage Loan serviced by Seller during that month by
netting such amounts from the total Servicing Fees due Purchaser pursuant to
Section 3.1. Such amount shall be payable to Seller regardless of (i) whether
the Mortgage Loans are current or delinquent or (ii) the number of days in any
month that Seller actually services any Mortgage Loan; provided, however, that
no Servicing Fee shall be paid for Excluded Loans which are required to be
repurchased from Pools pursuant to this Agreement.
SECTION 2.9 OTHER PAYMENTS TO SELLER.
In addition to the interim servicing fee, provided in Section 2.8,
during the Interim Period Seller shall be entitled to receive or retain, as
applicable, all Ancillary Fees, all late fees and all Float Benefit related to
the Mortgage Loans being serviced by Seller during the month such benefits
accrue.
SECTION 2.10 ACCOUNTS RECEIVABLE.
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Seller shall make all required advances up to the related Transfer
Date and shall add such amounts to the Accounts Receivable. Purchaser will
attempt to collect the outstanding Accounts Receivable for Seller for a period
of twenty-four months using the same standard of care it uses for its own
accounts. Collections on an account received by Purchaser shall be attributed
first to Seller's related Account Receivable, until such amounts have been
fully collected. At such times as Purchaser deems appropriate, but not sooner
than six months from the last Transfer Date, Purchaser and Seller will mutually
agree on which Accounts Receivable no further collection action will be
required.
ARTICLE III
CONSIDERATION AND PAYMENTS
SECTION 3.1 AMOUNTS DUE PURCHASER.
By the third (3rd) Business Day following the applicable Transfer
Date, Seller shall remit to Purchaser, through a wire transfer in immediately
available funds, all amounts collected on behalf of Purchaser as assignee of
all economic and beneficial interests in the Servicing Agreements between the
Effective Date and the respective Transfer Date in excess of that to which
Seller is entitled pursuant to Sections 2.8 and 2.9 hereof less the amount of
the Guarantee fees during the Interim Period, which are Purchaser's obligation.
SECTION 3.2 PAYMENT OF PURCHASE PRICE BY PURCHASER.
The Purchase Price shall be paid by Purchaser to Seller as follows:
(a) DEPOSIT. On the Closing Date, Purchaser shall remit to Seller
50% of the sum of (i), (ii), (iii), (iv), (v) and (vi) below:
(i) An amount equal to:
(A) The FNMA Purchase Price Percentage times the
principal balance of the FNMA Portfolio, excluding
the Excluded Loans within the FNMA Portfolio, as of
the Effective Date; minus
(B) $500.00 times the number of Non Recourse
conventional mortgage loans in the FNMA Portfolio in
Foreclosure, as of the Effective Date.
(ii) An amount equal to the GNMA Purchase Price Percentage
times the principal balance of the GNMA Portfolio, excluding
the Excluded Loans within the GNMA Portfolio, as of the
Effective Date.
(iii) An amount equal to:
(A) The FHLMC Purchase Price Percentage times the
principal balance of the FHLMC Portfolio, excluding
the Excluded Loans within the FHLMC Portfolio, as of
the Effective Date, minus
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(B) $500.00 times the number of Non Recourse
conventional mortgage loans in the FHLMC Portfolio in
Foreclosure, as of the Effective Date.
(iv) An amount equal to the MNB Purchase Price Percentage
times the principal balance of the MNB Portfolio excluding the
Excluded Loans within the MNB Portfolio, as of the Effective
Date.
(v) An amount equal to:
(A) The Other Institutional Investors' Purchase
Price Percentage times the principal balance of the
Other Institutional Investors' Portfolio, excluding
the Excluded Loans within the Other Institutional
Investors' Portfolio and excluding the GMAC
Portfolio, as of the Effective Date, minus
(B) $500.00 times the number of Non Recourse
conventional mortgage loans in the Other
Institutional Investor Portfolio (excluding the GMAC
Portfolio) in Foreclosure, as of the Effective Date.
(vi) An amount equal to:
(A) The GMAC Purchase Price Percentage times the
principal balance of the GMAC Portfolio, excluding
the Excluded Loans within the GMAC Portfolio, as of
the Effective Date, minus
(B) $500.00 times the number of Non Recourse
conventional mortgage loans in the GMAC Portfolio in
Foreclosure, as of the Effective Date.
(b) FINAL PAYMENTS
(i) Within two (2) Business Days after the FNMA Transfer
Date, Purchaser shall pay to Seller an amount equal to:
(A) The FNMA Purchase Price Percentage times the
principal balance of the FNMA Portfolio (excluding
the Excluded Loans within the FNMA Portfolio) as of
the Effective Date; minus
(B) The FNMA Purchase Price Percentage times the
principal balance of all Prepaid Loans in the FNMA
Portfolio; and also minus
(C) The deposit related to the FNMA Portfolio
calculated pursuant to Section 3.2(a)(i).
(ii) Within two (2) Business Days after the GNMA Transfer
Date, Purchase shall pay to Seller an amount equal to:
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(A) The GNMA Purchase Price Percentage times the
principal balance of the GNMA Portfolio (excluding
the Excluded Loans within the GNMA Portfolio) as of
the Effective Date; minus
(B) The GNMA Purchase Price Percentage times the
principal balance of all Prepaid Loans in the GNMA
Portfolio; and also minus
(C) The deposit related to the GNMA Portfolio
calculated pursuant to Section 3.2(a)(ii).
(iii) Within two (2) Business Days after the FHLMC Transfer
Date, Purchaser shall pay to Seller an amount equal to:
(A) The FHLMC Purchase Price Percentage times the
principal balance of the FHLMC portfolio (excluding
the Excluded Loans within the FHLMC Portfolio); as
of the Effective Date minus
(B) The FHLMC Purchase Price Percentage times the
principal balance of all Prepaid Loans in the FHLMC
Portfolio.; and also minus
(C) The deposit related to the FHLMC Portfolio
calculated pursuant to Section 3.2(a)(iii).
(iv) Within two (2) Business Days after the MNB Transfer
Date, Purchaser shall pay to Seller an amount equal to:
A) The MNB Purchase Price Percentage times the
principal balance of the MNB Portfolio (excluding the
Excluded Loans within the MNB Portfolio) as of the
Effective Date; minus
(B) The MNB Purchase Price Percentage times the
principal balance of all Prepaid Loans in the MNB
Portfolio.; and also minus
(C) The deposit related to the MNB Portfolio
calculated pursuant to Section 3.2(a)(iv).
(v) Within two (2) Business Days after the Other
Institutional Investors' Transfer Date, Purchaser shall pay to Seller an amount
equal to:
(A) The Other Institutional Investors' Purchase
Price Percentage times the principal balance of the
Other Institutional Investors' Portfolio (excluding
the Excluded Loans within the Other Institutional
Investors' Portfolio and excluding the GMAC
Portfolio) as of the Effective Date; minus
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(B) The Other Institutional Investors' Purchase
Price Percentage times the principal balance of all
Prepaid Loans in the Other Institutional Investors'
Portfolio other than the GMAC Portfolio; and also
minus
(C) The deposit related to the Other
Institutional Investors' Portfolio calculated
pursuant to Section 3.2(a)(v).
(vi) Within two (2) Business Days after the GMAC Transfer
Date, Purchaser shall pay to Seller an amount equal to:
(A) The Other Institutional Investors' Purchase
Price Percentage times the principal balance of the
GMAC Portfolio (excluding the Excluded Loans within
the GMAC Portfolio) as of the Effective Date; minus
(B) The Other Institutional Investors' Purchase
Price Percentage times the principal balance of all
Prepaid Loans in the GMAC Portfolio; and also minus
(C) The deposit related to the GMAC Portfolio
calculated pursuant to Section 3.2(a)(vi).
(vii) At the time of final payments paid to Seller pursuant
to Section 3.1(b)(i)-(vi) above, Purchaser shall also pay Seller interest on
such amounts from the applicable Transfer Date through the dates upon which
Seller receives such payments at the Federal fund rate.
(viii) Within five (5) Business Days after the Employee
Transfer Date, Purchaser shall pay Seller an amount equal to the related IOMC
WarehousePurchase Price Percentage (per the applicable schedule) times the
unpaid principal balance of the related Mortgage Loans in the IOMC Warehouse
Portfolio .
(c) FF&E.
On the Employee Transfer Date Purchaser shall pay to Seller an amount
equal to 100% of the book value of the FF&E less one half of the amount, if
any, due as sales or use taxes.
(d) ESCROWS, RECONCILIATION.
Within three (3) Business Days following the related Transfer Date,
Seller shall use best efforts to remit and deliver to Purchaser all principal
and interest payments, Related Escrow Account balances (subject to the
adjustments required by paragraphs (g) and (h) of Section 3.5 hereof), and
other appropriate collections relating to the Mortgage Loans being transferred
on such Transfer Date. No later than five (5) Business Days following the
Transfer Date, Seller shall use best efforts to provide to Purchaser a
reconciliation, as of the respective Transfer Date, of the Related Escrow
Accounts and related Accounts Receivable that is performed in accordance with
the Applicable Requirements.
Seller shall be responsible to fund any and all shortages identified
in the above reconciliations, within two (2) Business Days of the applicable
reconciliation, in accordance with Applicable Requirements. Any payments
received by Seller on or after the Transfer Date with respect to any of the
Mortgage Loans transferred on such date shall be forwarded by Seller at
Seller's expense to Purchaser within one (1) Business Day after receipt .
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(e) REPURCHASE OF CERTAIN EXCLUDED LOANS.
Prior to the applicable Transfer Date, Seller shall repurchase from
the applicable Investor Portfolios those FHA or VA Excluded Loans that are
three (3) or more months past due as of the Effective Date to the extent
permitted by the Applicable Requirements.
(f) ADJUSTMENTS.
If, no later than six (6) months from the latest Transfer Date , the
principal on which the Purchase Price with respect to the Servicing Rights was
based is found to be in error, or if, for any other reason, the Purchase Price
or such other amounts are found to be in error, within five (5) Business Days
after the receipt of information sufficient to provide evidence that payment is
due, the Party benefiting from the error shall pay an amount sufficient to
correct and reconcile the Purchase Price or such other amounts and shall
provide a reconciliation statement and such other documentation sufficient to
satisfy the other Party (in such other Party's exercise of its reasonable
discretion), concerning the accuracy of such reconciliation.
(g) PIPELINE.
Within one (1) Business Day after the Employee Transfer Date,
Purchaser and Seller will identify on Exhibit Q those unclosed pipeline loans
eligible for inclusion in FNMA, FHLMC or GNMA Pools or loans which meet the
characteristics of the MNB Portfolio which Seller shall sell to Purchaser
"servicing released." Seller shall assign all right, title and interest to
such loans to Purchaser effective as of the Employee Transfer Date. Within one
(1) Business Day after Exhibit Q is finalized, all such loans shall be marked
to market effective as of the Employee Transfer Date taking into account any
mandatory forward commitments that are assigned to Purchaser. Purchaser and
Seller shall agree on the marked price and Purchaser shall pay Seller the
marked price for the closed loans. Seller will pay to the sales
representative the appropriate compensation for the loan on the Seller's sales
representative compensation schedule. For a period of three (3) months
thereafter, within five (5) Business Days after the end of each month
thereafter, Purchaser shall pay Seller the marked price for all unclosed loans
which close in the prior month, plus a service release fee of .75% of the
funded principal balance plus an amount equal to the Purchaser's normal sales
representative compensation. To the extent that a pipeline loan, once closed,
is not eligible for inclusion in a FNMA, FHLMC, or GNMA pool, the servicing
release fee shall be negotiated by the parties. Seller is responsible for
unwinding and satisfying its own hedges.
SECTION 3.3 VERIFICATION OF PURCHASE PRICE AND OTHER AMOUNTS TO BE
TRANSFERRED.
Within five (5) Business Days after the Execution Date, Seller shall
determine as of the Effective Date from its books and records and promptly
notify Purchaser in writing of: (i) the aggregate outstanding principal balance
of all Mortgage Loans relating to the Servicing Rights being transferred as of
the Effective Date; (ii) the aggregate principal balance of all Excluded Loans;
(iii) the amount of all Accounts Receivable; and (iv) the amount of Related
Escrow Accounts. All such accounts shall be reconciled by Seller and to
reports made to the applicable Investor, and Seller shall provide Purchaser
with appropriate supporting documentation for the balances generated by Seller.
SECTION 3.4 PURCHASER COVENANTS.
(a) Purchaser shall use its best efforts to consummate the
transfer of the Servicing Rights as contemplated by this Agreement, including,
but not limited to (i) obtaining the consents of the Investors, and (ii) using
best efforts to achieve the earliest possible Transfer Dates.
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(b) Subject to Section 3.5(j), Purchaser shall exercise best
efforts after the applicable Transfer Date to obtain by the appropriate
deadline the final certification or recertification of any Pool. Purchaser
shall use best efforts to notify Seller of any and all incomplete, missing or
incorrect custodial Mortgage Files which are necessary for the final
certification or recertification of any Pool, and, commencing at the end of the
month after the month in which the initial Transfer Date occurs, shall provide
Seller with monthly status reports of such missing, incomplete or incorrect
Mortgage Files in such form and with such content as Seller may reasonably
request.
(c) Purchaser shall use best efforts to initiate a Buydown (at
Seller's expense) with respect to a No-Bid, if a Buydown is likely to reduce
Seller's liability hereunder; provided, however, that the amount of the Buydown
shall not be more than the amount reasonably necessary to avoid a No-Bid.
(d) Purchaser will service the Excluded Loans which Seller has
repurchased from the applicable Investor and the MNB Other Loan Portfolio for a
service fee of $55 per loan per month. Purchaser will file initial and
supplemental insurance/guarantee claims on Seller's behalf. Seller may sell
any of the repurchased Excluded Loans or MNB Other Loan Portfolio to a third
party upon 60 days notice to Purchaser. If Seller elects to sell any of the
repurchased Excluded Loans or MNB Other Loan Portfolio servicing released to a
third party or if Seller elects to service such loans itself, Purchaser may (i)
increase the fee set forth in this section for the remaining repurchased
Excluded Loans or MNB Other Loan Portfolio by an amount up to $11 per loan per
month and (ii) charge a release fee of $55 per loan sold.
(e) Upon the terms and subject to the conditions hereof, Purchaser
agrees to use its best efforts to take or cause to be taken, all actions and
to do, or cause to be done, all things necessary, proper or advisable to ensure
that the conditions set forth in Articles VII and VIII are satisfied and to
consummate and make effective the transactions contemplated by this Agreement
insofar as such matters are within its control.
SECTION 3.5 SELLER COVENANTS.
(a) Seller shall pay, perform and discharge all liabilities and
obligations imposed on Servicer related to the Servicing Rights, the Related
Escrow Accounts and the Mortgage Loans, from the Effective Date to the Transfer
Date. Without limiting the foregoing, Seller shall take all actions necessary
to cause the Pools to be fully funded and balanced in accordance with the
Applicable Requirements as of the Effective Date and the applicable Transfer
Date.
(b) Within the time period provided by the applicable Investor,
Seller shall promptly take such actions as may be necessary to transfer all
right, title and interest in and to the Mortgage Loans to Purchaser, consisting
of (i) assigning nominal title to the Mortgage Instruments to Purchaser; (ii)
preparing or causing to be prepared and recorded all prior intervening
Assignments of Mortgage Instruments, as required by the applicable Investor;
and (iii) endorsing or causing to be endorsed the Mortgage Notes to Purchaser
without recourse, except as provided in this Agreement. Seller shall bear all
costs and all responsibility associated with the preparation and recordation of
such Assignments of Mortgage Instruments, and shall record such Assignments of
Mortgage Instruments if, and to the extent, such recordation is required by
Applicable Requirements. Seller shall cause to be prepared Assignments of
Mortgage Instruments from Purchaser to the applicable Investor for Purchaser's
signature at Seller's expense. None of the Assignments of Mortgage instruments
that Seller prepares, or causes to be prepared, from Seller to Purchaser or
from Purchaser to the Applicable Investor, shall be blanket Assignments of
Mortgage Instruments.
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(c) Seller shall properly account for and appropriately pass
through all of the Bi- Weekly payments it receives from Mortgagors for as long
as its agreement to do so with the Mortgagors exists.
(d) Seller shall pay any and all costs of securing Investor
approvals for the transactions contemplated in this Agreement, including,
without limitation, fees to the Investors for the transfer of the Servicing
Rights and rights related thereto and all fees and expenses in connection with
the certification of Pools in accordance with the Applicable Requirements.
(e) Following the Transfer Date, upon request of Purchaser, Seller
shall make the first payment of principal and interest due holders of GNMA and
FNMA securities relating to the Mortgage Loans and will pay all applicable
guaranty fees for the month in which the Transfer Date occurs from the
payments received by Seller with respect to such Mortgage Loans during the
Interim Period. In the event the payments so received by Seller are
insufficient to pay these amounts, Purchaser agrees to provide to Seller the
additional funds necessary to pay these amounts by wiring immediately available
funds to Seller no later than twenty-four (24) hours prior to the required
remittance date.
(f) Between the Execution Date and the last Transfer Date, Seller
shall not, without the prior written consent of the Purchaser:
(i) Engage in any material transactions or incur or
sustain any material obligation related to the assets or branch locations which
are the subject of this transaction, except in the ordinary course of business;
(ii) Transfer, assign, encumber or otherwise dispose of or
enter into any contract, agreement or understanding to transfer, assign,
encumber or otherwise dispose of any of the assets which are being sold to
Purchaser under this Agreement except in the ordinary course of business or
pursuant to the terms of this Agreement;
(iii) Increase or agree to increase the salary,
remuneration or compensation of the employees listed in Exhibit 3 (other than
those employees that Purchaser has indicated that it will not offer employment
to) other than in accordance with Seller's customary policies or pay or agree
to pay any bonus not already committed to be paid to any such employees, other
than regular bonuses granted based on Seller's historical practice;
(iv) Solicit any employees listed in Exhibit 3 (other than
those employees that Purchaser has indicated that it will not offer employment
to) to transfer employment to another division or affiliate of Seller;
(v) Renegotiate or change the terms of any of the Leases;
(vi) Settle any class action lawsuits related to the
Servicing Rights.
Seller shall use its best efforts to maintain records in the usual
manner and preserve the present relationships with its customers. Seller shall
maintain the corporate existence of Seller in good standing; maintain the
general character of its business and conduct its business in the ordinary and
usual manner; maintain proper business and accounting records, maintain the
FF&E in good condition and repair, ordinary wear and tear excepted; maintain
presently existing insurance coverages with respect to the assets subject to
this Agreement, use reasonable efforts to preserve its business organization
intact, to keep the services of its present principal employees and to preserve
its good will and the good will of its suppliers, customers and others having
business relationships with Seller, and permit
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Purchaser and its representatives to make reasonable examination of Seller's
books, records and properties and to interview its officers, employees and
agents at all reasonable times during normal business hours upon reasonable
prior notice. No such examination by Purchaser or its representatives, either
before or after the date of this Agreement, shall in any way affect, diminish
or terminate any of the representations, warranties or covenants of Seller
contained herein.
Upon the terms and subject to the conditions hereof, Seller agrees to
use its best efforts to take or cause to be taken, all actions and to do, or
cause to be done, all things necessary, proper or advisable to ensure that the
conditions set forth in Articles VIII and VIII are satisfied and to consummate
and make effective the transactions contemplated by this Agreement insofar as
such matters are within its control.
(g) All bills (including, without limitation, tax and insurance
bills) pertaining to the servicing of the Mortgage Loans and which are due and
payable without payment of a penalty on, prior to or within thirty (30) days
subsequent to the Transfer Date, and which are in Seller's possession, shall be
paid by Seller in accordance with Applicable Requirements. All other bills,
transmittal lists or any other information used to pay such bills, which items
are received within two (2) months after the applicable Transfer Date, shall be
forwarded by Seller to Purchaser . All penalties and interest due on any
Mortgage Loan resulting from Seller's failure to pay, prior to the Transfer
Date, bills which are due and payable within thirty (30) days following the
Transfer Date or where Seller failed to forward bill information to Purchaser
as provided above shall be borne by Seller. Seller shall assign to Purchaser,
effective as of the applicable Transfer Date or as soon thereafter as
reasonably practicable, fully paid, life of the loan service contracts issued
by First American Real Estate Tax Service related to all Mortgage Loans for
which the Servicing Rights are transferred from Seller to Purchaser at a cost
to Seller of $6 per loan.
(h) Seller shall pay interest on Related Escrow Accounts accrued
through the applicable Transfer Date to the extent interest with respect to
such accounts is required to be paid by law or contract for the benefit of
Mortgagors under the Mortgage Loans. Seller shall either deposit the interest
earned in the Related Escrow Account or forward such interest to Purchaser's
designee within five (5) Business Days after the applicable Transfer Date.
Provided Seller has timely provided all required information, Purchaser shall
be responsible for reporting all interest paid by Seller for the account of
Mortgagors related to the Mortgage Loans through the Transfer Date to the
Internal Revenue Service and to the Mortgagors, as required by the Internal
Revenue Code.
(i) Provided Seller has timely provided all required information,
Purchaser shall prepare and file with the Internal Revenue Service all reports,
forms, notices and filings required by the Internal Revenue Service in
connection with the Servicing Rights and Mortgage Loans with respect to events
that occurred prior to the applicable Transfer Date. Any expenses incurred by
Purchaser pursuant to this paragraph shall be shared by Seller (9/12) and
Purchaser (3/12).
(j) Seller shall use its best efforts, at its expense (a) obtain,
on or before the applicable Transfer Date, the final certification of any Pool
with respect to which either the deadline for final certification is a date
that occurs on or before the applicable Transfer Date or the "issue" date for
the related Pool is on or before February, 1993, and (b) obtain such documents
as become available and take such steps on or before the applicable Investor
deadline as are necessary to enable Purchaser, through the exercise of best
efforts after the applicable Transfer Date, to obtain by the appropriate
deadline the final certification or recertification of any Pool with respect to
which the deadline for final certification or recertification is after the
applicable Transfer Date.
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(k) Seller will use best efforts to attempt to terminate prior to
the Other Institutional Investor Transfer Date, all Servicing Agreements with
Other Institutional Investors that Purchaser reasonably identifies on Exhibit L
as economically disadvantageous to Purchaser. If Servicing Agreements set
forth on Exhibit L cannot be terminated by Seller on terms it deems reasonable,
Seller agrees to subsidize the Servicing Fee payable by the Investor to
Purchaser to the point where Purchaser receives a minimum Servicing Fee of $10
per month per affected Mortgage Loan. Purchaser shall bill Seller quarterly
for all amounts due pursuant to this Section 3.5(k).
(l) Seller will properly identify every Mortgage Loan subject to
mortgage pool insurance and shall pay all premiums due to any mortgage pool
insurance underwriter prior to the Transfer Date.
(m) Seller will pay the cost of a third party vendor (up to
$130,000) to perform an ARM audit on all ARM loans and Seller shall make all
adjustments required by the Applicable Requirements. The Parties will use
their best efforts to complete the audit prior to October 31, 1994.
SECTION 3.6 INTENTIONALLY OMITTED.
SECTION 3.7 EXPENSE PRORATION.
All expenses for operation of the Leased Locations, including without
limitation, rent, utilities, maintenance contract payments, and equipment lease
payments, shall be prorated as of the Employee Transfer Date in accordance
with generally accepted accounting principles with the Seller responsible for
any expenses accruing prior to the Employee Transfer Date and the Purchaser
responsible for any expenses accruing on or after the Employee Transfer Date.
To be attached prior to the Employee Transfer Date as Exhibit 4 is an
itemization of the expense proration. Seller shall be solely responsible for
expenses, if any, related to items such as stationary, advertising, etc., which
are not being transferred to or assumed by Purchaser. Certain prepaid expenses
may be prorated and will be identified on Exhibit 5 .
SECTION 3.8 LEASED LOCATIONS.
Seller shall use its best efforts to obtain each lessor's approval to
assignment of the leases related to the Leased Locations as soon as
practicable. If for any reason Seller is unable to obtain such approvals, then
the parties agree to use their best efforts to enter into a sublease of the
premises from Seller to Purchaser.
SECTION 3.9 EXHIBITS.
The Seller and Purchaser shall work together to prepare and finalize
all Exhibits (other than the Exhibits referred to in Article IV which cannot be
revised without Purchaser consent) prior to the Closing Date to take into
account ongoing business results.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
The representations and warranties of Seller contained in this
Agreement shall continue and survive the purchase of the Servicing Rights and
other assets which are the subject of this Agreement and the delivery and
assignment to Purchaser of such Servicing Rights, for a period of seven years
after the last Transfer Date, except as
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otherwise provided herein, and shall inure to the benefit of Purchaser and its
assigns. In addition to representations and warranties, if any, made elsewhere
in this Agreement, Seller represents and warrants to Purchaser, as of the
Execution Date, the Closing Date, and the Transfer Date, as applicable, that:
SECTION 4.1 DUE INCORPORATION AND GOOD STANDING.
Independence One Mortgage Corporation is a corporation, duly
organized, validly existing, and in good standing under the laws of the State
of Michigan. MNB is a National Banking Association. Seller has in full force
and effect (without notice of possible suspension, revocation or impairment)
all required qualifications, permits, approvals, licenses, and registrations to
conduct all activities in all states in which its activities with respect to
the Mortgage Loans or the Servicing Rights require it to be qualified or
licensed, except where the failure of Seller to possess such qualifications,
licenses, permits, approvals and registrations would not have a material
adverse effect on the ability of Servicer to enforce any Mortgage Loan.
SECTION 4.2 AUTHORITY AND CAPACITY.
Seller has all requisite corporate power, authority and capacity to
carry on its business as it is now being conducted, to execute and deliver this
Agreement and to perform all of its obligations hereunder and thereunder.
Seller does not believe, nor does it have any cause or reason to believe, that
it cannot perform each and every covenant contained in this Agreement .
SECTION 4.3 EFFECTIVE AGREEMENT.
The execution, delivery and performance of this Agreement and the by
Seller and consummation of the transactions contemplated hereby and thereby
have been or will be duly and validly authorized by all necessary corporate,
shareholder or other action; this Agreement has been duly and validly executed
and delivered by Seller, and this Agreement is a valid and legally binding
agreement of Seller enforceable against Seller in accordance with its terms,
subject to bankruptcy, insolvency and similar laws affecting generally the
enforcement of creditor's rights and the discretion of a court to grant
specific performance. Any requisite consents or approvals of third parties
(including the Investors and any other applicable regulatory authorities) to
the execution and delivery of this Agreement or the performance of the
transactions contemplated hereby by Seller have been or will be obtained prior
to the Transfer Date or such other earlier or later date as expressly provided
herein.
SECTION 4.4 NO CONFLICT.
Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby, nor compliance with its
terms and conditions, shall (a) violate, conflict with, result in the breach
of, constitute a default under, be prohibited by, or require any additional
approval under any of the terms, conditions or provisions of the Articles of
Incorporation or By-Laws of Seller, or of any mortgage, indenture, deed of
trust, loan or credit agreement or other agreement or instrument to which
Seller is now a party or by which Seller is bound, or of any law, ordinance,
rule or regulation of any governmental authority applicable to Seller, or of
any order, judgment or decree of any court or governmental authority applicable
to Seller, or (b) result in the creation or imposition of any lien, charge or
encumbrance of any nature upon, the Servicing Rights or any of the Mortgage
Loans or the properties or assets of Seller.
SECTION 4.5 APPROVALS AND COMPLIANCE.
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Seller is approved and in good standing with each Investor and
Insurer. Seller is not in default with respect to Seller's obligations under
the Servicing Agreements, and Seller is in compliance in all material respects
with Applicable Requirements (including, without limitation, the rules,
regulations and requirements relating to the Servicing Rights), and Seller is
in compliance with all statutes, orders, rules and regulations with respect to
the business and assets which are the subject of this Agreement.
SECTION 4.6 FILING OF REPORTS.
Seller has filed all reports required by the Investors and Insurers
with respect to the Mortgage Loans and the Servicing Rights, and Seller has
complied in all material respects with federal, state and municipal laws,
regulations and ordinances affecting the Mortgage Loans and the Servicing
Rights. Seller has filed all IRS Forms, including but not limited to Forms
1041 KI, 1041, 1099 INT, 1099 MISC, 1099A and 1098, as appropriate, which are
required to be filed with respect to the Servicing Rights for activity that
occurs on or before year end 1993.
SECTION 4.7 RELATED ESCROW ACCOUNTS.
All Related Escrow Accounts required to be maintained by Seller have
been established and continuously maintained in accordance with Applicable
Requirements. Except as to payments which are past due under the Mortgage
Loans, all Related Escrow Account balances required by the Mortgage Loans and
paid to Seller for the account of the Mortgagors under the Mortgage Loans are
on deposit in the appropriate Related Escrow Accounts. Within the last twelve
(12) months prior to the Transfer Date, Seller has analyzed the payments
required to be deposited into the Related Escrow Accounts and adjusted the
payment thereto in order to eliminate any deficiency between amounts actually
collected and amounts actually disbursed during the period covered by the
analysis that Seller may have discovered, except with respect to Mortgage Loans
originated within the twelve (12) months preceding the Transfer Date. With
regard to Mortgage Loans that provide for Mortgage Escrow Payments, Seller and
each Originator and Prior Servicer has (i) computed the amount of such payments
in accordance with Applicable Requirements, (ii) paid on a timely basis all
charges and other items to be paid out of the Mortgage Escrow Payments, and
when required by the applicable Servicing Agreement has advanced its own funds
to pay such charges and items, and (iii) delivered to the related Mortgagors
the statements and notices required by Applicable Requirements in connection
with the Related Escrow Accounts, including without limitation statements of
taxes and other items paid out of the Mortgage Escrow Payments and notices of
adjustments to the amount of the Mortgage Escrow Payments.
SECTION 4.8 ACCOUNTS RECEIVABLE.
The Accounts Receivable are valid and subsisting accounts owing to
Seller, and Seller has not received any notice from an Investor, Insurer,
Mortgagor or other appropriate party in which the Investor, Insurer or party
disputes or denies a claim by Seller for reimbursement in connection with an
Account Receivable.
SECTION 4.9 INVESTOR REMITTANCES AND REPORTING.
Seller and each Originator and Prior Servicer has remitted or
otherwise made available to each Investor (i) all principal and interest
payments received to which the Investor is entitled under the applicable
Servicing Agreements, including without limitation any guaranty fees, and (ii)
all advances of principal and interest payments required by such Servicing
Agreement. In accordance with the Applicable Requirements, Seller has prepared
and submitted to each Investor all reports in connection with such payments
required by the Applicable Requirements.
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SECTION 4.10 INTENTIONALLY OMITTED.
SECTION 4.11 THE MORTGAGE LOANS.
(a) Investor/Insurer Requirements. Each Mortgage Loan conforms in
all material respects to Applicable Requirements and each Mortgage Loan was
eligible for sale to, insurance by, or pooling to back securities issued or
guaranteed by, the applicable Investor or Insurer upon such sale, issuance of
insurance or pooling.
(b) Enforceability of Each Mortgage Loan. Each Mortgage Note and
the related Mortgage Instrument are genuine and each is the legal, valid and
binding obligation of the maker thereof, enforceable in accordance with its
terms, subject to bankruptcy, insolvency and similar laws affecting generally
the enforcement of creditor's rights and the discretion of a court to grant
specific performance. All parties to the Mortgage Note and the Mortgage
Instrument had legal capacity to execute the Mortgage Note and the Mortgage
Instrument and each Mortgage Note and Mortgage Instrument has been duly and
properly executed by such parties. Each Mortgage Loan is not subject to any
valid, enforceable right of rescission, set-off, counterclaim or defense
against Seller or Purchaser, including the defense of usury, nor will the
operation of any of the terms of the Mortgage Note or the Mortgage Instrument,
or the exercise of any right thereunder, render either the Mortgage Note or the
Mortgage Instrument unenforceable by Purchaser, in whole or in part, or subject
to any right of rescission, set-off, counterclaim or defense against Purchaser,
including the defense of usury, and no such right of rescission, set-off,
counterclaim or defense has been asserted with respect thereto.
(c) Disbursement. The full original principal amount of each
Mortgage Loan (net of any discounts) has been fully advanced or disbursed to
the Mortgagor named therein, there is no requirement for future advances and
except as disclosed on Exhibit 0 any and all requirements as to completion of
any on-site or off-site improvements and as to disbursements of any escrow
funds therefor have been satisfied. All costs, fees and expenses incurred in
making, closing or recording each Mortgage Loan was paid. There is no
obligation on the part of Seller, or of any other party, to make supplemental
payments in addition to those made by the Mortgagor.
(d) Priority of Lien. Each Mortgage Instrument has been duly
acknowledged and recorded and is a valid and subsisting first or second lien as
required by the Applicable Requirements, and the Mortgaged Property is free and
clear of all encumbrances and liens having priority over the lien of the
Mortgage Instruments, except for (i) liens for real estate taxes and special
assessments not yet due and payable, (ii) covenants, conditions and
restrictions, rights of way, easements and other matters of the public record
as of the date of recording, acceptable to mortgage lending institutions or
Investors generally and (iii) 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 Instrument or the use,
enjoyment, value or marketability of the related Mortgaged Property. 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 lien) affecting the Mortgaged Property which are or may be liens prior to,
or equal or coordinate with, the lien of the Mortgage Instrument which are not
insured against by the title policy as set forth herein. A valid and
enforceable title policy has been issued and is and shall remain in full force
and effect for each such Mortgage Loan in the amount not less than the original
principal amount of such Mortgage Loan, which title policy insures that the
related Mortgage Instrument is a valid first or second lien on the Mortgaged
Property therein described and that the Mortgaged Property is free and clear of
all encumbrances and liens having priority over the lien of the Mortgage,
subject to the exceptions set forth in this section, and otherwise satisfies
the Applicable Requirements. All tax identifications and property
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descriptions are legally sufficient. All intervening Assignment of Mortgage
Instruments have been recorded in the proper jurisdiction such that record
title to the Mortgage Loan is clearly vested in Seller or the appropriate
Investor as required by the Applicable Requirements.
(e) No Default/No Waiver. Except with respect to the Excluded
Loans, there is no default, breach, violation or event of acceleration existing
under any Mortgage Loan, and no event has occurred which, with the passage of
time or with notice and the expiration of any grace or cure period, would
constitute a default, breach, violation or event of acceleration; and Seller
has not waived any default, breach, violation or event of acceleration. Except
as approved in writing, a copy of which is in the Mortgage File, by the
applicable Investor and except for loss mitigation and error correction
activities taken in accordance with Applicable Requirements, neither Seller nor
any Originator or Prior Servicer has (i) agreed to any modification, extension
or forbearance in connection with a Mortgage Note or Mortgage Instrument, (ii)
released, satisfied or canceled any Mortgage Note or Mortgage Instrument in
whole or in part, (iii) subordinated any Mortgage Instrument in whole or in
part, or (iv) released any Mortgaged Property in whole or in part from the lien
of any Mortgage Instrument, and the written instrument necessary to effect any
of the foregoing has been recorded, if necessary, and is held in the Mortgage
File and otherwise satisfies Applicable Requirements. Seller has not advanced
its funds to cure a default or delinquency with respect to any such Mortgage
Loans, except for deficiencies in Mortgage Escrow Payments, or induced,
solicited or knowingly received any advance of funds by a party other than the
Mortgagor, directly or indirectly, for the payment for any amount required
under the Mortgage Loan.
(f) Application of Funds. All payments received by Seller with
respect to any Mortgage Loan have been remitted and properly accounted for as
required by Applicable Requirements. All funds received by Seller in
connection with the satisfaction of Mortgage Loans, including but not limited
to foreclosure proceeds and insurance proceeds from hazard losses, have been
deposited in the appropriate principal and interest account or taxes and
insurance account included among the Related Escrow Accounts, and all such
funds have been applied to reduce the principal balance of the Mortgage Loans
in question, or for reimbursement of repairs to the Mortgaged Property or as
otherwise required by Applicable Requirements, or are and will be in one of the
Related Escrow Accounts on the Transfer Date. The unpaid balances of the
Mortgage Loans are as stated on the Mortgage Files to be delivered to
Purchaser.
(g) Mortgage Insurance. Each Mortgage Loan which is represented
by Seller to have FHA insurance is insured, pursuant to the National Housing
Act. Each Loan which is represented by Seller to be guaranteed by the VA is
guaranteed under the provisions of Chapter 37 of Title 38 of the United States
Code. If required by the Applicable Requirements, each conventional Mortgage
Loan is, or prior to the Effective Date will be, insured as to payment defaults
by a policy of primary mortgage guaranty insurance and, if applicable, pool
insurance, in the amount required, and by an Insurer approved by the Investor,
and all provisions of such primary mortgage guaranty insurance policy and pool
insurance policy have been and are being complied with, such policy is in full
force and effect and all premiums due thereunder have been paid. As to each
mortgage insurance or guaranty certificate, each of Seller and any Originator
and Prior Servicer, has complied with applicable provisions of the insurance
for guaranty contract and federal statutes and regulations, all premiums or
other charges due in connection with such insurance or guaranty have been paid,
there has been no act or omission which would or may invalidate any such
insurance or guaranty with respect to Purchaser, and the insurance or guaranty
is, or when issued, will be, in full force and effect with respect to each
Mortgage Loan. There are no valid and enforceable defenses, counterclaims, or
rights of set-off against Purchaser affecting the validity or enforceability of
any mortgage insurance or guaranty with respect to a Mortgage Loan.
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(h) Compliance with Laws. Seller and each Originator and Prior
Servicer have complied with any applicable federal, state, or local law,
statute, and ordinance, and any applicable rule, regulation, or order issued
thereunder, pertaining to the subject matter of this Agreement, including,
without limitation, the fair housing, anti-redlining, equal credit opportunity,
truth-in-lending, real estate settlement procedures, fair credit reporting, and
every other prohibition against unlawful discrimination in residential or
governing consumer credit, and also including, without limitation, the Consumer
Credit Reporting Act, Equal Credit Opportunity Act of 1975 and Regulation B,
Fair Credit Reporting Act, Truth in Lending Law, in particular, Regulation Z as
amended, the Flood Disaster Protection Act of 1973, the Real Estate Settlement
Procedures Act of 1974, and Regulation X and state consumer credit codes and
laws. Each Originator and Prior Servicer was qualified to do business, and had
all requisite licenses, permits and approvals, in the states in which the
applicable Mortgaged Properties are located, except where the failure to
possess such qualifications, licenses, permits and approvals would not
materially and adversely affect the enforceability of the Mortgage Loan
Documents by Purchaser.
(i) Taxes, Insurance. All taxes, governmental assessments,
insurance premiums, water, sewer and municipal charges, leasehold payments,
ground rents relating to the Mortgage Loans have been paid by Seller to the
extent such items are required to be paid by Seller pursuant to Applicable
Requirements and as herein provided.
(j) Insurance. All Mortgaged Properties are currently insured
against loss by fire, hazards or extended coverage insurance policies in
conformity with Applicable Requirements and in an amount at least equal to the
outstanding principal balance of the applicable Mortgage Loans or, where
applicable, carry a sufficient amount of guaranteed replacement cost coverage
unless prohibited by applicable state law. If required by Applicable
Requirements, each such property is covered by a flood insurance policy in an
amount not less than the lesser of (i) the outstanding principal balance of the
applicable Mortgage Loan, or (ii) the maximum amount of insurance that is
available under such Act. All such insurance policies are in full force and
effect, and, to the extent Seller maintains Related Escrow Accounts, all
premiums with respect to such policies have been paid. Except with the written
consent of the applicable Investor (a copy of which is in the Mortgage File) or
otherwise in accordance with Applicable Requirements, no casualty insurance
proceeds for property damage have been used to reduce Mortgage Loan balances or
for any other purpose except to make repairs to the Mortgaged Property. Each
Mortgage Note or Mortgage Instrument obligates the Mortgagor thereunder to
maintain all fire, hazard, extended coverage and, if applicable, flood
insurance at Mortgagor's cost and expense, and upon Mortgagor's failure to do
so, authorizes the holder of the Mortgage Loan to obtain and maintain such
insurance at Mortgagor's cost and expense and to seek reimbursement therefor
from Mortgagor. Seller has provided the appropriate Insurer with such notice,
or has obtained such consent, as is necessary to designate Seller or the
related Investor as required by the Applicable Requirements as loss payee on
each such insurance policy. There are no uninsured casualty losses or casualty
losses where coinsurance has been (and seller has no reason to believe, will
be) claimed by an Insurer or where the loss, exclusive of contents, is greater
than the recovery, less actual expenses incurred in such recovery from the
Insurer.
(k) Damage, Condemnation. Except as disclosed on Exhibit F
attached hereto, there exists no physical damage to any Mortgaged Property from
fire, flood, windstorm, earthquake, tornado, hurricane or any other similar
casualty, which physical damage would materially and adversely affect the value
or marketability of any Mortgage Loan, the Servicing Rights, the Mortgaged
Property or the eligibility of the Mortgage Loan for insurance benefits by any
Insurer. There is no proceeding pending for the total or partial condemnation
of, or eminent domain with respect to, the Mortgaged Property. All of the
improvements that were included for the purpose of determining the appraised
value of the Mortgaged Property for a Mortgage Loan lie wholly within the
boundaries and building restriction lines of the Mortgaged Property, and no
improvements on adjoining properties encroach upon the Mortgaged Property.
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(l) Pools. Except as disclosed on Exhibit G with respect to pools
which have not been finally certified, all Pools have been initially certified,
finally certified and/or recertified if required by and otherwise in accordance
with Applicable Requirements, and the securities backed by such Pools have been
issued on uniform documents, promulgated in the applicable Investor guide
without any material deviations therefrom. Subject to the obligations of
Seller pursuant to Section 3.5(j), hereof, the Mortgage Files to be delivered to
Purchaser will include all documents necessary (other than Assignments of
Mortgage Instruments that are to be delivered by Seller after the applicable
Transfer Date) in order for Purchaser's document custodian to finally certify
or recertify, as applicable, the Pools in accordance with the Applicable
Requirements by the applicable deadline. Each Mortgage Loan included in a Pool
meets all eligibility requirements of the applicable Investor for inclusion in
such Pool. After the reconciliation required hereunder, each Pool will be
properly balanced and fully funded.
(m) Mortgage File. The Mortgage File contains each of the
documents and instruments specified to be included therein and required to be
maintained under the Applicable Requirements; and such document or instrument
is duly executed and in form acceptable to the applicable Investor or Insurer.
(n) Good Title. Seller is the sole owner and holder of all right,
title and interest in and to the Servicing Rights. The sale, transfer and
assignment by Seller to Purchaser of the Servicing Rights, and the instruments
required to be executed by Seller and delivered to Purchaser pursuant to the
applicable Investor rules and regulations or other contractual provisions, are,
or will be on the Transfer Date, valid and enforceable in accordance with their
terms and will effectively vest in Purchaser good and marketable title to the
Servicing Rights, free and clear of any and all liens, claims, or encumbrances,
except for those encumbrances required by applicable Investor rules and
regulations. Seller has not previously assigned, transferred or encumbered the
Servicing Rights.
(o) Origination, Sale and Servicing Practices. The origination,
sale and servicing practices used by Seller or any Originator and Prior
Servicer with respect to each Mortgage Loan have been legal, proper, prudent
and customary in the mortgage lending business and in accordance with
Applicable Requirements. With respect to Mortgage Escrow Payments, except for
Mortgage Loans three or more payments past due or as disclosed on Exhibit H
there exist no deficiencies in connection therewith for which customary
arrangements for repayment thereof have not been made, and no Mortgage Escrow
Payments or payments or other charges or prepayments due from Mortgagor have
been capitalized under any Mortgage instrument or the related Mortgage Note.
(p) Appraisals, Loan to Value Ratio. The loan-to-value ratio of
each Mortgage Loan did not, at the time of origination, exceed the maximum
amount permitted by the Applicable Requirements for such Mortgage Loan. The
appraisal prepared in connection with each Mortgaged Property was prepared by a
qualified appraiser with no direct or indirect interest in the Mortgaged
Property, and both the appraisal and the appraiser satisfied all Applicable
Requirements.
(q) Fraud. The following representation shall survive for the
life of the Mortgage Loans: No fraud occurred on the part of any person in
connection with any Mortgage Loan, that could materially and adversely affect
Purchaser or the Servicing Rights, or result in Purchaser incurring Losses.
(r) Mortgage Loan Characteristics. All Mortgage Loans are
secured by single-family (i.e., one (1) - to four (4) - family) residential
real property, and except as disclosed on Exhibit I none of the Mortgage Loans
are (i) coinsured, (ii) subsidized, (iii) graduated payment loans that are
still in the adjustment period of the loan, (iv) reverse mortgage loans, (v)
self insured, (vi) VA Vendee loans, (vii) FNMA Timesaver Loans, (viii)
Bi-weekly payment loans, (ix)
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Texas "Vet" loans, or (x) housing authority loans. All Mortgage Loans that are
secured by a condominium, planned unit development or cooperative unit have and
had all necessary project acceptances, were underwritten using all special
property appraisal methods, and otherwise meet and met any and all other
special acceptance requirements under the Applicable Requirements and at the
time required by the Applicable Requirements, or at such later time acceptable
to the applicable Investor. No Mortgage Loan is secured by manufactured
housing that is not affixed to a permanent structure and are deemed to be real
property pursuant to applicable state law.
(s) No Recourse. Except with respect to GNMA, and except as
disclosed on Exhibit I as Recourse Loans, none of the Servicing Agreements
provides for recourse to the Servicer for ultimate credit losses incurred in
connection with the default or foreclosure of, or acceptance of a deed in lieu
of foreclosure in connection with, a Mortgage Loan nor do they contain a
requirement to make Unrecoverable Advances.
(t) Notice of Relief Requested Pursuant to the Soldiers and
Sailors Relief Act of 1940. Except as disclosed on Exhibit P, Seller has not
received notice from any Mortgagor or other party with respect to the Mortgage
Loans of a request for relief pursuant to or invoking any of the provisions of
the Soldiers and Sailors Relief Act of 1940 or any similar law which would have
the effect of suspending or reducing the Mortgagor's payment obligations under
a Mortgage Loan or which would prevent such loan from going into foreclosure.
(u) No Additional Collateral. The Mortgage Note is not and has
not been secured by any collateral except the lien of the corresponding
Mortgage Instrument.
(v) Deeds of Trust. In the event the Mortgage Instrument
constitutes a deed of trust, a trustee, duly qualified under applicable law to
serve as such, has been properly designated and currently so serves and is
named in the Mortgage Instrument, and no fees or expenses are or will become
payable by the Purchaser, or the applicable Investor, or their respective
successors and assigns, to the trustee under the deed of trust, except as
expressly provided in the Mortgage Loan Documents for the performance of duties
by the trustee after a default by the Mortgagor.
(w) No Inquiries. Except as disclosed on Exhibit J, within the
three (3) years immediately preceding the Execution Date, Seller has not been
the subject of an audit by any of the VA, FHA, FNMA, FHLMC, GNMA, Other
Institutional Investor or Insurer, which audit included final findings (or, if
a current, not finalized audit, includes allegations) of a failure to comply
with Applicable Requirements, or resulted in a request for repurchase of a
Mortgage Loan or indemnification in connection with a Mortgage Loan (or in
connection with other mortgage loans to the extent such audit finding could
reasonably be expected to have an adverse effect on all or any portion of the
Servicing Rights or on Seller's ability to perform its obligations under this
Agreement), or resulted in rescission of an insurance or guaranty contract or
agreement.
(x) 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
material benefits of the security provided thereby, including, (i) in the case
of a Mortgage designated as a deed of trust, by trustee's sale, and (ii)
otherwise by judicial foreclosure. There is no homestead or other exemption
available to a Mortgagor, which would prevent the sale of the Mortgaged
property by trustee's sale or the foreclosure of the Mortgage.
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(y) Consolidation of Future Advances. Any future advances made in
connection with a Mortgage Loan have been consolidated with the outstanding
principal amount secured by the Mortgage Instrument, and the secured principal
amount, as consolidated, bears a single interest rate and single repayment
term. The lien of the Mortgage Instrument securing the consolidated principal
amount is expressly insured as having first lien priority by a title insurance
policy, an endorsement to the policy insuring the mortgagee's consolidated
interest or by other title evidence acceptable to the applicable Investor. The
consolidated principal amount does not exceed the original principal amount of
the Mortgage Loan.
SECTION 4.12 INSURANCE.
Error and omissions and fidelity insurance coverage, in amounts as
required by Applicable Requirements, is in effect with respect to Seller and
will be maintained until the last Transfer Date.
SECTION 4.13 LITIGATION.
Except as disclosed on Exhibit J, and except with respect to Mortgage
Loans that will be reported on Exhibit E as Excluded Loans (under clause (i) of
the definition of Excluded Loans), there is no action, suit or proceeding
pending against Seller or, to Seller's knowledge, threatened against Seller
before any court or arbitrator or any governmental body, agency or official
which (i) would materially adversely affect the ability of Seller to perform
its obligations under this Agreement, or which in any manner questions the
validity of this Agreement, (ii) would materially adversely affect the
aggregate value of the FF&E or the Servicing Rights or (iii) would materially
adversely affect the business of Seller taken as a whole. Seller has received
no notice from any federal, state or other governmental agency indicating that
such agency would oppose the transactions contemplated hereby or would not
grant or issue its consent or approval, if required with respect to the
transactions contemplated hereby.
SECTION 4.14 NO ACCRUED LIABILITIES.
There are no accrued or contingent liabilities of Seller with respect
to the Mortgage Loans or Servicing Rights for which Purchaser would be
responsible, or circumstances under which such accrued or contingent
liabilities will arise against Purchaser, with respect to occurrences prior to
the Transfer Date.
SECTION 4.15 FACTS AND OMISSIONS.
Subject to Section 4.16 hereof, no representation, warranty or written
statement made by Seller in this Agreement, in any Exhibit to this Agreement,
in any written statement or certificate furnished by Seller to Purchaser in
connection with this Agreement, or in any data tape provided by Seller to
Purchaser hereunder, contain any material misstatement of fact or will omit to
state a material fact necessary in order to make the statements in light of the
circumstances in which they are made not misleading.
SECTION 4.16 QUALIFICATIONS TO REPRESENTATIONS.
Seller is making Seller's representations and warranties without
having necessarily performed sufficient investigations to provide it with a
sufficient factual basis on which to determine the truth or accuracy of such
representations and warranties. The inaccuracy in any material respect of any
representation or warranty made by Seller under this Agreement shall constitute
a breach by Seller regardless of Seller's knowledge concerning the truth or
accuracy of such representations and warranties when made or the disclosure of
any exceptions on any Schedule or Exhibit. In no event shall a breach of any
of Seller's representations and warranties with respect to any Mortgage
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Loan be used as evidence of or be deemed to constitute bad faith, misconduct,
misrepresentation or fraud by Seller unless it is shown that Seller knew or
should have known that any of such representations were materially incorrect
when made.
SECTION 4.17 INDICTMENTS AND RELATED MATTERS.
Neither Seller, nor any entity affiliated with it, nor any current or
former director, officer, or other person employed by or acting as agent for
Seller has been indicted, arraigned, convicted or is under investigation for
any criminal offense or fraudulent activity related to the origination,
servicing or sale of Mortgage Loans, or related to other business operations of
Seller.
SECTION 4.18 TITLE TO FF&E; NO DEFAULT ON LEASES.
Seller has sole title to the FF&E and the FF&E are subject to no lien
or encumbrance of any kind. Seller is not in default on any lease or FF&E
Contract to be assumed by Purchaser under this Agreement; all payments on such
leases or FF&E Contracts are current.
SECTION 4.19 FINANCIAL STATEMENTS.
The published financial statements provided to Purchaser by Seller,
present fairly in all material respects the financial position of Seller as of
their respective dates and the results of operations for the periods then
ending, in conformity with generally accepted accounting principles
consistently applied.
SECTION 4.20 MATERIAL ADVERSE CHANGE.
Since March 31, 1994 Seller has conducted business only in the
ordinary and usual course and no event has occurred which has had or could
reasonably be expected to have a material adverse effect on Seller's business.
SECTION 4.21 ASSETS.
There is no asset required by Seller in the conduct of the Seller's
business at the Leased Locations which is not included in this transaction and
which is not either owned by Seller or licensed or leased to Seller under one
of the licenses or leases to be assigned hereunder. The FF&E are reasonably
fit and suitable for the purposes for which they were intended, in good
operating condition and repair, and free from any known defects except such as
do not interfere with the continued use of such FF&E. Seller is not in default
under any material agreement, commitment, arrangement, lease, insurance policy
or other instrument related to the FF&E, including the FF&E Contracts and the
leases for the Leased Locations, the violation of which would prevent Seller
from performing its obligations hereunder or would result in a lien,
encumbrance or other charge upon any of the FF&E.
SECTION 4.22 CERTAIN LABOR MATTERS.
Except as disclosed on Exhibit 6, there is no employment agreement,
severance or similar agreement with any employee listed on Exhibit 3. There
are no labor controversies pending with any employees listed on Exhibit 3 and,
to the best of Seller's knowledge, no group, organization or union has
attempted to organize any employees of Seller.
SECTION 4.23 LEASED LOCATIONS.
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To Seller's Knowledge there are no facts or circumstances existing or
threatened which could have a material adverse effect on the present or future
use of the Leased Locations as mortgage origination or servicing offices as the
case may be. To Seller's Knowledge none of the Leased Locations or any
improvements relating thereto violate or have violated any fire, zoning,
health, building, hazardous waste or environmental code, ordinance, statute,
regulation or order of any governmental authority or any agency, body or
subdivision thereof. To Seller's Knowledge there are no hazardous or toxic
materials or substances on or affecting any of the Leased Locations.
SECTION 4.24 SOFTWARE.
Seller warrants that it owns the entire right, title and interest in
and to the Software.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PURCHASER
In addition to the representations and warranties, if any, made
elsewhere in this Agreement, Purchaser represents and warrants to Seller, as of
the Execution Date, the Closing Date and the Transfer Date, as applicable, as
follows:
SECTION 5.1 DUE INCORPORATION AND GOOD STANDING.
Purchaser is a corporation, duly organized, validly existing, and in
good standing under the laws of the State of Minnesota. Purchaser has in full
force and effect (without notice of possible suspension, revocation or
impairment) all required qualifications, permits, approvals, licenses, and
registrations to conduct all activities in all states in which its activities
with respect to the Mortgage Loans or the Servicing Rights require it to be
qualified or licensed, except where the failure of Purchaser to possess such
qualifications, licenses, permits, approvals and registrations would not have a
material adverse effect on Seller.
SECTION 5.2 AUTHORITY AND CAPACITY.
Purchaser has all requisite corporate power, authority and capacity,
to execute and deliver this Agreement and to perform all of its obligations
hereunder. Purchaser does not believe, nor does it have any cause or reason to
believe, that it cannot perform each and every covenant contained in this
Agreement.
SECTION 5.3 EFFECTIVE AGREEMENT.
The execution, delivery and performance of this Agreement by Purchaser
and consummation of the transactions contemplated hereby have been or will be
duly and validly authorized by all necessary corporate, shareholder or other
action by Purchaser; and this Agreement has been duly and validly executed and
delivered by Purchaser, and this Agreement is a valid and legally binding
agreement of Purchaser and enforceable against Purchaser in accordance with its
respective terms, subject to bankruptcy, insolvency and similar laws affecting
generally the enforcement of creditor's rights and the discretion of a court to
grant specific performance. Any requisite consents of third parties (including
the Investor and any other applicable regulatory authorities) to the execution
and delivery of this Agreement or the performance of the transactions
contemplated hereby by Purchaser have been or will be obtained prior to the
Transfer Date or such earlier or later date as expressly provided herein.
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SECTION 5.4 NO CONFLICT.
Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby and thereby, nor
compliance with their respective terms and conditions, shall (a) violate,
conflict with, result in the breach of, or constitute a default under, be
prohibited by, or require any additional approval under any of the terms,
conditions or provisions of Purchaser's Articles of Incorporation or By-Laws,
or of any mortgage, indenture, deed of trust, loan or credit agreement or
instrument to which Purchaser is now a party or by which it is bound, or of any
order, judgment or decree of any court or governmental authority applicable to
Purchaser, or (b) result in the creation or imposition of any lien, charge or
encumbrance of any material nature upon any of the properties or assets of
Purchaser.
SECTION 5.5 APPROVALS AND COMPLIANCE.
Purchaser is approved by and in good standing with each Investor or
Insurer, as necessary, in order to assume responsibility for the Servicing
Rights. Other than the Investor and Landlord approvals referred to in Section
7.5 and the regulatory approvals referred to in Section 7.8, no approval by any
regulatory agency or official is necessary in order for Purchaser to consummate
the transactions contemplated in this Agreement.
ARTICLE VI
INVESTOR CONSENT
SECTION 6.1 INVESTOR CONSENT.
The purchase and sale of the Servicing Rights are subject to consent
by the applicable Investor and the assignments of Seller's rights in the Leased
Locations are subject to consent by the applicable landlord. Purchaser and
Seller each shall take such steps as required by the applicable Investor in
order to obtain such Investor's consent. In accordance with the Applicable
Requirements, Seller, at its sole expense, shall submit to the Investors all
materials, and pay such fees, required by the Applicable Requirements in order
to obtain the Investor Consents in a timely manner with respect to the transfer
of the Servicing Rights from Seller to Purchaser. If any Investor does not
provide written consent to the transfer of the Servicing Rights related to it
prior to the applicable Transfer Date, Purchaser may elect to pay for such
Servicing Rights not withstanding the lack of consent. Such non consented
Servicing Agreements shall be listed on Exhibit M. Notwithstanding anything
else in this Agreement, Seller agrees that if an Investor terminates any
Servicing Agreement listed on Exhibit M within twelve months of the Transfer
Date, Seller will refund the Purchase Price it received applicable to the
Servicing Rights related to such Servicing Agreement, less 50% of the Servicing
Fees actually collected by Purchaser.
SECTION 6.2 FNMA CONSENT, FNMA TRANSFER DATE.
In seeking Investor Consent from FNMA, Seller shall request a FNMA
Transfer Date of October 1, 1994. Seller shall promptly notify Purchaser in
writing if (i) FNMA advises Seller that the FNMA Transfer Date, for all or any
portion of the Servicing Rights in connection with FNMA Portfolio, will be a
date other than September 30, 1994, or (ii) FNMA advises Seller that all or any
portion of the Servicing Rights in connection with the FNMA Portfolio may not
be transferred to Purchaser.
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SECTION 6.3 GNMA CONSENT, GNMA TRANSFER DATE.
In seeking Investor Consent from GNMA, Seller shall request a GNMA
Transfer Date of October 1, 1994. Seller shall promptly notify Purchaser in
writing if (i) GNMA advises Seller that the GNMA Transfer Date, or all or any
portion of the Servicing Rights with respect to the GNMA Portfolio, will be a
date other than October 1, 1994, or (ii) GNMA advises Seller that all or any
portion of the Servicing Rights in connection with the GNMA Portfolio may not
be transferred to Purchaser.
SECTION 6.4 FHLMC CONSENT, FHLMC TRANSFER DATE.
In seeking Investor Consent from FHLMC, Seller shall request a FHLMC
Transfer Date of October 17, 1994. Seller shall promptly notify Purchaser in
writing if (i) FHLMC advises Seller that the FHLMC Transfer Date, or all or any
portion of the Servicing Rights with respect to the FHLMC Portfolio, will be a
date other than October 17, 1994, or (ii) FHLMC advises Seller that all or any
portion of the Servicing Rights in connection with the FHLMC Portfolio may not
be transferred to Purchaser.
SECTION 6.5 OTHER INSTITUTIONAL INVESTOR CONSENT, OTHER INSTITUTIONAL
INVESTOR TRANSFER DATE.
In seeking Investor Consent from any Other Institutional Investor,
Seller shall request an Other Institutional Investor Transfer Date of September
30, 1994. Seller shall promptly notify Purchaser in writing if (i) any Other
Institutional Investor advises Seller that the Other Institutional Investor
Transfer Date, or all or any portion of the Servicing Rights with respect to
said Other Institutional Investor Portfolio, will be a date other than September
30, 1994, or (ii) any Other Institutional Investor advises Seller that all or
any portion of the Servicing Rights in connection with the Other Institutional
Investor Portfolio may not be transferred to Purchaser.
SECTION 6.6 GMAC CONSENT, GMAC TRANSFER DATE.
In seeking Investor Consent from GMAC, Seller shall request a GMAC
Transfer Date of October 17, 1994. Seller shall promptly notify Purchaser in
writing if (i) GMAC advises Seller that the GMAC Transfer Date, or all or any
portion of the Servicing Rights with respect to the GMAC Portfolio, will be a
date other than October 17, 1994, or (ii) GMAC advises Seller that all or any
portion of the Servicing Rights in connection with the GMAC Portfolio may not
be transferred to Purchaser.
ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER
The obligations of Purchaser under this Agreement are subject to the
satisfaction in all material respects of each of the following conditions:
SECTION 7.1 CORRECTNESS OF REPRESENTATIONS AND WARRANTIES.
The representations and warranties made by Seller in this Agreement
shall be true and correct in all material respects as of the Execution Date,
the Closing Date, and Transfer Date.
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SECTION 7.2 COMPLIANCE WITH CONDITIONS.
All material terms, covenants and conditions of this Agreement
required to be complied with and performed by Seller at or prior to the
Effective Date, Closing Date or the Transfer Date, as applicable, shall have
been duly complied with and performed by Seller in all material respects.
SECTION 7.3 CORPORATE RESOLUTION.
Purchaser shall have received from Seller prior to the Closing Date a
duly executed Certificate of its Secretary or Assistant Secretary reciting the
approval of the Board of Directors of Seller of the transfer and sale of the
Servicing Rights, FF&E, the FF&E Contracts and the Seller's interest in the
Leased Locations to Purchaser and authorizing the officers of Seller to execute
such documents as may be necessary to accomplish the transactions contemplated
hereby.
SECTION 7.4 OFFICER'S CERTIFICATION.
Purchaser shall have received an Officer's Certification from a senior
officer of Seller to the effect that all of the representations and warranties
made by the Seller under this Agreement were true, accurate, and complete in
all material respects on the date made and as of the Closing Date and that
Seller has complied with all material terms, covenants and conditions of this
Agreement which are due prior to the date of such Officer's Certification.
SECTION 7.5 CONSENTS.
The Investor Consents and landlord consents and FF&E Contract consents
shall have been issued and delivered to Purchaser prior to the Closing Date,
and such Investor Consents and landlord consents and FF&E Contract consents
shall not contain any term or condition that could adversely affect the value
of the Servicing Rights or the Leased Locations or the FF&E Contracts to
Purchaser or would impose any cost or obligation on Purchaser not normally
imposed in the ordinary course of a transfer of servicing rights or assets as
contemplated in this Agreement. The consent of Computer Power, Inc. to permit
Purchaser to run the Servicing on Seller's CPI license until September 30,
1995, shall have been issued and delivered to Purchaser.
SECTION 7.6 LEGAL OPINION.
Seller shall have delivered to Purchaser prior to the Closing Date a
legal opinion in the form of Exhibit K attached hereto.
SECTION 7.7 NO INJUNCTION.
No judgment, ruling, order or decree shall have been rendered which
has the effect of enjoining the consummation of the transactions contemplated
by this Agreement at or prior to the Transfer Date.
SECTION 7.8 REGULATORY APPROVALS.
All regulatory consents, approvals and notifications required under
federal and state laws shall have been obtained without the imposition of any
condition which would be unreasonably burdensome to the business or financial
condition of Purchaser, and all applicable waiting periods shall have expired
or been terminated prior to the Closing Date.
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SECTION 7.9 ENVIRONMENTAL MATTERS.
With respect to the Leased Locations there shall be no reasonable
basis for any proceeding, claim or action of any nature seeking to impose or
that could reasonably be expected to result in the imposition or any liability
arising from the release of hazardous substances under any local, state or
federal environmental statute, regulation or ordinance including, without
limitation, the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended prior to the Closing Date.
SECTION 7.10 NO MATERIAL ADVERSE CHANGE.
There shall have been no material adverse change in Seller's financial
condition, assets, business or prospects relating to the assets acquired by
Purchaser hereunder as of the Closing Date and Transfer Date.
ARTICLE VIII
CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER
The obligations of Seller under this Agreement are subject to the
satisfaction in all material respects of each of the following conditions:
SECTION 8.1 CORRECTNESS OF REPRESENTATIONS AND WARRANTIES.
The representations and warranties made by Purchaser in this Agreement
were true and correct in all material respects as of the Execution Date,
Closing Date,, and Transfer Date.
SECTION 8.2 COMPLIANCE WITH CONDITIONS.
All material terms, conditions and covenants of the Agreement required
to be complied with and performed by Purchaser at or prior to the Closing Date
or Transfer Date shall have been duly complied with and performed by Purchaser
in all material respects.
SECTION 8.3 CORPORATE RESOLUTION.
Seller shall have received from Purchaser prior to the Closing Date a
duly executed Certificate of its Secretary or an Assistant Secretary reciting
the approval of the Board of Directors of Purchaser of the assumption and
purchase from Seller of the Servicing Rights, FF&E and tenant obligations for
the Leased Locations and authorizing Purchaser's officers to execute such
documents as may be necessary to carry out the transactions contemplated
hereby.
SECTION 8.4 OFFICER'S CERTIFICATION.
Seller shall have received prior to the Closing Date an Officer's
Certification from a senior officer of Purchaser to the effect that all of the
representations and warranties made by the Purchaser under this Agreement
were true, accurate, and complete in all material respects on the date made.
SECTION 8.5 CONSENTS.
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Seller shall have received the Investor Consents and landlords
consents as required by Article VI prior to the Closing Date.
ARTICLE IX
INDEMNIFICATION
SECTION 9.1 INDEMNIFICATION OF SELLER.
Subject to Section 9.5 below, Seller shall indemnify and hold
Purchaser, its affiliates and the officers, directors, employees and agents,
whether past, present or future, of Purchaser or its affiliates harmless from,
and will reimburse Purchaser for, any and all documented Losses incurred by
Purchaser its affiliates and the officers, directors, employees and agents,
whether past, present or future, of Purchaser or its affiliates after the
Execution Date to the extent that such Losses arise out of, relate to or result
from:
(a) the inaccuracy of any representation or warranty made by
Seller in this Agreement in any material respect;
(b) the failure by Seller to perform or observe any material term
or provision of this Agreement in any material respect;
(c) No-Bids, including, without limitation, those resulting in
Buydowns (subject to the limitations set forth in Section 9.5(c));
(d) any Excluded Loan, the Servicing Rights to which are
transferred to Purchaser hereunder which has not reinstated and remained
current for a period of at least six months;
(e) any Claim arising from the failure to comply with the
Applicable Requirements relating to the conduct of business which is the
subject matter of this transaction or relating to any act or failure to act of
Seller relating to the assets which are the subject of this transaction prior
to the Employee Transfer Date, or with regard to the Servicing Rights, prior
to the applicable Transfer Date;
(f) any expenses as a result of any requirements imposed upon
Purchaser by GNMA in the event Seller fails to arrange for or make possible the
timely final certification of the Pools (including but not limited to the
posting by Seller of any required letter(s) of credit and the provision by
Seller of the collateral therefor, and all expenses associated with making such
final certification to the extent reasonably attributable to the Servicing
Rights. For example, if, on a given final certification date established in
accordance with the GNMA Applicable Requirements, Pools under Purchaser's
issuer number with an aggregate principal balance of $100,000,000 have not
timely been so certified or recertified, of which aggregate principal balance
relates to Pools of $75,000,000 are included within the Servicing Rights, then
seventy-five percent (75%) of such costs and expense shall be attributable to
and paid by Seller; and
(g) any loss due to a Recourse Loan, a FNMA Timesaver Loan or a VA
Vendee Loan.
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SECTION 9.2 REPURCHASE OF MORTGAGE LOANS AND SERVICING RIGHTS.
In the event Purchaser discovers that any of the representations and
warranties made in this Agreement by Seller were not accurate at or as of the
time they were made by Seller, or if there exists a basis to demand
indemnification under Section 9.1 hereof, and such inaccuracy or basis for
indemnification reasonably appears to be a proximate reason for the Loss
incurred by Purchaser or the Claim asserted against Purchaser, and Seller fails
to cure the same in accordance with Section 9.4 hereof or repurchase the
affected Mortgage Loan, Purchaser, subject to any limitations of the applicable
Investor, may demand that Seller (i) repurchase from Purchaser the Servicing
Rights to the affected Mortgage Loans based upon the applicable Purchase Price
Percentage (as set forth in the second sentence following), and (ii) repurchase
such Mortgage Loans or provide Purchaser with the funds necessary to effect
such repurchase. Notwithstanding the foregoing, Purchaser is not entitled to
demand repurchase of any Mortgage Loan hereunder if (i) Seller indemnifies
Purchaser against on-going Losses as they are incurred and (ii) the retention
of the Mortgage Loans in Investor pools does not prejudice Purchaser in the
exercise of Purchaser's reasonable discretion with the Investor including but
not limited to the possible imposition of administrative remedies by the
Investor. The purchase price under this section for any repurchased Mortgage
Loan shall equal the sum of (i) the applicable Purchase Price Percentage
multiplied by the then outstanding principal balance for such Mortgage Loan,
(ii) the aggregate unpaid principal balance of the Mortgage Loan, and all
accrued and unpaid interest thereon at the time of repurchase by Seller, and
(iii) all other documented unreimbursed Losses incurred by Purchaser in
connection with such Mortgage Loan after the Transfer Date, except to the
extent that such Losses are attributable to Purchaser's failure to service such
Mortgage Loans in accordance with Applicable Requirements. In connection with
the repurchase of a Mortgage Loan, the amount of funds that Seller shall
provide to Purchaser shall equal the amount of funds that Purchaser must
provide to the applicable Investor to effect the repurchase to the extent that
such amount exceeds the amounts set forth in (ii) and (iii) in the immediately
preceding sentence. Subject to Applicable Requirements, when Seller is
required to either purchase a Mortgage Loan or repurchase Servicing Rights
related to a Mortgage Loan from Purchaser, such purchase or repurchase shall be
accomplished within fifteen (15) Business Days following receipt from Purchaser
of written demand from Purchaser pursuant hereto; Purchaser shall service such
repurchased Mortgage Loan under the MNB Other Loan Portfolio Servicing
Agreement.
SECTION 9.3 INDEMNIFICATION OF PURCHASER.
Subject to Section 9.5 below, Purchaser shall indemnify and hold
Seller harmless from, and will reimburse Seller for, any and all documented
Losses incurred by Seller after the Execution Date to the extent that such
Losses result from:
(a) the inaccuracy of any representation or warranty made by
Purchaser in this Agreement in any material respect; or
(b) the failure by Purchaser to perform or observe any term or
provision of this Agreement in any material respect.
SECTION 9.4 NOTICE AND SETTLEMENT OF CLAIMS.
Each Party to this Agreement shall promptly notify the other party in
writing of the existence of any material fact known to it giving rise to any
obligations of the other party under this Article IX and, in the case of any
Claim brought by a third party, which may give rise to any such obligations,
each Party shall promptly notify the other party of the making of such Claim or
the commencement of such action by a third party as and when same becomes known
to it, and the Party seeking indemnification shall provide reasonable
supporting documentation for such Claim. The
<PAGE> 41
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indemnifying party (the "Indemnifying Party") may, at its own cost and
expenses, assume and control defense of any Claim, including, without
limitation, the right to designate counsel and to control all negotiations,
litigation, settlements, compromises and appeals of any such Claim or potential
Claim; provided that the counsel is satisfactory to the indemnified party
("Indemnified Party") in the exercise of its reasonable discretion. The Party
not controlling the defense or prosecution of any such Claim may participate at
its own costs and expense. Notwithstanding the foregoing, the Indemnifying
Party may permit the Indemnified Party to assume the defense or prosecution of
all or a portion of such Claim if the Indemnified Party reasonably believes
that such assumption is necessary to assure that its right or ability to
enforce a material portion of its other Mortgage Loans or Servicing Rights or
its method of doing business or its authority and approvals to service are not
materially impaired. Neither the Indemnifying Party nor the Indemnified Party
shall be entitled to settle, compromise, decline to appeal, or otherwise
dispose of any Claim, without the written consent of the other Party, which
consent shall not be unreasonably withheld or delayed; provided, however, such
consent shall not be required for a Claim involving less than Ten Thousand
Dollars ($10,000), unless the other Party reasonably believes that the
settlement, compromise, declination to appeal or other disposition may (a)
prejudice the Party in connection with other Claims or potential Claims, or (b)
result in injunctive or other relief (excepting the payment of monetary
damages) against the Party that could materially interfere with the business,
operations, assets, condition or prospects of the Party. Following the
discharge of the Indemnifying Party's obligations under this Article IX, the
Indemnified Party shall, subject to the Applicable Requirements, assign to the
Indemnifying Party any and all related claims against third parties. Within
fifteen (15) days after receipt, the Indemnified Party shall refund to the
Indemnifying party the amounts of all recoveries received by the Indemnified
Party with respect to any claim with respect to which it is reimbursed for
Losses.
Following the receipt of written notice from the Indemnified Party of
a demand for indemnification or repurchase, the Indemnifying party shall seek
to cure the problem giving rise to the demand, if possible, and pay the amount
for which it is liable, repurchase the Mortgage Loan or otherwise take the
actions which it is required to take within sixty (60) days or such lesser time
as may be required by the applicable Investor, Insurer or third party claimant.
As to any Claim for indemnity for which notice is given as hereinbefore
provided, the corresponding obligation of indemnity shall continue to survive
until whichever of the following events first occurs: (1) the Indemnifying
Party shall have discharged its obligation of indemnity to the Indemnified
Party with respect to such claim, as required hereunder; (2) a court of
competent jurisdiction shall have finally determined that the Indemnifying
Party is not liable to the Indemnified Party with respect to such claim; or (3)
the Indemnified Party shall have released in writing (or be held to have
released) the Indemnified Party from any liability with respect to such claim.
SECTION 9.5 EXCLUSIONS FROM LIABILITY.
Notwithstanding anything else to the contrary and in addition to any
other limitations and exclusions set forth in this Agreement, neither Seller
nor Purchaser shall indemnify and hold the other harmless from, or assert a
Claim against the other for, any of the following:
(a) Losses which arise from or in connection with any Claim made
by Purchaser or Seller against Seller or Purchaser, respectively, for
consequential damages consisting of lost investment or business opportunity,
damages to reputation, punitive damages, exemplary damages, treble damages and
nominal damages, unless such Losses are incurred by Purchaser or Seller as a
sole and direct result of a third party Claim, such third party claims include
but are not limited to any demand by an Investor for a letter of credit or
performance bond as a result of a breach by Seller hereunder, asserted against
Purchaser or Seller, respectively;
<PAGE> 42
42
(b) Losses attributable to or arising from overhead allocations
or general and administrative costs and expenses;
(c) Losses with respect to No-Bids or Buydowns pursuant to Section
9.1(c) hereof where the VA elects a No-Bid and notifies the Purchaser of such
election or Purchaser effects a Buydown more than three (3) years after the
Effective Date. Provided however, anything to the contrary notwithstanding, in
no event will Seller be obligated for such Losses which in the aggregate exceed
$2.5 Million.
SECTION 9.6 NOTIFICATION OF LOSSES.
An Indemnified Party shall, to the extent practicable and reasonably
within its control, make best efforts to mitigate any Losses of which it has
adequate notice, provided that Indemnified Party shall not be obligated to act
in contravention of Applicable Requirements. The Indemnifying Party shall have
the right, but not the obligation, and shall be afforded the opportunity by the
Indemnified Party to the extent reasonably possible, to take reasonable actions
to minimize Losses before such Losses actually are incurred by the Indemnified
Party, including but not limited to (i) providing personnel and contractors to
seek to obtain outstanding documentation which are preventing the final
certification or recertification of any Pool, (ii) buying the Mortgaged
Properties in the case of a VA no-bid and (iii) buying VA guaranteed Mortgage
Loans out of Pools for which Seller may be obligated to indemnify Purchaser
under Section 9.1 (c) hereof. Nothing in this Section 9.6 shall be construed
as obligating either Party to pursue deficiency judgments against Mortgagors on
foreclosed Mortgage Loans.
SECTION 9.7 SPECIAL INDEMNIFICATION FOR SELLER'S ESCROW OR ARM
ADJUSTMENT PRACTICES.
Seller shall indemnify and hold Purchaser harmless from, and will
reimburse Purchaser for, any and all Losses incurred by Purchaser to the extent
that such Losses arise out of, relate to, or result from any of the Seller's
escrow or arm adjustment practices in connection with Servicing Rights acquired
by the Purchaser under this Agreement prior to the Transfer Date and any ARM
adjustment practices of Seller different from Purchaser's ARM adjustment
practices that Purchaser continues in connection with Servicing Rights acquired
on such Transfer Date until six (6) months after such Transfer Date. The
indemnification set forth in Section 9.7 shall apply to any Claim that results
in any such Losses, whether or not the Claim was brought by a Mortgagor under a
Mortgage Loan, the Servicing Rights to which were acquired by Purchaser
hereunder.
Notwithstanding Section 9.4 hereof, Purchaser shall have the sole
right to, with counsel of its choice, conduct the defense of, settle or
otherwise dispose of any third party claim that may involve indemnification
under this Section 9.7 and Seller shall have no right to participate in the
defense of any such claim.
In the event that Mortgage Loans related to Servicing Rights acquired
by Purchaser hereunder become subject to any Claim covered by this Section 9.7,
and other mortgage loans owned or serviced by the Purchaser also are subject to
such Claim, then the extent of Seller's indemnification under this Section 9.7
shall equal (i) the amount of any judgment or settlement attributable to
Seller's escrow or arm adjustment practices prior to the relevant Transfer
Date, and any arm adjustment practices of Seller different from Purchaser's arm
adjustment practices that Purchaser continues until six (6) months after the
relevant Transfer Date, in connection with Mortgage Loans the Servicing Rights
to which were acquired pursuant to this Agreement, and (ii) a share of (a) the
expenses and attorneys' fees incurred by the Purchaser after the relevant
Transfer Date in the defense and/or settlement of any such Claim and (b) the
expenses and attorneys' fees incurred by the claimants after the relevant
Transfer Date that Purchaser is required to
<PAGE> 43
43
pay pursuant to the terms of any judgment or settlement. Seller's share of (a)
and (b) shall be calculated by multiplying the percentage of the amount that
Seller pays under (i) of the entire judgment or settlement amount by the total
amount of expenses and attorneys' fees incurred by Purchaser under (a) and (b).
For example, if the amount payable by Seller to the Purchaser under (i) above
is equal to 10% of the full amount payable by Purchaser under the terms of any
judgment or settlement (regardless of the percentage of Purchaser's servicing
portfolio (or portion thereof) that is the subject matter of any claim or
settlement that is comprised of Servicing Rights purchased from Seller, then
Seller shall also be responsible for 10% of (ii) (a) and (ii) (b).
ARTICLE X
TERMINATION
SECTION 10.1 TERMINATION.
This Agreement and the transactions contemplated hereby may be
terminated as follows:
(a) by mutual written consent of the Parties at any time prior to
the Closing Date; or
(b) by Purchaser or Seller, by written notice to the other, if any
condition precedent to the other Party's obligations under this Agreement is
not met within the specified time period and the failure to meet such condition
would have a material and adverse affect on the transactions contemplated
hereunder; provided, however, that neither of the Parties may terminate this
Agreement pursuant to this Section I0. 1 (b) if such Party is itself in breach
in any material respect of any of its representations, warranties, covenants or
other obligations set forth herein.
(c) by Purchaser or Seller by written notice to the other party upon
failure of the closing to occur prior to November 30, 1994, unless the failure
to close is caused by a breach of this Agreement by the party seeking to
terminate under this Section 10.1(c).
SECTION 10.2 EFFECT OF TERMINATION.
In the event of the termination of this Agreement pursuant to Section
10.1 hereof, this Agreement (other than Sections 11.4 and this Section 10.2)
shall forthwith become void and have no effect, without any liability on the
part of any Party. Upon the termination of this Agreement within five (5)
Business Days thereafter, Seller shall return to Purchaser the Deposit and any
other portions of the Purchase Price paid by Purchaser to Seller, plus interest
on such amounts at the Federal funds rate, less all Servicing Fees paid by
Seller to Purchaser during the Interim Period (net of the interim servicing fee
paid by Purchaser to Seller). If this Agreement is terminated pursuant to
Section 10.1 (b) or (c) by Purchaser, then Purchaser shall be entitled to such
remedies as may be available to it under law or equity and if this Agreement is
terminated pursuant to Section 10.1 (b) or (c) by Seller, then Seller shall be
entitled to such remedies as may be available to it under law or equity.
ARTICLE XI
MISCELLANEOUS
<PAGE> 44
44
SECTION 11.1 NOTIFICATION OF MORTGAGORS, INSURANCE COMPANIES, ETC.
By no later than thirty (30) days prior to each Transfer Date, Seller
and Purchaser shall agree upon a form of joint notification of transfer of
Servicing Rights for approval. Sixteen (16) days prior to the Transfer Date
and otherwise in accordance with Applicable Requirements, Seller shall mail the
approved form of notification to Mortgagors under the Mortgage Loans of the
transfer of the Servicing Rights and instruct the Mortgagors to deliver all
mortgage and related payments and all tax and insurance notices to Purchaser
after the Transfer Date. Purchaser and Seller shall each bear one-half of the
expense of the mailing of the joint borrower notices. Seller shall also, at
its expense, notify or have its tax service provider notify any applicable
taxing authority, the custodian of the Mortgage Files, within reasonable time
as agreed between Seller and Purchaser, and Insurers, that the Servicing Rights
are being transferred and instruct such entities to deliver all tax bills,
payments, notices and insurance statements to Purchaser after the Transfer
Date. Purchaser and Seller shall cooperate in obtaining Computer Power Inc's
("CPI") consent to Purchaser's use of CPI's software licensed by MNB until
September 30, 1995.
SECTION 11.2 SUPPLEMENTARY INFORMATION.
From time to time prior to and after the Transfer Date, Seller shall
furnish to Purchaser such information supplementary to the information
contained in the documents and schedules delivered pursuant hereto which is
reasonably available to Seller as Purchaser may reasonably request or which may
be necessary to enable Purchaser to file any reports due to the Investors in
connection with the Mortgage Loans or Servicing Rights.
SECTION 11.3 ACCESS TO INFORMATION.
Seller shall allow Purchaser and its counsel, accountants, and other
representatives, reasonable access, during normal business hours throughout the
period prior to the Transfer Date, to all of Seller's files, books and records
relating to the Servicing Rights, the Mortgage Loans, Related Escrow Accounts
and Accounts Receivable. Purchaser and its representatives and affiliates
shall treat all information obtained in such investigation, not otherwise in
the public domain, as confidential and shall not use any such information for
its own benefit. Following the Transfer Date, Purchaser shall allow Seller and
its counsel, accountants and other representatives similar access, subject to
similar limitations, to verify claims of Purchaser for indemnification and to
enable Seller to minimize any indemnity it may be obligated to pay hereunder.
SECTION 11.4 NO BROKER'S FEES.
Each party hereto represents and warrants to the other that, except
for Seller's agreement with Broker, it has made no agreement to pay any agent,
finder, or broker or any other representative, any fee or commission in the
nature of a finder's or broker's fee arising out of or in connection with the
subject matter of this Agreement. Seller shall be solely responsible for fees
and commissions payable to Broker in connection with the transaction. The
Parties hereto covenant with each other and agree to indemnify and hold each
other harmless from and against any such obligation or liability and any
expense incurred by the other in investigating or defending (including
reasonable attorneys' fees) any Claim based upon the other party's actions
under this Section 11.4.
SECTION 11.5 FURTHER ASSURANCES.
Seller shall, at any time and from time to time, promptly, upon the
reasonable request of Purchaser or its representatives, execute, acknowledge,
deliver or perform all such further acts, deeds, assignments, transfers,
<PAGE> 45
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conveyances, and assurances as may be required for the better vesting and
confirming to Purchaser and its successors and assigns of title to Servicing
Rights, the FF&E and FF&E Contracts, or as shall be necessary to effect the
transactions provided for in this Agreement. Purchaser and Seller shall
cooperate in good faith to consummate the transactions and perform the
covenants contemplated by this Agreement.
SECTION 11.6 SOLICITATION OF REFINANCING AND CORRESPONDENTS.
From and after the Execution Date, Seller shall not solicit, and
Seller shall exercise best efforts to prevent any of its affiliates from
directly or indirectly soliciting on a targeted basis, by means of direct mail,
or telephonic or personal solicitation, the Mortgagors: (a) for purposes of
prepayment or refinance or modification of such Mortgages, or (b) with respect
to Mortgagors residing outside the state of Michigan for any financial services
or products including, but not limited to, (1) checking and savings accounts,
certificates of deposit, safe deposit boxes, automatic teller machines, second
mortgage loans, equity source accounts, personal loans and credit cards, and
with respect to all Mortgagors (2) ordinary life, ordinary health, credit life,
credit health, credit unemployment, hazard insurance and any other forms of
group or individual insurance coverages; provided, however, that the limitation
of Section 11.6(b) immediately above shall not apply to solicitation by Seller
or its affiliates, among other marketing activities, of the renewal by the
Mortgagor of any such financial services or products described in Section
11.6(b) for which the Mortgagor initially contracted with Seller or its
affiliates prior to the Execution Date. Purchaser shall not solicit, and
Purchaser shall exercise best efforts to prevent any of its affiliates from
directly or indirectly soliciting on a targeted basis, by means of direct mail,
or telephonic or personal solicitation until the date the Servicing is
transferred to Purchaser's CPI data base (between June and September 1995),
Mortgagors residing inside the State of Michigan for any financial services or
products including, but not limited to, checking and savings accounts,
certificates of deposit, safe deposit boxes, automatic teller machines, second
mortgage loans, equity source accounts, personal loans and credit cards. It is
understood and agreed that, among other marketing activities, promotions
undertaken by Seller or any affiliate of Seller or Purchaser or any affiliates
of Purchaser which are directed to the general public at large, including
without limitation mass mailings not based on any lists of Seller or its
affiliates or Purchaser or its affiliates related to the business being sold
hereunder based on commercially acquired mailing lists, newspaper, radio and
television advertisements, shall not constitute solicitation under this Section
11.6. As required by Paragraph 3.2(d) hereof, Seller shall transfer to
Purchaser, without any additional cost or expense to Purchaser, any impound or
other account balances held by Seller related to, and all of Seller's right,
title, and interest in and to, any of the insurance coverages or related
products described in Section 11.6(b)(2) sold by Seller or its affiliates to
Mortgagors prior to the related Transfer Date.
SECTION 11.7 SURVIVAL.
Notwithstanding anything else to be contrary herein, all warranties,
representations, covenants, indemnities and other agreements of the parties to
this Agreement set forth herein pursuant hereto shall survive the sale on the
Effective Date hereunder for the life of the Mortgage Loans.
SECTION 11.8 GOVERNMENTAL AUTHORITIES; LAWS AND SEVERABILITY.
The terms and provisions of this Agreement are expressly made subject
to applicable Federal and State statutes, laws, and rules and regulations
promulgated thereunder, as amended from time to time, and the acts and actions
of the applicable Investors and Insurers and their respective rules and
regulations, as amended from time to time. Any rule, regulation or
administrative policy of any government agency having jurisdiction which
relates to the transfer of the Servicing Rights to Purchaser in effect on the
Transfer Date shall be deemed to be incorporated herein,
<PAGE> 46
46
and shall supersede the terms of this Agreement, unless such incorporation
shall materially impair the contemplated benefits to be received by the parties
pursuant to this Agreement, in which event the parties shall renegotiate the
terms and conditions hereof to reflect a fair allocation of the economic
benefits contemplated hereby. In the event any provision of this Agreement is
deemed by a court of competent jurisdiction to be in violation of any of the
above, such provision shall be of no force or effect, and this Agreement shall
be interpreted as though such superseded provision were not contained in this
Agreement.
SECTION 11.9 FORM OF PAYMENT TO BE MADE.
All payments to be made by a Party to another Party shall be made by
wiring immediately available funds to the accounts designated by the Party
receiving the Payment.
SECTION 11.10 SUCCESSORS AND ASSIGNS.
Neither Seller nor Purchaser shall assign this Agreement or any rights
hereunder with respect to the other party without the prior express written
consent of the other party, which consent may be withheld in the sole
discretion of such party.
SECTION 11.11 PAYMENT OF COSTS.
Except as otherwise provided herein, Seller shall be responsible for
all transfer and recording fees, costs with respect to delivery of the
custodial and other loan files and mortgage servicing records relating to the
Mortgage Loans and other related costs incurred by Seller in its performance of
its obligations under this Agreement, together with fees of Seller's document
custodian, attorneys and accountants. Purchaser shall pay all data processing
costs incurred by Purchaser in connection with this Agreement, and other
related costs of Purchaser in its performance of its obligation under this
Agreement, together with fees of Purchaser's attorneys and accountants.
SECTION 11.12 PURCHASER'S REVIEW.
The parties agree that any and all determinations made by Purchaser in
connection with its review of the Mortgage Loans, Servicing Rights and related
books and records shall not be evidence that Seller has complied with any of
its representations, warranties, or covenants under this Agreement.
SECTION 11.13 NOTICES.
All notices, requests, demands and other communications that 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, postage prepaid unless otherwise instructed in the Agreement.
(a) If to the Purchaser, to:
Stephen Morrison, Esq.
Senior Vice President and
General Counsel
Norwest Mortgage, Inc.
405 S.W. Fifth Street
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47
Des Moines, IA 50309-4603
(b) If to Seller, to:
Lawrence L. Gladchun
Senior Vice President and
General Counsel
Michigan National Corporation
27777 Inkster Drive
Farmington Hills, MI 48333-9065
or to such other address as Purchaser or Seller shall have specified in writing
to the other.
SECTION 11.14 ENTIRE AGREEMENT; CONSTRUCTION.
This Agreement constitutes the entire Agreement between the parties
with respect to the subject matter hereof. No amendments, modifications or
supplements of this Agreement shall be binding unless executed in writing by
the Parties hereto. Reference to Sections, Subsections or Exhibits in this
Agreement are to Sections and Subsections of, and Exhibits to, this Agreement.
The Exhibits are part of this Agreement.
SECTION 11.15 BINDING EFFECT.
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48
This Agreement shall inure to the benefit of and be binding upon the
parities hereto and their successors and permitted assigns. Nothing in this
Agreement, express or implied, is intended to confer on any person, other than
the Parties hereto and their successors, any rights, obligations, remedies or
liabilities.
SECTION 11.16 HEADINGS.
Headings on the Sections are for reference purposes only and shall not
be deemed to have any substantive effect.
SECTION 11.17 APPLICABLE LAWS.
This Agreement shall be construed in accordance with the laws of the
State of Minnesota.
SECTION 11.18 COUNTERPARTS.
This Agreement may be executed in any number of counterparts, which
together shall constitute full and proper execution hereof.
SECTION 11.19 TIME OF ESSENCE.
Time is of the essence in the performance of the obligations stated in
this Agreement.
IN WITNESS WHEREOF, each of the undersigned parties to this Agreement
has caused this Agreement to be duly executed in its name by one of its duly
authorized officers, all as of the date first above written.
ATTEST: NORWEST MORTGAGE, INC.
Purchaser
By Timothy Ermatinger By M L O
Its: President
ATTEST:
INDEPENDENCE ONE MORTGAGE
CORPORATION
Seller
By Timothy Ermatinger By Kenneth Alverson
Its: Executive Vice President
ATTEST:
MICHIGAN NATIONAL BANK
Seller
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49
By Timothy Ermatinger By J.J. Whiteside
Its: Executive Vice President
and Chief Financial Officer
<PAGE> 1
EXHIBIT 10(B)
TERMINATION AGREEMENT
BY AND AMONG
FEDERAL DEPOSIT INSURANCE CORPORATION,
AS MANAGER OF THE
FSLIC RESOLUTION FUND,
MICHIGAN NATIONAL CORPORATION
AND
INDEPENDENCE ONE BANK OF CALIFORNIA, FSB
DATED AS OF SEPTEMBER 29, 1994
<PAGE> 2
TERMINATION AGREEMENT
This TERMINATION AGREEMENT (which together with all Exhibits attached
hereto is collectively called the "Agreement"), dated as of September 29, 1994,
is entered into by and among the Federal Deposit Insurance Corporation (the
"FDIC") as Manager of the FSLIC Resolution Fund (the "FRF") (the FDIC as
Manager of the FRF is herein called the "FDIC Manager"), Michigan National
Corporation, a savings and loan holding company incorporated under the laws of
the State of Michigan ("MNC"), and Independence One Bank of California, FSB
(formerly named Beverly Hills Federal Savings Bank), a federally-chartered
stock savings bank wholly owned by MNC ("Independence One").
RECITALS
The FRF is the transferee of the assets and liabilities of the Federal
Savings and Loan Insurance Corporation (the "FSLIC"). The FDIC Manager,
Independence One, and MNC desire to provide for (i) except as specifically set
forth herein, the early termination of that certain Assistance Agreement dated
December 31, 1988, by and among the FSLIC, Independence One, and MNC (the
"Assistance Agreement"), (ii) the settlement of certain disputes under the
Assistance Agreement, and (iii) the prepayment of the Replacement Promissory
Note dated July 1, 1990, made by the FDIC Manager (the "Note") in the principal
amount of $811,465,568.00.
<PAGE> 3
AGREEMENT
In consideration of the mutual promises and covenants contained
herein, and of other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, and, notwithstanding anything to
the contrary in the Assistance Agreement or any related agreement, the parties
hereby agree as follows:
ARTICLE 1
EXECUTION
SECTION 1.1 EXECUTION AND EFFECT. This Agreement is executed and
effective as of this 29th day of September, 1994. Except for any and all
payments of interest to Independence One, MNC or the FDIC Manager pursuant to
Section 2.4(d), Section 4.2, or Section 11.14, and except for the payments
contemplated by Section 3.2, all payments provided for under this Agreement to
be made by the FDIC Manager to Independence One or MNC represent either a
prepayment, or a payment in lieu of, a fixed or contingent right to assistance
provided for in the Assistance Agreement, and all payments provided for in this
Agreement to be made by Independence One or MNC to the FDIC Manager represent a
payment of net tax benefits or a repayment of other assistance provided for in
the Assistance Agreement.
SECTION 1.2 MNC DELIVERIES AT EXECUTION. Simultaneously with the
execution of this Agreement:
(A) CERTIFIED RESOLUTIONS. The FDIC Manager shall have received
certificates from each of Independence One and MNC,
- 2 -
<PAGE> 4
signed by their respective corporate secretaries, certifying that (i) its board
of directors has duly adopted resolutions, copies of which shall be attached to
such certificate, (A) approving the terms of this Agreement and authorizing the
consummation of the transactions contemplated by this Agreement, and (B)
authorizing an officer of it to execute and deliver this Agreement and all
necessary ancillary documents; (ii) all of such resolutions are in full force
and effect; and (iii) none of such resolutions has been amended or modified.
(B) INCUMBENCY CERTIFICATES. The FDIC Manager shall have received
certificates from each of Independence One and MNC, signed by their respective
corporate secretaries or other officers, certifying as to each person executing
this Agreement on behalf of Independence One and MNC, respectively, that (i)
such person is an officer of Independence One or of MNC holding the office or
offices specified therein; and (ii) the signature of each such person set forth
on such certificate is his or her genuine signature.
(C) LEGAL OPINIONS. The FDIC Manager shall have received signed
opinions from Independence One and MNC addressed to the FDIC Manager and
substantially in the form of Exhibit 1.2(c) hereto, with such changes as the
FDIC Manager and its legal counsel may approve.
SECTION 1.3 FDIC MANAGER DELIVERIES AT EXECUTION. Simultaneously
with the execution of this Agreement:
- 3 -
<PAGE> 5
(A) CERTIFIED RESOLUTIONS. MNC shall have received certificates from
the FDIC Manager, signed by its corporate secretary, certifying that (i) its
board of directors has duly adopted resolutions, copies of which shall be
attached to such certificate, (A) approving the terms of this Agreement and
authorizing the consummation of the transactions contemplated by this
Agreement, and (B) authorizing an officer of it to execute and deliver this
Agreement and all necessary ancillary documents; (ii) all of such resolutions
are in full force and effect; and (iii) none of such resolutions has been
amended or modified.
(B) INCUMBENCY CERTIFICATES. MNC shall have received certificates
from the FDIC Manager, signed by its corporate secretary, certifying as to the
person executing this Agreement on behalf of the FDIC Manager that (i) such
person is an officer of the FDIC Manager holding the office or offices
specified therein; and (ii) the signature of such person set forth on such
certificate is his genuine signature.
(C) LEGAL OPINION. MNC shall have received a signed opinion from the
FDIC's Senior Counsel (Resolutions) addressed to Independence One and MNC and
substantially in the form of Exhibit 1.3(c) hereto, with such changes as
Independence One and MNC and their legal counsel may approve.
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<PAGE> 6
ARTICLE 2
TERMINATION AMOUNT; NOTE CANCELLATION;
FINAL SRA PROCEDURES; SRLY AND REFUND PAYMENTS;
TAX INDEMNIFICATIONS; AND RESERVE FOR BAD DEBTS
SECTION 2.1 TERMINATION AMOUNT.
(A) PAYMENT OF TERMINATION AMOUNT. On September 30, 1994, the FDIC
Manager shall pay or cause to be paid to Independence One, by wire transfer in
immediately available funds, $340,555,345.00 (the "Termination Amount"). The
Termination Amount shall be transferred to Independence One pursuant to the
following instructions:
ABA: 322270660
Telegraphic Name: INDPC ONE BK CA MV
Credit: The Federal Deposit Insurance Corporation,
Account Number 322270660
The Termination Payment has been determined by subtracting from the
sum of the items described in (i) through (iv) below, the items described in
(v) through (viii) below.
(i) As of September 30, 1994, the outstanding principal
balance of the Note delivered to Independence One pursuant to the
Assistance Agreement is $348,930,193.00. The Termination Amount
effectuates a prepayment of this principal amount.
(ii) As of September 30, 1994, the interest due on the
Note for the third quarter of 1994 is estimated to be $3,900,342.00.
The Termination Amount effectuates a payment of this interest.
(iii) The amount of interest paid on the Note for the
second quarter of 1994 was $49,199.00 less than the actual
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<PAGE> 7
interest due for such quarter. The Termination Amount effectuates a
payment of this additional interest.
(iv) Independence One has projected that it will receive
legal bills for services performed during and prior to the third
quarter of 1994 for which it is entitled to be reimbursed pursuant to
the Assistance Agreement in the amount of $27,478.00. The FDIC
Manager is entitled under the Assistance Agreement to receive a
payment for a share of the tax benefit attributable to the
reimbursement of legal bills which would be $9,617.00. Independence
One has agreed to accept a payment of $17,861.00 ($27,478.00 minus
$9,617.00) in lieu of its right to reimbursement of the specific bills
under the Assistance Agreement and its obligation to pay tax benefits
on such items to the FDIC Manager. The Termination Amount effectuates
a payment of this additional net amount for such legal bills.
(v) The FDIC Manager is entitled under the Assistance
Agreement to receive a share of net tax benefits realized by
Independence One in each taxable year. Because the tax benefits for
taxable years 1993 and 1994 cannot be determined with certainty at
this time, Independence One has agreed to pay the amount of
$4,500,000.00 as an estimate of such amounts, which estimate is later
adjusted to actual as provided in other provisions of this Agreement.
The Termination Amount effectuates this prepayment of such net tax
benefits.
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<PAGE> 8
(vi) The parties agree that the amount of Indemnification
Net Tax Benefits paid to the FDIC Manager by Independence One pursuant
to the Assistance Agreement for taxable year 1991 was understated by
$747,528.00. The Termination Amount effectuates a payment of this
additional amount due to the FDIC Manager under the Assistance
Agreement.
(vii) The parties agree that the amount of Federal and
State Net Tax Benefits paid to the FDIC Manager pursuant to the
Assistance Agreement for taxable year 1991 was understated by
$94,722.00. The Termination Amount effectuates a payment of this
additional amount due to the FDIC Manager under the Assistance
Agreement.
(viii) Independence One and the FDIC Manager had a number of
disputes as to the rights and obligations of the parties under the
Assistance Agreement and the Note which affected the amount of
assistance and interest properly due to Independence One. In
addition, if the Assistance Agreement were to continue, the FDIC
Manager and Independence One would have certain obligations to pay the
other party in the future. Because the parties desired to terminate
the Assistance Agreement, and resolve all disputes thereunder,
Independence One agreed to pay to the FDIC Manager the amount of
$7,000,000.00. The Termination Amount effectuates a payment of this
amount.
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<PAGE> 9
(B) INTEREST ADJUSTMENT.
(i) No later than November 7, 1994, the FDIC Manager
shall provide to Independence One a calculation of the amount of
interest payable by the FDIC Manager on the Note for the quarter ended
September 30, 1994.
(ii) No later than November 10, 1994, the FDIC Manager
shall pay or cause to be paid to Independence One, by wire transfer in
immediately available funds, an amount equal to the excess, if any, of
--
(A) the amount of interest payable by the FDIC
Manager on the Note for the quarter ending September
30, 1994, over
(B) $3,900,342.00.
Such interest adjustment shall be transferred to
Independence One pursuant to the following instructions:
ABA: 322270660
Telegraphic Name: INDPC ONE BK CA MV
Credit: The Federal Deposit Insurance Corporation,
Account Number 322270660, Section 2.1(b) Interest
(iii) No later than November 10, 1994, Independence One and
MNC shall pay or cause to be paid to the FDIC Manager, by wire
transfer in immediately available funds, an amount equal to the
excess, if any, of --
(A) $3,900,342.00, over
(B) the amount of interest payable by the FDIC
Manager on the Note for the quarter ending September
30, 1994.
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<PAGE> 10
Such interest adjustment shall be transferred to the FDIC Manager
pursuant to the following instructions:
ABA: 021030004
Telegraphic Name: TREAS NYC/CTR/
Credit: BNF=/AC-4976 OBI=FRF, FIN # 1790, C-393 interest
SECTION 2.2 NOTE CANCELLATION. On September 30, 1994, upon receipt
of confirmation of the wire transfer described in Section 2.1(a), Independence
One shall deliver to the FDIC Manager the original Note marked "Cancelled:
Paid in Full."
SECTION 2.3 RESOLVED ITEMS. Exhibit 2.3 attached hereto contains
the definitive agreement among the parties hereto regarding resolution of the
issues set forth therein (collectively, the "Resolved Items"); any and all
payments due between them with respect to such issues have been encompassed in
the Termination Amount.
SECTION 2.4 FINAL SRA PROCEDURES.
(A) FINAL REPORTS.
(i) No later than November 15, 1994, Independence One
shall provide the FDIC Manager with a copy of its 1993 state corporate
tax return and with the report for 1993 of Deloitte & Touche required
by Section 15(e)(1) of the Assistance Agreement.
(ii) No later than December 30, 1994, Independence One
will file with the Dallas office of the FDIC Manager the quarterly
report for the Special Reserve Account established pursuant to Section
3 of the Assistance Agreement (the
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<PAGE> 11
"SRA") for the quarter ending September 30, 1994 (the "Final Report").
(iii) Except as otherwise specifically required by this
Agreement, neither Independence One nor MNC shall have any obligation
to file with the FDIC Manager any further reports, records, audits,
returns or other statements with respect to any matters that are the
subject of the Assistance Agreement.
(B) 1993 TAX SHARING. With respect to taxable year 1993,
Independence One shall make a debit to the SRA as of September 30, 1994, for
the amount due to Independence One under Section 3(a)(16) of the Assistance
Agreement and shall make a credit to the SRA as of September 30, 1994, for the
amount due to the FDIC Manager under Section 3(b)(5) of the Assistance
Agreement.
(C) 1994 TAX SHARING. In lieu of any debits to the SRA under Section
3(a)(16) of the Assistance Agreement and any credits to the SRA under Section
3(b)(5) of the Assistance Agreement with respect to taxable year 1994,
Independence One shall make a credit to the SRA as of September 30, 1994, for
an amount equal to the sum of the following:
(i) Thirty-five percent (35%) of the debits made to the
SRA from and including January 1, 1994, through September 30, 1994, to
the extent such debits --
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<PAGE> 12
(A) are made pursuant to the provisions of Sections
3(a)(2) and (3) of the Assistance Agreement, and
(B) are deductible on any consolidated federal income
tax return of the affiliated group (within the meaning of
Section 1504 of the Internal Revenue Code of 1986, as amended
(the "Code")) of corporations of which MNC is the common
parent ("the MNC Group");
(ii) Fifteen and five-sixteenths percent (15.3125%) of the
interest accrued on the Note for the period from and including January
1, 1994, through and including September 30, 1994 (including an
appropriate adjustment for the amount provided in Section 2.1(b)
above), but only to the extent any such interest is excludible from
the federal taxable income of Independence One; and
(iii) Fifteen and five-sixteenths percent (15.3125%) of the
excess of --
(A) the costs, expenses and losses that are (I)
incurred by Independence One from and including January 1,
1994, through September 30, 1994, (II) debited to the SRA
during such period pursuant to the Assistance Agreement (other
than pursuant to Sections 3(a)(2) and (3) thereof), and (III)
deductible on any consolidated federal income tax return of
the MNC Group, over
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<PAGE> 13
(B) the amount of undisclosed assets that are (I)
identified by Independence One from and including January 1,
1994, through September 30, 1994, and (II) credited to the SRA
during such period pursuant to Section 3(b)(1) of the
Assistance Agreement, but only to the extent that such amounts
are includible in gross income on any consolidated federal
income tax return of the MNC Group.
(D) SRA DEBIT. For purposes of the Final Report, Independence One
shall make a debit to the SRA as of September 30, 1994, in an amount equal to
$4,556,925.00, representing $4,500,000.00 of estimated tax benefits included in
the Termination Amount and $56,925.00 of interest on such amount.
(E) FINAL REPORT PAYMENT.
(i) If the Final Report reflects a net credit balance in the
SRA, on December 30, 1994, Independence One and MNC shall pay or cause
to be paid to the FDIC Manager, by wire transfer in immediately
available funds, the amount of such credit balance. No later than the
close of business on December 27, 1994, the FDIC Manager shall provide
Independence One with written wire transfer instructions indicating
the account to which any payment required by this Section 2.4(e)(i)
shall be transferred.
(ii) If the Final Report reflects a net debit balance in the
SRA, on January 30, 1995, the FDIC Manager shall pay or cause to be
paid to Independence One, by wire transfer in
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<PAGE> 14
immediately available funds, the amount of such debit balance. No
later than the close of business on January 25, 1995, Independence One
shall provide the FDIC Manager with written wire transfer instructions
indicating the account to which any payment required by this Section
2.4(e)(ii) shall be transferred.
SECTION 2.5 SRLY AND REFUND PAYMENTS.
(A) FEDERAL SRLY PAYMENTS. For each taxable year beginning with
1994, Independence One and MNC shall pay to the FDIC Manager, at the time and
in the manner specified in Section 2.5(c), an amount equal to the sum of the
following (the "Federal SRLY Payment"):
(i) Fifty percent (50%) of the excess of --
(A) an amount equal to the tax that would be imposed
under Section 11(b) of the Code, or any successor provision,
on the sum of (I) the taxable income of the MNC Group as
reported on its original federal income tax return for the
year, and (II) the amount of any net operating loss carryovers
as of January 1, 1989, of Independence One or any of its
subsidiaries (a "SRLY NOL") that is deducted on that year's
federal income tax return, over
(B) an amount equal to the tax that would be imposed
under Section 11(b) of the Code, or any successor provision,
on the taxable income of the MNC
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<PAGE> 15
Group as reported on its original federal income tax return
for the year; and
(ii) Fifty percent (50%) of the amount of any tax credit
carryovers as of January 1, 1989, of Independence One or any of its
subsidiaries ("SRLY Tax Credits") that are claimed on that year's
federal income tax return.
(B) STATE SRLY PAYMENTS. For each taxable year beginning with
1994, Independence One and MNC shall pay to the FDIC Manager, at the time and
in the manner specified in Section 2.5(c), an amount equal to the sum of the
following (the "State SRLY Payment"):
(i) Fifty percent (50%) of the excess of --
(A) an amount equal to the tax that would be imposed
under the section of the relevant state law that sets forth
the rate or rates of tax (the "State Tax Rate Provision") on
the sum of (I) the taxable income of Independence One and its
subsidiaries as reported on each original state tax return for
the year, and (II) the amount of any SRLY NOLs that is
deducted on that year's state tax return, over
(B) an amount equal to the tax that would be imposed
under the State Tax Rate Provision on the taxable income of
Independence One and its subsidiaries as reported on each
original state tax return for the year; and
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<PAGE> 16
(ii) Fifty percent (50%) of the amount of any SRLY Tax
Credits that are claimed on that year's state tax return.
(C) PAYMENT OF FEDERAL SRLY PAYMENT AND STATE SRLY PAYMENT. Any
amount owed to the FDIC Manager for any taxable year (the "Subject Year")
pursuant to Section 2.5(a) or (b) shall be paid as follows:
(i) No later than thirty (30) days following the filing
of a federal income tax return claiming a SRLY NOL deduction or SRLY
Tax Credit described in Section 2.5(a), Independence One and MNC shall
pay to the FDIC Manager an amount equal to the excess of --
(A) the Federal SRLY Payment for the Subject Year, over
(B) fifty percent (50%) of the federal AMT liability
paid for the Subject Year;
(ii) No later than thirty (30) days following the filing
of any subsequent year's federal income tax return claiming a credit
for the federal AMT paid in the Subject Year, Independence One and MNC
shall pay to the FDIC Manager an amount equal to fifty percent (50%)
of the amount claimed as a credit for the federal AMT paid in the
Subject Year.
(iii) No later than thirty (30) days following the filing of
a state tax return claiming a SRLY NOL deduction or SRLY Tax Credit
described in Section 2.5(b), Independence One and MNC shall pay to the
FDIC Manager an amount equal to the excess of --
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<PAGE> 17
(A) the State SRLY Payment for the Subject Year, over
(B) fifty percent (50%) of the state AMT liability,
if any, paid for the Subject Year; and
(iv) No later than thirty (30) days following the filing of
any subsequent year's state tax return claiming a credit for the state
AMT paid in a Subject Year, Independence One and MNC shall pay to the
FDIC Manager an amount equal to fifty percent (50%) of the amount
claimed as a credit for the state AMT paid in the Subject Year.
(D) ORDERING RULE AND MAXIMUM PAYMENT. For purposes of Section
2.5(c), federal and state AMT credits shall be treated as being utilized on a
first-in first-out basis. For example, no AMT liability arising in 1994 shall
be allowed as a credit unless and until all AMT liability paid in 1993 and
prior years have been utilized as credits. In addition, in no event shall the
aggregate amounts payable by Independence One and MNC to the FDIC Manager under
subsection (c) for any Subject Year exceed the aggregate Federal SRLY Payments
and aggregate State SRLY payments due for such year.
(E) SRLY REPORTS. No later than thirty (30) days following the
filing of any federal income tax return and state tax return, MNC and
Independence One shall provide to the FDIC Manager a Section 2.8 Report setting
forth a calculation of amounts that are due to the FDIC Manager pursuant to
Section 2.5(c), together with an explanation of such calculation, and shall
accompany each
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<PAGE> 18
such Report with a copy of the tax returns that will permit the FDIC Manager
independently to verify the contents of such Report.
(F) REFUNDS FROM CARRYBACK OF 1989-1991 NOLS. No later than thirty
(30) days following the actual or constructive receipt by MNC of any federal
income tax refunds attributable to the carryback of net operating losses of the
MNC Group arising in 1989, 1990 or 1991 to taxable years of the MNC Group
ending prior to January 1, 1989 (a "Section 2.5(f) Refund"), Independence One
shall pay or cause to be paid to the FDIC Manager an amount equal to
twenty-five percent (25%) of such Section 2.5(f) Refund, together with an
amount equal to fifteen and three-fourths percent (15.75%) of an allocable
portion of the interest, if any, actually or constructively received by
Independence One on such Section 2.5(f) Refund. At the time any payment is
made to the FDIC Manager pursuant to Section 2.5(f), Independence One shall
provide the FDIC Manager with a Section 2.8 Report explaining the refund, and
the calculation of the payment related thereto.
SECTION 2.6 TAX INDEMNIFICATIONS.
(A) GENERAL PROVISIONS REGARDING ADJUSTMENTS GIVING RISE TO
PAYMENTS. This Section 2.6 provides for certain tax indemnification payments
to be paid to Independence One by the FDIC Manager and certain payments of
additional tax benefits to be paid to the FDIC Manager by Independence One and
MNC. In connection with such payments, the following provisions shall apply.
(i) If the Internal Revenue Service (the "IRS"), or a
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state taxing authority proposes in writing an adjustment to a tax
return which would, if sustained, require the FDIC Manager to make a
payment to Independence One under any of the provisions of this
Section 2.6, Independence One and MNC shall notify the FDIC Manager in
writing of such proposed adjustment no later than thirty (30) days
after receipt of such written proposal. No later than ninety (90)
days following receipt of such notice, the FDIC Manager shall provide
in writing to MNC and Independence One a statement that it
acknowledges and accepts its indemnification obligations under this
Section 2.6 with respect to the proposed adjustment as set forth in
the notice thereof from MNC and Independence One. In the event the
FDIC Manager fails to provide the written statement referred to in the
preceding sentence by the date required therefor, the FDIC Manager
shall be deemed to have waived its rights under this Section 2.6(a)
(but not Section 2.6(a)(v) or 2.6(h)) with respect to the proposed
adjustment, but shall remain fully liable for its obligations under
all other provisions of this Section 2.6 and this Agreement.
(ii) Provided the FDIC Manager shall have timely provided
to MNC and Independence One the written statement required by the
second sentence of Section 2.6(a)(i), MNC and Independence One shall
notify the FDIC Manager in writing of any decision not to contest the
proposed adjustment. No later than twenty-one (21) days after
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<PAGE> 20
receipt of the notice described in the preceding sentence, the FDIC
Manager may, in writing, direct MNC and Independence One to contest
the proposed adjustment. Any such written direction from the FDIC
Manager shall state that, in addition to any other indemnification
obligations the FDIC Manager may have under this Agreement, the FDIC
Manager agrees to indemnify and hold harmless MNC and Independence One
from any and all reasonable legal, accounting and related third-party
fees, cost and expenses incurred by MNC or Independence One in
connection with thereafter contesting such proposed adjustment.
(iii) Following receipt of written directions to contest a
proposed adjustment pursuant to Section 2.6(a)(ii), Independence One
and MNC shall contest the proposed adjustment, shall keep the FDIC
Manager reasonably informed as to the progress thereof, and shall
consult with the FDIC Manager within a reasonable period before any
significant action with respect thereto is taken or omitted.
(iv) No such contest shall be settled without the prior
written consent of the FDIC Manager; provided, however, that
Independence One may at any time decline to take any further action
with respect to a proposed adjustment or not comply with the
provisions of Section 2.6(a)(iii) by notifying the FDIC Manager in
writing that it declines to take such action, and waiving its right to
any indemnity payment from the FDIC Manager that would otherwise
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<PAGE> 21
be payable by the FDIC Manager pursuant to this Section 2.6 in respect
of such adjustment. An election by Independence One not to contest
any given proposed adjustment shall not affect the rights and
obligations of Independence One, MNC and the FDIC Manager in respect
of any other proposed adjustment unless such election not to contest
adversely affects the ability to contest any other item for which
Independence One is indemnified pursuant to this Section 2.6.
(v) The FDIC Manager shall not be required to make any
payment required by this Section 2.6 as a result of such a proposed
adjustment before the date that is thirty (30) days after Independence
One, MNC and the FDIC Manager mutually agree to terminate the contest,
or the proposed adjustment has been resolved in a manner requiring a
payment and no further appeals are permitted.
(vi) If the IRS, or a state taxing authority proposes in
writing an adjustment to a tax return which would, if sustained,
require Independence One and MNC to make a payment of at least
$100,000.00 to the FDIC Manager under any of the provisions of this
Section 2.6, Independence One and MNC shall notify the FDIC Manager in
writing of such proposed adjustment within thirty (30) days after
receipt in writing thereof. Any such adjustment shall be accepted by
Independence One and any further proposal to eliminate such
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<PAGE> 22
adjustment shall be treated as a proposed adjustment described in
Section 2.6(a)(i).
(B) SECTION 2.4(C) ADJUSTMENTS. If either --
(i) an action of the IRS or the U.S. Congress either
permanently disallows a deduction or credit for any items described in
Section 2.4(c)(i) or (iii), or requires the permanent inclusion in
gross income of any portion of the interest described in Section
2.4(c)(ii), or
(ii) an action of the FDIC Manager or the FDIC's OIG causes a
permanent increase or decrease in any of the items described in
Section 2.4(c),
(a "Section 2.4(c) Adjustment"), then payments shall be made between
Independence One, MNC and the FDIC as follows:
(iii) Independence One and MNC shall make a payment to the
FDIC Manager for an amount equal to the additional credit, if any,
Independence One would have made to the SRA pursuant to Section 2.4(c)
had such Section 2.4(c) Adjustment been made on September 30, 1994,
together with an amount equal to thirty-one and one-half percent
(31.5%) of an allocable portion of the interest, if any, actually or
constructively received by Independence One from the IRS as a result
of such Section 2.4(c) Adjustment; and
(iv) the FDIC Manager shall make a payment to Independence
One in an amount equal to the excess, if any, of the credit
Independence One made to the SRA pursuant to Section 2.4(c) over the
credit Independence One would have
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<PAGE> 23
made had such Section 2.4(c) Adjustment been made on September 30,
1994, together with an amount equal to thirty-one and one-half percent
(31.5%) of an allocable portion of the interest, if any, actually or
constructively paid by Independence One to the IRS as a result of such
Section 2.4(c) Adjustment.
Any payment from Independence One to the FDIC Manager pursuant to Section
2.6(b)(iii) shall be made no later than thirty (30) days following the date on
which MNC actually or constructively receives any tax refunds attributable to
the Section 2.4(c) Adjustment. At the time any payment is made to the FDIC
Manager pursuant to Section 2.6(b)(iii), Independence One shall provide the
FDIC Manager with a Section 2.8 Report explaining the Section 2.4(c) Adjustment
and the calculation of the payment related thereto. Any payment from the FDIC
Manager to Independence One pursuant to Section 2.6(b)(iv) shall be made no
later than thirty (30) days following the date on which MNC delivers to the
FDIC Manager a Section 2.8 Report explaining the Section 2.4(c) Adjustment and
the calculation of the payment related thereto.
(C) SECTION 2.5 ADJUSTMENTS. If either an action of the IRS, a state
taxing authority or the U.S. Congress causes an increase or decrease in the
amount of a Federal SRLY Payment, a State SRLY Payment or a Section 2.5(f)
Refund (a "Section 2.5 Adjustment"), then payments shall be made between
Independence One, MNC and the FDIC as follows:
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<PAGE> 24
(i) If the Section 2.5 Adjustment causes an increase in the
amount of a Federal SRLY Payment, a State SRLY Payment or a Section
2.5(f) Refund, Independence One shall make a payment to the FDIC
Manager in an amount equal to the increase in payments Independence
One previously would have made to the FDIC Manager pursuant to Section
2.5(c) or (f) and this Section 2.6(c) with respect to the affected
Federal SRLY Payment, State SRLY Payment or Section 2.5(f) Refund had
such Section 2.5 Adjustment been made in the year in which the Federal
SRLY Payment or State SRLY Payment arose, or the year in which the
Section 2.5(f) Refund was constructively received, together with an
amount equal to thirty-one and one-half percent (31.5%) of an
allocable portion of the interest, if any, actually or constructively
received by Independence One from the IRS or state taxing authority as
a result of the Section 2.5 Adjustment; thereafter, any future
payments required pursuant to Section 2.5(c) with respect to an
affected Federal SRLY Payment or State SRLY Payment shall be made
based on the adjusted amount of such Payment; and
(ii) If the Section 2.5 Adjustment causes a decrease in the
amount of a Federal SRLY Payment, a State SRLY Payment or a Section
2.5(f) Refund, the FDIC Manager shall make a payment to Independence
One in an amount equal to the excess of the payments Independence One
previously made to the FDIC Manager pursuant to Section 2.5(c) or (f)
and this
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<PAGE> 25
Section 2.6(c) with respect to the affected Federal SRLY Payment,
State SRLY Payment or Section 2.5(f) Refund, over the payments
Independence One would have made had such Section 2.5 Adjustment been
made in the year in which the Federal SRLY Payment, State SRLY Payment
or Section 2.5(e) Refund arose, together with an amount equal to
thirty-one and one-half percent (31.5%) of an allocable portion of the
interest, if any, actually or constructively paid by Independence One
to the IRS or state taxing authority as a result of the Section 2.5
Adjustment; thereafter, any future payments required pursuant to
Section 2.5(c) with respect to the affected Federal SRLY Payment or
State SRLY Payment shall be made based on the adjusted amount of such
payment.
Any payment from Independence One and MNC to the FDIC Manager pursuant to
Section 2.6(c)(i) shall be made no later than thirty (30) days following the
date on which MNC actually or constructively receives any tax refunds
attributable to the Section 2.5 Adjustment. At the time any payment is made to
the FDIC Manager pursuant to Section 2.6(c)(i), Independence One shall provide
the FDIC Manager with a Section 2.8 Report explaining the Section 2.5
Adjustment and the calculation of the payment related thereto. Any payment
from the FDIC Manager to Independence One pursuant to Section 2.6(c)(ii) shall
be made no later than thirty (30) days following the date on which MNC delivers
to the FDIC Manager a Section 2.8 Report explaining the
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<PAGE> 26
Section 2.5 Adjustment and the calculation of the payment related thereto.
(D) ADJUSTMENTS TO 1989-1993 INDEMNIFICATION NET TAX BENEFITS. If
either an action of either the IRS or the U.S. Congress permanently disallows a
deduction for any item described in Section 3(a)(2) or (3) of the Assistance
Agreement ("ITB Items") or an action of the FDIC Manager or FDIC OIG causes a
permanent decrease in the amount of any ITB Item (either being an "ITB Item
Adjustment"), then a payment shall be made from the FDIC Manager to
Independence One in the amount of $351.61 for each $1,000.00 of permanently
disallowed deductions for, or permanent decrease in the amount of, ITB Items,
provided, however, that the maximum amount payable by the FDIC Manager pursuant
to this Section 2.6(d) shall be $4,094,029.00, together with an amount equal to
thirty-one and one-half percent (31.5%) of an allocable portion of the
interest, if any, actually or constructively paid by Independence One to the
IRS as a result of such ITB Item Adjustment. Any payment from the FDIC Manager
to Independence One pursuant to this Section 2.6(d) shall be made no later than
thirty (30) days following the date on which MNC delivers to the FDIC Manager a
Section 2.8 Report explaining the ITB Item Adjustment and the calculation of
the payment related thereto.
(E) 1989-1993 SUBSIDIARY TAX BENEFITS. If either --
(i) an action of the IRS or the U.S. Congress either
disallows a deduction in any of the taxable years 1989
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<PAGE> 27
through 1993 for any "Subsidiary Tax Benefit Items" (as defined below)
or decreases or increases the amount of Subsidiary Tax Benefit Items
allowed to be claimed as a deduction by the MNC Group in any of such
years, or
(ii) an action of the FDIC Manager or the FDIC OIG causes
an increase or decrease in any Subsidiary Tax Benefit Items,
(an "STB Item Adjustment"), then payments shall be made between Independence
One, MNC and the FDIC Manager as follows:
(iii) the FDIC Manager shall pay to Independence One $42.55
for each $1,000.00 of deduction disallowances for, or decreases in the
amount of, Subsidiary Tax Benefit Items, and
(iv) Independence One shall pay to the FDIC Manager $42.55
for each $1,000.00 of increases in the amount of Subsidiary Tax
Benefit Items,
in either case together with an amount equal to thirty-one and one-half percent
(31.5%) of an allocable portion of the interest, if any, actually or
constructively paid (in the case of a disallowed deduction or decrease in the
amount of Subsidiary Tax Benefit Items) or received (in the case of an increase
in the amount of Subsidiary Tax Benefit Items) by Independence One to or from
the IRS as a result of such STB Item Adjustment.
The maximum amount of any payment (exclusive of interest) from the
FDIC Manager to Independence One pursuant to this Section 2.6(e) shall not
exceed the sum of $8,027,208.00 and any
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<PAGE> 28
amount paid by Independence One to the FDIC Manager pursuant to this Section
2.6(e).
(v) For purposes of this Agreement, "Subsidiary Tax Benefit
Items" means:
(A) Any net operating loss carryovers as of January
1, 1989, of any subsidiary of Independence One which is
claimed as a deduction in arriving at the federal income tax
liability for the MNC Group for 1989, 1990, 1991, 1992 or
1993; and
(B) Any deduction for a write-off of the following
assets of subsidiaries of Independence One: (I) principal and
accrued interest on the so-called "VMS Loans," (II) the asset
known as the "59th Street Joint Venture," and (III) the asset
known as the "Stamford Partnership."
(vi) Any payment from the FDIC Manager to Independence One
pursuant to Section 2.6(e)(iii) shall be made no later than thirty
(30) days following the date on which MNC delivers to the FDIC Manager
a Section 2.8 Report explaining the STB Item Adjustment and the
calculation of the payment related thereto. Any payment from
Independence One to the FDIC Manager pursuant to Section 2.6(e)(iv)
shall be made no later than thirty (30) days following the date on
which MNC actually or constructively receives any tax refunds
attributable to the STB Item Adjustment. At the time any payment is
made to the FDIC Manager pursuant to
- 27 -
<PAGE> 29
Section 2.6(e)(iv), Independence One shall provide the FDIC Manager
with a Section 2.8 Report explaining the STB Item Adjustment and the
calculation of the payment related thereto.
(F) ADJUSTMENTS TO 1989-1993 OTHER TAX BENEFITS ITEMS.
(i) OTHER TAX BENEFIT ITEMS. The FDIC Manager, MNC and
Independence One agree that the following items in the following
amounts were properly accounted for under the terms of the Assistance
Agreement as Tax Benefit Items or Tax Detriment Items (as those terms
are defined in the Assistance Agreement) for taxable years 1989
through 1993, inclusive (the total amount of Tax Benefit Items and Tax
Detriment Items are referred to herein as "Other Tax Benefit Items"):
<TABLE>
<CAPTION>
Item Amount
---- ------
<S> <C>
Interest on Note $282,479,221.00
Covered Asset Losses 102,758,503.00
Guaranteed Yield 68,194,502.00
Deposit and World Loan Subsidy 58,137,324.00
Mark to Market Items 13,636,701.00
OID, Section 481 Adjustment,
and Vacation Accrual 7,703,080.00
Other Assistance 12,111,241.00
FSLIC Share of REO Gains (5,037,733.00)
FHLB Stock (8,064,200.00)
Section 3(b)(1) Credits (11,727,704.00)
---------------
Total $520,190,935.00
===============
</TABLE>
(ii) FDIC MANAGER PAYMENTS. If either --
(A) an action of the IRS or the U.S. Congress
permanently decreases the amount of Other Tax Benefit Items,
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<PAGE> 30
(B) an action of the IRS or the U.S. Congress forever
precludes, for reasons other than adjustments to taxable income, MNC
and Independence One from claiming, for federal income tax purposes,
as a credit the amount of the MNC Group's alternative minimum tax
credit carryforward as of January 1, 1994, which amount the parties
hereto agree is $54,187,411.00 (the "AMT Credit"), or
(C) an action of the FDIC Manager or the FDIC OIG
causes a permanent decrease in the amount of Other Tax Benefit Items,
(an OTB Item Adjustment"), then payments shall be made to Independence One
from the FDIC Manager as set forth in Section 2.6(f)(iii). For purposes of
determining the amount of any payment to be made pursuant to Section
2.6(f)(iii) as a result of MNC and Independence One being forever precluded
from claiming any portion or all of the AMT Credit as a credit for federal
income tax purposes, the amount of Other Tax Benefit Items shall be deemed to
be permanently decreased by $2.857143 for each $1.00 of such AMT Credit.
(iii) If there is an OTB Item Adjustment, the FDIC
Manager shall pay to Independence One --
(A) $175.00 for each $1,000.00 of decreases in the
amount of Other Tax Benefit Items, for the first
$171,929,851.00 of such decreases;
(B) $57.225 for each additional $1,000.00 of
decreases in the amount of Other Tax Benefit Items, for
- 29 -
<PAGE> 31
the next $14,795,029.00 of such decreases, plus interest on
such amount at the rate of fifteen percent (15%) compounded
annually from September 30, 1994, until the date of
payment, but in no event may the amount determined in this
Section 2.6(f)(iii)(B) exceed $2,589,130.00;
(C) $65.80 for each additional $1,000.00 of
decreases in the amount of Other Tax Benefit Items, for the
next $38,164,897.00 of such decreases, plus interest on such
amount at the rate of fifteen percent (15%) compounded
annually from September 30, 1994, until the date of payment,
but in no event may the amount determined in this Section
2.6(f)(iii)(C) exceed $6,678,857.00;
(D) $75.60 for each additional $1,000.00 of
decreases in the amount of Other Tax Benefit Items, for the
next $38,164,897.00 of such decreases, plus interest on such
amount at the rate of fifteen percent (15%) compounded
annually from September 30, 1994, until the date of payment,
but in no event may the amount determined in this Section
2.6(f)(iii)(D) exceed $6,678,857.00;
(E) $86.975 for each additional $1,000.00 of
decreases of Other Tax Benefit Items, for the next
$40,307,754.00 of such decreases, plus interest on such amount
at the rate of fifteen percent (15%) compounded
- 30 -
<PAGE> 32
annually from September 30, 1994, until the date of payment,
but in no event may the amount determined in this Section
2.6(f)(iii)(E) exceed $7,053,857.00;
(F) $100.10 for each additional $1,000.00 of
decreases in the amount of Other Tax Benefit Items, for the
next $23,388,600.00 of such decreases, plus interest on such
amount at the rate of fifteen percent (15%) compounded
annually from September 30, 1994, until the date of payment,
but in no event may the amount determined in this Section
2.6(f)(iii)(F) exceed $4,093,005.00; and
(G) $72.912 for each $1,000.00 of decreases in the
amount of Other Tax Benefit Items, for the remaining
$193,439,907.00 of such Other Tax Benefit Items.
(H) Any payment from the FDIC Manager required
pursuant to this Section 2.6(f)(iii) shall be made together
with an amount equal to thirty-one and one-half percent
(31.5%) of an allocable portion of the interest, if any,
actually or constructively paid by Independence One to the IRS
as a result of the OTB Item Adjustment giving rise to the FDIC
Manager's obligation to make such payment. The interest
payment described in this Section 2.6(f)(iii)(H) shall not be
subject to any maximum payment restrictions or caps set forth
in Sections 2.6(f)(iii)(A) - (G).
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<PAGE> 33
(iv) TIMING OF FDIC MANAGER PAYMENTS. Any payment from the
FDIC Manager to Independence One pursuant to Section 2.6(f)(iii) shall
be made no later than thirty (30) days following the date on which MNC
delivers to the FDIC Manager a Section 2.8 Report explaining the OTB
Item Adjustment and the calculation of the payment related thereto,
and, except for any payment pursuant to Section 2.6(f)(iii)(G) (with
respect to which there are no conditions), a statement that the
conditions to such payment set forth in Section 2.6(f)(v) have been
satisfied.
(v) CONDITIONS TO FDIC PAYMENTS.
(A) Payments required pursuant to Section
2.6(f)(iii)(A), together with interest under Section
2.6(f)(iii)(H), shall be made as (I) the cumulative post-1993
federal taxable income of the MNC Group exceeds (II) the
excess of (1) $171,929,851.00, over (2) the amount of
permanent decreases in Other Tax Benefit Items (but not in
excess of $171,929,851.00).
(B) For each $2,333.00 of cumulative post-1993
federal taxable income of the MNC Group in excess of
$171,929,851.00, the FDIC Manager shall pay to Independence
One the payment required pursuant to Sections 2.6(f)(iii)(B),
(C), (D), (E) and (F) for each $1,000.00 of permanent
decreases in the amount of Other Tax Benefit Items in excess
of $171,929,851.00.
(vi) INDEPENDENCE ONE PAYMENT. If either --
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<PAGE> 34
(A) an action of the IRS or the U.S. Congress
permanently increases the amount of Other Tax Benefit Items, or
(B) an action of the FDIC Manager or the FDIC OIG
permanently increases the amount of Other Tax Benefit Items,
then Independence One and MNC shall pay to the FDIC Manager an
amount equal to seventeen and one-half percent (17.5%) of the
increase, together with an amount equal to thirty-one and one-half
percent (31.5%) of an allocable portion of the interest, if any,
actually or constructively received by Independence One from the IRS
as a result of such increase. Any payment from Independence One to
the FDIC Manager pursuant to this Section 2.6(f)(vi) shall be made no
later than thirty (30) days following the date on which MNC actually
or constructively receives any tax refunds attributable to the
increase. At the time any payment is made to the FDIC Manager
pursuant to this Section 2.6(f)(vi), Independence One shall provide
the FDIC Manager with a Section 2.8 Report explaining the increase and
the calculation of the payment related thereto.
(G) PENALTIES. For purposes of this Section 2.6, if Independence One
actually or constructively pays a penalty (other than a penalty imposed for
negligence or willful misconduct) to the IRS or a state tax authority, the FDIC
Manager shall pay Independence One an allocable portion of such penalty.
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<PAGE> 35
(H) FEES AND COSTS. Except to the extent that a greater payment
is required pursuant to Section 2.6(a)(ii), the FDIC Manager agrees to pay MNC
thirty-one and one-half percent (31.5%) of the amount of any reasonable legal,
accounting and related fees and costs incurred in connection with any
administrative submission, protest or subsequent proceedings or litigation
concerning a challenge by the IRS or a state taxing authority to any items,
which if the IRS or state taxing authority prevails, would give rise to a
payment from the FDIC Manager to Independence One pursuant to this Section 2.6,
provided that the FDIC Manager shall be given written notice within thirty (30)
days of the receipt of a written notice from the IRS or state taxing authority
which proposes adjustments that could give rise to a payment from the FDIC
Manager to Independence One pursuant to this Section 2.6, and provided further,
that the FDIC Manager shall have reasonable participation rights with respect
to any such submission, protest, subsequent proceedings or litigation;
provided, however, that the content of all such submissions and protests and
the conduct of all such proceedings and litigation shall remain in the ultimate
control of Independence One and MNC.
(I) SECTIONS 2.6(G) AND (H) PAYMENTS. The FDIC Manager shall make
any payments required under Section 2.6(g) or (h) within thirty (30) days of
Independence One's or MNC's providing the FDIC Manager with a Section 2.8
Report explaining the payment and the calculation of the amount thereof.
- 34 -
<PAGE> 36
(J) DEFINITION OF "PERMANENT". For purposes of this Section 2.6,
the term "permanent" or "permanently" shall mean:
(i) any act that prohibits MNC or Independence One from ever
claiming a loss or expense deduction in any taxable year beginning
after December 31, 1988;
(ii) any act that requires MNC or Independence One to include
in taxable income for any taxable year beginning after December 31,
1988, any assistance paid pursuant to the Assistance Agreement or this
Agreement or any interest paid pursuant to the Note, but only if MNC
or Independence One is not allowed a tax deduction in a future taxable
year for the amount of assistance previously included in taxable
income; or
(iii) any act by the FDIC Manager or the FDIC OIG which
results in Independence One or MNC returning to the FDIC Manager any
prior assistance paid under the Assistance Agreement or this Agreement
or receiving from the FDIC Manager any additional assistance under the
Assistance Agreement or this Agreement.
(K) ADJUSTMENTS PURSUANT TO TREASURY REGULATIONS SECTION
1.597-8. If it is determined as a result of an IRS action that any portion of
the Termination Amount is not a payment that represents a prepayment of (or a
payment in lieu of) a fixed or contingent right to federal financial assistance
within the scope of Treasury Regulations section 1.597-8, then the FDIC Manager
- 35 -
<PAGE> 37
shall make a payment to Independence One in an amount necessary to put
Independence One in the position that it would have been in had such
determination not been made. Any payment from the FDIC Manager to Independence
One pursuant to this paragraph shall be made no later than thirty (30) days
following the date on which MNC delivers to the FDIC Manager a Section 2.8
Report explaining the effect of the determination and a calculation of the
payment required as a result thereof.
SECTION 2.7 RESERVE FOR BAD DEBTS. No later than January 30, 1995,
Independence One shall file with the IRS a request for permission to change its
method of tax accounting for bad debts from the reserve method to the specific
charge-off method beginning in calendar year 1995. At the time of such filing,
Independence One shall provide a copy of the request to the FDIC Manager. If
such request is granted, Independence One shall not file a request for
permission, or otherwise seek, to return to the reserve method until the year
after the year in which the net amount of any adjustments required by Section
481 of the Code resulting from the change to the specific charge-off method has
been fully taken into account. Independence One shall provide to the FDIC
Manager a copy of any IRS approval or denial of such request within thirty (30)
days after the receipt of such approval or denial. If such request is denied,
Independence One shall cause its reserve for bad debts to be reduced to zero
over the same period and at least the same rate that it would have been
required to recapture its bad debt reserve as of January 1,
- 36 -
<PAGE> 38
1995, had the request been approved. If such request is denied and
Independence One does not comply with the immediately preceding sentence, then
Independence One and MNC shall pay to the FDIC Manager the amount of
$300,000.00, together with interest at the Late Payment Rate (as defined in
Section 11.14) from October 1, 1994, until the date of payment.
SECTION 2.8 SECTION 2.8 REPORTS. Any Section 2.8 Report required to
be submitted by Independence One and MNC to the FDIC Manager pursuant to
Section 2.5(e) or 2.6 shall be (A) signed by the senior corporate officer
responsible for the preparation and filing of corporate tax returns, (B)
certified by such officer that all calculations have been determined pursuant
to and in conformance with this Agreement, and (C) accompanied by such
documents and materials as are necessary for the FDIC Manager to verify the
calculations. If the FDIC Manager reasonably believes that it needs additional
documents or materials that are in the possession of Independence One and MNC,
Independence One and MNC shall provide such additional documents and materials
upon the request of the FDIC Manager.
ARTICLE 3
TRANSFER OF LITIGATION
SECTION 3.1 TRANSFER. Effective at the close of business on
September 30, 1994, the FDIC Manager shall assume full responsibility for
managing and conducting all proceedings relating to the litigation cases listed
on Exhibit 3.1 hereto (the "Transferred Cases"). As promptly as practicable
after
- 37 -
<PAGE> 39
September 30, 1994, Independence One shall advise its outside counsel in
writing of the FDIC's assumption of responsibility for managing the Transferred
Cases, and shall direct such counsel to prepare those documents reasonably
necessary to designate new counsel of record for the Transferred Cases. The
FDIC Manager, MNC, and Independence One shall cooperate in taking all steps
reasonably necessary to transfer full responsibility for the Transferred Cases
to the FDIC Manager.
SECTION 3.2 PAYING AGENT SERVICES. For a period of up to ninety (90)
days after September 30, 1994, Independence One shall serve as the paying agent
on behalf of the FDIC Manager for all legal fees and expenses incurred with
respect to work performed in connection with the Transferred Cases on or after
September 30, 1994, and shall pay all such fees and expenses in a timely
manner. The FDIC Manager shall reimburse Independence One for such payments
within thirty (30) days after receipt by the FDIC Manager of a written notice
from Independence One stating that such payments have been made and requesting
reimbursement therefor. Any and all such payments made by Independence One on
behalf of the FDIC Manager shall not be considered to be assistance to
Independence One under the Assistance Agreement, this Agreement, or both such
Agreements.
SECTION 3.3 COSTS AND INDEMNIFICATIONS. Effective at the close of
business on September 30, 1994, the FDIC Manager shall assume all
responsibility for paying all legal fees and expenses incurred in connection
with the Transferred Cases, and shall
- 38 -
<PAGE> 40
indemnify and hold harmless the Independence One Indemnitees (as defined in
Section 10.1) from all claims for such legal fees and expenses from and after
September 30, 1994, pursuant to Article 10 of this Agreement.
ARTICLE 4
DIVISION OF RESOLUTIONS ("DOR") POST-CLOSING AUDIT
SECTION 4.1 GENERALLY. Following the execution of this Agreement,
the FDIC Manager or its designee may audit the following matters:
(A) the assistance paid to Independence One under the Assistance
Agreement (other than any matters relating to taxes) for the period commencing
July 1, 1994, and ending September 30, 1994;
(B) the debits to the SRA pursuant to Section 3(a)(16) of the
Assistance Agreement and the credits to the SRA pursuant to Section 3(b)(5) of
the Assistance Agreement, in each case only to the extent any such debits or
credits relate to taxable years 1991, 1992, and 1993;
(C) the calculations pursuant to Section 2.4(c); and
(D) the payments and calculations pursuant to Sections 2.5, 2.6,
10.1, and 11.14.
The audit of the matters described in Section 4.1(a), (b) and (c) (the
"DOR Post-Closing Audit") shall be completed by no later than September 30,
1995. The audit of the matters described in Section 4.1(d) shall be completed
by no later than one (1) year following the date on which Independence One or
MNC
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<PAGE> 41
delivers the notice described in Section 2.5 covering the matters being audited
or the payments under Section 2.6, 10.1 or 11.14 to be audited have been made
(as the case may be). Except as described in this Article 4, the FDIC Manager
shall have no rights to audit or propose adjustments to any matters relating to
the SRA or the assistance paid under the Assistance Agreement.
SECTION 4.2 PAYMENT. No later than forty (40) days after the date of
completion of the DOR Post-Closing Audit:
(A) The FDIC Manager shall pay to Independence One the amount, if
any, by which (i) any net adjustment in Independence One's favor determined
pursuant to this Article 4 (excluding any DOR Audit Disputed Items (as defined
in Section 4.3)), exceeds (ii) any net adjustment in the FDIC Manager's favor
determined pursuant to this Article 4 (excluding any DOR Audit Disputed Item),
together with interest on such excess at the rate equal to the Interest Rate
(as defined below) from and including October 1, 1994, to but excluding the
date of such payment (the term "Interest Rate" shall mean, for a particular
month or other period, the arithmetic average of the weekly auction rates
adjusted to a bond equivalent yield basis for three (3)-month bills issued and
settled by the United States Department of Treasury during such month or other
period (or, if there is no auction or only one auction for any period, the last
auction rate) as reported by The Wall Street Journal, or, if not so reported,
then by such other recognized national publication as mutually agreed upon by
the parties hereto); or
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<PAGE> 42
(B) Independence One shall pay to the FDIC Manager the amount, if
any, by which (i) any net adjustment in the FDIC Manager's favor determined
pursuant to this Article 4 (excluding any DOR Audit Disputed Item), exceeds
(ii) any net adjustment in Independence One's favor determined pursuant to this
Article 4 (excluding any DOR Audit Disputed Item), together with interest on
such excess at the Interest Rate from and including October 1, 1994, to but
excluding the date of such payment.
SECTION 4.3 DOR POST-CLOSING AUDIT PROCEDURES. The parties hereto
agree that the DOR Post-Closing Audit, and any adjustments as a result thereof,
shall be conducted and determined in accordance with the following procedures:
(A) Until completion of the DOR Post-Closing Audit, Independence One
and MNC shall cause to be made available to the FDIC Manager or its designees,
at such reasonable times as the FDIC Manager may reasonably request, all books,
papers, records and information of any kind in the possession of Independence
One or MNC relating to any and all matters within the scope of the DOR
Post-Closing Audit; provided, however, that neither Independence One nor MNC
shall be required to make available to the FDIC Manager or its designee any
information or documentation that is subject to the attorney-client,
work-product or any similar privilege, unless the cost of which was reimbursed
to Independence One or MNC under the Assistance Agreement or this Agreement.
Such materials shall be made available to the FDIC
- 41 -
<PAGE> 43
Manager or its designee at MNC's headquarters or such other location reasonably
agreed to by Independence One or MNC.
(B) Within thirty (30) days after Independence One and MNC have
received a copy of the final audit report resulting from the DOR Post-Closing
Audit (the "Final Audit Report") from the FDIC Manager, Independence One or MNC
shall provide the FDIC Manager with a written list of all items in the Final
Audit Report with which Independence One or MNC agrees (all other items in the
Final Audit Report are referred to herein as the "DOR Audit Disputed Items").
Any DOR Audit Disputed Items shall be resolved in accordance with the
procedures specified in Article 5 hereof.
SECTION 4.4 OTHER ADJUSTMENTS. Within thirty (30) days after
completion of any audit pursuant to Section 4.1(d) hereof, the FDIC Manager
shall deliver to Independence One and MNC a report setting forth any proposed
adjustments arising from such audit and the basis therefor (an "Adjustment
Report"). Within thirty (30) days after Independence One and MNC have received
a copy of such Adjustment Report, Independence One or MNC shall provide the
FDIC Manager with a written list of all items in such Adjustment Report with
which Independence One or MNC agrees; all other proposed adjustments in such
Adjustment Report shall be deemed to be disputed and shall be resolved in
accordance with the procedures set forth in Article 5 hereof.
ARTICLE 5
DISPUTE RESOLUTION
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<PAGE> 44
SECTION 5.1 DISPUTES. Any disputes arising under this Agreement or
the Assistance Agreement shall be resolved through the procedures specified
under this Article 5. The resolution of any disputes under this Article 5
(whether through the negotiation, mediation or arbitration procedures specified
herein) shall be final and binding upon the FDIC Manager, Independence One and
MNC, and specifically enforceable under applicable law. Independence One and
MNC shall be deemed one party in proceedings under this Article 5. The
procedures set forth in this Article 5 shall be initiated by the conduct of a
face-to-face meeting: (a) within forty-five (45) days after the receipt by
Independence One and MNC of the Final Audit Report if there are any DOR Audit
Disputed Items, (b) within forty-five (45) days after the receipt by
Independence One and MNC of an Adjustment Report if any proposed adjustments
set forth therein are disputed, or (c) within fifteen (15) days after the
delivery of a written notice by a party hereto to the other party hereto
stating that the claiming party has a claim against the other party, describing
in reasonable detail the nature and amount of such claim and the basis
therefor.
SECTION 5.2 NEGOTIATION. Prior to the submission of any dispute
through the mediation or arbitration procedures specified in Section 5.3 or 5.4
hereof, the parties to the dispute shall make every effort in good faith to
resolve such dispute by mutual agreement within thirty (30) days following the
initiation of the procedures set forth in this Article 5 (the date on which
such
- 43 -
<PAGE> 45
thirty (30)-day period expires, or any extension of such period as the parties
to the dispute may mutually agree to in writing, is herein called the "Claim
Resolution Deadline Date").
SECTION 5.3 MEDIATION PROCEDURES. If the parties to a dispute have
not resolved such dispute pursuant to the procedures set forth in Section 5.2
by the Claim Resolution Deadline Date, then the mediation procedures provided
in this Section 5.3 shall apply.
(A) Within thirty (30) days after the Claim Resolution Deadline Date,
the parties to the dispute shall jointly appoint an independent and impartial
mediator (the "Mediator"). If the parties to the dispute are unable to agree
on the appointment of the Mediator, then application shall be immediately made
to the CPR Institute for Dispute Resolution (the "CPR") for the selection and
appointment of the Mediator. The Mediator shall establish procedures designed
to facilitate the mediation of such dispute, shall meet with representatives of
the parties to the dispute and take other appropriate actions to facilitate a
negotiated or other voluntary resolution of such dispute; and
(B) If the parties to the dispute have not resolved the dispute
within thirty (30) days of the appointment of the Mediator or such later date
as to which they mutually agree in writing (the "Mediation Deadline Date"),
then the arbitration procedures specified in Section 5.4 hereof shall apply.
SECTION 5.4 ARBITRATION.
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<PAGE> 46
(A) If the parties to the dispute have not resolved the dispute by
the Mediation Deadline Date, the parties to the dispute shall jointly select an
independent and impartial arbitrator (the "Arbitrator"). The Arbitrator shall
have such expertise as the parties to the dispute to be resolved by such
Arbitrator agree is relevant. The Arbitrator may be removed only by unanimous
action of the parties. If the parties hereto are unable to agree upon the
selection of the Arbitrator within thirty (30) days after the Mediation
Deadline Date or such later date as to which they mutually agree in writing,
application shall be made to the CPR for the selection and appointment of the
Arbitrator.
(B) The arbitration proceeding shall be conducted in accordance with
the then current CPR Rules for Non-Administered Arbitration of Business
Disputes to the extent that such Rules are not inconsistent with this Article
5. The Arbitrator may modify the procedures set forth in such Rules from time
to time with the prior approval of the parties to such dispute. The place of
such arbitration shall be Washington, D.C., or such other location agreed to by
the parties.
(C) The arbitration proceedings shall be concluded within one hundred
eighty (180) days of the appointment of the Arbitrator or such later date as
the parties to the dispute mutually agree in writing. Within thirty (30) days
of the conclusion of the arbitration proceedings, the Arbitrator shall adopt
without modification the position of one of the parties,
- 45 -
<PAGE> 47
reject the position of the other party, and shall present to the parties a
written statement of his or her determination regarding the dispute. Failure
to submit a position by any party shall be deemed an acceptance by such party
of the other party's position, and shall constitute a final, binding, and
specifically enforceable decision against such party.
SECTION 5.5 COSTS AND EXPENSES. The FDIC Manager shall pay one-half
of the fees and expenses of the Mediator and/or the Arbitrator and Independence
One and/or MNC shall pay the other half thereof. Except as otherwise provided
in the preceding sentence, each party shall bear all costs and expenses
incurred by it in connection with the conduct of the procedures described in
this Article 5.
SECTION 5.6 CONFIDENTIALITY; PRECEDENTIAL EFFECT. Any dispute
resolution proceeding (including without limitation any mediation proceeding)
held pursuant to this Article 5 shall not be public. In addition, except as
may be required by law, each party, their respective representatives, the
Mediator and the Arbitrator shall strictly maintain the confidentiality of all
issues, disputes, arguments, positions, interpretations, awards, determinations
and decisions of any such proceeding, as well as all information, attachments,
enclosures, exhibits, summaries, compilations, studies, analyses, notes,
documents, statements, schedules and other similar items associated therewith.
The resolution of any dispute pursuant to the negotiation or mediation
procedures specified in Sections 5.2 and 5.3 hereof
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<PAGE> 48
shall constitute precedent regarding any subsequent dispute under this Article
5 only if the parties to such dispute so specify in writing as part of such
resolution. The resolution of any dispute pursuant to the arbitration
procedures specified in Section 5.4 shall constitute precedent regarding any
subsequent dispute unless otherwise determined by the Arbitrator.
ARTICLE 6
FDIC'S OFFICE OF INSPECTOR GENERAL ("OIG") MATTERS
SECTION 6.1 MAINTENANCE OF RECORDS. Independence One and MNC shall
maintain, for a period of not less than five (5) years from September 30, 1994,
all books, papers, records, and information of any kind relating to any and all
matters subject to the Assistance Agreement, this Agreement, or both such
Agreements, including any such materials or information in the possession or
control of Independence One or MNC or any of their affiliates, subsidiaries,
agents or counsel (including, but not limited to, tax returns and amended tax
returns for any taxable years specified by the FDIC Manager or its designee).
SECTION 6.2 OIG ACCESS TO BOOKS AND RECORDS. Independence One and
MNC shall cause to be made available to the FDIC's OIG, at such reasonable
times as the FDIC's OIG may specify, all books, papers, records, and
information described in Section 6.1 during the period provided therein;
provided, however, that neither Independence One nor MNC shall be required to
make available to the FDIC's OIG or its designee any information or
documentation that is subject to the attorney-client, work-
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product or any similar privilege, unless the cost of which was reimbursed to
Independence One or MNC under the Assistance Agreement or this Agreement. Such
materials shall be made available to the FDIC Manager or its designee at MNC's
headquarters or such other location reasonably agreed to by Independence One or
MNC.
SECTION 6.3 OIG AUDITS AND EXAMINATIONS. Following the execution of
this Agreement, the FDIC's OIG may audit Independence One, MNC or any of their
respective affiliates or subsidiaries with respect to the following matters:
(a) the assistance paid to Independence One under the Assistance
Agreement (other than any matters relating to taxes) for periods commencing on
or after October 1, 1992, and ending on or before September 30, 1994;
(b) the debits to the SRA pursuant to Section 3(a)(16) of the
Assistance Agreement and the credits to the SRA pursuant to Section 3(b)(5) of
the Assistance Agreement, in each case only to the extent any such debits or
credits relate to taxable years 1991, 1992, and 1993;
(c) the calculations pursuant to Section 2.4(c); and
(d) the payments and calculations pursuant to Sections 2.5, 2.6,
10.1, and 11.14.
Such audits shall be conducted by the FDIC's OIG at its own expense but, if
requested by the FDIC's OIG, with the reasonable assistance of Independence
One's or MNC's respective directors, officers, and employees, whose salaries
and expenses shall be
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paid by Independence One or MNC without reimbursement from the FDIC.
SECTION 6.4 OTHER RIGHTS. Nothing in this Agreement shall be
construed to prevent or impair the audit and investigative authority of the
FDIC's OIG pursuant to the Inspector General Act of 1977, as amended.
ARTICLE 7
REPRESENTATIONS AND WARRANTIES
SECTION 7.1 REPRESENTATIONS AND WARRANTIES OF INDEPENDENCE ONE AND
MNC. To induce the FDIC Manager to enter into this Agreement and to consummate
the transactions contemplated hereby, Independence One and MNC severally make
the following representations and warranties (but only to the extent applicable
to each party) to the FDIC Manager as of the date hereof, all of which shall
survive the execution and delivery of this Agreement and the consummation of
such transactions:
(a) CORPORATE EXISTENCE.
(i) Independence One is a federally chartered stock savings
bank duly organized, validly existing, and in good standing under the
laws of the United States of America, with all requisite power and
authority to (A) own and operate its properties and conduct its
business as currently conducted by it and (B) engage in the activities
and transactions described in and contemplated by this Agreement.
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(ii) MNC is a Michigan corporation duly organized, validly
existing, and in good standing under the laws of the State of Michigan
with all requisite power and authority to (A) own and operate its
properties and conduct its business as now conducted by it and (B)
engage in the activities and transactions described in and
contemplated by this Agreement.
(b) DUE AUTHORIZATION. Independence One and MNC each has full power
and authority to execute, deliver, and perform this Agreement, and has taken
all necessary action to authorize the execution, delivery, and performance of
this Agreement in accordance with its terms.
(c) BINDING AGREEMENT. This Agreement has been duly authorized,
executed, and delivered by Independence One and MNC and, when duly authorized,
executed, and delivered by the FDIC Manager, this Agreement shall constitute a
legal, valid, and binding obligation of Independence One and MNC, enforceable
against each of them in accordance with its terms except as such enforceability
may be limited by (i) bankruptcy, insolvency, reorganization or other similar
laws affecting the enforcement of creditors' rights generally, and (ii) general
equitable principles (regardless of whether the issue of enforceability is
considered in a proceeding in equity or at law).
(d) COMPLIANCE WITH LAW.
(i) Independence One and MNC are not, and their respective
subsidiaries are not, in violation of any
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statute, regulation, order, decision, judgment, or decree of, or any
restriction imposed by, the United States of America, any state,
municipality, or other political subdivision thereof, or any agency of
the foregoing, or any court or other competent tribunal having
jurisdiction over Independence One, MNC, or their respective
subsidiaries or any of their assets, or any foreign government or
agency thereof having jurisdiction over Independence One, MNC, or
their respective subsidiaries or any of their assets, or any
securities exchange or securities quotation system on which
Independence One, MNC, or any of their respective subsidiaries'
securities are listed or quoted, in respect of the conduct of their
business or the ownership of their properties, which violations,
either individually or in the aggregate, would materially and
adversely affect Independence One's or MNC's ability to observe or
perform its obligations under this Agreement.
(ii) The execution, delivery, and performance by Independence
One and MNC of this Agreement will not materially violate or conflict
with any provision of any applicable law or regulation, or any order,
writ, judgment or decree of any court or governmental authority to
which Independence One or MNC is otherwise subject, which violation or
conflict, either individually or in the aggregate, would materially
and adversely affect
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Independence One's or MNC's ability to observe or perform its
obligations under this Agreement.
(e) COMPLIANCE WITH OBLIGATIONS.
(i) Independence One and MNC are not in violation or breach
of, or in default under, any obligation, agreement, covenant, or
condition contained in their respective bylaws or charter, and
Independence One and MNC are not in violation or in breach of or in
default under any contract, lease, or other instrument to which it is
respectively a party (or which is binding on it or its assets), which
violation, breach or default, either individually or in the aggregate,
would materially and adversely affect Independence One's or MNC's
ability to observe or perform its obligations under this Agreement.
(ii) The execution, delivery, and performance by Independence
One and MNC of this Agreement does not and will not materially (A)
violate or conflict with any provision of the respective articles of
association or organization or bylaws of Independence One and MNC, or
(B) result in a violation or breach of, or default under, any contract,
lease, or other instrument to which Independence One or MNC is a party
(or which is binding on it or any of its assets), which violation,
conflict, breach or default, either individually or in the aggregate,
would materially and adversely affect Independence One's or MNC's
ability to observe or perform its obligations under this Agreement.
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(f) APPROVALS AND CONSENTS. All material governmental approvals and
other third party consents that are required in connection with the execution,
delivery, or performance of this Agreement or the transactions contemplated by
this Agreement by Independence One and MNC, if any, have been obtained.
(g) LITIGATION. There is no legal action, suit, investigation, or
proceeding pending (in which Independence One or MNC is a party) or, to
Independence One's or MNC's knowledge, threatened against or affecting
Independence One or MNC (whether or not Independence One or MNC is a party
thereto) or any of their respective subsidiaries or their assets which
questions the validity of this Agreement, or any of the transactions
contemplated hereby, which, either individually or in the aggregate, would
materially and adversely affect Independence One's or MNC's ability observe or
perform its obligations under this Agreement.
(h) CAPITAL COMPLIANCE. After giving effect to the transactions
contemplated by this Agreement, Independence One will be in compliance with the
minimum regulatory capital requirements of the Office of Thrift Supervision
(the "OTS") currently applicable to Independence One.
(i) INDEPENDENCE ONE OWNERSHIP STRUCTURE. As of the date hereof, all
of the outstanding capital stock of Independence One is owned by MNC.
(j) TAX MATTERS.
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(i) Independence One and MNC have supplied the Resolution
Trust Corporation (the "RTC") or the FDIC Manager with all federal and
state income tax returns (including amended returns) (the "Tax
Returns") for Independence One or for the MNC Group which have been
filed for the periods ended December 31, 1988, December 31, 1989,
December 31, 1990, December 31, 1991, December 31, 1992, and December
31, 1993, and no adjustments have been proposed on IRS Form 4549 with
respect to any tax benefit items.
(ii) Independence One is, and at all times during the term of
the Assistance Agreement has been, a "domestic building and loan
association" under the terms of Section 7701(a)(19) of the Code.
SECTION 7.2 REPRESENTATIONS AND WARRANTIES OF THE FDIC MANAGER. To
induce Independence One and MNC to enter into this Agreement and to consummate
the transactions contemplated hereby, the FDIC Manager hereby makes the
following representations and warranties to Independence One and MNC as of the
date hereof, all of which shall survive the execution and delivery of this
Agreement and the consummation of such transactions:
(A) POWER AND AUTHORIZATION. The execution, delivery, and
performance of this Agreement (i) are within the legal power and authority of
the FDIC Manager, and (ii) have been duly authorized by all necessary action on
the part of the FDIC Manager.
(B) BINDING AGREEMENT. This Agreement has been duly authorized,
executed, and delivered by the FDIC Manager, and upon
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the due authorization, execution, and delivery of this Agreement by
Independence One and MNC, this Agreement shall be a legal, valid, and binding
obligation of the FDIC Manager, enforceable against it in accordance with its
terms except as such enforceability may be limited by (i) bankruptcy,
insolvency, reorganization or other similar laws affecting the enforcement of
creditors' rights generally, and (ii) general equitable principles (regardless
of whether the issue of enforceability is considered in a proceeding in equity
or at law).
ARTICLE 8
COVENANTS
SECTION 8.1 ACCESS TO BOOKS AND RECORDS. Independence One and MNC
shall cause to be made available to the FDIC Manager or its designee, at such
reasonable times as the FDIC Manager may specify, all books, papers, records,
and information of any kind relating to any or all matters subject to the
Assistance Agreement, this Agreement, or both such Agreements, including any
such materials or information in the possession or control of Independence One
or MNC or any of their affiliates, subsidiaries, agents or counsel (including,
but not limited to, tax returns and amended tax returns for any taxable years
reasonably specified by the FDIC Manager or its designee that are pertinent to
the matters concerned by this Agreement or the Assistance Agreement); provided,
however, that neither Independence One nor MNC shall be required to make
available to the FDIC Manager or its designee any information or documentation
that is subject to the attorney-
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client, work-product or any similar privilege, unless the cost of which was
reimbursed to Independence One or MNC under the Assistance Agreement or this
Agreement. Such materials shall be made available to the FDIC Manager or its
designee at MNC's headquarters or such other location reasonably agreed to by
Independence One or MNC.
SECTION 8.2 FURTHER ASSURANCES. Each of the parties hereto shall
promptly and duly cause to be taken, executed, acknowledged or delivered all
such further acts, conveyances, documents, and assurances as any party hereto
may from time to time reasonably request in order more effectively to carry out
the intent and purposes of this Agreement and the transactions contemplated
hereby.
SECTION 8.3 COSTS AND EXPENSES. Except to the extent otherwise
specifically provided herein, each party hereto agrees to pay all costs and
expenses incurred by it in connection with or incidental to the matters
contained in this Agreement, including any fees and disbursements of attorneys,
accountants, and investment banking consultants.
8.4 SECTION 13224 CLAIMS. If MNC and Independence One assert a claim
or claims ("Claims") against a party other than the FDIC Manager for damages
and for refunds of federal and state taxes and/or for the redetermination of
liability for federal and state taxes for the taxable years 1989 and
thereafter, and such Claims arise out of or relate to the enactment of Section
13224 of the Revenue Reconciliation Act of 1993 ("Section 13224") or
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the application of Section 13224 to MNC, then the amount of damages or refunds
sought in such Claims shall not include the amount that would have accrued to
the benefit of the FDIC Manager under the Assistance Agreement or that would
accrue to the benefit of the FDIC Manager under this Agreement. If MNC and
Independence One receive any damages or refunds that include the amount that
would have accrued to the benefit of the FDIC Manager under the Assistance
Agreement or that would accrue to the benefit of the FDIC Manager under this
Agreement, then MNC and Independence One shall pay such amount to the FDIC
Manager no later than thirty (30) days following the date on which such damages
or refunds were received. MNC and Independence One shall provide a copy of any
Claims to the FDIC Manager within thirty (30) days of the assertion thereof.
SECTION 8.5 CAPITAL MAINTENANCE AGREEMENT. The FDIC Manager agrees
not to oppose any application or other proposal made by MNC to the OTS or any
other regulatory agency to terminate, revise, or amend the Capital Maintenance
Agreement dated December 31, 1988, by and between MNC, Independence One and the
FSLIC.
SECTION 8.6 COMPLIANCE WITH SECTION 2.5. If Independence One or any
of its subsidiaries leaves the MNC Group, MNC shall remain liable for any
obligations Independence One may have under Section 2.5 to the FDIC Manager.
SECTION 8.7 DEBITS TO THE SRA FOR LEGAL FEES. Independence One
agrees that it shall not debit the SRA after June 30, 1994,
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for any legal fees and related costs, which fees and costs shall be the sole
responsibility of Independence One.
ARTICLE 9
RELEASE
SECTION 9.1 RELEASE BY THE FDIC MANAGER. The FDIC Manager, on behalf
of the FRF, hereby releases, acquits, and forever discharges, effective as of
the date hereof, each of Independence One, MNC, and their subsidiaries,
officers, directors, employees, and affiliates (and the respective successors,
assigns, employees, agents, and representatives of all the foregoing)
(collectively, the "Independence One Released Persons") from and against any
and all actions and causes of action, suits, disputes, debts, accounts,
promises, warranties, damages, claims, proceedings, demands, and liabilities,
of every kind and character, direct and indirect, known and unknown, in law or
in equity, that the FDIC Manager now has, has had at any time heretofore, or
hereafter may have against the Independence One Released Persons by reason of
any act or omission whatsoever by any Independence One Released Person in
connection with the negotiation, administration, execution, or performance by
any Independence One Released Person of the Assistance Agreement or any other
agreements related thereto (and no other agreements to which the FDIC Manager
is a party); provided, however, that the release provided in this Section 9.1
(i) is not intended to and shall not prevent any assertion of a claim with
respect to any breach of this Agreement or any ancillary agreements or
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instruments executed and delivered by the parties or any of them in connection
with the execution of this Agreement or thereafter; (ii) shall not limit the
right of the FDIC Manager to bring any claim based on fraud, willful and
intentional misrepresentation of a material fact required to be disclosed under
this Agreement, willful and intentional failure to disclose a material fact
required to be disclosed under this Agreement, or willful and intentional
misconduct; and (iii) shall not limit the rights of the FDIC Manager to pursue
adjustments (other than adjustments relating to the Resolved Items) under
Article 4 of this Agreement.
SECTION 9.2 RELEASE BY INDEPENDENCE ONE AND MNC. Independence One
and MNC hereby release, hold harmless, acquit, and forever discharge each of
the FDIC Manager and the FRF and their officers, directors, and employees (and
the respective successors, assigns, employees, agents, and representatives of
all the foregoing) (collectively, the "FDIC Released Persons") from and against
any and all actions and causes of action, suits, disputes, debts, accounts,
promises, warranties, damages, claims, proceedings, demands, and liabilities,
of every kind and character, direct and indirect, known and unknown, in law or
in equity, that such Independence One Released Persons now have, have had at
any time heretofore, or hereafter may have against the FDIC Released Persons by
reason of any act or omission whatsoever by any FDIC Released Persons in
connection with the negotiation, administration, execution, or performance by
any of
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the FDIC Released Persons of the Assistance Agreement or any other agreements
related thereto; provided, however, that the release provided in this Section
9.2 (i) is not intended to and shall not prevent any assertion of a claim with
respect to any breach of this Agreement or any ancillary agreements or
instruments executed and delivered by the parties or any of them in connection
with the execution of this Agreement or thereafter; (ii) shall not limit the
rights of Independence One or MNC to bring any claim based on fraud, willful
and intentional misrepresentation of a material fact required to be disclosed
under this Agreement, willful and intentional failure to disclose a material
fact required to be disclosed under this Agreement, or willful and intentional
misconduct; and (iii) shall not limit the rights of Independence One or MNC
under Article 4 of this Agreement. Nothing contained herein shall release or
discharge or be construed to release or discharge in any way any claim
(including without limitation any claim arising out of or relating to the
enactment or application of Section 13224 of the Omnibus Budget Reconciliation
Act of 1993) that Independence One or MNC may have against any other party
including without limitation the United States of America or any agency or
instrumentality thereof.
SECTION 9.3 RIGHTS TO ENFORCE. Notwithstanding the foregoing
provisions of this Article 9, Independence One, MNC, and the FDIC Manager shall
retain their respective rights to enforce this Agreement.
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SECTION 9.4 TERMINATION OF THE ASSISTANCE AGREEMENT. Effective as of
the close of business on September 30, 1994, except as expressly provided in
Articles 2 and 10 hereof, the Assistance Agreement and the obligations and
rights of the parties thereunder shall terminate and thereafter be of no
further force or effect.
ARTICLE 10
INDEMNIFICATIONS
SECTION 10.1 INDEMNIFICATION BY THE FDIC MANAGER.
(A) The FDIC Manager shall indemnify and hold harmless Independence
One and MNC (and each of their respective officers, directors, employees, and
affiliated persons) (collectively, the "Independence One Indemnitees") for
sixty-three percent (63%) of the amounts actually incurred and paid by the
Independence One Indemnitees in connection with the defense, prosecution,
satisfaction, settlement, or compromise, including the reasonable costs and
expenses of litigation (including reasonable attorneys' and accountants' fees,
travel expenses, judgments, court costs, and related litigation expenses, and
such other actual and reasonable costs as may be actually incurred and paid by
the Independence One Indemnitees in connection with such defense, prosecution,
satisfaction, settlement, or compromise); provided, however, that if such
amounts are determined to be not deductible on a federal income tax return of
any Independence One Indemnitee, the FDIC Manager shall indemnify such
Independence One Indemnitee for one hundred percent (100%) of such amounts
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(all of such amounts, costs, and expenses hereinafter referred to as the
"Costs"), of (i) any claims relating to the Transferred Cases for which the
FDIC Manager would have been required to indemnify the Independence One
Indemnitees under the Assistance Agreement had such agreement not been
terminated (including without limitation, the legal fees and expenses specified
in Section 3.3 hereof); and (ii) any claim against any Independence One
Indemnitee for which the FDIC Manager would have been required to indemnify the
Independence One Indemnitees under the Assistance Agreement had such agreement
not been terminated that arises from Environmental Losses (as such term is
defined herein). For purposes of this Section 10.1(a), "Environmental Losses"
shall mean any and all claims, damages, losses, expenses, costs, deficiencies,
penalties, liens, interest, fines, assessments, charges, compensation,
obligations and liabilities of any kind imposed or incurred by, or under or
pursuant to Environmental Laws (as such term is defined herein), whether based
on negligence, strict liability or otherwise, under any theory or process of
recovery or relief, at law or in equity, including restoration, abatement,
investigation, testing, monitoring, personal injury, death and property damage
costs, and reasonable attorneys' fees, court costs, and interest paid or
accrued, related to the contamination of a property or off-site locations
arising from operations or activities on a property and the remediation
thereof. For purposes of this Section 10.1(a), "Environmental Laws" shall mean
any and all federal, state, or
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local laws (including common law), rules, regulations, orders, ordinances,
writs, judgments, injunctions, decrees, or determinations in effect during the
period of this Agreement relating to the protection of the environment, the
release of any hazardous substances into the environment, the generation,
management, transportation, storage, treatment and disposal of hazardous
substances, or the pollution of air, soil, groundwater or surface water
(including, without limitation, the Clear Air Act, the Toxic Substance Control
Act, the Clean Water Act, the Comprehensive Environmental Response,
Compensation, and Liability Act, and the Resource Conservation and Recovery
Act, all as amended).
(B) Independence One shall provide the FDIC Manager with prompt
notice of any claim which may give rise to an indemnification hereunder and (i)
cooperate with the FDIC Manager in connection with the defense of such claims,
(ii) notify and provide the FDIC Manager with any summons, complaint, or other
notice of lawsuit and any other documents directly related to such claims which
the Independence One Indemnitees receive in connection with such claims within
fifteen (15) days of receipt of such documents, and (iii) provide appropriate
documentation of the expenses for which the Independence One Indemnitees
request indemnification. The FDIC Manager may participate, at its own expense,
in the defense of such claims. The FDIC Manager may assume the defense of such
claims provided that the FDIC Manager indemnifies and holds harmless the
Independence One Indemnitees
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for any losses, costs, or expenses incurred by Independence One Indemnitees
with respect to such assumed defenses (including any reasonable costs and
expenses of litigation as specified in the first sentence of Section 10.1(a))
in connection with the FDIC Manager's defense, satisfaction, settlement, or
compromise of such defense. The FDIC Manager shall have the right to monitor
and direct the defense of any proceeding for which the FDIC Manager is
obligated to indemnify such Independence One Indemnitees pursuant to the
provisions of this Section 10.1, and the FDIC Manager shall have the right to
direct such Independence One Indemnitees to appeal any determination of any
trial court. The settlement or compromise of any claims against the
Independence One Indemnitees for which the FDIC Manager is obligated to
indemnify such Independence One Indemnitees pursuant to this Section 10.1 is
subject to the prior written approval of the FDIC Manager.
(C) The indemnification provided in Section 10.1 hereof shall not
apply to any Costs to the extent they are attributable to any of the following
(the "Exclusion Events"):
(i) the generation, treatment, transportation, storage, use,
installation or disposal by Independence One of any hazardous
substances in or on any property;
(ii) the failure of Independence One to use reasonable
efforts to protect a property against willful or wanton misconduct or
grossly negligent acts or omissions of third parties that result in
the release of hazardous substances
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on a property to the extent such efforts are required by applicable
state or federal law;
(iii) the failure of Independence One to comply in all
material respects with applicable state and federal notification,
disclosure and reporting requirements during the period of time that
it held title to a property; or
(iv) any action or failure to act on the part of Independence
One that is inconsistent with the management standard set forth in
Section 16(a) of the Assistance Agreement.
(D) The indemnification by the FDIC Manager in Section 10.1(a) shall
not be transferable except by operation of law, directly or indirectly, without
the prior written consent of the FDIC Manager.
(E) The indemnification by the FDIC Manager in Section 10.1(a) shall
expire at 11:59 p.m. Eastern Standard Time on December 31, 1998; provided,
however, that for Costs incurred after such date, the indemnification shall
continue for such Costs that are related to claims that are in litigation on
such date, up to and including the date on which all such Costs are incurred
and paid as provided in Section 10.1(f) hereof, and such litigation is finally
resolved.
(F) The FDIC Manager shall pay the Independence One Indemnitees for
any and all Costs for which such Independence One Indemnitees request
indemnification within thirty (30) days after
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the FDIC Manager has received all reasonably requested documentation of such
Costs.
SECTION 10.2 INDEMNIFICATION BY INDEPENDENCE ONE AND MNC.
Independence One and MNC shall indemnify and hold harmless the FDIC Manager and
the FRF (and each of their respective officers, directors, employees, and
affiliated persons) (the "FDIC Indemnitees") for amounts actually incurred and
paid by the FDIC Indemnitees in connection with the defense, prosecution,
satisfaction, settlement, or compromise, including the reasonable costs and
expenses of litigation (including reasonable attorneys' and accountants' fees,
travel expenses, judgments, court costs, and related litigation expenses, and
such other costs as may be incurred and paid by the FDIC Indemnitees in
connection with such defense, prosecution, satisfaction, settlement, or
compromise), of any claims relating to matters described in Sections 10.1(a)(i)
and (ii) attributable to the Exclusion Events as defined in Section 10.1(c).
The FDIC Indemnitees shall provide Independence One with prompt notice of any
claim which may give rise to an indemnification hereunder and (i) cooperate
with Independence One in connection with the defense of such claims, (ii)
notify and provide Independence One with any summons, complaint, or other
notice of lawsuit and any other documents directly related to such claims which
the FDIC Indemnitees receive in connection with such claims, and (iii) provide
appropriate documentation of the expenses for which the FDIC Indemnitees
request indemnification. Independence One or MNC may
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participate, at its own expense, in the defense of such claims. Independence
One or MNC may assume the defense of such claims provided that Independence One
or MNC indemnifies and holds harmless the FDIC Indemnitees for any losses,
costs, or expenses incurred by the FDIC Indemnitees with respect to such
assumed defenses (including any reasonable costs and expenses of litigation as
specified in the first sentence of this Section 10.2) in connection with
Independence One's or MNC's defense, satisfaction, settlement, or compromise of
such defense. Independence One or MNC shall have the right to monitor and
direct the defense of any proceeding for which Independence One and MNC are
obligated to indemnify such FDIC Indemnitees pursuant to the provisions of this
Section 10.2, and Independence One or MNC shall have the right to direct such
FDIC Indemnitees to appeal any determination of any trial court. The
settlement or compromise of any claims against FDIC Indemnitees for which
Independence One and MNC are obligated to indemnify such FDIC Indemnitees
pursuant to this Section 10.2 is subject to the prior written approval of
Independence One or MNC.
ARTICLE 11
MISCELLANEOUS
SECTION 11.1 AMENDMENTS. No amendment, modification, or waiver of any
provision of this Agreement, nor any consent to any departure therefrom by any
party, shall in any event be effective unless the same shall be embodied in a
writing signed by all parties hereto, and then such waiver or consent shall be
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effective only in the specific instance and for the specific purpose for which
given.
SECTION 11.2 NOTICES. Any notice, request, claim, demand, consent,
approval, or other communication to any party hereto shall be deemed effective
when received and shall be given in writing, and delivered in person against
receipt therefor, or sent by certified mail, postage prepaid, to such party at
its address set forth below (with copies as indicated below) or at such other
address as such party shall hereafter furnish in writing to the other parties.
(A) If to Independence One or MNC:
Independence One Bank of California, FSB
c/o Michigan National Corporation
27777 Inkster Road
Farmington Hills, Michigan 48333-9065
Attn: Lawrence C. Gladchun, Esq.
General Counsel and Senior Vice President
With a copy to:
Ernest J. Antczak
Corporate Tax Director
Michigan National Corporation
27777 Inkster Road
Farmington Hills, Michigan 48333-9065
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(B) If to the FDIC Manager:
Federal Deposit Insurance Corporation
Division of Resolutions
Assisted Acquisitions (FRF)
550 17th Street, N.W.
Washington, D.C. 20429
Attn: Assistant Director (FRF)
With copies to:
Federal Deposit Insurance Corporation
Legal Division
550 17th St., N.W.
Washington, D.C. 20429
Attn: Assistant General Counsel
(Resolutions)
and
Federal Deposit Insurance Corporation
Division of Resolutions
Assisted Acquisitions (FRF)
550 17th Street, N.W.
Washington, D.C. 20429
Attn: Chief, FRF Tax Unit
SECTION 11.3 WAIVER. Except as otherwise provided herein, no failure
or delay on the part of any party to this Agreement in exercising any right,
privilege, power, or remedy under this Agreement, and no course of dealing
among the parties hereto, shall operate as a waiver of such right, privilege,
power, or remedy; nor shall any single or partial exercise of any right,
privilege, power, or remedy under this Agreement preclude any other or further
exercise of such right, privilege, power, or remedy. The rights, privileges,
powers, and remedies available to the parties hereto are cumulative and not
exclusive of any other rights, privileges, powers, or remedies provided by
statute, at law, in equity, or otherwise. No notice to or demand
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on any party in any case shall entitle such party to any other or further
notice or demand in any similar or other circumstances or constitute a waiver
of the right of the party giving such notice or making such demand to take any
other or further action in any circumstances without notice or demand.
SECTION 11.4 GOVERNING LAW. To the extent federal law does not
control, this Agreement and the rights and obligations hereunder shall be
governed by and construed in accordance with the laws of the State of Michigan
without regard to principles of conflicts of laws thereof. Any legal action or
proceedings with respect to this Agreement shall be brought in the federal
courts of the United States of America located in the District of Columbia and
each party hereto submits to the exclusive jurisdiction of such courts and
hereby waives any objections on the grounds of venue, forum non conveniens, or
any similar grounds.
SECTION 11.5 SEVERABILITY. Whenever possible, each provision of this
Agreement shall be interpreted in such a manner as to be effective and valid
under all applicable laws. However, in the event that any provision of this
Agreement shall be held to be prohibited or invalid under any applicable law,
or declared unenforceable, then all of the remaining provisions of this
Agreement shall, to the fullest extent possible, remain in full force and
effect and shall be binding on the parties hereto; provided, however, that this
Section 11.5 shall be of no force or effect if the exclusion of such provision
or portion thereof
- 70 -
<PAGE> 72
shall render the remaining provisions of this Agreement incapable of observance
or shall cause this Agreement as a whole to fail of its essential purpose.
SECTION 11.6 SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and, except as
otherwise provided in this Agreement, their respective successors and assigns;
provided, however, that this Agreement may not be assigned (other than by
operation of law) to any person or entity, nor may any rights or obligations
under this Agreement be transferred or delegated to or vested in any other
person or entity, without the prior written consent of the FDIC Manager.
Accordingly, MNC and Independence One shall remain liable to the FDIC Manager
for all obligations under this Agreement, including the obligation to make
payments under Section 2.4 hereof, unless the FDIC Manager has provided its
prior written consent to the release of such parties.
SECTION 11.7 HEADINGS; ARTICLE AND SECTION REFERENCES. The headings
contained in this Agreement are for convenience only and shall not affect the
construction of any provision of this Agreement. Unless otherwise specifically
indicated, all Article and Section references contained herein are to Articles
and Sections of this Agreement.
SECTION 11.8 EXHIBITS. All Exhibits attached hereto are an integral
part of and hereby incorporated into this Agreement.
SECTION 11.9 ENTIRE AGREEMENT. This Agreement and the Exhibits hereto
embody the entire agreement among the parties
- 71 -
<PAGE> 73
hereto relating to the subject matters herein, and supersede all prior
agreements and understandings among the parties, oral or written, relating to
such matters.
SECTION 11.10 THIRD-PARTY BENEFICIARIES. Except as expressly
provided in this Agreement, no provision of this Agreement is intended to
benefit, nor shall it benefit, any person other than the parties hereto.
SECTION 11.11 EXECUTION IN COUNTERPARTS. This Agreement may be
executed in separate counterparts, each of which when executed and delivered
shall be deemed to be an original, and all of which taken together shall
constitute one and the same Agreement.
SECTION 11.12 CONTINUING COOPERATION. The parties hereto agree that
they shall exercise their reasonable judgment and act in good faith in
performing their duties and responsibilities under this Agreement and they
shall also in good faith, and with their best efforts, cooperate with one
another to carry out the purposes of this Agreement.
SECTION 11.13 JOINT AND SEVERAL LIABILITY OF MNC AND INDEPENDENCE
ONE. Any obligation of Independence One or MNC to the FDIC Manager under this
Agreement shall be the obligation of each of them and each shall be jointly and
severally liable to perform such obligation.
SECTION 11.14 LATE PAYMENTS. In the event any payment due to any
party under the terms of this Agreement is not made on or before the date
specified by which such payment shall be made,
- 72 -
<PAGE> 74
interest shall accrue on that payment (including any interest included therein)
at the Late Payment Rate. The "Late Payment Rate" is the base (i.e., the
prime) rate of CitiBank, N.A. in effect on the date such payment is due and
thereafter adjusted on the first day of each calendar quarter; but in no event
shall the Late Payment Rate exceed the maximum interest rate permitted by
Michigan law to be charged among the parties hereto. Notwithstanding any other
provision of this Agreement, any interest required pursuant to this Section
11.14 shall not be subject to any maximum payment restriction or cap.
SECTION 11.15 DUPLICATE PAYMENTS. Any amount paid to any party under
any provision of this Agreement or the Assistance Agreement shall not be paid
to such party under any other provision of this Agreement, even though such
payment may be described in whole or in part in two or more such provisions.
SECTION 11.16 WIRE INSTRUCTIONS. Except where otherwise specifically
provided herein, any payments pursuant to this Agreement among the parties
hereto shall be made via wire transfer instructions to be provided by the payee
to the payor at least three (3) business days prior to the due date of the
payment.
[SIGNATURE PAGE FOLLOWS]
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<PAGE> 75
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their duly authorized officers as of the day and year first
above written.
INDEPENDENCE ONE BANK OF CALIFORNIA, FSB
By: /s/ Edward H. Sondker
--------------------------
Name: Edward H. Sondker
------------------------
Title: President
-----------------------
MICHIGAN NATIONAL CORPORATION
By: /s/ Lawrence L. Gladchun
--------------------------
Name: Lawrence L. Gladchun
------------------------
Title: SVP, GC and Secretary
-----------------------
FEDERAL DEPOSIT INSURANCE
CORPORATION, AS MANAGER OF
THE FSLIC RESOLUTION FUND
By: /s/ Robert H. Harthelmer
--------------------------
Name: Robert H. Harthelmer
------------------------
Title: Acting Director - DOR
-----------------------
- 74 -
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF INCOME AND CONSOLIDATED BALANCE SHEETS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENT.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> 585,211
<INT-BEARING-DEPOSITS> 32,211
<FED-FUNDS-SOLD> 500,518
<TRADING-ASSETS> 36,522
<INVESTMENTS-HELD-FOR-SALE> 251,069
<INVESTMENTS-CARRYING> 1,036,469
<INVESTMENTS-MARKET> 1,020,933
<LOANS> 6,176,404 <F1>
<ALLOWANCE> (185,731) <F3>
<TOTAL-ASSETS> 9,207,306
<DEPOSITS> 7,512,949
<SHORT-TERM> 401,036
<LIABILITIES-OTHER> 225,001
<LONG-TERM> 70,779
<COMMON> 153,151
0
0
<OTHER-SE> 844,390
<TOTAL-LIABILITIES-AND-EQUITY> 9,207,306
<INTEREST-LOAN> 389,238
<INTEREST-INVEST> 66,910
<INTEREST-OTHER> 29,532
<INTEREST-TOTAL> 485,680
<INTEREST-DEPOSIT> 182,091
<INTEREST-EXPENSE> 189,740
<INTEREST-INCOME-NET> 295,940
<LOAN-LOSSES> 18,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 341,034
<INCOME-PRETAX> 152,009
<INCOME-PRE-EXTRAORDINARY> 152,009
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 191,626 <F2>
<EPS-PRIMARY> 12.31
<EPS-DILUTED> 12.22
<YIELD-ACTUAL> 4.68
<LOANS-NON> 145,915
<LOANS-PAST> 94,848
<LOANS-TROUBLED> 283
<LOANS-PROBLEM> 319,000
<ALLOWANCE-OPEN> 190,992
<CHARGE-OFFS> 26,313
<RECOVERIES> 5,347
<ALLOWANCE-CLOSE> 185,731
<ALLOWANCE-DOMESTIC> 185,731 <F3>
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>
Loans are net of unearned income of $25,076.
<F2>
Total non-interest income = $215,103.
<F3>
Allowance of $2,295 associated with the loans of a sold subsidiary was
eliminated.
</FN>
</TABLE>
