As filed with the Securities and Exchange Commission on November 5, 1996
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM S-3+
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
------------------
MERIT Securities Corporation
(Exact name of registrant as specified in its charter)
Virginia
(State of Incorporation)
-----------------
54-1736551
(I.R.S. Employer I.D. No.)
4880 Cox Road
Glen Allen, Virginia 23060
(804) 967-5800
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------------------
Thomas H. Potts, President With a Copy to:
MERIT Securities Corporation Kevin J. Buckley
4880 Cox Road Hunton & Williams
Glen Allen, Virginia 23060 Riverfront Plaza, East Tower
(804) 967-5800 951 East Byrd Street
Richmond, Virginia 23219-4074
(Name, address, including zip code and telephone
number, including area code, of agent for service)
--------------------------
Approximate date of commencement of proposed sale
to the public: From time to time after the effective
date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, please check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_| _________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_| _________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
================================================================================================================================
<S> <C>
Proposed Proposed
Title of Each Class Amount Maximum Maximum
of Securities to be to be Offering Price Aggregate Amount of
Registered Registered* Per Unit* Offering Price* Registration Fee
- --------------------------------------------------------------------------------------------------------------------------------
Collateralized Mortgage Bonds $2,000,000,000 100% $2,000,000,000 $606,061
================================================================================================================================
</TABLE>
* Estimated solely for calculating the registration fee.
The within Prospectus and related Prospectus Supplements cover the
$2,000,000,000 in principal amount of Collateralized Mortgage Bonds being
registered hereunder, plus the $2,000,000,000 in principal amount of
Collateralized Mortgage Bonds registered by the Registrant under Registration
Statement No. 33-99316 on Form S-3, $161,482,410 of which is being carried
forward. The registration fees in respect to the Collateralized Mortgage Bonds
registered under Registration Statement No. 33-99316 were paid at the time of
the filing of that Registration Statement.
--------------------------
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that the Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- --------------------------------------------------------------------------------
+In addition, pursuant to Rule 429, this Registration Statement on Form S-3
constitutes Post-Effective Amendment No. 3 to Registration Statement No.
33-99316 on Form S-3 (filed by Registrant on November 14, 1995).
<PAGE>
<PAGE>
MERIT Securities Corporation
Collateralized Mortgage Bonds
(Issuable in Series)
MERIT Securities Corporation (the "Issuer") may sell from time to time
under this Prospectus and related Prospectus Supplements various series (each, a
"Series") of its Collateralized Mortgage Bonds (the "Bonds"). Capitalized terms
not otherwise defined herein have the meanings specified in the Glossary.
Each Series of Bonds will be secured primarily by collateral (the "Mortgage
Collateral") consisting of one-to four-family mortgage loans (the "Mortgage
Loans"). If specified in the related Prospectus Supplement, the Mortgage
Collateral securing a Series of Bonds may include Mortgage Loans secured by
second liens on residential properties, properties acquired by foreclosure or
deed-in-lieu of foreclosure ("REO Properties"), and Mortgage Loans that are past
due or non-performing as of the Cut-off Date. A Series of Bonds also may be
secured by certain debt service funds, Reserve Funds, Insurance Policies,
servicing agreements, additional mortgage collateral, and other credit support
as specified in the related Prospectus Supplement (together with the Mortgage
Collateral, the "Collateral").
The Mortgage Loans will have been originated by one or more affiliates of
the Issuer, by various financial institutions, and by other entities engaged
generally in the business of originating and/or servicing residential mortgage
loans. The Mortgage Loans may include fixed rate or adjustable rate loans, as
specified in the related Prospectus Supplement. See "Security for the
Bonds -- The Mortgage Loans" herein. The Mortgage Loans may be underwritten in
accordance with the underwriting standards for "non-conforming credits," which
include mortgagors whose creditworthiness and repayment ability do not satisfy
FNMA or FHLMC underwriting guidelines. Mortgage Loans underwritten pursuant to
underwriting standard for "non-conforming credits" will be likely to experience
rates of delinquency and foreclosure that are higher, and may be substantially
higher, than mortgage loans originated in accordance with FNMA or FHLMC
underwriting guidelines. As a result, losses on such Mortgage Loans may be
higher than losses on mortgage loans originated in accordance with such
guidelines. See "Risk Factors -- Underwriting Standards and Potential
Delinquencies" herein. The Mortgage Loans securing a Series will be serviced by
one or more Servicers that are subject to supervision by Resource Mortgage
Capital, Inc. ("Resource"), as Master Servicer. The Master Servicer's and each
Servicer's obligations will be limited to its contractual, supervisory and/or
servicing obligations. Unless otherwise specified in the related Prospectus
Supplement, each Servicer and the Master Servicer will be obligated under
certain circumstances to make Advances. See "Servicing of Mortgage Loans"
herein.
The Prospectus Supplement or Supplements relating to a Series of Bonds will
set forth, among other things, the following information if applicable to such
Series: (i) the Class or Classes of Bonds and authorized denominations of each
Class of Bonds of such Series; (ii) the aggregate principal amount, interest
rate (or method of determining the interest rate), payment dates and stated
maturity dates for each Class of Bonds; (iii) the order of application of
principal and interest payments to one or more Classes of Bonds of such Series,
which may differ as to timing, sequential order, priority of payment or amount
of payments of principal or interest or both; (iv) certain information as to the
nature of the Mortgage Loans and any other assets securing such Series; (v) the
redemption features pertaining to such Series; (vi) additional information with
respect to the form of any credit enhancement securing one or more Classes of
such Series; and (vii) additional information with respect to the plan of
distribution of Bonds of each Class of such Series. See "Description of the
Bonds" herein.
Bonds of a Series will be characterized for federal income tax purposes as
debt instruments. No election will be made to treat any Series of Bonds and the
related Collateral as a real estate mortgage investment conduit (a "REMIC") for
federal income tax purposes. See "Certain Federal Income Tax Consequences"
herein.
It is intended that the Bonds of a Series will be payable from the
Collateral pledged to secure the Bonds of that Series or other Series sold from
time to time under this Prospectus. The Issuer has no significant assets other
than those pledged as security for the Bonds. There will be no recourse to the
Issuer. Except as otherwise provided in a related Prospectus Supplement, neither
the Mortgage Loans nor the Bonds will be guaranteed or insured by any
governmental agency or any other party.
Under certain circumstances, the Issuer may pledge additional mortgage
loans or mortgage certificates ("Additional Mortgage Collateral") to the Trustee
and issue additional Bonds ("Additional Bonds") of a Series. Any such pledge of
Additional Mortgage Collateral and issuance of Additional Bonds may affect the
timing and amount of payments on any outstanding Bonds of that Series and an
investor's yield on any such outstanding Bonds. See "Security for the
Bonds -- Pledge of Additional Collateral and Issuance of Additional Bonds"
herein.
See "Risk Factors" on page 7 for a discussion of certain risk factors that
should be considered before purchasing Bonds of a Series.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales offered hereby unless accompanied by a related
Prospectus Supplement.
The date of this Prospectus is November 5, 1996
<PAGE>
ADDITIONAL INFORMATION
The Issuer has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Bonds. This Prospectus, which is a part of the
Registration Statement, omits certain information contained in such Registration
Statement pursuant to the rules and regulations of the Commission. The
Registration Statement and the exhibits thereto can be inspected and copied at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at certain of its Regional Offices
located as follows: Chicago Regional Office, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511; and New York Regional Office, 7 World Trade
Center, New York, New York 10048. Copies of such material can also be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The statements contained in this
Prospectus concerning the contents of any contract or other document referred to
are not necessarily complete. Although such statements disclose all material
provisions of such contract or other document, where such contract or other
document is an exhibit to the Registration Statement, reference is made to such
exhibit for a full statement of the provisions thereof.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by the Issuer pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934 after the date of this Prospectus
and prior to the termination of the offering of the Bonds hereunder shall be
deemed to be incorporated into and made a part of this Prospectus from the date
of filing of such documents.
The Issuer hereby undertakes to provide a copy of any and all information
that has been incorporated by reference into the Registration Statement (not
including exhibits to the information so incorporated by reference unless such
exhibits are specifically incorporated by reference into the information that
the Registration Statements incorporate) upon written or oral request of any
person, without charge to such person, provided that such request is made to
MERIT Securities Corporation, 4880 Cox Road, Glen Allen, Virginia 23060 (804)
967-5800.
REPORTS TO BONDHOLDERS
The Issuer will cause to be provided to Bondholders the monthly remittance
reports concerning the Trust Estate securing the Bonds and the annual reports
concerning the Issuer. See "The Indenture -- Reports to Bondholders" herein.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to each Series of Bonds contained in the related
Prospectus Supplement and Indenture to be prepared and delivered in connection
with the offering of Bonds of such Series.
Capitalized terms used herein and not defined herein will have the
respective meanings assigned to them in the "Glossary."
<TABLE>
<S> <C>
Issuer........................ MERIT Securities Corporation, a wholly-owned, limited-purpose financing subsidiary of Resource
Mortgage Capital, Inc. ("Resource"). Resource has not guaranteed, and is not otherwise
obligated with respect to, the Bonds of any Series. See "The Issuer" and "Resource Mortgage
Capital, Inc." herein.
Title of Bonds................ Collateralized Mortgage Bonds (the "Bonds"), issuable in Series, all as more fully described in
the related Prospectus Supplement. The Bonds may be issued from time to time in Series pursuant
to an indenture (the "Original Indenture") between the Issuer and Texas Commerce Bank National
Association, as trustee (the "Trustee") (or such other Trustee as may be specified in the
related Prospectus Supplement), as supplemented by an indenture supplement for each Series (a
"Series Supplement") (the Original Indenture as so supplemented, the "Indenture").
Interest Payments............. The Bonds of each Class of a Series will bear interest on their outstanding principal amounts
at the rate specified (the "Class Interest Rate"), or determined as specified, in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus Supplement,
interest on each Class of Bonds will be paid periodically on the dates specified in the related
Prospectus Supplement (each, a "Payment Date"). Each such payment of interest will include all
interest either accrued through the Accounting Date immediately preceding the Payment Date on
which it is made or to another date indicated in the related Prospectus Supplement. See
"Description of the Bonds -- Payments of Principal and Interest" and "Certain Federal Income
Tax Consequences."
Principal Payments............ To the extent specified in the related Prospectus Supplement, payments on the Mortgage
Collateral securing a Series, together with withdrawals from various debt service and Reserve
Funds, if any, will be available to pay principal of and interest on the Bonds of a Series. The
related Prospectus Supplement may specify that the payments received on the Collateral will be
distributed (i) so as to prioritize certain Classes of Bonds of a Series, (ii)
disproportionately among the various Classes of Bonds or (iii) to secure one or more Series
sold pursuant to this Prospectus. On each Payment Date for a Series, provided funds are
available therefore, principal will be paid on the Bonds in an amount equal to the Principal
Distribution Amount or such other amount as may be specified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement, the Principal
Distribution Amount on any Payment Date will equal the amount by which (i) the aggregate
Collateral Value of the Mortgage Collateral securing the Series as of the preceding Payment
Date (or, with respect to the first Payment Date, as of the Cut-off Date for such Series)
exceeds (ii) the aggregate Collateral Value of the Mortgage Collateral securing the Series as
of the current Payment Date. See "Description of the Bonds -- Payments of Principal and
Interest."
Redemption at Option of
Issuer...................... To the extent specified in the related Prospectus Supplement, any Class of Bonds may be subject
to redemption at the option of the Issuer prior to its Stated Maturity Date. See "Description
of the Bonds -- Redemption." Security for the Bonds Each Series of Bonds will be secured by
Collateral consisting primarily of one or more of the following, each of which will be more
specifically described in the Prospectus Supplement for such Series:
A. Mortgage
Collateral............... The Bonds of a Series may be secured by (i) conventional fixed or adjustable rate mortgage
loans secured by mortgages or deeds of trust on properties consisting of single family (one- to
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
four-family) attached or detached residential housing ("Mortgage Loans") and (ii) certain other
assets evidencing interests in loans secured by such residential property. If specified in the
related Prospectus Supplement, the Mortgage Collateral securing a Series of Bonds may include
Mortgage Loans secured by second liens on residential properties, REO Properties and Mortgage
Loans that are past due or non-performing as of the Cut-off Date.
Mortgage Loans and other similar assets are herein referred to collectively as "Mortgage
Collateral." The Mortgage Collateral securing the Bonds of a Series will have an aggregate
Collateral Value (as defined in the Glossary) initially equal to at least the original
aggregate principal amount of such Bonds. Assuming no losses, scheduled payments of principal
of and interest on the Mortgage Collateral with respect to a Series (together with payments
from the Reserve Funds for such Series) net of applicable servicing, master servicing,
administration and guarantee fees and insurance premiums, if any, all as specified in the
related Prospectus Supplement, are intended to be sufficient to make the required payments of
interest on the Bonds of such Series and to pay the principal of each Class of Bonds of such
Series not later than its Stated Maturity Date. See "Security for the Bonds."
B. Collateral Proceeds
Account.................. All distributions (net of servicing and master servicing fees and other credit enhancement and
administrative costs described herein) on the Mortgage Loans will be remitted to the Collateral
Proceeds Account for the Bonds and will be available for application to the payment of
principal of and interest on the Bonds on the related Payment Date to the extent specified in
the Prospectus Supplement. See "Security for the Bonds -- Collateral Proceeds Account" and
" -- Master Servicer Custodial Account."
C. Reserve Funds............ If specified in the Prospectus Supplement for a Series, the Issuer will deposit cash,
securities, certificates of deposit, letters of credit or other instruments or documents
acceptable to the Rating Agencies for such Series in one or more Reserve Funds that may be used
by the Trustee for such Series to make any required payments of principal or interest on
Classes of Bonds of such Series to the extent funds are not otherwise available. The amount of
any deposit to the Reserve Fund will be specified in the Prospectus Supplement for the Series.
The Issuer will have certain rights on any Payment Date to cause the Trustee to release funds
to the Issuer from the Reserve Fund provided that such funds are not needed on such Payment
Date to make a required payment of principal or interest on Classes of Bonds of that Series.
See "Security for the Bonds -- Reserve Fund or Accounts."
D. Credit
Enhancement.............. If so specified in the related Prospectus Supplement for a Series, in addition to, or in lieu
of, a Reserve Fund or Insurance Policies, the Trust Estate with respect to such Series may
include one or any combination of a letter of credit, guarantees, pledge of additional
collateral by an institution acceptable to the Rating Agencies or other form of credit
enhancement to provide full or partial coverage for certain defaults and losses relating to the
Mortgage Collateral.
E. Bond
Insurance................ To the extent specified in the related Prospectus Supplement for a Series, a financial guaranty
policy may be acquired with respect to one or more Classes of Bonds. Such policy may be
acquired for the purposes of guaranteeing timely payment of interest and timely or ultimate
payment of principal on certain Classes of Bonds.
F. Surplus Amounts.......... To the extent specified in the related Prospectus Supplement, amounts in the Collateral
Proceeds Account in excess of the amount required to pay principal of and interest on the Bonds
of a Series and certain expenses will be "Surplus." All or a portion of the Surplus may be (i)
distributed to the Issuer and released from the lien of the Indenture or (ii) applied to cover
Losses for such Series or other Series on each Payment Date.
Servicing..................... The Mortgage Loans securing a Series will be serviced by one or more servicers specified in the
related Prospectus Supplement (each, a "Servicer"). Each Servicer will be supervised by the
Master Servicer and must be approved by the Master Servicer. In addition, each Servicer
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
generally must be approved or will utilize a sub-servicer that is approved by FNMA or FHLMC as
a servicer of mortgage loans. Unless otherwise specified in the related Prospectus Supplement,
each Servicer will be obligated under a Servicing Agreement (i) to perform customary servicing
functions and (ii) to make limited advances of funds (each, an "Advance") to cover certain
payments not made by a Borrower to the extent such Advance is deemed by the Master Servicer to
be recoverable out of future payments on the Mortgage Loan by the Borrower, Insurance Proceeds,
Liquidation Proceeds or as otherwise provided in the related Prospectus Supplement. Any
Servicer may delegate duties under its Servicing Agreement to a qualified sub-servicer (each, a
"Sub-Servicer"), which may be either an affiliate of such Servicer or an unrelated third party.
The Issuer will assign to the Trustee its rights under each Servicing Agreement as security for
the Bonds of the Series. See "Servicing of Mortgage Loans -- General."
Master Servicer............... Resource will act as Master Servicer (in such capacity, the "Master Servicer") with respect to
all of the Mortgage Loans pursuant to a Master Servicing Agreement between the Master Servicer
and the Issuer. The Master Servicer will administer and supervise the performance of the
Servicers under the Servicing Agreements and will be obligated to perform the servicing
obligations of a terminated servicer or appoint a successor servicer. In addition, the Master
Servicer will provide certain reports to the Trustee regarding the Mortgage Loans, provide
certain administrative functions with respect to the Bonds and, unless otherwise specified in
the related Prospectus Supplement, may make limited Advances. However, in no event will the
Master Servicer be obligated to make an Advance that is deemed by it to be a Non-Recoverable
Advance. The Issuer will assign to the Trustee its rights to enforce the obligations of the
Master Servicer under the Master Servicing Agreement as security for the Bonds of the Series.
See "Servicing of Mortgage Loans -- Master Servicing Agreement."
Special Servicer.............. If specified in the related Prospectus Supplement, the Master Servicer may appoint a special
servicer (the "Special Servicer") to service, make certain decisions and take various actions
with respect to delinquent or defaulted Mortgage Loans pledged as security for such Series. See
"Servicing of Mortgage Loans -- Special Servicing Agreement."
Certain Federal Income
Tax Consequences............ Based on the facts as they exist on the Closing Date, the Bonds, when beneficially owned by
someone other than the Participant or one of its qualified real estate investment trust
("REIT") subsidiaries (as defined in section 856(i) of the Code), will constitute debt
instruments for federal income tax purposes. See "Certain Federal Income Tax Consequences"
herein.
Yield Considerations.......... The Prospectus Supplement for a Series may specify certain yield considerations for Bondholders
of Discount Bonds or Premium Bonds. A higher rate of principal payments on the Mortgage
Collateral than was anticipated when pricing the Bonds of a particular Class is likely to have
an adverse effect on the yield of any Class of Bonds (a "Premium Class" or "Premium Bonds")
that has a purchase price greater than the price at which the yield to maturity of such Class
is equal to its coupon, after giving effect to any payment delay (its "Parity Price"), and a
lower rate of principal payments on the Mortgage Collateral than anticipated is likely to have
an adverse effect on the yield of any Class of Bonds that has a purchase price less than its
Parity Price (a "Discount Class" or "Discount Bonds"). It is possible under certain
circumstances that Bondholders of Premium Bonds not only will suffer a lower than anticipated
yield but, in extreme cases, will fail to recoup fully their initial investment.
Use of Proceeds............... The Issuer will use the net proceeds from the sale of each Series for one or more of the
following purposes: (i) to purchase the related Mortgage Collateral, (ii) to repay
indebtedness, if any, that has been incurred to obtain funds to acquire such Mortgage
Collateral, (iii) to establish any Reserve Funds described in the related Prospectus Supplement
and (iv) to pay costs of structuring and issuing such Bonds. See "Use of Proceeds."
Legal Investment.............. The Bonds of any Class offered by the related Prospectus Supplement may constitute "mortgage
related securities" under the Secondary Mortgage Market Enhancement Act of
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
1984 ("SMMEA") so long as they are secured by first liens on residential properties and are
rated in one of the two highest rating categories by at least one of the Rating Agencies
identified in such Prospectus Supplement. Any such securities would be "legal investments" for
certain types of institutional investors to the extent provided in SMMEA, subject to state laws
overriding SMMEA. Institutions whose investment activities are subject to review by federal or
state regulatory authorities should consult with their counsel or the applicable authorities to
determine whether an investment in such Class of Bonds complies with applicable guidelines,
policy statements or restrictions. See "Legal Investment."
ERISA Considerations.......... A fiduciary of an employee benefit plan and certain other retirement plans and arrangements,
including individual retirement accounts and annuities, Keogh plans, and collective investment
funds and separate accounts in which such plans, accounts, annuities or arrangements are
invested, which is subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Code (each such entity, a "Plan") should carefully review
with its legal advisors whether the purchase or holding of Bonds could give rise to a
transaction that is prohibited or is not otherwise permissible either under ERISA or under
Section 4975 of the Code. Investors are advised to consult their counsel and to review "ERISA
Considerations" herein. As specified in the related Prospectus Supplement, Plans may be
prohibited from acquiring certain Classes of Bonds.
Rating........................ Each Class of Bonds offered by means of this Prospectus and the related Prospectus Supplement
will initially be rated in one of the four highest rating categories by one or more Rating
Agencies identified in such Prospectus Supplement. Such ratings are subject to review and
possible revision from time to time.
</TABLE>
6
<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with an investment in the Bonds.
Credit Considerations
General. The Issuer is expected to have no significant assets other than
the Collateral. For that reason, prospective purchasers of the Bonds of a Series
must rely primarily upon payments of principal of and interest on such
Collateral, the security therefor and sources of credit enhancement identified
in the related Prospectus Supplement to provide for payments on the Bonds. A
Mortgage Loan typically is made based upon a determination of the Borrower's
ability to make Monthly Payments on his Mortgage Loan and upon the value of the
Mortgaged Premises secured thereby. The ability of a Borrower to make Monthly
Payments will be dependent on the availability of jobs and general economic
conditions. The value of an investment in Bonds of a Series may be adversely
affected by a decline in real estate values. If the residential real estate
market in the area of one or more of the Mortgaged Premises should experience an
overall decline in property values, the actual rate of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. In addition, to the extent that the Mortgage
Loans are underwritten pursuant to underwriting guidelines that are less
stringent than the underwriting guidelines of FNMA and FHLMC with respect to the
mortgagor's creditworthiness and repayment ability, the rates of delinquencies
and foreclosures experienced on the Mortgage Loans are likely to be
substantially higher than those experienced by mortgage loans underwritten in
accordance with FNMA and FHLMC underwriting guidelines. As a result, losses on
the Mortgage Loans may be higher than those on mortgage loans originated in
accordance with such guidelines. See "Risk Factors -- Underwriting Standards and
Potential Delinquencies." To the extent that such losses are not covered by
applicable insurance policies, if any, or by any credit enhancement as described
herein, Holders of the Bonds of a Series will bear all risk of loss resulting
from default by mortgagors and will have to look primarily to the value of the
Mortgaged Premises for recovery of the outstanding principal and unpaid interest
of the defaulted Mortgage Loans. As described in the related Prospectus
Supplement, the risk of loss associated with such Mortgage Loans may be
allocated disproportionately among the Classes of Bonds that comprise a Series
to the extent that such losses are not covered by applicable Insurance Policies,
additional mortgage collateral or other credit enhancement. Such losses could
result in an Event of Default. See "The Indenture -- Events of Default."
As further described in the applicable Prospectus Supplement, Balloon
Payment Mortgage Loans include Mortgage Loans that provide for amortization of
the principal amount over a certain period (for example, 30 years), although all
remaining principal is due at the end of a shorter period (for example, 15
years). The final balloon payment on a Balloon Payment Mortgage Loan will be
treated as a prepayment of that Mortgage Loan. The ability of a Borrower to make
the final "balloon" payment may be dependent upon the Borrower's ability to
refinance the Balloon Payment Mortgage Loan or sell the related Mortgaged
Premises for an amount equal to or greater than the unpaid principal balance of
the Mortgage Loan. Under certain circumstances (for example, in a rising
interest rate environment), a Borrower may be unable to secure refinancing for
such loan or to sell the related Mortgaged Premises. Accordingly, Balloon
Payment Mortgage Loans may be subject to a higher risk of delinquency, loss, and
foreclosure than certain other types of mortgage loans.
In addition, ARM Loans and Buy-Down Mortgage Loans may be underwritten on
the basis of an assessment that the Borrower will have the ability to make
payments in higher amounts in later years and, in the case of certain ARM Loans,
after relatively short periods of time. Accordingly, defaults on ARM Loans and
Buy-Down Mortgage Loans leading to foreclosure and the ultimate liquidation of
the related Mortgaged Premises may occur with greater frequency in the early
years of such loans, although little data is available with respect to the rate
of default on such loans. Increases in the required monthly payments on such
loans may result in a default rate that is higher than that for fixed rate
Mortgage Loans. If specified in the related Prospectus Supplement, losses on
Mortgage Loans that exceed levels estimated by a Rating Agency rating the Series
in determining required levels of overcollateralization or other credit support
could result in an Event of Default. See "The Indenture -- Events of Default."
As specified in the related Prospectus Supplement, in order to maximize
recoveries on defaulted Mortgage Loans, the Master Servicer will have
considerable flexibility under the Master Servicing Agreement to extend and
modify the terms of Mortgage Loans that are in default or as to which a payment
default is reasonably foreseeable, including in particular Mortgage Loans with
balloon payments. In addition, the Master Servicer may receive a workout fee
based on receipts from or proceeds of such Mortgage Loans. While the Master
Servicer generally will be required to determine that any such extension or
modification is likely to produce a greater recovery on a present value basis
than liquidation, there can be no assurance that such flexibility with respect
to extensions or modifications or payment of a workout fee to the Master
Servicer will increase the present value of receipts from or proceeds of
Mortgage Loans that are in default or as to which a default is reasonably
7
<PAGE>
foreseeable. To the extent losses on such Mortgage Loans exceed levels of
available credit enhancement, the holders of the Bonds of a Series may
experience a loss.
Delinquent and Non-Performing Mortgage Loans. As set forth in the related
Prospectus Supplement, the Mortgage Collateral for a particular Series may
include, as of the Cut-off Date, REO Properties or Mortgage Loans that are past
due or are non-performing. If so specified in the related Prospectus Supplement,
management of such REO Properties or servicing with respect to such Mortgage
Loans may be transferred to a Special Servicer. Credit enhancement provided with
respect to a particular Series may not cover all losses related to such REO
Properties or to such delinquent or non-performing Mortgage Loans. Investors
should consider the risk that the inclusion of such REO Properties or such
Mortgage Loans in a Series may affect the rate of defaults and prepayments on
the Mortgage Collateral and the yield on the Bonds of such Series. See "Security
for the Bonds -- The Mortgage Loans."
Insurance and Credit Support Limitations. The Insurance Policies, if any,
on the Mortgage Loans or the obligation to deliver Additional Mortgage
Collateral, if any, with respect to a Series will not cover all contingencies
and will cover certain contingencies only to a limited extent. See "Security for
the Bonds -- Mortgage Insurance on the Mortgage Loans." The amount, type and
nature of insurance policies, subordination, letters of credit and other credit
support, if any, required with respect to a Series will be determined on the
basis of actuarial criteria established by each Rating Agency rating such
Series. Such actuarial analysis is the basis upon which each Rating Agency
determines required amounts and types of pool insurance, special hazard
insurance, Reserve Funds, overcollateralization or other credit support. There
can be no assurance that the historical data supporting such actuarial analysis
will accurately reflect future experience or any assurance that the data derived
from a large pool of housing loans will accurately predict the delinquency,
foreclosure or loss experience of any particular pool of Mortgage Loans.
Second Lien Mortgage Loans
An overall decline in the residential real estate market could adversely
affect the values of the properties securing the Mortgage Loans with second
liens such that the outstanding principal balances, together with any senior
financing thereon, exceed the value of the Mortgaged Premises. Because Mortgage
Loans secured by second liens are subordinate to the rights of the beneficiaries
under the related senior deeds of trust or senior mortgagees, such a decline
would adversely affect the position of the related Trust Estate as a junior
beneficiary or junior mortgagee before having such an effect on the position of
the related senior beneficiaries or senior mortgagees. A rise in prevailing
interest rates over a period of time, the general condition of a Mortgaged
Premises and other factors may also have the effect of reducing the value of the
Mortgaged Premises from the value at the time the second lien Mortgage Loan was
originated. As a result, the ratio of the amount of the Mortgage Loan to the
value of the Mortgaged Premises may exceed the ratio in effect at the time the
Mortgage Loan was originated. Such an increase may reduce the likelihood that,
in the event of a default by the Borrower, Liquidation Proceeds or other
proceeds will be sufficient to satisfy the second lien Mortgage Loan after
satisfaction of any senior liens and the payment of any Liquidation expenses.
Even assuming that the Mortgaged Premises provide adequate security for the
second lien Mortgage Loans, substantial delay could be encountered in connection
with the liquidation of defaulted Mortgage Loans and corresponding delays in the
receipt of related proceeds available for payment to Bondholders and thereby
reduce the security for the second lien Mortgage Loans. In the event that any
Mortgaged Premises fail to provide adequate security for the related second lien
Mortgage Loans and any related credit enhancement has been exhausted,
Bondholders would experience a loss.
Liquidation expenses with respect to defaulted mortgage loans generally do
not vary directly with the outstanding principal balance of the mortgage loans
at the time of default. Therefore, assuming that a Servicer or Special Servicer
took the same steps in realizing upon defaulted Mortgage Loans having small
remaining principal balances as in the case of defaulted Mortgage Loans having
larger principal balances, the amount realized after expenses of Liquidation
would be smaller as a percentage of the outstanding principal balance of the
smaller Mortgage Loans. To the extent that the average outstanding principal
balances of the Mortgage Loans in a Trust Estate are relatively small,
realizations net of Liquidation expenses may also be relatively small as a
percentage of the principal amount of the Mortgage Loans.
Limited Liquidity
There can be no assurance that a secondary market for the Bonds of any
Series will develop or, if it does develop, that it will provide Bondholders of
such Series with liquidity of investment or will remain for the term of such
Series of Bonds. In addition, if such a market does develop and continue, the
market value of Bonds of each Series may fluctuate with changes in prevailing
rates of interest and other factors. Consequently, the sale of Bonds by a
Bondholder in any secondary market that
8
<PAGE>
may develop may be at a discount from their purchase price. Except as otherwise
specified in the related Prospectus Supplement, Bondholders will have no
optional redemption rights.
Bankruptcy or Insolvency of the Issuer
The bankruptcy or insolvency of the Issuer could adversely affect payments
on the Bonds. For this reason, the Issuer was formed as a limited-purpose
financing subsidiary of Resource. See "The Issuer." Notwithstanding its limited
purpose, in the event of a bankruptcy or insolvency of the Issuer, the automatic
stay imposed by Title 11 of the United States Code (the "Bankruptcy Code") could
prevent enforcement of the obligations of the Issuer, including its obligations
under the Bonds and the Indenture, or actions against any of the Issuer's
property, including the Collateral, prior to modification of the stay. In
addition, the trustee in bankruptcy for the Issuer may be able to accelerate
payment of the Bonds and liquidate the Collateral. In the event the principal of
the Bonds is declared due and payable, the Bondholders would lose the right to
future payments of interest and might suffer reinvestment loss in a lower
interest rate environment and, (i) in the case of Premium Bonds, may fail to
fully recover their initial investments, and (ii) in the case of Discount Bonds,
may be entitled, under applicable provisions of the Bankruptcy Code, to receive
no more than an amount equal to the unpaid principal amount thereof less
unamortized original issue discount ("Accreted Value"). There is no assurance as
to how such Accreted Value would be determined if such event occurred.
Bankruptcy or Insolvency of Resource
The Issuer believes that each transfer of Mortgage Collateral from Resource
to the Issuer will constitute an absolute and unconditional sale. However, in
the event of the bankruptcy of Resource, a trustee in bankruptcy could attempt
to recharacterize the sale of the Mortgage Collateral as a borrowing secured by
a pledge of the Mortgage Collateral. Such an attempt, even if unsuccessful,
could result in delays in distributions on the Bonds. If such an attempt were
successful, the trustee in bankruptcy could elect to accelerate payment of the
Bonds and liquidate the Mortgage Collateral, with the holders of the Bonds
entitled to no more than the then outstanding principal amount of such Bonds
together with interest at the applicable Class Interest Rate to the date of
payment. There is no assurance that the proceeds of any such sale would be
sufficient to pay such amounts. In the event the principal of the Bonds is
declared due and payable, the Bondholders of the Bonds would lose the right to
future payments of interest and might suffer reinvestment loss in a lower
interest rate environment and, (i) in the case of Premium Bonds, may fail to
fully recover their initial investments, and (ii) in the case of Discount Bonds,
may be entitled, under applicable provisions of the Bankruptcy Code, to receive
no more than an amount equal to the Accreted Value. There is no assurance as to
how such Accreted Value would be determined if such event occurred.
Deficiency on Sale of Collateral
In the event of an acceleration of the payment of the Bonds following an
Event of Default for a Series, if the assets securing the Bonds of such Series
were to be sold, there can be no assurance that the proceeds of any such sale
would be sufficient to pay in full the outstanding principal amount of the
related Bonds and interest payments due thereon. The market value of the assets
generally will fluctuate with changes in prevailing rates of interest.
Consequently, the Mortgage Collateral and any Eligible Investments in which the
funds deposited in the Collateral Proceeds Account and any Reserve Funds for a
Series may be invested may be liquidated at a discount, in which case the
proceeds of liquidation might be less than the aggregate outstanding principal
amount and interest payable on the Bonds of that Series. Unless otherwise
specified in the related Prospectus Supplement, except under limited
circumstances, the Holders of Subordinated Bonds will have no independent
ability to declare a default or force the sale of the Mortgage Collateral even
if an Event of Default has occurred. See "The Indenture -- Events of Default"
herein.
Underwriting Standards and Potential Delinquencies
The Mortgage Loans will be adjustable rate and fixed rate loans. Mortgage
Loans originated under underwriting standards less stringent than the
underwriting guidelines of FNMA or FHLMC generally will bear higher rates of
interest than mortgage loans that are originated in accordance with FNMA and
FHLMC underwriting guidelines. The Mortgage Loans generally will be underwritten
in accordance with the underwriting standards described under "Origination of
the Mortgage Loans," which are intended to provide for the origination of
single-family mortgage loans for non-conforming credits. A mortgage loan made to
a "non-conforming credit" means a mortgage loan that is ineligible for purchase
by FNMA or FHLMC due to mortgagor credit characteristics that do not meet FNMA
or FHLMC underwriting guidelines, including a loan made to a Borrower whose
creditworthiness and repayment ability do not satisfy such FNMA or FHLMC
underwriting guidelines or a Borrower who may have a record of major derogatory
credit items such as default on a prior mortgage loan,
9
<PAGE>
credit write-offs, outstanding judgments and prior bankruptcies. Accordingly,
the Mortgage Loans are likely to experience rates of delinquency and foreclosure
that are higher, and may be substantially higher, than mortgage loans originated
in accordance with FNMA or FHLMC underwriting guidelines. As a result, losses on
the Mortgage Loans may be higher than losses on mortgage loans originated in
accordance with such guidelines.
Under the underwriting standards described under "Origination of the
Mortgage Loans," the primary considerations in underwriting a Mortgage Loan are
the assessment of the creditworthiness of the Borrower, the value of the
Mortgaged Premises and the adequacy of such property as collateral in relation
to the amount of the Mortgage Loan. Because the Borrowers on the Mortgage Loans
originated under underwriting standards for non-conforming credit are less
creditworthy than Borrowers who meet FNMA or FHLMC underwriting criteria,
delinquencies and foreclosures may be more prevalent with respect to the
Mortgage Loans than with respect to mortgage loans originated in accordance with
FNMA or FHLMC underwriting guidelines. Therefore, changes in the values of the
Mortgaged Premises may have a greater effect on the loss experience of the
Mortgage Loans than on mortgage loans originated in accordance with FNMA or
FHLMC underwriting guidelines. No assurance can be given that the values of the
Mortgaged Premises have remained or will remain at the levels in effect on the
dates of origination of the related Mortgage Loans. If the values of the
Mortgaged Premises decline after the dates of origination of the Mortgage Loans,
then the rate of losses on the Mortgage Loans may increase, and such increase
may be substantial.
Modification and Substitution of Mortgage Loans
If a Mortgage Loan is in material default or a payment default is imminent,
the related Servicer, with the consent of the Master Servicer, may enter into a
forbearance or modification agreement with the Borrower. The terms of any such
forbearance or modification agreement may affect the amount and timing of
principal and interest payments on the Mortgage Loan and, consequently, may
affect the amount and timing of payments on one or more Classes of the related
Series of Bonds. For example, a modification agreement that results in a lower
Note Rate would lower the Class Interest Rate of any related Class of Bonds that
accrues interest at a rate based on the weighted average Net Rate of the
Mortgage Loans. See "Servicing of the Mortgage Loans -- Defaulted Mortgage
Loans."
In addition, under certain circumstances, the Issuer may substitute a
mortgage loan (a "Substitute Mortgage Loan") for a defaulted Mortgage Loan or
REO. The terms of the Substitute Mortgage Loan may differ from those of the
Mortgage Loan for which it is substituted. In particular, the Note Rate of the
Substitute Mortgage Loan may be less than that of the Mortgage Loan for which it
is substituted and, indeed, may be less than the then current market interest
rate for mortgage loans with similar characteristics. The substitution of a
Substitute Mortgage Loan with a Note Rate less that that of the Mortgage Loan
for which it is substituted will reduce the Class Interest Rate of any related
Class of Bonds with a Class Interest Rate based on the Note Rates or Net Rates
of the Mortgage Loans. Furthermore, any Bondholder that would be entitled to
receive payments based on the Collateral Value of the defaulted Mortgage Loan or
REO upon Liquidation of such defaulted Mortgage Loan or REO may prefer that such
defaulted Mortgage Loan or REO be Liquidated rather than have it replaced with a
Substitute Mortgage Loan, particularly if the Substitute Mortgage Loan has a
Note Rate less than the then current market interest rate for mortgage loans
with similar characteristics. See "Security for the Bonds -- Substitution of
Mortgage Collateral."
As a condition to any modification or forbearance related to any Mortgage
Loan or to the substitution of a Substitute Mortgage Loan, the Master Servicer
is required to determine, in its reasonable business judgment, that such
modification, forbearance or substitution will maximize the recovery on such
Mortgage Loan on a present value basis. However, the interests of the Issuer and
the Master Servicer, which is an affiliate of the Issuer, may conflict with
those of the Bondholders in determining whether to enter into a modification or
forbearance agreement or to substitute a Substitute Mortgage Loan (or in
establishing the terms of any such modification or forbearance agreement or the
terms of such Substitute Mortgage Loan).
Pledge of Additional Collateral
Subject to certain conditions set forth herein and in the Prospectus
Supplement for a Series, the Issuer may pledge additional mortgage loans or
mortgage certificates ("Additional Mortgage Collateral") to the Trustee and
issue Additional Bonds of that Series within one year of the date of initial
issuance of the Bonds of such Series. Although the pledge of any Additional
Collateral will not result in any change in the Class Interest Rate, Stated
Maturity Date or Payment Dates of any outstanding Bonds of such Series, the
pledge of Additional Mortgage Collateral may result in a variance of
(plus/minus) 0.05 years in the weighted average life of any outstanding Class of
Bonds of such Series at the prepayment rate assumed for the pricing of the
initial issuance of such Class, and the characteristics of the Mortgage
Collateral may vary within the parameters specified
10
<PAGE>
in the Prospectus Supplement relating to the initial issuance of the Bonds of
such Series. Furthermore, no assurance can be given that any pledge of
Additional Mortgage Collateral and issuance of Additional Bonds would not affect
the timing or amount of payments received by Holders of the outstanding Bonds of
that Series. Provided that the conditions described in the Prospectus Supplement
for the outstanding Bonds are satisfied, the pledge of Additional Mortgage
Collateral and the issuance of Additional Bonds will not be subject to the prior
consent of the Holders of the outstanding Bonds of such Series. See "Security
for the Bonds -- Pledge of Additional Collateral and Issuance of Additional
Bonds" herein.
Average Life and Yield Considerations
The rate of payment of principal on the Mortgage Loans will affect the
average life of each Class of Bonds. Mortgage Loans may have provisions that
provide for the payment of a premium in connection with a voluntary or
involuntary principal prepayment thereof. In addition, the rate of payment of
principal, including prepayments, on the Mortgage Loans may be influenced by a
variety of economic, geographic, social, tax, legal and other factors, including
the difference between the interest rates on the Mortgage Loans and prevailing
mortgage interest rates. In general, if the Mortgage Loans are not subject to
prepayment penalties and if prevailing mortgage interest rates fall below the
interest rates on the Mortgage Loans, the rate of principal prepayments would be
expected to increase, especially if the Mortgage Loans carry fixed rates of
interest. Conversely, if prevailing mortgage interest rates rise above the
interest rates on the Mortgage Loans, the rate of principal prepayments would be
expected to decrease. See "Yield Considerations" herein.
Yields realized by Bondholders of Discount Bonds or Premium Bonds may be
extremely sensitive to the rate of principal payments (including for this
purpose, modifications, substitutions, scheduled principal payments, payments
resulting from refinancings, Liquidations due to defaults, casualties,
condemnations and repurchase by the seller of the Mortgage Loans securing such
Series). In general, yields on Premium Bonds will be adversely affected by
higher than anticipated rates of principal payments on the Mortgage Loans and
enhanced by lower than anticipated rates. Conversely, yields on Discount Bonds
are likely to be enhanced by higher than expected rates of principal payments
and adversely affected by lower than expected rates. In certain circumstances,
Holders of certain Classes of Bonds could fail to fully recover their initial
investment.
Limited Nature of Ratings
Each Class of Bonds of a Series offered hereby and by means of the related
Prospectus Supplement will be, when issued, rated in one of the four highest
rating categories by one or more Rating Agencies identified in such Prospectus
Supplement. Any such rating is not a recommendation to buy, sell or hold Bonds
and is subject to revision or withdrawal at any time by the Rating Agency
issuing such rating. An investor may obtain further details with respect to any
rating on the Bonds from the Rating Agency issuing such rating. In addition, any
such rating will be based, among other things, on the credit quality of the
Mortgage Loans and will represent only an assessment of the likelihood of
receipt by Bondholders of payments with respect to underlying Mortgage Loans.
Such rating will not represent any assessment of the likelihood that prepayment
experience may differ from prepayment assumptions and, accordingly, will not
represent any assessment of the possibility that Bondholders of Premium Bonds
may, under circumstances of high principal prepayments on the Mortgage Loans,
fail to fully recoup their initial investment. Credit ratings assigned to
Classes of Bonds having a disproportionate entitlement to Mortgage Loan
principal or interest payments specifically do not address the impact on the
yield to the Bondholder should the rate of principal payments be substantially
different than that assumed by the Bondholder when the Class of Bonds was
purchased. In addition, the ratings assigned to Subordinated Classes of Bonds
may be more subject to change than the ratings assigned to other kinds of
securities. A rating also will not assess the ability of the Participant or
other party to perform its obligation, if any, to repurchase Converted Mortgage
Loans.
Legal Investment Considerations
No representation or warranties are made concerning whether the Bonds of
any Series are legal investments under any federal or state law, regulation,
rule or order of any court. Any Class of a Series of Bonds secured by second
liens on the Mortgaged Premises or not rated in one of the two highest rating
categories by at least one nationally recognized statistical rating organization
will not constitute "mortgage related securities" within the meaning of SMMEA.
Prospective investors are advised to consult their counsel as to qualification
of any Class of a Series of Bonds as legal investments under any such laws,
regulations, rules and orders.
11
<PAGE>
Consolidated Tax Return
If the Issuer were to fail to be treated for federal income tax purposes as
a "qualified REIT subsidiary" by reason of Resource's failure to continue to
qualify as a real estate investment trust ("REIT") for federal income tax
purposes or for any other reason, the net income of the Issuer would be subject
to corporate income tax and the Issuer would not be permitted to be included on
a consolidated income tax return of another corporate entity. No assurance can
be given with regard to the prospective qualification of the Issuer as a
qualified REIT subsidiary or of Resource as a REIT for federal income tax
purposes. See "Certain Federal Income Tax Consequences -- General."
DESCRIPTION OF THE BONDS
General
The Bonds will be issued in Series, pursuant to an Indenture between the
Issuer and a Trustee, as specified in the Prospectus Supplement. The Bonds
within a Series will be issued by Class or Classes, pursuant to the Indenture. A
Series of Bonds will consist of one or more Classes of Bonds. The Prospectus
Supplement and the Series Supplement for a Series of Bonds will specify with
respect to each Class the types of Bonds, specific designations, Stated Maturity
Dates, aggregate principal amount, Payment Dates, interest rates (or method of
determining such rates), redemption features and other terms relating to each
Class of Bonds of that Series. The Bonds will be issued in fully-registered
certificated or book-entry form in the authorized denominations specified in the
related Prospectus Supplement.
The Bonds of each Series will be secured by the Mortgage Collateral, the
Collateral Proceeds Account, and, to the extent specified in the related
Prospectus Supplement, the Reserve Funds (and any other funds or accounts
pledged to secure such Series), if any, the Insurance Policies, if any, the
Servicing Agreements and the Master Servicing Agreement for such Series. See
"The Indenture" and "Security for the Bonds." The following summaries describe
certain provisions of the Bonds. The summaries do not purport to be complete and
are subject to, and are qualified in their entirety by reference to, the
provisions of the Indenture and the Series Supplement relating to the applicable
Series of Bonds. When particular provisions or terms used in the Indenture are
referred to, the actual provisions (including definitions of terms) are
incorporated by reference. A copy of the form of Indenture (including all
supplements thereto to date) has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. A copy of the Indenture
supplement for a Series (the "Series Supplement") will be filed with the
Commission as an Exhibit to a Current Report on Form 8-K to be filed with the
Commission within 15 days of issuance of Bonds of the related Series.
The Indenture does not limit the amount of Bonds that can be issued
thereunder and provides that Bonds may be issued up to the aggregate principal
amount authorized from time to time by the Issuer. The Indenture provides that
additional Bonds may be issued for any outstanding Class of Bonds or Series up
to the aggregate principal amount authorized from time to time by the Issuer,
subject to the provisions of the related Series Supplement or supplements
thereto.
The Bonds of each Series will be issued in fully-registered certificated or
book-entry form in the authorized denominations specified in the related
Prospectus Supplement. The Bonds of each Series that are issued in certificated
form may be transferred or exchanged at the corporate trust office of the
Trustee without the payment of any service charge, other than any tax or other
governmental charge payable in connection therewith. Unless otherwise specified
in the related Prospectus Supplement, the Trustee will make payments of
principal of and interest on the Bonds of a Series that are issued in
certificated form (i) by checks mailed to registered Bondholders at their
addresses appearing on the books and records of the Issuer or (ii) by wire
transfer of immediately available funds upon timely request to the Trustee in
writing by any Bondholder of Bonds having an initial principal amount of at
least $1,000,000 or such other amount as may be specified in the related
Prospectus Supplement; except that the final payments in retirement of each
Class of Bonds of a Series issued in certificated form will be made only upon
presentation and surrender of such Bonds at the office or agency of the Issuer
maintained for that purpose. The Trustee will make such payments with respect to
Bonds in book-entry form as set forth below.
Book-Entry Procedures
The Prospectus Supplement for a Series may specify that certain Classes of
the Bonds will initially be issued in book-entry form ("Book-Entry Bonds") in
the authorized denominations specified therein. Each such Class of Bonds will be
represented by one or more certificates registered in the name of the nominee of
the depository, which is expected to be The Depository Trust Company ("DTC" and,
together with any successor or other depository selected by the Issuer, the
"Depository"). The Depository or its nominee will be registered as the record
holder of the Bonds in the Bond Register. No person acquiring a Book-Entry Bond
(a "beneficial owner") will be entitled to receive a certificate representing
such Bond.
12
<PAGE>
The beneficial owner's ownership of a Book-Entry Bond will be recorded on
the records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "Financial Intermediary") that maintains such beneficial
owner's account for such purpose. In turn, the Financial Intermediary's
ownership of such Book-Entry Bond will be recorded on the records of the
Depository (either directly or through one or more Financial Intermediaries).
Therefore, the beneficial owner must rely on the foregoing procedures to
evidence its beneficial ownership of a Book-Entry Bond, and beneficial ownership
of a Book-Entry Bond may only be transferred by compliance with the procedures
of such Financial Intermediaries and Depository participants.
DTC, which is a New York-chartered limited-purpose trust company, performs
services for its participants, some of whom (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC participant in the Book-Entry Bonds, whether held for
its own account or as a nominee for another person. In general, beneficial
ownership of Book-Entry Bonds will be subject to the rules, regulations and
procedures governing the Depository and Depository participants as in effect
from time to time.
Payment of principal of and interest on the Book-Entry Bonds will be made
on each Payment Date to the Depository. The Depository will be responsible for
crediting the amount of such distributions to the accounts of the applicable
Depository participants in accordance with the Depository's normal procedures.
Each Depository participant will be responsible for disbursing such payments to
the beneficial owners of the Book-Entry Bonds that it represents and to each
Financial Intermediary for which it acts as agent. Each such Financial
Intermediary will be responsible for disbursing funds to the beneficial owners
of the Book-Entry Bonds that it represents. As a result of the foregoing
procedures, beneficial owners of the Book-Entry Bonds may experience some delay
in their receipt of payments.
Because transactions in Book-Entry Bonds can be effected only through the
Depository, participating organizations, indirect participants and certain
banks, the ability of a beneficial owner of a Book-Entry Bond to pledge such
Bond to persons or entities that do not participate in the Depository, or
otherwise to take actions in respect of such Bond, may be limited due to the
lack of a physical certificate representing such Bond. Issuance of Book-Entry
Bonds may reduce the liquidity of such Bonds in the secondary trading market
because investors may be unwilling to purchase Book-Entry Bonds for which they
cannot obtain physical certificates.
The Book-Entry Bonds will be issued in fully-registered, certificated form
to beneficial owners of Book-Entry Bonds or their nominees, rather than to the
Depository or its nominee, only if (i) the Issuer advises the Trustee in writing
that the Depository is no longer willing or able to discharge properly its
responsibilities as depository with respect to the Book-Entry Bonds and the
Issuer is unable to locate a qualified successor within 30 days or (ii) the
Issuer, at its option, elects to terminate the book-entry system through the
Depository. Upon the occurrence of either event described in the preceding
sentence, the Trustee is required to notify the Depository, which in turn will
notify all beneficial owners of Book-Entry Bonds through Depository
participants, of the availability of certificated Bonds. Upon surrender by the
Depository of the certificates representing the Book-Entry Bonds and receipt of
instructions for re-registration, the Trustee will reissue the Book-Entry Bonds
as certificated Bonds to the beneficial owners of Book-Entry Bonds.
Neither the Issuer, the Master Servicer nor the Trustee will have any
liability for any aspect of the records relating to or payment made on account
of beneficial ownership interests of the Book-Entry Bonds held by the
Depository, or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests.
Payments of Principal and Interest
To the extent specified in the related Prospectus Supplement, payments on
the Mortgage Collateral securing a Series, including prepayments, together with
withdrawals from various debt service and reserve funds, will be available to
pay principal of and interest on the Bonds of a Series.
On each Payment Date for a Series, principal will be paid on the Bonds in
an amount equal to the Principal Distribution Amount or such other amount as may
be specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, the Principal Distribution Amount on any
Payment Date will equal the amount by which (i) the aggregate Collateral Value
of the Mortgage Collateral securing the Series as of the preceding Payment Date
(or, with respect to the first Payment Date, as of the Cut-off Date for such
Series) exceeds (ii) the aggregate Collateral Value of the Mortgage Collateral
securing the Series as of the current Payment Date. Unless otherwise specified
in the related Prospectus Supplement, the Collateral Value of any Mortgage
Collateral securing a Series will generally equal (i) the Scheduled Principal
Balance of such Mortgage Collateral or (ii) as specified in the related
Prospectus Supplement, the Scheduled Principal
13
<PAGE>
Balance of such Mortgage Collateral multiplied by a fraction, the numerator of
which is the Net Rate of the Mortgage Collateral and the denominator of which is
the Collateral Value Discount Rate (the "Interest Method").
The Prospectus Supplement will specify (i) the order in which payments of
principal (including prepayments) on the Mortgage Collateral will be applied to
pay principal of different Classes of Bonds of a Series and (ii) the percentage
interest in payments of principal (including prepayments) on the Mortgage
Collateral or pools of Mortgage Collateral for each Class of Bonds within a
Series if such payments are unequally allocated among the Classes of Bonds
within a Series. Unless otherwise specified in the related Prospectus
Supplement, all payments of principal of a particular Class of Bonds will be
applied on a pro rata basis.
The Stated Maturity Date for the Bonds of each Class will be the date by
which all Bonds of the Class are scheduled to be fully paid. The Stated Maturity
Date of a Class of Bonds may be determined by reference to the maturity date of
the Mortgage Collateral pledged to a Series with the latest stated final Due
Date or on the basis of the assumptions set forth in the related Prospectus
Supplement. All or a portion of the payments on the Mortgage Collateral securing
a Series will be used to amortize Bonds of the Series, as described in the
related Prospectus Supplement. It is expected that each Class of Bonds will be
fully paid in advance of its Stated Maturity Date from payments, including
prepayments, on the Mortgage Collateral. The rate of principal payments on the
Mortgage Collateral securing a Series will depend on the characteristics of the
Mortgage Collateral, as well as on the level of interest rates prevailing from
time to time and other economic factors. No assurance can be given as to the
actual prepayment experience of the Mortgage Collateral. See "Maturity and
Prepayment Considerations" and "Yield Considerations."
Each Class of Bonds will bear interest from the date and at the rate per
annum (the "Class Interest Rate") specified, or determined as specified, in the
related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, interest will be computed on the basis of a 360-day year
consisting of 12 months of 30 days each. Interest on a Class of Bonds consisting
of Current Interest Bonds will be payable on the Payment Dates specified in the
related Prospectus Supplement. Each such payment of interest will include all
interest either accrued to the Accounting Date immediately preceding the Payment
Date on which it is made or to another date specified in such Prospectus
Supplement. Unless interest is accrued to the Payment Date, the effective yield
to the Bondholder will be reduced to a level below the yield that would apply if
interest were paid to the respective Payment Dates. If specified in the related
Prospectus Supplement, any Class of Bonds may bear interest at a variable rate.
For any variable rate Class of Bonds, the related Prospectus Supplement will set
forth the manner for determining the variable interest rate and the interest
rate change interval. The variable interest rate for a Class of Bonds will not
exceed a maximum rate specified in the related Prospectus Supplement, and the
payments due on the Mortgage Collateral securing the related Series or Class of
Bonds will be in amounts (taking into account reserve and other funds and any
redemption rights and obligations) determined to be adequate to pay interest on
such Class of Bonds at the specified maximum interest rate.
If specified in the related Prospectus Supplement, a Class of Bonds may be
a Principal-Only Class comprised solely of Principal-Only Bonds, which will not
bear interest. If specified in the related Prospectus Supplement, a Class of
Bonds may be an Accretion Class comprised solely of Accretion Bonds on which
interest will accrue on the Compound Value of such Class but not be paid until
each Class of Bonds of such Series with an earlier Stated Maturity Date, if any,
has been paid in full, or as otherwise specified in the related Prospectus
Supplement ("Deferred Interest"). Deferred Interest will be added to the
principal of each Class of Accretion Bonds on each Accounting Date until all
other Classes of Bonds having an earlier priority of payment are paid in full,
and, thereafter, interest will be paid on the Class of Accretion Bonds on their
unpaid Compound Value. The Compound Value of a Class of Accretion Bonds will
equal the original principal amount of such Class of Bonds plus accrued and
unpaid interest through the Accounting Date preceding the determination date,
less any principal payments made on such Class of Bonds.
Unless otherwise specified in the related Prospectus Supplement, payments
on the Collateral pledged to a particular Series and not used to pay principal
or interest on the Bonds will be treated as Surplus. To the extent specified in
the related Prospectus Supplement for a Series, all or a portion of the Surplus
on any Payment Date may be applied to cover Losses or interest shortfalls
associated with a Series or any Series sold pursuant to this Prospectus or such
Surplus may be distributed to the Issuer. Any Surplus distributed to the Issuer
will not be available for payment of principal or interest on the Bonds.
Redemption
To the extent provided in the related Prospectus Supplement, the Bonds of
any Class may be subject to redemption at the option of the Issuer prior to
their Stated Maturity Date. Notice of such redemption must be given by the
Issuer or by the Trustee as provided in the related Prospectus Supplement. The
redemption price for any Bond (or portion thereof) so
14
<PAGE>
redeemed will be the percentage of the unpaid principal amount of such Bonds
specified in the related Prospectus Supplement, together with accrued interest
thereon to the date specified in the related Prospectus Supplement, or such
other price as may be specified in the related Prospectus Supplement.
MATURITY AND PREPAYMENT CONSIDERATIONS
The actual maturity date and average life of a Class of Bonds will be
determined by, among other things, (i) the prepayment experience on the Mortgage
Collateral, (ii) the frequency and scope of any forbearance or modification
relating to defaulted Mortgage Loans and (iii) the optional redemption
provisions of a Series of Bonds.
The rate of principal payments on Mortgage Loans will be affected by the
amortization schedules of the Mortgage Loans and by the rate of principal
prepayments thereon (including for this purpose payments resulting from
refinancings, liquidations due to defaults, casualties and condemnations). No
assurance can be given as to the rate of principal payments or prepayments on
the Mortgage Loans. In general, however, if prevailing interest rates fall
significantly below the interest rates on the Mortgage Loans and the Mortgage
Loans may be voluntarily prepaid in accordance with their terms, such Mortgage
Loans would be likely to be subject to a higher rate of principal prepayments
than if prevailing rates remain at or above the rates borne by such Mortgage
Loans.
The Servicer, with the approval of the Master Servicer in most cases, is
authorized pursuant to the Servicing Agreement to modify the payment terms of a
defaulted Mortgage Loan. If the Master Servicer appoints a Special Servicer, the
Special Servicer would be authorized to make such modifications or
substitutions. Any such modification or substitution would likely provide for a
slower principal amortization schedule than under the original terms of the
Mortgage Loan (including an extension of the final Due Date) and therefore would
have the opposite effect on the average life of a Class of Bonds that a
prepayment of a Mortgage Loan would have. To the extent one or more of such
Mortgage Loans is in default on its revised final Due Date and the respective
Servicer is unable to liquidate timely the defaulted Mortgage Loan, the Issuer
may fail to pay one or more Classes of the Bonds in full by their Stated
Maturity Date. See "Servicing of the Mortgage Loans -- Master Servicing
Agreement" and " -- Special Servicing Agreement."
The Prospectus Supplement for a Series of Bonds may contain a table setting
forth percentages of the original principal amount of each Class of Bonds of
such Series anticipated to be outstanding after each of the dates shown in the
table. It is unlikely that the prepayment experience of the Mortgage Loans
pledged as Collateral for any Series will conform to any of the percentages of
the prepayment assumption model described in any table set forth in the related
Prospectus Supplement.
YIELD CONSIDERATIONS
Payments of interest on the Bonds generally will include interest accrued
through the Accounting Date for the applicable Payment Date. Because payments to
the Bondholders generally will not be made until the Payment Date following the
Accounting Date, the effective yield to the Bondholders of the Bonds will be
lower than the yield otherwise produced by the applicable Class Interest Rate
and purchase price for the Bond.
The yield to maturity of any Bond will be affected by the rate and timing
of payment of principal of the Mortgage Loans and, to a lesser extent, the
frequency and scope of any modifications or substitutions of the Mortgage Loans.
If the purchaser of a Bond offered at a discount from its Parity Price
calculates the anticipated yield to maturity of such Bond based on an assumed
rate of payment of principal that is faster than that actually received on the
Mortgage Loans, the actual yield to maturity will be lower than that so
calculated. If the purchaser of a Bond offered at a premium over its Parity
Price calculates the anticipated yield to maturity of such Bond based on an
assumed rate of payment of principal that is slower than that actually received
on the Mortgage Loans, the actual yield to maturity will be lower than that so
calculated.
The timing of changes in the rate of payment of principal on the Mortgage
Loans may significantly affect an investor's actual yield to maturity, even if
the average rate of principal payments experienced over time is consistent with
an investor's expectation. In general, the earlier a payment of principal on the
Mortgage Loans, the greater will be the effect on the investor's yield to
maturity. As a result, the effect on an investor's yield of principal payments
occurring at a rate higher (or lower) than the rate anticipated by the investor
during the period immediately following the issuance of the Bonds would not be
fully offset by a subsequent commensurate reduction (or increase) in the rate of
principal payments at a later date. Because the rate of principal payments
(including prepayments) on the Mortgage Loans may significantly affect the
weighted average life and other characteristics of any Class of Bonds,
prospective investors are urged to consider their own estimates as to the
anticipated rate of future payments of principal on the Mortgage Loans and the
suitability of the Class of Bonds to their
15
<PAGE>
investment objectives. For factors affecting principal payments on the Mortgage
Loans, including the impact of modifications and substitutions of Mortgage
Loans, see "Maturity and Prepayment Considerations" above.
Investors should consider the risk that rapid rates of prepayment on the
related Mortgage Loans, and therefore of principal payments on the Bonds, may
coincide with periods of low prevailing interest rates. During such periods, the
effective interest rates on securities in which an investor may choose to
reinvest amounts received as principal payments on such investor's Bond may be
lower than the applicable Class Interest Rate. Conversely, slow rates of
prepayments on the Mortgage Loans, and therefore of principal payments on the
various Classes of Bonds, may coincide with periods of high prevailing interest
rates. During such periods, the amount of principal payments available to an
investor for reinvestment at such high prevailing interest rates may be
relatively low.
SECURITY FOR THE BONDS
General
Unless otherwise specified in the related Prospectus Supplement, each
Series will be secured by the pledge to the Trustee of Collateral consisting of
(i) Mortgage Collateral, together with the payments thereon, having an aggregate
initial Collateral Value at least equal to 100% of the original principal amount
of the Bonds of such Series and any REO acquired in respect of such Mortgage
Collateral through Foreclosure, (ii) the Collateral Proceeds Account for such
Series, (iii) to the extent applicable, Reserve Funds and other funds and
accounts for such Series, (iv) to the extent applicable, the Issuer's rights to
Additional Mortgage Collateral, (v) all payments that may become due under
Insurance Policies, if any, (vi) the Issuer's rights under the Servicing
Agreements and the Master Servicing Agreement with respect to such Series and
(vii) to the extent applicable, a rate cap agreement with a third party.
Scheduled payments of principal of and interest on the Mortgage Collateral
securing a Series of Bonds (including payments from the Reserve Fund, if
applicable), net of applicable servicing fees, master servicing fees, trustee
fees, guarantee fees and insurance premiums, if any, for such Series, are
intended to be sufficient to make the required payments of interest on the Bonds
of such Series and to pay the entire principal amount of each Class of Bonds of
such Series not later than the Stated Maturity Date of such Class of Bonds.
Except as otherwise specified in the related Prospectus Supplement, the
Collateral (other than certain credit enhancement items) will secure only one
Series of Bonds.
The Mortgage Collateral
The Prospectus Supplement for a Series will describe in general the type of
Mortgage Collateral that will secure the Series. The Mortgage Collateral may be
composed of Mortgage Loans or certain other assets evidencing interests in loans
secured by residential property.
The Mortgage Loans
Unless otherwise specified in the related Prospectus Supplement, the
Mortgage Loans securing a Series generally will be secured by first liens on
one-family or two- to four-family residential property. If specified in the
related Prospectus Supplement, the Mortgage Collateral securing a Series of
Bonds may include Mortgage Loans secured by second liens on residential
properties, REO Properties and Mortgage Loans that are past due or
non-performing. Because Mortgage Loans secured by second liens are subordinate
to the rights of the senior lienholders, the position of the related Trust
Estate, and in turn, the Bondholders, could be more adversely affected by a
reduction in value of the Mortgaged Premises than would the position of a senior
lienholder. In addition, in the event of a default by the related Borrower,
liquidation or other proceeds may be insufficient to satisfy the second lien
Mortgage Loan after satisfaction of the senior lien and the payment of any
liquidation expenses. In addition, if REO Properties or non-performing Mortgage
Loans are included in the Trust Estate for a Series of Bonds, the inclusion of
such Mortgage Collateral may increase the rate of defaults and prepayments on
the Mortgage Collateral and, in turn, affect the yield on the Bonds of the
related Series. Regular monthly installments of principal of and interest on
each Mortgage Loan ("Monthly Payments") paid by the Borrower will be collected
by the Servicer or Master Servicer and ultimately remitted to the Trustee.
Except as provided in the related Prospectus Supplement, each Mortgage Loan
securing a Series will have been originated by a savings and loan association,
savings bank, commercial bank, credit union, insurance company, or similar
institution that is supervised and examined by a federal or state authority or
by a mortgagee approved by HUD (each, an "Originator"). The Mortgaged Premises
securing such Mortgage Loans may consist of (i) detached homes, (ii) attached
homes (units having a common wall), (iii) units located in condominiums and (iv)
other types of homes or units set forth in
16
<PAGE>
the related Prospectus Supplement. The Mortgage Loans securing a Series of Bonds
may be secured by Mortgaged Premises that (i) are owner-occupied, (ii) are owned
by investors or (iii) serve as second residences or vacation homes.
The Mortgage Loans securing a Series may provide for the payment of
interest and full repayment of principal in level Monthly Payments with a fixed
rate of interest computed on the declining principal balance of the Mortgage
Loan ("Level Payment Mortgage Loans"); may provide for periodic adjustments to
the rate of interest on such Mortgage Loans ("ARM Loans") to equal the sum
(which may be rounded) of a fixed margin ("Gross Margin") and an index
("Index"), all as described in the related Prospectus Supplement; may consist of
Mortgage Loans for which funds have been provided to reduce the Borrower's
Monthly Payments during the early period of such Mortgage Loans ("Buy-Down
Mortgage Loans"); may include Mortgage Loans on which only interest is payable
until maturity as well as Mortgage Loans that provide for the amortization of
principal over a certain period, although all remaining principal is due at the
end of a shorter period ("Balloon Payment Mortgage Loans"); may include ARM
Loans that provide for negative amortization or accelerated amortization
resulting from delays in or limitations on the payment adjustments necessary to
amortize fully the outstanding principal balance of the loan at its then
applicable Note Rate over its remaining term; and may include such other types
of mortgage loans as are described in the related Prospectus Supplement. Balloon
Payment Mortgage Loans also may be ARM Loans. A Series may also be secured by
other Mortgage Collateral consisting of conventional mortgage pass-through
certificates or collateralized mortgage obligations as more fully described in
the related Prospectus Supplement. Such other Mortgage Collateral must be in
form and substance satisfactory to each Rating Agency rating that Series of
Bonds.
As further described in the applicable Prospectus Supplement, Balloon
Payment Mortgage Loans include Mortgage Loans that provide for amortization of
the principal amount over a certain period (for example, 30 years), although all
remaining principal is due at the end of a shorter period (for example, 15
years). The final balloon payment on a Balloon Payment Mortgage Loan will be
treated as a prepayment of that Mortgage Loan. The ability of a Borrower to make
the final "balloon" payment may be dependent upon the Borrower's ability to
refinance the Balloon Payment Mortgage Loan or sell the related Mortgaged
Premises for an amount equal to or greater than the unpaid principal balance of
the Mortgage Loan. Under certain circumstances (for example, in a rising
interest rate environment), a Borrower may be unable to secure refinancing for
such loan or to sell the related Mortgaged Premises. Accordingly, Balloon
Payment Mortgage Loans may be subject to a higher risk of delinquency, loss, and
foreclosure than certain other types of mortgage loans.
In addition, ARM Loans and Buy-Down Mortgage Loans may be underwritten on
the basis of an assessment that the Borrower will have the ability to make
payments in higher amounts in later years and, in the case of certain ARM Loans,
after relatively short periods of time. Accordingly, defaults on ARM Loans and
Buy-Down Mortgage Loans leading to foreclosure and the ultimate liquidation of
the related Mortgaged Premises may occur with greater frequency in the early
years of such loans, although little data is available with respect to the rate
of default on such loans. Increases in the required monthly payments on such
loans may result in a default rate that is higher than that for fixed rate
Mortgage Loans.
As specified in the related Prospectus Supplement, a Security Instrument
may contain a "due-on-sale" clause permitting acceleration of the maturity of
the related Mortgage Loan if the Borrower transfers its interest in the
Mortgaged Premises. Unless otherwise specified in the related Prospectus
Supplement, the Servicing Agreement will require the Servicers to enforce
"due-on-sale" clauses. See "Certain Legal Aspects of the Mortgage
Loans -- Due-on-Sale Provisions."
The Prospectus Supplement applicable to a Series of Bonds will include
among other things information, as of the applicable Cut-off Date, as to (i) the
aggregate principal balance of the Mortgage Loans, (ii) the range of remaining
terms to stated maturity or weighted average remaining term to stated maturity
of the Mortgage Loans, (iii) the current Scheduled Principal Balance of the
largest Mortgage Loan and the average outstanding Scheduled Principal Balance of
the Mortgage Loans, (iv) the weighted average Note Rate or range of Note Rates
borne by the Mortgage Loans, (v) the range of original loan-to-value ratios or
the weighted average loan-to-value ratio of the Mortgage Loans and (vi) the
geographic distribution of the Mortgaged Premises.
Second Liens
Certain of the Mortgage Loans may be secured by second liens, and the
related first liens ("First Liens") may not be included in the Mortgage Pool.
The primary risk to holders of Mortgage Loans secured by second liens is the
possibility that adequate funds will not be received in connection with a
Foreclosure of the related First Lien to satisfy fully both the First Lien and
the Mortgage Loan. In the event that a holder of the First Lien forecloses on a
Mortgaged Premises, the proceeds of the Foreclosure or similar sale will be
applied first to the payment of court costs and fees in connection with the
Foreclosure, second to real estate taxes, third in satisfaction of all
principal, interest, prepayment or acceleration penalties, if any, and fourth
any other sums due and owing to the holder of the First Lien. The claims of the
holder of the First Lien will be
17
<PAGE>
satisfied in full out of proceeds of the Liquidation of the Mortgage Loan, if
such proceeds are sufficient, before the Trust Estate as holder of the second
lien receives any payments in respect of the Mortgage Loan. If the Servicer were
to foreclose on any Mortgage Loan, it would do so subject to any related First
Lien. In order for the debt related to the Mortgage Loan to be paid in full at
such sale, a bidder at the Foreclosure sale of such Mortgage Loan would have to
bid an amount sufficient to pay off all sums due under the Mortgage Loan and the
First Lien or purchase the Mortgaged Premises subject to the First Lien. In the
event that such proceeds from a Foreclosure or similar sale of the related
Mortgaged Premises are insufficient to satisfy both mortgage loans in the
aggregate, the Trust Estate, as the holder of the second lien, and, accordingly,
holders of the Bonds bear (i) the risk of delay in distributions while a
deficiency judgment against the Borrower is obtained and (ii) the risk of loss
if the deficiency judgment is not realized upon. Moreover, deficiency judgments
may not be available in certain jurisdictions. In addition, a second mortgagee
may not foreclose on the property securing a second mortgage unless it
forecloses subject to the first mortgage.
Even assuming that the Mortgaged Premises provide adequate security for the
Mortgage Loans, substantial delays could be encountered in connection with the
Liquidation of defaulted Mortgage Loans, and corresponding delays in the receipt
of related proceeds by Bondholders could occur. An action to foreclose on a
Mortgaged Premises securing a Mortgage Loan is regulated by state statutes and
rules and is subject to many of the delays and expenses of other lawsuits if
defenses or counterclaims are interposed, sometimes requiring several years to
complete. Furthermore, in some states an action to obtain a deficiency judgment
is not permitted following a nonjudicial sale of a Mortgaged Premises. In the
event of a default by a Borrower, these restrictions, among other things, may
impede the ability of the Servicer to foreclose on or sell the Mortgaged
Premises or to obtain Liquidation Proceeds sufficient to repay all amounts due
on the related Mortgage Loan. In addition, the Servicer generally will be
entitled to deduct from related Liquidation Proceeds all expenses reasonably
incurred in attempting to recover amounts due on defaulted Mortgage Loans and
not yet repaid, including payments to senior lienholders, legal fees and costs
of legal action, real estate taxes and maintenance and preservation expenses.
Liquidation expenses with respect to defaulted second mortgage loans do not
vary directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a Servicer took the same steps in realizing
upon a defaulted second mortgage loan having a small remaining principal balance
as it would in the case of a defaulted second mortgage loan having a large
remaining principal balance, the amount realized after expenses of Liquidation
would be smaller as a percentage of the outstanding principal balance of the
defaulted second mortgage loan having a small remaining principal balance than
would be the case with the defaulted second mortgage loan having a large
remaining principal balance. Because the average outstanding principal balance
of the second lien Mortgage Loans generally are smaller relative to the size of
the average outstanding principal balance of the loans in a typical pool of
conventional first priority mortgage loans, Liquidation Proceeds may also be
smaller as a percentage of the principal balance of a Mortgage Loan than would
be the case in a typical pool of conventional first priority mortgage loans.
Repurchase of Converted Mortgage Loans
If so specified in the Prospectus Supplement for a Series, the related
Series may be secured by ARM Loans the Note Rate of which is convertible from an
adjustable rate to a fixed rate at the option of the Borrower upon the
fulfillment of certain conditions. Except as otherwise specified in the related
Prospectus Supplement, the Participant will be obligated to repurchase any such
ARM Loan as to which the conversion option has been exercised at a purchase
price equal to the Unpaid Principal Balance of such Mortgage Loan, plus 30 days
of interest thereon at the applicable Note Rate. The purchase price will be
treated as a prepayment of the related Mortgage Loan. In the event of a default
on the obligation of the Participant to purchase any Converted Mortgage Loan,
the Master Servicer will attempt to sell the Converted Mortgage Loan. Until a
Converted Mortgage Loan is purchased or sold as described above, it will remain
in the Trust Estate with a fixed Note Rate. An obligation of the Participant to
repurchase Converted Mortgage Loans generally will not be supported by cash,
letters of credit, third party guarantees or other similar arrangements.
Substitution of Mortgage Collateral
Unless otherwise provided in the Prospectus Supplement and subject to the
limitations set forth below, the Issuer at any time may deliver to the Trustee
other items of Mortgage Collateral in substitution for any one or more items of
Mortgage Collateral pledged as security for such Series. The Issuer will have
the option to pledge to the Trustee, in substitution for a defaulted Mortgage
Loan or REO, a new mortgage loan (a "Substitute Mortgage Loan"), to the extent
that the Master Servicer has determined, in its reasonable business judgment,
that the present value of any potential Loss on such defaulted Mortgage Loan or
REO will be reduced through the substitution of a Substitute Mortgage Loan for
such defaulted Mortgage Loan or REO, and provided that such Substitute Mortgage
Loan (i) is secured by the Mortgaged Premises that secures the
18
<PAGE>
defaulted Mortgage Loan or by such REO, (ii) has either (A) an initial principal
balance equal to or less than the Scheduled Principal Balance of the defaulted
Mortgage Loan for which it is substituted or (B) a loan-to-value ratio of not
more than 100%, based upon a current appraisal of the Mortgaged Premises, and
(iii) has a maturity date that is not later than the Stated Maturity Date of the
related Series of Bonds. The amount, if any, by which the Collateral Value of
the defaulted Mortgage Loan or REO exceeds the Collateral Value of the
Substitute Mortgage Loan would constitute a Loss on such Mortgage Loan or REO.
Upon the pledge of a Substitute Mortgage Loan, the Trustee will release the
defaulted Mortgage Loan or the REO from the lien of the Indenture.
In addition, unless otherwise provided in the Prospectus Supplement, the
Issuer may pledge to the Trustee items of Mortgage Collateral in substitution
for an item of Mortgage Collateral initially pledged ("Original Mortgage
Collateral") as security for a Series of Bonds in the event of a breach of a
representation or warranty by the seller of such item of Original Mortgage
Collateral or in the case of defective or incomplete documentation with respect
to such item of Original Mortgage Collateral. Any such substitute Mortgage
Collateral will have an interest rate within one percentage point in excess of
that with respect to the item of Original Mortgage Collateral for which it is
substituted, a principal balance or value at least equal to the principal
balance or value of the item of Original Mortgage Collateral for which it was
substituted and a maturity within 180 days of the item of Original Mortgage
Collateral for which it is substituted. As more particularly set forth in the
Indenture, substitute Mortgage Collateral must have characteristics
substantially similar to those of the Original Mortgage Collateral for which
they are substituted.
Pledge of Additional Collateral and Issuance of Additional Bonds
To the extent specified in the Prospectus Supplement for a Series, the
Issuer may pledge additional mortgage loans or mortgage certificates
("Additional Mortgage Collateral") to the Trustee and issue additional Bonds
("Additional Bonds") of that Series within one year of the date of initial
issuance of the Bonds of such Series. Such Additional Bonds may represent
additional Bonds of one or more outstanding Classes of Bonds or may represent
one or more new Classes of Bonds of such Series. Any such Additional Bonds will
be issued pursuant to a Prospectus Supplement, which will describe the
characteristics of the Additional Mortgage Collateral and the material terms of
the Additional Bonds. Any pledge of Additional Mortgage Collateral and issuance
of Additional Bonds will be subject to satisfaction of the following conditions:
(a) each Rating Agency rating any outstanding Class of Bonds of the related
Series will confirm that the pledge of Additional Mortgage Collateral and other
additional Collateral, if any, and the corresponding issuance of Additional
Bonds will not result in the downgrading of the credit rating of any outstanding
Class of Bonds of such Series, (b) the pledge of Additional Mortgage Collateral
will not affect the Class Interest Rate, Stated Maturity Date or Payment Dates
of any outstanding Bonds of such Series, (c) the weighted average life of each
outstanding Class of Bonds calculated at the prepayment rate assumed for the
pricing of the initial issuance of such Class of Bonds will not vary by more
than (plus/minus) 0.05 years in the weighted average life disclosed in the
Prospectus Supplement for the initial issuance of the Bonds of such Series, and
(d) the characteristics of the Additional Mortgage Collateral and the Mortgage
Collateral as augmented by the Additional Mortgage Collateral will conform to
the parameters for Additional Mortgage Collateral disclosed in the Prospectus
Supplement for the initial issuance of Bonds of such Series. However, there can
be no assurance that any pledge of Additional Mortgage Collateral and issuance
of Additional Bonds would not affect the timing or amount of payments received
by Holders of the outstanding Bonds of that Series. Provided that the conditions
described in the Prospectus Supplement for the outstanding Bonds are satisfied,
the pledge of Additional Mortgage Collateral and the issuance of Additional
Bonds will not be subject to the prior consent of the Holders of the outstanding
Bonds of such Series.
Master Servicer Custodial Account
Unless otherwise specified in the Prospectus Supplement for a Series, each
Servicing Agreement will require an amount representing the Servicer Remittance
to be remitted by each Servicer on the Remittance Date to the Master Servicer
Custodial Account established by the Master Servicer at a depository institution
whose senior debt obligations are then rated in the security rating category
required to support the then applicable rating assigned to that Series. See
"Servicing of the Mortgage Loans -- Payments on Mortgage Loans" herein.
Collateral Proceeds Account
The Collateral Proceeds Account will be an account established by the
Trustee for the benefit of Bondholders. The Collateral Proceeds Account will be
an account or accounts that are either (i) maintained with a depository
institution whose senior debt obligations are then rated in the security rating
category required to support the then applicable rating assigned to that Series,
or (ii) trust accounts.
19
<PAGE>
On or before each Master Servicer Remittance Date, the Master Servicer will
transfer from the Master Servicer Custodial Account the proceeds of the Mortgage
Collateral that are distributable to the Bondholders to the Collateral Proceeds
Account. The proceeds of the Mortgage Loans deposited into the Collateral
Proceeds Account generally will consist of the sum of (i) the aggregate Servicer
Remittance relating to the Mortgage Loans securing a Series, less the master
servicing fee, and (ii) any Advances to be made by the Master Servicer or
Special Servicer, if any. On each Payment Date, the Trustee will withdraw from
the Collateral Proceeds Account and pay to the Bondholders, to the extent of the
available funds on deposit therein, all amounts required to be paid on the Bonds
of such Series on such date. The interposition of the Master Servicer between
the Servicers and the Trustee provides for the accumulation of collections from
the various Servicers outside of a trust account, thereby avoiding the
likelihood that multiple Servicers will make demands on the Trustee for the
payment of servicing fees or the reimbursement of Advances from amounts on
deposit in the Collateral Proceeds Account. The master servicing fee is payable
to the Master Servicer in part due to its performance as an intermediary between
the various Servicers and the Trustee.
Funds in the Collateral Proceeds Account may be invested and, if invested,
shall be invested in the name of the Trustee (in its capacity as such) in
Eligible Investments that mature not later than the Business Day preceding each
Payment Date (except that, if such Eligible Investment is an obligation of the
Trustee, then such Eligible Investment may mature not later than such Payment
Date) and will not be sold or disposed of prior to its maturity. All income
realized from any such investments will accrue to the benefit of the Master
Servicer as additional compensation and may be withdrawn by the Master Servicer
from time to time. However, no withdrawals from the Collateral Proceeds Account
will be permitted if such withdrawals would cause a deficiency in amounts
payable to Bondholders.
Reserve Fund or Accounts
If stated in the Prospectus Supplement for a Series, the Issuer will
deposit cash, certificates of deposit or letters of credit in one or more
Reserve Funds or accounts, which may be used by the Trustee to make any required
payments of principal or interest on the Bonds of the Series to the extent that
funds are not otherwise available. The Series Supplement may limit the pledge of
any Reserve Fund to certain Classes of Bonds. The Issuer may have certain rights
on any Payment Date to cause the Trustee to make withdrawals from the Reserve
Fund for a Series and to pay such amounts in accordance with the instructions of
the Issuer as specified in the related Prospectus Supplement to the extent that
such funds are no longer required to be maintained for the Bondholders.
Other Funds or Accounts
The Bonds of a Series may also be secured by certain other funds and
accounts for the purpose of, among other things, (i) making required payments of
principal or interest on the Bonds of the Series to the extent funds are not
otherwise available, (ii) paying certain administrative, insurance and similar
costs and (iii) accumulating funds that are credited to the Issuer's account
pending their distribution to the Issuer. To the extent such funds and accounts
are material, they will be described in the related Prospectus Supplement.
Investment of Funds
Funds deposited in or remitted to the Collateral Proceeds Account, any
Reserve Fund and any other funds and accounts held under the Indenture for a
Series will be invested by the Trustee, and amounts in the Master Servicer
Custodial Account will be invested by the Master Servicer, in certain eligible
investments ("Eligible Investments") as specified in the Indenture or Indenture
Supplement for the related Series.
Mortgage Insurance on the Mortgage Loans
Mortgage Loans securing a Series generally will be covered by special
hazard insurance, title insurance, and, if so specified in the related
Prospectus Supplement, primary mortgage insurance policies (each, a "Primary
Mortgage Insurance Policy," and together with any special hazard insurance
policies and title insurance policies, the "Insurance Policies"). To the extent
provided in the related Prospectus Supplement, in lieu of certain Insurance
Policies, Additional Mortgage Collateral (or instruments secured by additional
Mortgage Loans) may be pledged to the Trustee to secure the timely payment of
principal of and interest on the Mortgage Loans and/or the Bonds.
20
<PAGE>
Pool Insurance
The Issuer may obtain a Pool Insurance Policy to cover losses (subject to
the limitations described below) incurred by reason of default by the Borrowers
of the Mortgage Loans securing such Series that are not covered by any Primary
Mortgage Insurance Policy or exceed the coverage provided any applicable Primary
Mortgage Insurance Policy. The terms of the Master Servicing Agreement with
respect to a Series will require the Master Servicer to maintain the Pool
Insurance Policies, if any, for such Series and to present or cause the
Servicers to present claims thereunder to the related insurer on behalf of the
Issuer, the Trustee and the holders of Bonds of such Series.
The amount of the Pool Insurance Policy (or Policies) for a Series, if any,
will be specified in the related Prospectus Supplement. A Pool Insurance Policy
for a Series, however, will not be a blanket policy against loss, because claims
thereunder may only be made for particular defaulted Mortgage Loans and only
upon satisfaction of certain conditions precedent as described below.
Unless otherwise specified in the related Prospectus Supplement, the Pool
Insurance Policy for a Series will provide that as a condition precedent to the
payment of any claim the insured will be required (a) to advance hazard
insurance premiums on the Mortgaged Premises securing the defaulted Mortgage
Loan; (b) to advance, as necessary and approved in advance by the related
insurer, (1) real estate property taxes, (2) all expenses required to preserve
and repair the Mortgaged Premises, to protect the Mortgaged Premises from waste,
so that the Mortgaged Premises is in at least as good a condition as existed on
the date upon which coverage under the Pool Insurance Policy with respect to
such Mortgaged Premises first became effective, ordinary wear and tear excepted,
(3) property sales expenses, (4) any outstanding liens on the Mortgaged
Premises, and (5) foreclosure costs including court costs and reasonable
attorneys' fees; and (c) if there has been physical loss or damage to the
Mortgaged Premises, to restore the Mortgaged Premises to its condition (ordinary
wear and tear excepted) as of the issue date of the Pool Insurance Policy. It
also will be a condition precedent to the payment of any claim under the Pool
Insurance Policy that the insured maintain a Primary Mortgage Insurance Policy
that is acceptable to the Pool Insurer on all Mortgage Loans that have
loan-to-value ratios at the time of origination in excess of 80%. Assuming
satisfaction of these conditions, the Pool Insurer will pay to the insured the
amount of the loss which will be: (a) the amount of the unpaid principal balance
of the Mortgage Loan immediately prior to the Approved Sale of the Mortgaged
Premises; (b) the amount of the accumulated unpaid interest on such Mortgage
Loan to the date of claim settlement at the contractual rate of interest; and
(c) reimbursable amounts advanced by the insured as described above, less
certain payments (including the proceeds of any prior Approved Sale and any
Primary Insurance Policies). The Pool Insurance Policy may not reimburse the
insured for attorneys' fees on a foreclosed Mortgage Loan in excess of 3% of the
unpaid balance of principal and interest of that Mortgage Loan. As a result,
legal expenses in excess of such reimbursement limitation may be charged as a
loss on the related Bonds. An Approved Sale is (1) a sale of the Mortgaged
Premises acquired by the insured because of a default by the Borrower to which
sale the Pool Insurer has given prior approval, (2) a pre-foreclosure,
foreclosure or trustee's sale of the Mortgaged Premises at a price exceeding the
minimum amount specified by the Pool Insurer, (3) the acquisition of the
Mortgaged Premises under the Primary Mortgage Insurance Policy by the related
Mortgage Insurer, or (4) the acquisition of the Mortgaged Premises by the Pool
Insurer. If the Pool Insurer elects to take title to the Mortgaged Premises, the
insured must, as a condition precedent to the payment of any such Loss, provide
the Pool Insurer with good and merchantable title to the Mortgaged Premises. If
any property securing a defaulted Mortgage Loan is damaged and the proceeds, if
any, from the related Standard Hazard Insurance Policy or the applicable Special
Hazard Insurance Policy are insufficient to restore the damaged property to a
condition sufficient to permit recovery under the Pool Insurance Policy, the
Servicer or the Master Servicer of the related Mortgage Loan will not be
required to expend its own funds to restore the damaged Mortgaged Premises
unless it determines and the Master Servicer agrees (A) that such restoration
will increase the proceeds to the Trust Estate on liquidation of the Mortgage
Loan after reimbursement of the Servicer or the Master Servicer for its expenses
and (B) that such expenses will be recoverable by it through Liquidation
Proceeds or Insurance Proceeds.
The Pool Insurance Policies will generally not insure (and many Primary
Insurance Policies may not insure) against loss sustained by reason of a default
arising from, among other things, (i) fraud or negligence in the origination or
servicing of a Mortgage Loan, including misrepresentation by the Borrower or the
Originator, (ii) failure to construct Mortgaged Premises in accordance with
plans and specifications, and (iii) a claim in respect of a defaulted Mortgage
Loan occurring when the Servicer of such Mortgage Loan, at the time of default
or thereafter, was not approved by the Mortgage Insurer. A failure of coverage
atributabe to one of the foregoing events might result in a breach of the
Participant's representations and warranties described under "Origination of
Mortgage Loans -- Representations and Warranties" and in such event, subject to
the limitations described therein, might give rise to an obligation on the part
of the Participant to purchase the defaulted Mortgage Loan if the breach cannot
be cured. See "Origination of Mortgage Loans -- Representations and Warranties."
In addition, if a terminated Servicer has failed to comply with its obligation
under the Servicing Agreement to purchase a Mortgage Loan
21
<PAGE>
upon which coverage under a Pool Insurance Policy has been denied on the grounds
of fraud, dishonesty or misrepresentation (or if the Servicer has no such
obligation), the Participant may be obligated to purchase the Mortgage Loan. See
"Servicing of the Mortgage Loans -- Maintenance of Insurance Policies; Claims
Thereunder and Other Realization Upon Defaulted Mortgage Loans."
The original amount of coverage under any Pool Insurance Policy securing a
Series will be reduced over the life of the Bonds of such Series by the
aggregate dollar amount of claims paid less the aggregate of the net amount
realized by the Pool Insurer upon disposition of all foreclosed Mortgaged
Premises covered thereby. The amount of claims paid includes certain expenses
incurred by the Servicer or the Master Servicer of the defaulted Mortgage Loan,
as well as accrued interest on delinquent Mortgage Loans to the date of payment
of the claim. See "Certain Legal Aspects of Mortgage Loans -- Foreclosure." The
net amounts realized by the Pool Insurer will depend primarily on the market
value of the Mortgaged Premises securing the defaulted Mortgage Loan. The market
value of the Mortgaged Premises will be determined by a variety of economic,
geographic, social, environmental and other factors and may be affected by
matters that were unknown and could not reasonably be anticipated at the time
the original loan was made.
If aggregate net claims paid under a Pool Insurance Policy reach the
original policy limit, coverage under the Pool Insurance Policy will lapse and
any further losses may affect adversely distributions to holders of Bonds of
such Series. In addition, unless the Servicer or Master Servicer could determine
that an advance in respect of a delinquent Mortgage Loan would be recoverable to
it from the proceeds of the liquidation of such Mortgage Loan or otherwise,
neither the Servicer nor the Master Servicer would be obligated to make an
advance respecting any such delinquency since the advance would not be
ultimately recoverable to it from either the Pool Insurance Policy or from any
other related source. See "Servicing of the Mortgage Loans -- Advances." The
original amount of coverage under the Pool Insurance Policy securing a Series
may also be reduced or cancelled to the extent each Rating Agency rating the
Series confirms that such reduction will not result in the lowering of the
rating of the Bonds of such Series.
Unless otherwise specified in the related Prospectus Supplement, a Pool
Insurance Policy may insure against losses on the Mortgage Loans securing other
Series of Securities or that secure other mortgage-backed securities or
collateralized mortgage obligations issued by the Issuer or one of its
affiliates, provided, however, that, at the time of the extension, such
extension of coverage (and corresponding assignment of the Pool Insurance
Policy) to any other Series or such other Bonds does not result in the lowering
by any Rating Agency rating a Series offered hereby of the rating of any Bonds
of such Series.
Credit Enhancement for the Mortgage Loans
Credit enhancements acceptable to each Rating Agency may be used to provide
for coverage of certain risks of default or losses on the Mortgage Loans. Any
such credit enhancement will be described in detail in the related Prospectus
Supplement. Such credit enhancements may be limited to one or more Classes of
Bonds and may include, but will not necessarily be limited to, any of the
following:
(i) Subordination in right of payment of one or more Classes to the
right of other Classes to receive payments, subject to such conditions and
limitations as may be described in the related Prospectus Supplement;
(ii) Pledge of additional collateral and any cash flow thereon by any
institution acceptable to each Rating Agency, which the Trustee may sell or
draw upon in the event amounts received as payments on the Mortgage Loans
are insufficient to make required payments on one or more Classes of Bonds.
Such pledge of additional collateral may be limited in amount and subject
to conditions, as described in the related Prospectus Supplement;
(iii) Limited guarantees against losses arising from defaults on the
Mortgage Loans, or against failure to make payments of principal of and
interest on the Bonds. Such guarantees may be limited to a specified
maximum dollar amount or may be subject to limitations having similar
effect;
(iv) Letters of credit issued by banks acceptable to each Rating
Agency, under which the Trustee may draw funds in the event amounts
received as payments on the Mortgage Loans are insufficient to make
required payments on a Class or Classes of Bonds. Such letters of credit
may be limited in amount and subject to conditions, as described in the
related Prospectus Supplement;
(v) Reserve Funds created by the deposit of assets at the time of the
issuance of the Bonds or by the accumulation of funds generated by the
Mortgage Loans, upon which the Trustee may draw in the event amounts
received as payments on the Mortgage Loans are insufficient to make
required payments on a Class or Classes of Bonds or by a combination of the
foregoing. The amounts held in such Reserve Funds will be invested in
Eligible Investments;
22
<PAGE>
(vi) Insurance policies issued by insurers acceptable to each Rating
Agency that provide for payment to the Trustee or the Servicer upon the
occurrence of certain casualty events at the Mortgaged Premises. Such
insurance policies may be limited in amount and subject to conditions, as
described above; and
(vii) Combinations of the foregoing.
Except as otherwise provided in the related Prospectus Supplement, each
Series of Bonds will be secured by the Mortgage Loans for that Series and
related property. The related Prospectus Supplement may specify that payments
received on such Mortgage Loans be paid (i) so as to prioritize, with respect to
right of payment, certain Classes of Bonds within a Series or (ii)
disproportionately among the various Classes of Bonds.
Unless otherwise specified in the related Prospectus Supplement, in the
event of delinquencies in payments of principal or interest on the Mortgage
Loans, the applicable Servicer and the Master Servicer (or the Special Servicer,
if any) will advance cash in the amounts described herein. Neither any Servicer,
the Master Servicer nor any Special Servicer will be obligated to make an
Advance that it (or in the case of the Servicer, the Master Servicer) reasonably
believes to be a Non-Recoverable Advance. See "Servicing of the Mortgage
Loans -- Advances."
There can be no assurance that real estate values will remain at present
levels in the areas in which the Mortgaged Premises will be located. If the real
estate market relating to Mortgage Loans in a particular pool should experience
an overall decline in property values, the actual rates of delinquencies,
foreclosures and losses could be significantly higher than those now generally
experienced in the mortgage lending industry. To the extent that such
delinquencies, foreclosures and losses are not covered by applicable credit
enhancements described in the related Prospectus Supplement, the Losses
resulting therefrom will be borne by Bondholders of the Series secured by such
pool as specified in the related Prospectus Supplement.
With respect to any Series as to which any Mortgage Loans have an
adjustable rate of interest, there may be a higher likelihood of defaults and
losses on the Mortgage Loans during periods of higher prevailing interest rates.
With respect to any Series as to which any Subordinated Class of Bonds will have
been issued, such losses, generally, first will be borne by the Issuer, to the
extent of any Surplus, and then by the Bondholders of any Subordinated Classes
of Bonds as a result and to the extent of the subordination in right of payment
of any Subordinated Classes of Bonds to any Senior Classes of Bonds, as
specified in the related Prospectus Supplement.
Insurance Policies and Surety Bonds
If so provided in the Prospectus Supplement for a Series of Bonds,
deficiencies in amounts otherwise payable on such Bonds or certain Classes
thereof will be covered by insurance policies and/or surety bonds provided by
one or more insurance companies or sureties. Such instruments may cover, with
respect to one or more Classes of Bonds of the related Series, timely payments
of interest and/or full payments of principal on the basis of a schedule of
principal payments set forth in or determined in the manner specified in the
related Prospectus Supplement. A copy of any such instrument for a Series will
be filed with the Commission as an exhibit to a Current Report on Form 8-K to be
filed with the Commission within 15 days of issuance of the Bonds of the related
Series.
ORIGINATION OF THE MORTGAGE LOANS
General
Each Mortgage Loan included in a Mortgage Pool securing a Series of Bonds
will be originated by a savings and loan association, savings bank, commercial
bank, credit union, or similar institution that is supervised and examined by a
federal or state authority, or by a mortgagee approved by HUD. In originating a
Mortgage Loan, the loan originator (the "Originator") will follow either (a) its
own credit approval process, to the extent that such process conforms to
underwriting standards generally acceptable to FNMA or FHLMC, or (b) the
Participant's various credit, appraisal and underwriting standards and
guidelines. The Prospectus Supplement will disclose the percentage of Mortgage
Loans in a Mortgage Pool securing a Series of Bonds that are originated using
the Participant's underwriting guidelines, and those originated using the
Originator's stricter underwriting guidelines. As discussed further in the
related Prospectus Supplement, the Participant's underwriting guidelines are
less stringent than those of FNMA or FHLMC, primarily in that they generally
permit the Borrower to have a higher debt-to-income ratio and a larger number of
derogatory credit items than do the guidelines of FNMA or FHLMC. However, the
Participant's underwriting guidelines require that the property appraisals
conform to FNMA or FHLMC appraisal standards then in effect.
23
<PAGE>
Both sets of underwriting standards are applied in a manner intended to
comply with applicable federal and state laws and regulations. The purpose of
applying these standards is to evaluate each prospective Borrower's credit
standing and repayment ability and the value and adequacy of the related
Mortgaged Premises as collateral.
The mortgage loans originated under the Participant's underwriting
standards generally are based on loan application packages submitted by mortgage
brokerage companies for underwriting review, approval and funding by the
Participant or an affiliate of the Participant. Originators who apply their own,
stricter underwriting standards review a similar loan application package in
their decision whether to approve and fund the mortgage loans. In general, a
prospective Borrower is required to complete a detailed application designed to
provide pertinent credit information. The prospective Borrower generally is
required to provide a current list of assets as well as an authorization for a
credit report which summarizes the Borrower's credit history with merchants and
lenders as well as any suits, judgments or bankruptcies that are of public
record. The Borrower may also be required to authorize verification of deposits
at financial institutions where the Borrower has demand or savings accounts.
In determining the adequacy of the Mortgaged Premises as collateral, an
appraisal is made of each property considered for financing by a qualified
independent appraiser approved by FNMA, FHLMC, the Participant or an affiliate
of the Participant. The appraiser is required to inspect the property and verify
that it is in good repair and that construction, if new, has been completed. The
appraisal is based on the market value of comparable homes and, if considered
applicable by the appraiser, the estimated rental income of the property and a
replacement cost analysis based on the current cost of constructing a similar
home. All appraisals are required to conform to FNMA or FHLMC appraisal
standards then in effect.
Once all applicable employment, credit and property information is
received, a determination generally is made as to whether the prospective
Borrower has sufficient monthly income available (i) to meet the Borrower's
monthly obligations on the proposed mortgage loan (generally determined on the
basis of the monthly payments due in the year of origination) and other expenses
related to the Mortgaged Premises (such as property tax and hazard insurance),
and (ii) to meet monthly housing expenses and other financial obligations and
monthly living expenses. The underwriting standards applied, particularly with
respect to the level of income and debt disclosure on the application and
verification, may be varied in appropriate cases where factors such as low
loan-to-value ratios or other favorable compensating factors exist.
A prospective Borrower applying for a loan pursuant to the full
documentation program is required to provide, in addition to the above, a
statement of income, expenses and liabilities (existing or prior). An employment
verification is obtained from an independent source (typically the prospective
Borrower's employer), which verification generally reports the length of
employment with that organization, the prospective Borrower's current salary and
whether it is expected that the prospective Borrower will continue such
employment in the future. If a prospective Borrower is self-employed, the
Borrower may be required to submit copies of signed tax returns. For other than
self-employed Borrowers, income verification may be accomplished by W-2 forms or
pay stubs that indicate year to date earnings.
Under the limited documentation program, greater emphasis is placed on the
value and adequacy of the Mortgaged Premises as collateral rather than on credit
underwriting, and certain credit underwriting documentation concerning income
and employment verification is therefore waived. Accordingly, the maximum
permitted loan-to-value ratios for loans originated under such program are
generally lower than those permitted for other similar loans originated pursuant
to the full documentation program.
Representations and Warranties
The Issuer generally will acquire Mortgage Loans from the Participant. The
Participant or an affiliate may act as a Servicer of Mortgage Loans securing the
Series or an unrelated entity may act as Servicer. The Participant will make
certain representations and warranties with respect to such Mortgage Loans in
the agreement by which the Participant transfers its interest in the Mortgage
Loans. Except as otherwise noted in the Prospectus Supplement for a Series, the
Participant will represent and warrant, among other things, as follows: (i) that
each Mortgage Loan has been originated in compliance with all applicable laws,
rules and regulations; (ii) that no Mortgage Loan is more than 60 days
delinquent as of the applicable Cut-off Date; (iii) that each Insurance Policy
is the valid and binding obligation of the Insurer; (iv) that each Security
Instrument constitutes a good and valid first or, if applicable, second lien on
the Mortgaged Premises; and (v) that the Borrower holds good and marketable
title to the Mortgaged Premises. Except as otherwise noted in the Prospectus
Supplement for a Series, the Participant is required to submit to the Trustee
with each Mortgage Loan a mortgagee title insurance policy, title insurance
binder, preliminary title report, or satisfactory evidence of title insurance.
If a preliminary title report is delivered initially, the Participant is
required to deliver a final title insurance policy or satisfactory evidence of
the existence of such a policy.
24
<PAGE>
In the event the Participant breaches a representation or warranty with
respect to a Mortgage Loan or if any principal document executed by the Borrower
relating to a Mortgage Loan is found to be defective in any material respect and
the breaching party cannot cure such breach of defect within the number of days
specified in the applicable agreement, the Trustee may require such breaching
party to purchase such Mortgage Loan upon deposit with the Trustee of funds
equal to the then Unpaid Principal Balance of such Mortgage Loan plus accrued
interest thereon at the Note Rate through the end of the month in which the
purchase occurs. In the event of a breach by the Participant of a representation
or warranty with respect to a Mortgage Loan or the delivery by the Participant
to the Trustee of a materially defective document with respect to a Mortgage
Loan, the Participant may under certain circumstances, in lieu of repurchasing
such Mortgage Loan, substitute a Mortgage Loan having characteristics
substantially similar to those of the defective Mortgage Loan. See "Security for
the Bonds -- Substitution of Mortgage Collateral." The Participant's obligation
to purchase a Mortgage Loan will not be guaranteed by the Issuer or any other
party, unless otherwise specified in the related Prospectus Supplement.
SERVICING OF THE MORTGAGE LOANS
General
For each Series secured by Mortgage Loans, various Servicers, which may
include Resource or an affiliate, will provide certain customary servicing
functions with respect to the Mortgage Loans securing such Series pursuant to
servicing agreements ("Servicing Agreements"), which will be pledged to the
Trustee to secure the Bonds. The Servicers will be entitled to withhold their
servicing fees and certain other fees and charges from payments on such Mortgage
Loans serviced by them. If so specified in the related Prospectus Supplement, a
Special Servicer may be appointed. The related Prospectus Supplement will
describe the duties and obligations of the Special Servicer, if any. A Special
Servicer will be entitled to a special servicing fee.
Each Servicer of one- to four-family Mortgage Loans generally will be
approved or will utilize a Sub-Servicer that is approved by FNMA or FHLMC as a
servicer of mortgage loans and must be approved by the Master Servicer. In
determining whether to approve a Servicer, the Master Servicer will review the
credit of the Servicer and, if necessary for the approval of the Servicer, the
Sub-Servicer, including capitalization ratios, liquidity, profitability and
other similar items that indicate financial ability to perform its obligations.
In addition, the Master Servicer's mortgage servicing personnel will review the
Servicer's and, if necessary, the Sub-Servicer's servicing record and evaluate
the ability of the Servicer (and Sub-Servicer) to conform with required
servicing procedures. Generally, the Master Servicer will not approve a Servicer
unless either the Servicer or Sub-Servicer, if any, (i) has serviced
conventional mortgage loans for a minimum of two years, (ii) maintains a loan
servicing portfolio of at least $300,000,000 and (iii) has GAAP tangible net
worth of at least $3,000,000. The Master Servicer will continue to monitor on a
regular basis the financial position and servicing performance of the Servicer
and, to the extent the Servicer does not meet the foregoing requirements, the
Sub-Servicer, if any.
The duties to be performed by the Servicers with respect to Mortgage Loans
securing a Series will include calculation, collection and remittance of
principal and interest payments, administration of mortgage escrow accounts, as
applicable, collection of insurance claims, foreclosure procedures and, if
necessary, the advance of funds to the extent certain payments are not made by
the Borrowers and are recoverable from late payments by the Borrower,
Liquidations Proceeds or Insurance Proceeds. Each Servicer also will provide
such accounting and reporting services as are necessary to enable the Master
Servicer to provide required information to the Issuer and the Trustee with
respect to the Mortgage Loans securing such Series. Each Servicer is entitled to
(i) a periodic servicing fee equal to a specified percentage of the outstanding
principal balance of each Mortgage Loan serviced by such Servicer and (ii)
certain other fees, including but not limited to, late payments, conversion or
modification fees and assumption fees. With the consent of the Master Servicer,
certain servicing obligations of a Servicer may be delegated to a Sub-Servicer
approved by the Master Servicer, provided, however, that the Servicer remains
fully responsible and liable for all of its obligations under the Servicing
Agreement.
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer will (i) administer and supervise the performance of the Servicers of
the Mortgage Loans for such Series of their duties and responsibilities under
the Servicing Agreements; (ii) maintain any insurance policies (other than
property specific Insurance Policies) providing coverage for losses on the
Mortgage Loans for such Series; (iii) calculate amounts payable to Bondholders
on each Payment Date; (iv) prepare periodic reports to the Trustee or the
Bondholders with respect to the foregoing matters; (v) prepare federal and state
tax and information returns; and (vi) prepare reports, if any, required under
the Securities Exchange Act of 1934, as amended. In addition, the Master
Servicer will receive, review and evaluate all reports, information and other
data provided by each Servicer to enforce the provisions of the Servicing
Agreements, to monitor each Servicer's servicing activities, to
25
<PAGE>
reconcile the results of such monitoring with information provided by the
Servicer and to make corrective adjustments to records of the Servicer and
Master Servicer, as appropriate.
The Master Servicer will be entitled to receive a portion of the interest
payments on the Mortgage Loans securing the Series remitted to cover its fees as
Master Servicer. The Master Servicer or the Trustee may terminate a Servicer who
has failed to comply with its covenants or breached one of its representations
contained in the Servicing Agreement. Upon termination of a Servicer by the
Master Servicer, the Master Servicer will assume certain servicing obligations
of the terminated Servicer or, at its option, may appoint a substitute Servicer
acceptable to the Trustee to assume the servicing obligations of the terminated
Servicer.
Forms of Servicing Agreements have been filed as exhibits to, or
incorporated by reference into, the Registration Statement of which this
Prospectus forms a part. The Issuer's rights under each Servicing Agreement with
respect to a Series will be assigned to the Trustee as security for such Series.
The descriptions contained herein do not purport to be complete and are
qualified in their entirety by reference to the form of Servicing Agreement.
Payments on Mortgage Loans
Pursuant to the Servicing Agreements with respect to a Series, each
Servicer will be required to establish and maintain one or more separate,
insured (to the available limits) custodial accounts (collectively, the
"Custodial P&I Account") into which the Servicer will be required to deposit on
a daily basis payments of principal and interest received with respect to
Mortgage Loans serviced by such Servicer that secure Bonds of such Series. To
the extent deposits in each Custodial P&I Account are required to be insured by
the FDIC, if at any time the sums in any Custodial P&I Account exceed the limits
of insurance on such account, the Servicer will be required within one business
day to withdraw such excess funds from such account and remit such amounts (i)
to a "Servicer Custodial Account," which shall be a custodial account maintained
at a separate institution designated by the Master Servicer or (ii) to the
Master Servicer for deposit in either the Collateral Proceeds Account for such
Series or the Master Servicer Custodial Account. The amounts so deposited
pursuant to (i) and (ii) above will be invested in Eligible Investments.
The Servicing Agreements will require each Servicer, not later than the
Remittance Date, to remit to the Master Servicer Custodial Account amounts
representing scheduled installments of principal and interest on the Mortgage
Loans securing such Series received or advanced by the Servicer that were due
during the related Due Period, principal prepayments, Insurance Proceeds and
Liquidation Proceeds received during the applicable Prepayment Period (as
specified in the Indenture for such Series), with interest to the last day of
the calendar month occurring in such Prepayment Period (subject to certain
limitations), and proceeds from the repurchase of Converted Mortgage Loans, less
applicable servicing fees and amounts representing reimbursement of Advances
made by the Servicer. On or before the related Master Servicer Remittance Date,
the Master Servicer will withdraw its master servicing fees from the Master
Servicer Custodial Account and remit to the Collateral Proceeds Account those
amounts allocable to the Bonds for such Payment Date. In addition, there will be
deposited in the Collateral Proceeds Account for such Series of Bonds any
Advances of principal and interest made by the Master Servicer or the Trustee
pursuant to the terms of the Master Servicing Agreement or Indenture to the
extent such amounts were not deposited in the Master Servicer Custodial Account
or received and applied by the Servicer.
Prior to each Payment Date for a Series, the Master Servicer will furnish
to the Trustee and to the Issuer a statement setting forth certain information
with respect to the Mortgage Loans securing such Series.
Advances
Unless otherwise provided in the related Prospectus Supplement, the
Servicing Agreements with respect to a Series will require each Servicer to
advance funds to cover, to the extent that such amounts are deemed to be
recoverable from any subsequent payments on the Mortgage Loans securing such
Series, (i) delinquent payments of principal of and interest on such Mortgage
Loans and (ii) delinquent payments of taxes, insurance premiums and other
escrowed items. If a Servicer defaults, the Master Servicer or the Trustee may,
if so provided in the Master Servicing Agreement or Indenture, respectively, be
required to make Advances to the extent necessary to make required payments on
certain Bonds, provided that such party deems such amounts to be recoverable.
As specified in the related Prospectus Supplement, the Advance obligation
of the Trustee, the Servicers and the Master Servicer may be further limited to
an amount specified (i) in the Indenture, the Servicing Agreement or the Master
Servicing Agreement or (ii) by a Rating Agency rating the Bonds. Any required
Advances by the Servicers, the Master Servicer or the Trustee, as the case may
be, must be deposited into the applicable Custodial P&I Account or Master
Servicer Custodial
26
<PAGE>
Account or into the Collateral Proceeds Account and will be due not later than
the Payment Date to which such delinquent payment relates. Amounts to be
advanced by the Servicers, the Master Servicer or the Trustee, as the case may
be, will be reimbursable out of future payments on the Mortgage Loans, Insurance
Proceeds or Liquidation Proceeds of the Mortgage Loans for which such amounts
were advanced. If an Advance made by a Servicer, the Master Servicer or the
Trustee later proves to be unrecoverable, such Servicer, the Master Servicer or
the Trustee, as the case may be, will be entitled to reimbursement from funds in
the Collateral Proceeds Account prior to the distribution of payments to the
Bondholders.
Any Advances made by the Servicers, the Master Servicer or the Trustee with
respect to Mortgage Loans securing any Series will be intended to enable the
Issuer to make timely payment of the scheduled principal and interest payments
on the Bonds of such Series and will be due not later than the Payment Date on
which such payments are scheduled to be made. However, none of the Trustee, the
Master Servicer nor any Servicer will insure or guarantee any Series or any
Mortgage Loan securing any Series, and their obligations to advance for
delinquent payments will be limited to the extent that such Advances, in the
judgment of the Master Servicer or the Trustee, will be recoverable out of
future payments on the Mortgage Loans, Insurance Proceeds or Liquidation
Proceeds of the Mortgage Loans from which such amounts were advanced.
Collection and Other Servicing Procedures
The Servicing Agreements with respect to a Series will require each
Servicer to make reasonable efforts to collect all payments called for under the
Mortgage Loans securing such Series and under the applicable Insurance Policies
with respect to each such Mortgage Loan and, consistent with the Servicing
Agreement, to follow such collection procedures as it normally would follow with
respect to mortgage loans serviced for FNMA.
The Security Instrument used in originating a conventional Mortgage Loan
may, at the lender's option, contain a "due-on-sale" clause. See "Certain Legal
Aspects of the Mortgage Loans -- Due-On-Sale Provisions." The Servicing
Agreements will require the Servicers to use reasonable efforts to enforce
"due-on-sale" clauses with respect to any Security Instrument containing such a
clause provided that the coverage of any applicable Insurance Policy will not be
adversely affected thereby. In any case in which Mortgaged Premises have been or
are about to be conveyed by the Borrower and the "due-on-sale" clause has not
been enforced or the related note is by its terms assumable, the Servicer will
be authorized to take or enter into an assumption agreement from or with the
person to whom such property has been or is about to be conveyed, if such person
meets certain loan underwriting criteria, including the criteria necessary to
maintain the coverage provided by the applicable Insurance Policies or if
otherwise required by law. In the event that the Servicer enters into an
assumption agreement in connection with the conveyance of any such Mortgaged
Premises, the Servicer will release the original Borrower from liability upon
the Mortgage Loan and substitute the new Borrower as obligor thereon. In no
event can the assumption agreement permit a decrease in the mortgage interest or
an increase in the term of the Mortgage Loan. Fees collected for entering into
an assumption agreement will be retained by the Servicer of the Mortgage Loan.
Defaulted Mortgage Loans
With respect to any Mortgage Loan on which a material default has occurred
or a payment default is imminent, the Servicer may, with the approval of the
Master Servicer in most cases, negotiate a forbearance or modification agreement
with the Borrower. A "forbearance" consists of a temporary reduction in the
Scheduled Payment that a Borrower is required to make with respect to a Mortgage
Loan, provided that the payment of principal and interest is only deferred and
not forgiven. A "modification" consists of a permanent reduction in the
Scheduled Payment that a Borrower is required to make with respect to a Mortgage
Loan, and may result in a Realized Loss on the Mortgage Loan. A modification may
involve the reduction in the Note Rate, the Unpaid Principal Balance of the
Mortgage Loan, or both. A forbearance or modification of a Mortgage Loan only
will be permitted if the Servicer and, if required, the Master Servicer have
determined that in their good faith business judgment that granting such
forbearance or modification will maximize the recovery on such Mortgage Loan to
the Trust Estate on a present value basis. In determining whether to grant a
forbearance or a modification, the Servicer, and if required, the Master
Servicer will take into account the willingness of the Borrower to perform on
the Mortgage Loan, the general condition of the Mortgaged Premises and the
likely proceeds from the foreclosure and liquidation of the Mortgaged Premises.
Except as otherwise specified in the Prospectus Supplement, the Issuer will
be entitled to purchase any Mortgage Loan that has a payment that is 90 days
past due upon payment to the Trustee of the Unpaid Principal Balance of such
Mortgage Loan plus accrued and unpaid interest thereon through the Payment Date
following the date of purchase.
27
<PAGE>
The Servicers will not exercise any discretion with respect to changes in
any of the terms of any Mortgage Loan (including but not limited to the Note
Rate and whether the term of the Mortgage Loan is extended for a further period
and the specific provisions applicable to such extension) or the disposition of
REO without the consent of the Master Servicer.
Maintenance of Insurance Policies; Claims Thereunder and Other Realization Upon
Defaulted Mortgage Loans
The Servicing Agreements require each Servicer to maintain, in full force
and effect as long as coverage is required under the Servicing Agreement,
standard hazard insurance, flood insurance and any primary mortgage insurance
policies relating to each Mortgage Loan that it services.
If any Mortgaged Premises securing a defaulted Mortgage Loan securing a
Series is damaged and the proceeds, if any, from the related Standard Hazard
Insurance Policy are insufficient to restore the damaged property to the
condition to permit recovery under the related Insurance Policy, the Servicer
will not be required to expend its own funds to restore the damaged property
unless it determines that such expenses will be recoverable by it through
Liquidation Proceeds or through Insurance Proceeds. Each Servicing Agreement and
the Master Servicing Agreement with respect to a Series will require the
Servicer or the Master Servicer, as the case may be, to present claims to the
insurer under any Insurance Policy applicable to the Mortgage Loans securing
such Series and to take such reasonable steps as are necessary to permit
recovery under such Insurance Policy with respect to defaulted Mortgage Loans or
losses on the Mortgaged Premises securing such Mortgage Loans.
If recovery under the applicable Insurance Policy is not available, the
Servicer or the Master Servicer nevertheless will be obligated to follow
standard practice and procedures to realize upon the defaulted Mortgage Loan.
See "Certain Legal Aspects of the Mortgage Loans -- Environmental
Considerations." In this regard, the Servicer or Master Servicer will sell the
Mortgaged Premises pursuant to foreclosure, trustee's sale or, in the event a
deficiency judgment is available against the mortgagor or other person and
proceed to seek recovery of the deficiency against the appropriate person. To
the extent that the proceeds of any such Liquidation proceedings are less than
the Collateral Value of the defaulted Mortgage Loan, there will be a reduction
in the value of the Collateral for the Series secured by such Mortgage Loan such
that the holders of Bonds of such Series may not receive full principal of and
interest on such Bonds.
The Master Servicer with respect to a Series may be required to maintain
any Special Hazard Insurance Policy and any Pool Insurance Policy for such
Series in full force and effect throughout the term of the Master Servicing
Agreement, subject to payment of the applicable premiums by the Trustee. The
Master Servicer will be required to notify the Trustee to pay the
premiums for any such Special Hazard Insurance Policy and any such Pool
Insurance Policy for such Series on a timely basis. Any such premiums may be
payable on a monthly basis in advance, or pursuant to any other payment schedule
acceptable to the applicable insurer. In the event that such Special Hazard
Insurance Policy or such Pool Insurance Policy for such Series is cancelled or
terminated for any reason (other than the exhaustion of total policy coverage),
the Master Servicer will be obligated to obtain from another insurer a
comparable replacement policy with a total coverage which is equal to the then
existing coverage (or such lesser amount if the Master Servicer confirms in
writing with the Rating Agencies rating the Bonds that such lesser amount will
not impair the rating on the Bonds) of such Special Hazard Insurance Policy or
such Pool Insurance Policy or other form of substitute credit enhancement as the
Rating Agencies rating the Bonds confirm in writing will not impair the ratings
on the Bonds. However, if the cost of any such replacement policy or bond is
greater than the cost of the policy or bond which has been terminated, then the
amount of the coverage either will be reduced to a level such that the
applicable premium will not exceed the cost of the premium for the policy or
bond that was terminated or the Master Servicer may secure such replacement
policy or other credit enhancement at such increased cost, so long as such
increase in cost will not adversely affect amounts available to make payments of
principal or interest on the Bonds.
Evidence as to Servicing Compliance
Within 120 days of the end of each of its fiscal years the Servicer must
provide the Master Servicer with a copy of its audited financial statements for
the year and a statement from the firm of independent public accountants that
prepared the financial statements to the effect that, in preparing such
statements, it reviewed the results of the Servicer's servicing operations in
accordance with the Uniform Single-Audit procedures for mortgage banks developed
by the Mortgage Bankers Association. In addition, the Servicer will be required
to deliver an officer's certificate to the effect that it has fulfilled its
obligations under the Servicing Agreement during the preceding fiscal year or
identifying any ways in which it has failed to fulfill its obligations during
the fiscal year and the steps that have been taken to correct such failure. The
Master Servicer will be required to promptly make available to the Trustee any
compliance reporting that it receives from a Servicer.
28
<PAGE>
Each year the Master Servicer will review each Servicer's performance under
its Servicing Agreement and the status of any fidelity bond and errors and
omissions policy required to be maintained by the Servicer under the Servicing
Agreement.
Events of Default and Remedies
Events of default under the Servicing Agreement in respect of a Series of
Bonds will consist of (i) any failure by the Servicer to remit to the Master
Servicer Custodial Account any payment required to be made by a Servicer under
the terms of the Servicing Agreement that is not remedied within at least one
Business Day; (ii) any failure on the part of a Servicer to observe or perform
in any material respect any other of its covenants or agreements contained in
the Servicing Agreement that continues unremedied for a specified period after
the giving of written notice to the Servicer by the Master Servicer; (iii)
certain events of insolvency, readjustment of debt, marshaling of assets and
liabilities or similar proceedings regarding a Servicer; or (iv) certain actions
by or on behalf of the Servicer indicating its insolvency or inability to pay
its obligations.
The Master Servicer will have the right pursuant to the Servicing Agreement
to terminate a Servicer upon the occurrence of an event of default by the
Servicer of any of its obligations under the Servicing Agreement. In the event
of such termination, the Master Servicer will appoint a substitute Servicer
(which may be the Master Servicer) acceptable to the Master Servicer and
approved by the Trustee (which shall be given upon receipt of written
confirmation by each Rating Agency that such appointment will not adversely
effect the ratings then in effect on the Bonds). Any successor servicer,
including the Master Servicer or the Trustee, will be entitled to compensation
arrangements similar to those provided to the Servicer.
Master Servicing Agreement
Except as otherwise specified in the related Prospectus Supplement,
Resource will act as the master servicer (in such capacity, the "Master
Servicer") of the Mortgage Loans pursuant to the terms of the Master Servicing
Agreement between Resource and the Issuer. Pursuant to the Master Servicing
Agreement, the Master Servicer (i) will supervise the servicing of the Mortgage
Loans by the Servicers, (ii) will instruct, among other things, each Servicer as
to the proper actions to be taken with respect to a defaulted Mortgage Loan,
(iii) will be responsible for providing general administrative services with
respect to the Bonds, and (iv) will make Advances to the limited extent
described herein. The Master Servicer may engage various independent contractors
to perform certain of its responsibilities, provided, however, that the Master
Servicer remains fully responsible and liable for all of its obligations under
the Master Servicing Agreement (other than those specifically undertaken by a
Special Servicer). The Master Servicer will be entitled to a monthly master
servicing fee applicable to each Mortgage Loan expressed as a fixed percentage
of the remaining Scheduled Principal Balance of such Mortgage Loan as of the
first day of the immediately preceding Due Period. It is anticipated that the
master servicing fee will range between 0.020%-0.050% per annum of the Scheduled
Principal Balance of the Mortgage Loans, depending upon the structure of the
related transaction. The related Prospectus Supplement will specify the actual
amount of the master servicing fee. The Issuer will assign its rights to enforce
the obligations of the Master Servicer under that agreement to the Trustee as
security for the Bonds.
The form of Master Servicing Agreement pursuant to which the Master
Servicer will master service the Mortgage Loans will be filed or incorporated by
reference as an exhibit to the Registration Statement of which this Prospectus
is a part. The summaries of the obligations of the Master Servicer contained
herein do not purport to be complete and are subject to, and qualified in their
entirety by reference to, the Master Servicing Agreement.
Special Servicing Agreement
The Master Servicer may appoint a Special Servicer to undertake certain
responsibilities of the Servicer with respect to certain defaulted Mortgage
Loans securing a Series. The Special Servicer may engage various independent
contractors to perform certain of its responsibilities, provided, however, the
Special Servicer remains fully responsible and liable for all of its
requirements under the special servicing agreement (the "Special Servicing
Agreement"). As may be further specified in the related Prospectus Supplement,
the Special Servicer, if any, may be entitled to various fees, including, but
not limited to, (i) a monthly engagement fee applicable to each Mortgage Loan or
related REO, expressed as a fixed percentage of the Scheduled Principal Balance
of such Mortgage Loan or REO as of the first day of the immediately preceding
Due Period, (ii) a special servicing fee expressed as a fixed percentage of the
remaining Scheduled Principal Balance of each specially serviced Mortgage Loan
or related REO, or (iii) a performance fee applicable to each liquidated
Mortgage Loan based upon the Liquidation Proceeds.
29
<PAGE>
THE INDENTURE
The following summaries describe certain provisions of the Indenture. When
particular provisions or terms used in the Indenture are referred to, the actual
provisions (including definitions of terms) are incorporated by reference as
part of such summaries.
General
The Indenture does not limit the amount of Bonds that can be issued
thereunder and provides that Bonds of any Series may be issued thereunder up to
the aggregate principal amount that may be authorized from time to time by the
Issuer. The Indenture provides that additional Bonds may be issued for any
outstanding Class or Series up to the aggregate principal amount authorized from
time to time by the Issuer, subject to the provisions of the related Series
Supplement or supplements thereto.
The Bonds of each Series will be issued in fully-registered certificated or
book-entry form in the authorized denominations for each Class of Bonds
specified in the related Prospectus Supplement. The Bonds of each Series in
certificated form may be transferred or exchanged at the corporate trust office
of the Trustee without the payment of any service charge, other than any tax or
other governmental charge payable in connection therewith. Unless otherwise
specified in the related Prospectus Supplement, the Trustee will make payments
of principal of and interest on the Bonds of a Series in certificated form by
checks mailed to registered Bondholders of the Bonds at their addresses
appearing on the books and records of the Issuer, except that the final payments
in retirement of each Class of Bonds of a Series in certificated form will be
made only upon presentation and surrender of such Bonds at the office or agency
of the Issuer maintained for that purpose. If provided in the related Prospectus
Supplement, upon receipt of written instructions and the payment of any required
charge or fee, payments on certain Bonds of a Series may be made to certain
Bondholders of such Bonds by the Trustee by wire transfer of immediately
available funds. Payment and transfer procedures for Bonds in book-entry form
will be as specified herein in "Description of the Bonds -- Book-Entry
Procedures" and in the related Prospectus Supplement.
Modification of Indenture
With the consent of the Holders of not less than a majority in principal
balance of the outstanding Bonds of each Series to be affected or, if fewer than
all Classes of a Series would be affected, of each Class to be affected, the
Trustee and the Issuer may execute a supplemental indenture to add provisions
to, or change in any manner or eliminate provisions of, the Indenture relating
to such Series, or to such Class or Classes, or modify in any manner the rights
of the Holders of the Bonds of such Series, or of such Class or Classes. If any
such supplemental indenture would adversely affect the Holders of any Senior
Bonds or of any Subordinated Bonds, then approval of Holders of a majority in
principal balance of such outstanding Senior Bonds or of such outstanding
Subordinated Bonds, as the case may be, would also be required.
Without the consent of the Bondholders of each outstanding Bond affected,
however, no supplemental indenture may (i) change the Stated Maturity Date of
the principal of, or timing of any installment of principal or interest on, any
Bond, reduce the principal amount thereof or the interest thereon or the
redemption price thereof or the time for redemption with respect thereto, change
the provisions relating to the application of proceeds of the Trust Estate to
the payment of principal on the Bonds, change any place where, or the currency
in which, any Bond or interest thereon is payable, or impair the right to
institute suit for payment on or after the maturity thereof or, in the case of
redemption, on or after the redemption date, (ii) reduce the percentage in
principal amount of Bonds of the affected Series whose Holders must consent to
any supplemental indenture or to any waiver of compliance with certain
provisions of the Indenture or certain defaults thereunder or their
consequences, (iii) impair or adversely affect the Collateral securing a Series,
(iv) permit the creation of any lien ranking prior to or on a par with the lien
of the Indenture with respect to any part of the Trust Estate or terminate the
lien of the Indenture on any part of the Trust Estate or terminate the lien of
the Indenture on any property at any time subject to the Indenture or deprive
the Holder of the security afforded by the lien of the Indenture, (v) change the
definition of default under the Indenture, or reduce the percentage of
Bondholders of Bonds of any Series whose consent is required to direct the
Trustee to liquidate the Collateral for such Series (vi) change any condition
precedent for the redemption of any Series of Bonds or (vii) modify any of the
provisions of the Indenture with respect to supplemental indentures except to
increase the percentage of outstanding Bonds whose consent is required for any
such action or to provide that certain other provisions of the Indenture cannot
be modified or waived without the consent of the Bondholders of each outstanding
Bond of a Class affected thereby. The issuance of additional Bonds in accordance
with the provisions and limitations contained in a Series Supplement relating to
outstanding Bonds will be deemed not to have changed the timing of any
installment of principal of or interest on
30
<PAGE>
any outstanding Class of Bonds issued under such Series Supplement for purposes
of requiring Bondholder consent pursuant to clause (i) above.
The Issuer and the Trustee, upon advice of counsel, also may enter into
supplemental indentures, without obtaining the consent of Bondholders, for the
purpose of, among other things, (i) setting forth the terms of and security for
any previously unissued Series, (ii) adding to the covenants of the Issuer or
the Trustee for the benefit of the Bondholders, and (iii) curing ambiguities, or
correcting or supplementing any defective, ineffective or inconsistent provision
or amending any other provision with respect to matters or questions relating to
the Indenture, provided the interests of the Bondholders would not be materially
adversely affected. For purposes of clause (iii) above, among other things, a
supplemental indenture will be conclusively deemed not to adversely affect a
particular Series if (i) the Trustee receives a letter or other writing from
each Rating Agency rating the Class or Series to the effect that execution of
the supplemental indenture will not result in any change in the current rating
assigned by that Rating Agency to the Class or Series and (ii) the supplemental
indenture effects no change in principal priority schedules, interest rates,
redemption prices, substitution of Mortgage Loans, Payment Dates, record dates,
Accounting Dates, terms of optional or mandatory redemption, application of
Surplus to the payment of a Series or other payment terms established by the
Series Supplement for the Series.
Events of Default
An event of default ("Event of Default") with respect to a Series or Class
of Bonds will be described in the related Prospectus Supplement. Generally, an
Event of Default with respect to the Senior Bonds of a Series (and, so long as
91 days have passed during which no Senior Bond has been outstanding, the
Subordinated Bonds of a Series) is (i) failure to pay required interest and
principal when any related available credit enhancement amount has been reduced
to zero, (ii) failure to pay principal in full prior to the Stated Maturity Date
for such Bonds and (iii) default in the performance of certain covenants in the
Indenture and the continuation of such default for 60 days after notice to the
Issuer by the Trustee or to the Trustee and the Issuer by the Bondholders of at
least 25% in principal amount of such Bonds. Certain events of bankruptcy,
insolvency, reorganization or receivership of the Issuer constitute an Event of
Default for all Bonds of a Series.
Unless otherwise specified in the related Prospectus Supplement, (i) a
breach of a representation, warranty or covenant in the Servicing Agreement or
Master Servicing Agreement will not constitute an Event of Default under the
Indenture and (ii) an Event of Default with respect to one Series will not
constitute an Event of Default with respect to any other Series.
Within 90 days after the occurrence of any default that is, or with notice
or the lapse of time or both would become, an Event of Default with respect to
the Bonds, the Trustee is required under the Indenture to transmit notice of
such default, if known to the Trustee, to all Bondholders, unless such default
shall have been cured or waived, or the Trustee determines in good faith that
the withholding of such notice is in the interest of the Bondholders.
If an Event of Default with respect to the Senior Bonds of a Series occurs
and is continuing, the Bondholders of not less than 25% in principal balance of
the outstanding Senior Bonds of such Series may declare the principal of all of
the Bonds of such Series to be immediately due and payable, by a notice in
writing to the Issuer and to the Trustee. If an Event of Default with respect to
the Subordinated Bonds of a Series occurs and is continuing, the Bondholders of
not less than 25% in principal balance of the outstanding Subordinated Bonds
(and of the outstanding Senior Bonds, if any) of such Series may declare the
principal of all of the Bonds of such Series to be immediately due and payable,
by a notice in writing to the Issuer and to the Trustee. Any such declaration
may be rescinded by the Bondholders of not less than a majority in principal
balance of the outstanding Bonds that were entitled to vote on the declaration.
Following any such declaration that is not rescinded, the Trustee shall sell the
Collateral as described in the Indenture. If an Event of Default has occurred
and is continuing and no Bonds of the Series have been declared due and payable,
or any such declaration and its consequences has been rescinded, the Trustee
may, and on the direction of a majority in principal balance of the outstanding
Senior Bonds (or, if no Senior Bonds are outstanding, Subordinated Bonds) shall
give notice to the Issuer of its election to preserve the Trust Estate, collect
the proceeds thereof and make and apply all payments in respect of the Bonds in
accordance with the Indenture.
Proceeds from the liquidation of the Collateral for a Series of Bonds will
be applied, after all required payments and reimbursements to the Trustee,
Servicer, Master Servicer and Special Servicer in the order set forth in the
Series Supplement and related Prospectus Supplement for such Series of Bonds.
Declaration of acceleration and liquidation of the Collateral pursuant to the
foregoing procedures shall be the sole remedy for the Bondholders upon an Event
of Default. In the event that a Series of Bonds is declared due and payable, as
described above, and the Collateral securing the Bonds is sold, the net proceeds
from such sale may be insufficient to pay the full unpaid amount of principal of
and interest due on each outstanding Class of Bonds of such Series. Furthermore,
in the event that the principal of the Bonds of a Series is declared due and
payable, as described above, and the Collateral securing such Series is sold,
the Bondholders of any Discount Bonds may be
31
<PAGE>
entitled to receive no more than an amount equal to the unpaid principal amount
thereof less the unamortized original issue discount. No assurance can be given
about how the amount of the original issue discount that has not been amortized
will be determined.
Subject to the provisions of the Indenture relating to the duties of the
Trustee in case an Event of Default will occur and be continuing, the Trustee
will be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any Bondholders of the Bonds of a
Series, unless such Bondholders will have offered to the Trustee reasonable
security or indemnity. Subject to such provisions for indemnification and
certain limitations contained in the Indenture, Holders of a majority in
principal amount of the outstanding Senior Bonds (or the most senior of any
Subordinated Bonds if no Senior Bonds are outstanding) of a Series will have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or exercising any trust or power conferred on
the Trustee with respect to the Bonds of such Series; and the Bondholders of the
majority in principal amount of the outstanding Senior Bonds (or the
Subordinated Bonds if no Senior Bonds are outstanding) of a Series may, in
certain cases, waive any default with respect to such Series.
No Bondholder of any of the Bonds of a Series will have the right to
institute any proceeding with respect to the Indenture, unless (i) such
Bondholder previously has given to the Trustee written notice of an Event of
Default, (ii) the Bondholders of not less than 25% in principal amount of the
outstanding Senior Bonds (or the Subordinate Bonds if no Senior Bonds are
outstanding) of the same Series have made written request upon the Trustee to
institute such proceedings in its own name as Trustee and have offered the
Trustee reasonable indemnity, (iii) the Trustee has for 60 days failed to
institute any such proceeding, and (iv) no direction inconsistent with such
written request has been given to the Trustee during such 60-day period by the
Holders of a majority in principal amount of the outstanding Senior Bonds (or
the Subordinated Bonds if no Senior Bonds are outstanding) of a Series.
Except as otherwise provided in the related Prospectus Supplement, at such
time as an Event of Default for a Series is declared and so long as Senior Bonds
of such Series remain outstanding, the Trustee will cease to act on behalf of
the Holders of Subordinated Bonds and will thereafter act only on behalf of the
Holders of the Senior Classes of Bonds. The Issuer is required in such
circumstances to appoint a separate trustee for the Holders of the Subordinated
Bonds. Such trustee may seek to act in a manner adverse to the Holders of the
Senior Bonds, and such action may result in a delay in disposition of the Trust
Estate or the exercise of other remedies and, consequently, a delay in payment
to the Holders of the Senior Bonds. Should the Issuer fail to appoint a separate
trustee within 60 days after such Event of Default, the Trustee will petition a
court of competent jurisdiction to appoint a separate trustee.
Authentication and Delivery of Bonds
The Issuer may from time to time deliver Bonds executed by it to the
Trustee and request that the Trustee authenticate such Bonds. Upon the receipt
of such Bonds and such request, and subject to the Issuer's compliance with
certain conditions specified in the Indenture, the Trustee will authenticate and
deliver such Bonds as the Issuer may direct.
List of Bondholders
Three or more Bondholders of the Bonds of a Series, each of whom has owned
a Bond of such Series for at least six months, may, by written request to the
Trustee, obtain access to the list of all Bondholders of Bonds of the same
Series or of all Bonds, as specified in the request, maintained by the Trustee
for the purpose of communicating with other Bondholders with respect to their
rights under the Indenture. The Trustee may elect not to afford the requesting
Bondholders access to the list of Bondholders if it agrees to mail the desired
communication or proxy, on behalf of the requesting Bondholders, to all such
Bondholders.
Annual Compliance Statement
The Issuer will be required to file annually with the Trustee a written
statement as to fulfillment of its obligations under the Indenture.
Reports to Bondholders
On or before each Payment Date for a Series, the Trustee will transmit by
mail to each Bondholder of such Series a report with respect to the principal
balance of the Bonds of such Series held by such Bondholder as of the
immediately preceding Payment Date and the amount of principal, interest and
premium, if any, paid with respect to the Bonds of such Series held by such
Bondholder since the immediately preceding Payment Date. Such report also will
include information
32
<PAGE>
regarding the levels of delinquencies and Losses on the Mortgage Loans in the
related Mortgage Pool, losses with respect to each related Class of Bonds, and
the amount of servicing and master servicing fees paid with respect to the
Mortgage Loans in the related Mortgage Pool for the applicable Payment Date.
Trustee's Annual Report
The Trustee under present law is required to mail each year to all
registered Bondholders of Bonds of a Series a brief report with respect to any
of the following events that may have occurred within the previous year (but if
no such event has occurred, no report is required): any change in its
eligibility and qualifications to continue as the Trustee under the Indenture,
any amounts advanced by it under the Indenture, the amount, interest rate and
maturity date of certain indebtedness owing by the Issuer to it in the Trustee's
individual capacity, any change in the property and funds relating to such
Series physically held by the Trustee as such, any additional issue of Bonds of
such Series not previously reported, any change in the release or release and
substitution of any property relating to such Series subject to the lien of the
Indenture, and any action taken by it that materially affects the Bonds or the
Trust Estate for such Series and that has not been previously reported. In any
event, the Trustee will make such information available to all Bondholders on an
annual basis.
Trustee
The Trustee for each Series of Bonds will be specified in the respective
Prospectus Supplement. The commercial bank or trust company serving as Trustee
may have normal banking relationships with the Issuer or any of its affiliates.
The Trustee may resign at any time, in which event the Issuer will be
obligated to appoint a successor Trustee. The Issuer may remove the Trustee and
appoint a successor Trustee if the Trustee ceases to be eligible to act as
Trustee under the Indenture or if the Trustee becomes insolvent or otherwise
incapable of acting with respect to any Series of Bonds. The Issuer may also
remove the Trustee and appoint a successor Trustee for any Series of Bonds at
any time provided that the Issuer receives confirmation that the appointment of
the successor Trustee will not result in the lowering of the rating of that
Series of Bonds. The Trustee with respect to a Series of Bonds may also be
removed at any time by the holders of a majority in principal amount of the
Bonds of such Series then outstanding.
Any resignation and removal of the Trustee, and the appointment of a
successor Trustee, will not become effective until acceptance of such
appointment by the successor Trustee. The Trustee, and any successor Trustee,
each will have a combined capital and surplus of at least $50,000,000, or will
be a member of a bank holding system, the aggregate combined capital and surplus
of which is at least $50,000,000, provided that the Trustee's and any such
successor Trustee's separate capital and surplus shall at all times be at least
the amount specified in Section 310(a)(2) of the Trust Indenture Act of 1939 and
that the Trustee and such successor Trustee will be subject to supervision or
examination by federal or state authorities and will have an office in the
United States.
Satisfaction and Discharge of the Indenture
The Indenture will be discharged as to a Series upon the cancellation of
all of the Bonds of such Series or, with certain limitations, upon deposit with
the Trustee of funds sufficient for the payment or redemption thereof.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans that are general in nature. Because such legal aspects are
governed by applicable state law (which laws may differ substantially), the
summaries do not purport to be complete nor to reflect the laws of any
particular state, or to encompass the laws of all states in which the Mortgage
Premises are situated. The summaries are qualified in their entirety by
reference to the applicable federal and state laws governing the Mortgage Loans.
Mortgages
The Mortgage Loans will be secured by Security Instruments consisting of
either mortgages or deeds of trust or deeds to secure debt, depending upon the
prevailing practice in the state in which the Mortgaged Premises is located. The
filing of a mortgage, deed of trust or deed to secure debt creates a lien or
title interest upon the real property covered by such instrument and represents
the security for the repayment of an obligation that is customarily evidenced by
a promissory note. It is not prior to the lien for real estate taxes and
assessments or other charges imposed under governmental police powers. Priority
with respect to such instruments depends on their terms, on the knowledge of the
parties to the mortgage and generally on the
33
<PAGE>
order of recording with the applicable state, county or municipal office. There
are two parties to a mortgage, the mortgagor, who is the borrower/owner or the
land trustee (as described below), and the mortgagee, who is the lender. Under
the mortgage instrument, the mortgagor delivers to the mortgagee a note or bond
and the mortgage. In the case of a land trust, there are three parties because
title to the property is held by a land trustee under a land trust agreement of
which the borrower/owner is the beneficiary. At origination of a mortgage loan,
the borrower executes a separate undertaking to make payments on the mortgage
note. A deed of trust transaction normally has three parties, the trustor, who
is the borrower/owner, the beneficiary, who is the lender, and the trustee, a
third-party grantee. Under a deed of trust, the trustor grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale, to
the trustee to secure payment of the obligation. The mortgagee's authority under
a mortgage and the trustee's authority under a deed of trust are governed by the
law of the state in which the real property is located, the express provisions
of the mortgage or deed of trust, and, in some cases in deed of trust
transactions, the directions of the beneficiary.
Foreclosure
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust that authorizes
the trustee to sell the property upon any default by the borrower under the
terms of the note or deed of trust. In some states, the trustee must record a
notice of default and send a copy to the borrower-trustor and to any person who
has recorded a request for a copy of a notice of default and notice of sale. In
addition, the trustee in some states must provide notice to any other individual
having an interest in the real property, including any second lienholders. The
trustor, borrower or any person having a junior encumbrance on the real estate
may, during a reinstatement period, cure the default by paying the entire amount
in arrears plus the costs and expenses incurred in enforcing the obligation.
Generally, state law controls the amount of foreclosure expenses and costs,
including attorney's fees, that may be recovered by a lender. If the deed of
trust is not reinstated, a notice of sale must be posted in a public place and
in most states, published for a specific period of time in one or more
newspapers. In addition, some state laws require that a copy of the notice of
sale be posted on the property, recorded and sent to all parties having an
interest in the real property.
An action to foreclose a mortgage generally is accomplished by judicial
action to recover the mortgage debt by enforcing the mortgagee's rights under
the mortgage. It is regulated by statutes and rules and subject throughout to
the court's equitable powers. Generally, a mortgagor is bound by the terms of
the mortgage note and the mortgage as made and cannot be relieved from his
default if the mortgagee has exercised his rights in a commercially reasonable
manner. However, because a foreclosure action historically was equitable in
nature, the court may exercise equitable powers to relieve a mortgagor of a
default and deny the mortgage foreclosure on proof that either the mortgagor's
default was neither willful nor in bad faith or the mortgagee's action
established a waiver, fraud, bad faith, or oppressive or unconscionable conduct
such as to warrant a court of equity to refuse affirmative relief to the
mortgagee. Under certain circumstances a court of equity may relieve the
mortgagor from an entirely technical default where such default was not willful.
A foreclosure action is subject to most of the delays and expenses of other
lawsuits if defenses or counterclaims are interposed, sometimes requiring up to
several years to complete. Moreover, a noncollusive, regularly conducted
foreclosure sale may be challenged as a fraudulent conveyance, regardless of the
parties' intent, if a court determines that the sale was for less than fair
consideration and such sale occurred while the mortgagor was insolvent and
within one year (or within the state statute of limitations if the trustee in
bankruptcy elects to proceed under state fraudulent conveyance law) of the
filing of bankruptcy. Similarly a suit against the debtor on the mortgage note
may take several years and, generally, is a remedy alternative to foreclosure,
the mortgagee being precluded from pursuing both at the same time.
In case of foreclosure under either a mortgage or a deed of trust, the sale
by the referee or other designated officer or by the trustee is a public sale.
However, because of the difficulty potential third party purchasers at the sale
have in determining the exact status of title and because the physical condition
of the property may have deteriorated during the foreclosure proceedings, it is
uncommon for a third party to purchase the property at a foreclosure sale.
Rather, it is common for the lender to purchase the property from the trustee or
referee for an amount which may be equal to the principal amount of the mortgage
or deed of trust plus accrued and unpaid interest and the expenses of
foreclosure, in which event the mortgagor's debt will be extinguished or the
lender may purchase for a lesser amount in order to preserve its right against a
borrower to seek a deficiency judgment in states where such a judgment is
available. Thereafter, the lender will assume the burdens of ownership,
including obtaining casualty insurance, paying taxes and making such repairs at
its own expense as are necessary to render the property suitable for sale. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property. Any loss may be reduced by the
receipt of any insurance proceeds.
34
<PAGE>
Second Mortgages
Some of the Mortgage Loans may be secured by second mortgages or deeds of
trust, which are junior to first mortgages or deeds of trust held by other
lenders. The rights of the holders of a junior deed of trust or a junior
mortgage are subordinate in lien and in payment to those of the holder of the
senior mortgage or deed of trust, including the prior rights of the senior
mortgagee or beneficiary to receive and apply hazard insurance and condemnation
proceeds and, upon default of the mortgagor, to cause a foreclosure on the
property. Upon completion of the foreclosure proceedings by the holder of the
senior mortgage or the sale pursuant to the deed of trust, the junior
mortgagee's or junior beneficiary's lien will be extinguished unless the second
lienholder satisfies the defaulted senior loan or asserts its subordinate
interest in a property in foreclosure proceedings.
Furthermore, the terms of the second mortgage or deed of trust are
subordinate to the terms of the first mortgage or deed of trust. In the event of
a conflict between the terms of the first mortgage or deed of trust and the
second mortgage or deed of trust, the terms of the first mortgage or deed of
trust will govern. Upon a failure of the mortgagor or trustor to perform any of
its obligations, the senior mortgagee or beneficiary, subject to the terms of
the senior mortgage or deed of trust, may have the right to perform the
obligation itself. Generally, all sums so expended by the mortgagee or
beneficiary become part of the indebtedness secured by the mortgage or deed of
trust. To the extent a first mortgagee expends such sums, such sums will
generally have priority over all sums due under the second mortgage.
Equity Rights of Redemption
The purposes of a foreclosure action are to enable the mortgagee to realize
upon its security and to bar the mortgagor, and all persons who have an interest
in the property that is subordinate to the foreclosing mortgagee, from their
"equity of redemption."
The doctrine of equity of redemption provides that, until the property
covered by a mortgage has been sold in accordance with a properly conducted
foreclosure and foreclosure sale, those having an interest that is subordinate
to that of the foreclosing mortgagee have an equity of redemption and may redeem
the property by paying the entire debt with interest. In addition, in some
states, when a foreclosure action has been commenced, the redeeming party must
pay certain costs of such action. Those having an equity of redemption must be
made parties and duly summoned to the foreclosure action in order for their
equity of redemption to be barred.
Statutory Rights of Redemption
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the trustor or mortgagor and foreclosed second lienor are given a
statutory period in which to redeem the property from the foreclosure sale. The
right of redemption should be distinguished from the equity of redemption, which
is a nonstatutory right that must be exercised prior to the foreclosure sale. In
some states, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest and expenses of foreclosure. In other
states, redemption may be authorized if the former borrower pays only a portion
of the sums due. The effect of a statutory right of redemption is to diminish
the ability of the lender to sell the foreclosed property. The right of
redemption would defeat the title of any purchaser from the lender subsequent to
foreclosure or sale under a deed of trust. Consequently, the practical effect of
a right of redemption is to force the lender to retain the property and pay the
expenses of ownership until the redemption period has run. In some states, there
is no right to redeem property after a trustee's sale under a deed of trust.
Due-on-Sale Provisions
The Mortgage Loans may contain due-on-sale clauses, which permit the lender
to accelerate the maturity of the Mortgage Loan if the Borrower sells, transfers
or conveys the related Mortgaged Premises in violation of the restrictions with
respect thereto set forth in the applicable Security Instrument. The
enforceability of these clauses has been the subject of legislation or
litigation in many states. Some jurisdictions automatically enforce such
clauses, while others require a showing of reasonableness and hold, on a
case-by-case basis, that a "due-on-sale" clause may be invoked only where a sale
threatens the legitimate security interest of the lender.
The Garn-St Germain Depository Institutions Act of 1982 purports to preempt
state laws that prohibit the enforcement of "due-on-sale" provisions in certain
loans made after October 15, 1982. The Servicer may thus be able to accelerate
the Mortgage Loans that contain a "due-on-sale" provision, upon transfer of an
interest in the related Mortgaged Premises, regardless of its ability to
demonstrate that a sale threatens its legitimate security interest.
35
<PAGE>
Subordinate Financing
When the mortgagor encumbers mortgaged property with one or more second
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and the
senior loan does not, a mortgagor may be more likely to repay sums due on the
junior loan than those on the senior loan. Second, acts of the senior lender
that prejudice the junior lender or impair the junior lender's security may
create a superior equity in favor of the junior lender. For example, if the
mortgagor and the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent an existing junior lender is harmed or the mortgagor is
additionally burdened. Third, if the mortgagor defaults on the senior loan
and/or any junior loan or loans, the existence of junior loans and actions taken
by junior lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender. Moreover, the
bankruptcy of a junior lender may operate to stay foreclosure or similar
proceedings by the senior lender.
Environmental Considerations
Under the federal Comprehensive Environmental Response Compensation and
Liability Act, as amended, a secured party that takes a deed in lieu of
foreclosure, purchases Mortgaged Premises at a foreclosure sale or operates
Mortgaged Premises may become liable in certain circumstances for the costs of
remedial action ("Cleanup Costs") if hazardous wastes or hazardous substances
have been released or disposed of on the Mortgaged Premises. Such Cleanup Costs
may be substantial. It is possible that such Cleanup Costs could subject the
Collateral to a lien and reduce the amounts otherwise available to pay to the
holders of the Bonds if Mortgaged Premises securing a Mortgage Loan were
acquired by the Trustee through foreclosure or deed in lieu of foreclosure and
if such Cleanup Costs were incurred. Moreover, some states impose a lien for any
Cleanup Costs incurred by that State on the Mortgaged Premises that are subject
of such Cleanup Costs (a "Superlien"). All subsequent liens on such Mortgaged
Premises (but not prior recorded liens) are subordinated to such Superlien. The
security interest of the Trustee in Mortgaged Premises subject to such a
Superlien could be adversely affected.
No representations or warranties are made by the Participant or Issuer as
to the absence or effect of hazardous wastes or hazardous substances on any of
the Mortgaged Premises. In addition, the Servicers have not made any
representations or warranties or assumed any liability with respect to the
absence or effect of hazardous wastes or hazardous substances on any Mortgaged
Premises or any casualty resulting from the presence or effect of hazardous
wastes or hazardous substances and any loss or liability resulting from the
presence or effect of such hazardous wastes or hazardous substances will reduce
the amounts otherwise available to pay to the holders of the Bonds.
The Servicers are not permitted to foreclose on any Mortgaged Premises
without the approval of the Master Servicer. The Master Servicer is not
permitted to approve foreclosure on any property that it knows or has reason to
know is contaminated with or affected by hazardous wastes or hazardous
substances. The Master Servicer is required to inquire of any Servicer
requesting approval of foreclosure whether the property proposed to be
foreclosed upon is so contaminated. If a Servicer does not foreclose on Mortgage
Premises, the amounts otherwise available to pay to the holders of the Bonds may
be reduced. A Servicer will not be liable to the holders of the Bonds if it
fails to foreclose on Mortgaged Premises that it reasonably believes may be so
contaminated or affected, even if such Mortgaged Premises are, in fact, not so
contaminated or affected. Similarly, a Servicer will not be liable to the
Bondholders if, based on its reasonable belief that no such contamination or
effect exists, the Servicer forecloses on Mortgaged Premises and takes title to
such Mortgaged Premises, and thereafter such Mortgaged Premises are determined
to be so contaminated or affected.
Equitable Limitations on Remedies
In connection with lenders' attempts to realize upon their security, courts
have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his defaults
under the loan documents. Examples of judicial remedies that have been fashioned
include judicial requirements that the lender undertake affirmative and
expensive actions to determine the causes for the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In some cases,
courts have substituted their judgment for the lender's judgment and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are experiencing temporary financial disability. In
other cases, courts have limited the right of a lender to realize upon his
security if the default under the security agreement is not monetary, such as
the borrower's failure to adequately maintain the property or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under security agreements receive notices in addition to the
statutorily prescribed minimums. For the most part, these cases have
36
<PAGE>
upheld the notice provisions as being reasonable or have found that, in cases
involving the sale by a trustee under a deed of trust or by a mortgagee under a
mortgage having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory restrictions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the Borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
Borrower equal in most cases to the difference between the amounts due to the
lender and the greater of the net amount realized upon the foreclosure sale and
the market value of the Mortgaged Premises.
Statutory provisions may limit any deficiency judgment against the former
Borrower following a foreclosure sale to the excess of the outstanding debt over
the fair market value of the Mortgaged Premises at the time of such sale. The
purpose of these statutes is to prevent a beneficiary or a mortgagee from
obtaining a large deficiency judgment against the former Borrower as a result of
receiving low or no bids at the foreclosure sale.
Some state statutes may require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the Borrower.
In other states, the lender has the option of bringing a personal action against
the Borrower on the debt without first exhausting such security; however, in
some of these states, the lender, following judgment in such personal action,
may be deemed to have elected a remedy and may be precluded from exercising
remedies with respect to the security. Consequently, the practical effect of the
election requirement, when applicable, is that lenders will usually proceed
first against the security rather than bringing a personal action against the
Borrower.
In some states, exceptions to the anti-deficiency statutes are provided for
in certain instances where the value of the lender's security has been impaired
by acts or omissions of the Borrower, for example, in the event of waste of the
Mortgaged Premises.
In addition to anti-deficiency and related legislation, numerous federal
and state statutory provisions, including the federal bankruptcy laws, the
federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws affording
relief to debtors, may interfere with or affect the ability of a secured
mortgage lender to realize upon its security. For example, in a Chapter 13
proceeding under the federal Bankruptcy Code, when a court determines that the
value of a home is less than the principal balance of the loan, the court may
prevent a lender from foreclosing on the home and, as part of the rehabilitation
plan, reduce the amount of the secured indebtedness to the value of the home as
its exists at the time of the proceeding, leaving the lender as a general
unsecured creditor for the difference between that value and the amount of
outstanding indebtedness. A bankruptcy court may grant the debtor a reasonable
time to cure a payment default and, in the case of a mortgage loan not secured
by the debtor's principal residence, also may reduce the periodic payments due
under such mortgage loan, change the rate of interest and alter the mortgage
loan repayment schedule. Certain court decisions have applied such relief to
claims secured by the debtor's principal residence. If a court relieves a
Borrower's obligation to repay amounts otherwise due on a Mortgage Loan, the
Servicer will not be required to advance such amounts, and any loss in respect
thereof may reduce the amounts available to be paid to the holders of the Bonds.
The Internal Revenue Code of 1986, as amended, provides priority to certain
tax liens over the lien of the mortgage or deed of trust. Other federal and
state laws provide priority to certain tax and other liens over the lien of the
mortgage or deed of trust. Numerous federal and some state consumer protection
laws impose substantive requirements upon mortgage lenders in connection with
the origination, servicing and the enforcement of mortgage loans. These laws
include the federal Truth in Lending Act, Real Estate Settlement Procedures Act,
Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting
Act, and related statutes and regulations. These federal laws and state laws
impose specific statutory liabilities upon lenders who originate or service
mortgage loans and who fail to comply with the provisions of the law. In some
cases, this liability may affect assignees of the mortgage loans.
Soldiers' and Sailors' Civil Relief Act of 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of all
branches of the military on active duty, including draftees and reservists in
military service, (i) are entitled to have interest rates reduced and capped at
6% per annum on obligations (including mortgage loans) incurred prior to the
commencement of military service for the duration of military service, (ii) may
be entitled to a stay of proceedings on any kind of foreclosure or repossession
action in the case of defaults
37
<PAGE>
on such obligations entered into prior to military service and (iii) may have
the maturity of such obligations incurred prior to military service extended,
the payments lowered and the payment schedule readjusted for a period of time
after the completion of military service. However, the benefits of (i), (ii), or
(iii) above are subject to challenge by creditors and if, in the opinion of the
court, the ability of a person to comply with such obligations is not materially
impaired by military service, the court may apply equitable principles
accordingly. If a Borrower's obligation to repay amounts otherwise due on a
Mortgage Loan securing the Bonds of a Series is relieved pursuant to the
Soldiers' and Sailors' Civil Relief Act of 1940, neither the Servicer, the
Master Servicer nor the Trustee will be required to advance such amounts, and
any loss in respect thereof may reduce the amounts available to be paid to the
holders of the Bonds of such Series. Unless otherwise provided in the Prospectus
Supplement for a Series, any shortfalls in interest collections on Mortgage
Loans securing the Bonds of a Series resulting from application of the Soldiers'
and Sailors' Civil Relief Act of 1940 will be allocated to each Class of Bonds
of such Series that is entitled to receive interest in respect of such Mortgage
in proportion to the interest that each such Class of Bonds would have otherwise
been entitled to receive in respect of such Mortgage Loans had such interest
shortfall not occurred.
THE ISSUER
The Issuer was incorporated in Virginia on August 19, 1994, as a
wholly-owned, limited-purpose financing subsidiary of Resource. The Issuer's
principal office is located at 4880 Cox Road, Glen Allen, Virginia 23060,
telephone (804) 967-5800. The Issuer was formed solely for the purpose of
facilitating the financing and sale of mortgage loans such as the Mortgage
Loans. It does not intend to engage in any business or investment activities
other than issuing and selling securities secured primarily by mortgage loans
and taking certain action with respect thereto. Resource has agreed not to file
a petition in bankruptcy with respect to the Issuer. The Issuer's Articles of
Incorporation, which have been filed as an Exhibit to the Registration Statement
of which this Prospectus forms a part, limit the Issuer's business to the
foregoing and place certain other restrictions on the Issuer's activities.
Under the Indenture, the Issuer is responsible for certain administrative
and accounting matters relating to the outstanding Bonds. It is intended that
Resource will perform these services on behalf of the Issuer and will be paid a
fee for its services relating to the administration of a Series.
RESOURCE MORTGAGE CAPITAL, INC.
Resource is a self-managed real estate investment trust that purchases and
securitizes residential mortgage loans and invests in mortgage-backed
securities. Resource was incorporated in Virginia in December 1987. Resource's
principal office is located at 4880 Cox Road, Glen Allen, Virginia 23060,
telephone (804) 967-5800.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
The following summary of the anticipated material federal income tax
consequences of the purchase, ownership and disposition of the Bonds is based on
advice provided to the Issuer by Hunton & Williams. With respect to each series
of Bonds, counsel to the Issuer will be identified in the related Prospectus
Supplement. See "Certain Federal Income Tax Consequences" in the related
Prospectus Supplement. The summary is based upon the provisions of the Code, the
regulations promulgated thereunder, and the judicial and administrative rulings
and decisions now in effect or (with respect to regulations) proposed, all of
which are subject to change or possible differing interpretations. The statutory
provisions, regulations, and interpretations on which this summary is based are
subject to change, and such a change could apply retroactively.
The summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances, nor with certain categories of investors subject to special
treatment under the federal income tax laws. This summary focuses primarily upon
investors who will hold Bonds as "capital assets," (generally, property held for
investment) within the meaning of Section 1221 of the Code, but much of the
discussion is applicable to other investors as well. The summary does not
purport to address the anticipated state income tax consequences to investors of
owning and disposing of the Bonds. Consequently, potential purchasers of Bonds
are advised to consult their own tax advisors concerning the federal, state or
local tax consequences to them of the purchase, holding, and disposition of the
Bonds.
No election will be made to treat any Series of Bonds as a real estate
mortgage investment conduit ("REMIC"). There are no regulations, published
rulings or judicial decisions involving the characterization for federal income
tax purposes of securities with terms substantially the same as the Bonds.
However, with respect to each series of Bonds, counsel to the
38
<PAGE>
Issuer will advise the Issuer that, based upon the facts as they exist at the
time the opinion is issued (which may precede the issuance of certain classes of
Bonds for federal income tax purposes), in the firm's opinion the Bonds will be
treated for federal income tax purposes as indebtedness of the Issuer, and not
as an ownership interest in the Collateral, or an equity interest in the Issuer
or in a separate association taxable as a corporation. That opinion will be
based on existing law, but there can be no assurance that the law will not
change or that contrary positions will not be taken by the Internal Revenue
Service (the "Service").
Taxable mortgage pool ("TMP") rules enacted as part of the Tax Reform Act
of 1986 (the "1986 Act") treat certain arrangements that securitize real estate
mortgages as taxable corporations. An entity will be characterized as a TMP if
(i) substantially all of its assets are debt obligations and more than 50
percent of such debt obligations consist of real estate mortgages or interests
therein, (ii) the entity is the obligor under debt obligations with two or more
maturities, and (iii) payments on the debt obligations referred to in (ii) bear
a relationship to payments on the debt obligations referred to in (i).
Furthermore, a group of assets held by an entity can be treated as a separate
TMP if the assets are expected to produce significant cash flow that will
support one or more of the entity's issues of debt obligation.
It is likely that the Issuer or the portion of the Issuer relating to the
ownership of the Mortgage Collateral and the issuance of the Bonds will satisfy
the foregoing requirements and will be treated as a TMP. Such characterization
would require that the Issuer be treated as a "separate" corporation and not
includible with any other corporation, therefore subjecting the Issuer to
corporate income tax. However, because the Issuer is also a "qualified REIT
subsidiary" (as defined in Section 856(i)(2) of the Code) of Resource, which
itself is a REIT, characterization of the Issuer as a TMP will result only in
the shareholders of Resource being required to include in income, as "excess
inclusion" income, some or all of their allocable share of the Issuer's net
income that would be excess inclusion income, if any, if the Issuer were treated
as a REMIC. Such characterization will not result in entity-level, corporate
income taxation with respect to the Issuer. If the Issuer were to fail to
continue to be treated as a qualified REIT subsidiary by reason of Resource's
failure to continue to qualify as a REIT for federal income tax purposes or for
any other reason, the net income of the Issuer would be subject to corporate
income tax and the Issuer would not be permitted to be included on a
consolidated income tax return of another corporate entity. No assurance can be
given with regard to the prospective qualification of the Issuer as a qualified
REIT subsidiary or of Resource as a REIT for federal income tax purposes.
In addition, if the Service were to make and prevail upon the contention
that a Class of Bonds did not constitute indebtedness for federal income tax
purposes, such Bonds could be treated as equity interests in an association
taxable as a corporation, which would result in the imposition of a federal
income tax at the entity level. The imposition of such a tax could result in a
delay or shortfall in payments on the Bonds. The Issuer may redeem a Class or
Classes of Bonds at any time upon a determination by the Issuer, based upon an
opinion of counsel, that a substantial risk exists that the Bonds of the Class
to be redeemed will not be treated for federal income tax purposes as evidences
of indebtedness. Such redemption could occur when a Bondholder could not
reinvest the proceeds at an interest rate at least equal to the applicable Class
Interest Rate.
Because, in Counsel's opinion, the Bonds will be treated as evidences of
indebtedness for federal income tax purposes and not as ownership interests in
the Collateral, Bondholders should be aware that (i) Bonds held by a mutual
savings bank or domestic building and loan association will not represent
interests in "qualifying real property loans" within the meaning of Code Section
593(d)(1); (ii) Bonds held by a domestic building and loan association will not
constitute "loans secured by an interest in real property," within the meaning
of Code Section 7701(a)(19)(C)(v); (iii) Bonds held by a REIT will not
constitute "real estate assets" or "government securities" within the meaning of
Code Section 856(c)(5)(A); and (iv) income derived from the Bonds will not be
considered "interest on obligations secured by mortgages on real property or on
interests in real property" within the meaning of Code Section 856(c)(3)(B).
Bonds held by a regulated investment company (a "RIC") will not constitute
"government securities" within the meaning of section 851 (b)(4)(A)(i) of the
Code.
Payments received by Bondholders on the Bonds generally should be accorded
the same tax treatment under the Code as payments received on other taxable
corporate bonds. Except as described below for Bonds issued with original issue
discount, market discount, or premium, interest paid or accrued on a Bond will
be treated as ordinary income to the Bondholder and a principal payment on a
Bond will be treated as a return of capital to the extent that the Bondholder's
basis in the Bond is allocable to that payment. In general, interest paid to
Bondholders who report their income on the cash receipts and disbursements
method should be taxable to them when received. Interest earned by Bondholders
who report their income on the accrual method will be taxable when accrued,
regardless of when it is actually received. The Trustee will report annually to
the Internal Revenue Service and to Bondholders of record with respect to
interest paid or accrued, market discount, and original issue discount, if any,
accrued on the Bonds.
39
<PAGE>
One or more Classes of Bonds may be subordinated to one or more other
Classes of Bonds of the same Series. In general, such subordination should not
affect the federal income tax treatment of either the Subordinated or the Senior
Bonds. Employee benefit plans subject to the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), should consult their tax advisors before
purchasing any Subordinated Bond. See "ERISA Considerations" herein and in the
Prospectus Supplement.
Original Issue Discount
General
Discount Bonds, Accretion Bonds, and certain other Classes of Bonds will be
issued with "original issue discount" within the meaning of Section 1273(a) of
the Code. In general such original issue discount will equal the difference
between the "stated redemption price at maturity" of the Bond (generally, its
principal amount) and its issue price. Original issue discount is treated as
ordinary interest income, and Holders of Bonds with original issue discount
generally must include the amount of original issue discount in income in
advance of the receipt of the cash to which it relates.
The amount of original issue discount required to be included in a
Bondholder's income in any taxable year will be computed in accordance with
Section 1272(a)(6) of the Code, which provides rules for the accrual of original
issue discount under a constant yield method for certain debt instruments, such
as the Bonds, that are subject to prepayment by reason of prepayments of
underlying obligations. Under Section 1272(a)(6), the amount and rate of accrual
of original issue discount on a Bond generally is to be calculated based on (i)
a single constant yield to maturity and (ii) the Mortgage Collateral prepayment
rate and the reinvestment rate on amounts held pending distribution that were
assumed in pricing the Bond (the "Pricing Prepayment Assumptions"). No
regulatory guidance currently exists under Code Section 1272(a)(6). Accordingly,
until the Treasury issues guidance to the contrary, the Master Servicer or other
person responsible for computing the amount of original issue discount to be
reported to a Bondholder each taxable year (the "Tax Administrator"), except as
otherwise provided herein, expects to base its computations on Code Section
1272(a)(6) and final regulations governing the accrual of original issue
discount on debt instruments that do not address directly the treatment of
instruments that are subject to Code Section 1272(a)(6) (the "OID Regulations").
However, there can be no assurance that such methodology, which is described
below, represents the correct manner of calculating original issue discount on
the Bonds. The Tax Administrator intends to account for income on certain Bonds
that provide for one or more contingent payments as described in " -- Interest
Weighted Bonds and Non-VRDI Bonds" herein.
The amount of original issue discount on a Bond equals the excess, if any,
of the Bond's "stated redemption price at maturity" over its "issue price."
Under the OID Regulations, a debt instrument's stated redemption price at
maturity is the sum of all payments provided by the instrument other than
"qualified stated interest" ( "Deemed Principal Payments"). Qualified stated
interest, in general, is stated interest that is unconditionally payable in cash
or property (other than debt instruments of the issuer) at least annually at (i)
a single fixed rate or (ii) a variable rate that meets certain requirements set
out in the OID Regulations. See " -- Variable Rate Bonds." Thus, in the case of
any Bond providing for such stated interest other than an Accretion Bond, the
stated redemption price at maturity generally will equal the total amount of all
Deemed Principal Payments due on that Bond. Because an Accretion Bond generally
does not require unconditional payments of interest at least annually, the
stated redemption price at maturity of such a Bond will equal the aggregate of
all payments due, whether designed as principal, accrued interest, or current
interest. The issue price of a Bond generally will equal the initial price at
which a substantial amount of such Bonds is sold to the public.
Under a de minimis rule, a Bond will be considered to have no original
issue discount if the amount of original issue discount is less than 0.25% of
the Bond 's stated redemption price at maturity multiplied by the weighted
average maturity ("WAM") of the Bond. For that purpose, the WAM of a Bond is the
sum of the amounts obtained by multiplying the amount of each Deemed Principal
Payment by a fraction, the numerator of which is the number of complete years
from the Bond 's issue date until the payment is made, and the denominator of
which is the Bond's stated redemption price at maturity. Although no Treasury
regulations have been issued under the relevant provisions of the 1986 Act, it
is expected that the WAM of a Bond will be computed using the Pricing Prepayment
Assumptions. A Bondholder will include de minimis original issue discount in
income on a pro rata basis as stated principal payments on the Bond are received
or, if earlier, upon disposition of the Bond, unless the Bondholder makes an
"All OID Election" (as defined below).
Bonds of certain Series may bear interest under terms that provide for a
teaser rate period, interest holiday, or other period during which the rate of
interest payable on the Bonds is lower than the rate payable during the
remainder of the life of the Bonds ("Teaser Bonds"). The OID Regulations provide
a more expansive test under which a Teaser Bond may be considered to have a de
minimis amount of original issue discount even though the amount of the original
issue discount on the
40
<PAGE>
Bond would be more than de minimis as determined under the regular test. The
expanded test applies to a Teaser Bond only if the stated interest on such Bond
would be qualified stated interest but for the fact that during one or more
accrual periods its interest rate is below the rate applicable for the remainder
of its term. Under the expanded test, the amount of original issue discount on a
Teaser Bond that is measured against the de minimis amount of original issue
discount allowable on the Bond is the greater of (i) the excess of the stated
principal amount of the Bond over its issue price ("True Discount") and (ii) the
amount of interest that would be necessary to be payable on the Bond in order
for all stated interest to be qualified stated interest (the "Additional
Interest Amount").
The holder of a Bond generally must include in gross income the sum, for
all days during his taxable year on which he holds the Bond, of the "daily
portions" of the original issue discount on such Bond. In the case of an
original holder of a Bond, the daily portions of original issue discount with
respect to such Bond generally will be determined by allocating to each day in
any accrual period the Bond's ratable portion of the excess, if any, of (i) the
sum of (a) the present value of all payments under the Bond yet to be received
as of the close of such period and (b) the amount of any Deemed Principal
Payments received on the Bond during such period over (ii) the Bond's "adjusted
issue price" at the beginning of such period. The present value of payments yet
to be received on a Bond is computed by using the Pricing Prepayment Assumptions
and the Bond's original yield to maturity (adjusted to take into account the
length of the particular accrual period), and taking into account Deemed
Principal Payments actually received on the Bond prior to the close of the
accrual period. The adjusted issue price of a Bond at the beginning of the first
accrual period is its issue price. The adjusted issue price at the beginning of
each subsequent period is the adjusted issue price of the Bond at the beginning
of the preceding period increased by the amount of original issue discount
allocable to that period and decreased by the amount of any Deemed Principal
Payments received during that period. Thus, an increased (or decreased) rate of
prepayments received with respect to a Bond will be accompanied by a
correspondingly increased (or decreased) rate of recognition of original issue
discount by the holder of such Bond.
The yield to maturity of a Bond is calculated based on (i) the Pricing
Prepayment Assumptions and (ii) any contingencies not already taken into account
under the Pricing Prepayment Assumptions that, considering all the facts and
circumstances as of the issue date, are more likely than not to occur.
Contingencies, such as the exercise of "mandatory redemptions," that are taken
into account by the parties in pricing the Bond typically will be subsumed in
the Pricing Prepayment Assumptions and thus will be reflected in the Bond's
yield to maturity. The Tax Administrator's determination of whether a
contingency relating to a Class of Bonds is more likely than not to occur is
binding on each holder of a Bond of such Class unless the holder explicitly
discloses on its federal income tax return that its determination of the yield
and maturity of the Bond is different from that of the Tax Administrator.
In many cases, Bonds will be subject to optional redemption before their
stated maturity dates. Under the OID Regulations, the Issuer will be presumed to
exercise its option to redeem for purposes of computing the accrual of original
issue discount if, and only if, by using the optional redemption date as the
maturity date and the optional redemption price as the stated redemption price
at maturity, the yield to maturity of the Bonds is lower than it would be if the
Bonds were not redeemed early. If the Issuer is presumed to exercise its option
to redeem the Bonds, original issue discount on such Bonds will be calculated as
if the redemption date were the maturity date and the optional redemption price
were the stated redemption price at maturity. In cases in which all of the Bonds
of a particular Series are issued at par or at a discount, the Issuer will not
be presumed to exercise its option to redeem the Bonds because a redemption by
the Issuer would not lower the yield to maturity of the Bonds. If, however, some
Bonds of a particular Series are issued at a premium, the Issuer may be able to
lower the yield to maturity of the Bonds by exercising its redemption option. In
determining whether the Issuer will be presumed to exercise its option to redeem
Bonds when one or more Classes of the Bonds is issued at a premium, the Tax
Administrator will take into account all Classes of Bonds that are subject to
the optional redemption to the extent that they are expected to remain
outstanding as of the optional redemption date, based on the Pricing Prepayment
Assumptions. If, determined on a combined weighted average basis, the Bonds of
such Classes were issued at a premium, the Tax Administrator will presume that
the Issuer will exercise its option. However, the OID Regulations are unclear as
to how the redemption presumption rules should apply to instruments such as the
Bonds, and there can be no assurance that the Service will agree with the Tax
Administrator's position.
The OID Regulations provide that a Bondholder generally may make an
election (an "All OID Election") to include in gross income all stated interest,
original issue discount, de minimis original issue discount, market discount (as
described below under " -- Market Discount"), and de minimis market discount
that accrues on the Bond (as reduced by any amortizable premium, as described
below under "Amortizable Premium," or acquisition premium, as described below)
under the constant yield method used to account for original issue discount. To
make an All OID Election, the holder of the Bond must attach a statement to its
timely filed federal income tax return for the taxable year in which the holder
acquired the Bond. The
41
<PAGE>
statement must identify the instruments to which the election applies. An All
OID Election is irrevocable unless the holder obtains the consent of the
Service. If an All OID Election is made for a debt instrument with market
discount, the holder is deemed to have made an election to include in income
currently the market discount on all of the holder's other debt instruments with
market discount, as described in " -- Market Discount" below. In addition, if an
All OID Election is made for a debt instrument with amortizable premium, the
holder is deemed to have made an election to amortize the premium on all of the
holder's other debt instruments with amortizable premium under the constant
yield method. See " -- Amortizable Premium." Bondholders should be aware that
the law is unclear as to whether an All OID Election is effective for a Bond
that is subject to the contingent payment rules. See " -- Interest Weighted
Bonds and Non-VRDI Bonds."
A Bond having original issue discount may be acquired in a transaction
subsequent to its issuance for more than its adjusted issue price. If the
subsequent holder's adjusted basis in such a Bond, immediately after its
acquisition, exceeds the sum of all Deemed Principal Payments to be received on
the Bond after the acquisition date, the Bond will no longer have original issue
discount, and the holder may be entitled to reduce the amount of interest income
recognized on the Bond by the amount of amortizable premium. See "Amortizable
Premium." If the subsequent holder's adjusted basis in the Bond immediately
after the acquisition exceeds the adjusted issue price of the Bond, but is less
than or equal to the sum of the Deemed Principal Payments to be received under
the Bond after the acquisition date, the amount of original issue discount on
the Bond will be reduced by a fraction, the numerator of which is the excess of
the Bond's adjusted basis immediately after its acquisition over the adjusted
issue price of the Bond and the denominator of which is the excess of the sum of
all Deemed Principal Payments to be received on the Bond after the acquisition
date over the adjusted issue price of the Bond. For that purpose, the adjusted
basis of a Bond generally is reduced by the amount of any qualified stated
interest that is accrued but unpaid as of the acquisition date. Alternately, the
subsequent purchaser of a Bond having original issue discount may make an All
OID Election with respect to the Bond.
If the interval between the issue date of a Current Interest Bond and the
first Distribution Date (the "First Distribution Period") contains more days
than the number of days of stated interest that are payable on the first
Distribution Date, the effective interest rate received by the Bondholder during
the first Distribution Period will be less than the Bond's stated interest rate
making such Bond a Teaser Bond. If the amount of original issue discount on the
Bond measured under the expanded de minimis test exceeds the de minimis amount
of original issue discount allowable on the Bond, the amount by which the stated
interest on the Bond exceeds the interest that would be payable on the Bond at
the effective rate of interest for the First Distribution Period (the
"Nonqualified Interest Amount") would be treated as part of the Bond's stated
redemption price at maturity. Accordingly, the holder of a Teaser Bond may be
required to recognize ordinary income arising from original issue discount
attributable to the First Distribution Period in addition to any qualified
stated interest that accrues in that period.
Similarly, if the First Distribution Period is shorter than the interval
between subsequent Distribution Dates, the effective rate of interest payable on
a Bond during the First Distribution Period will be higher than the stated rate
of interest if a Bondholder receives interest on the first Distribution Date
based on a full accrual period. Unless the "Pre-Issuance Accrued Interest Rule"
described below applies, such Bond (a "Rate Bubble Bond") would be issued with
original issue discount unless the amount of original issue discount is de
minimis. The amount of original issue discount on a Rate Bubble Bond
attributable to the First Distribution Period would be the amount by which the
interest payment due on the first Distribution Date exceeds the amount that
would have been payable had the effective rate for that Period been equal to the
stated interest rate. However, under the Pre-Issuance Accrued Interest Rule, if
(i) a portion of the initial purchase price of a Rate Bubble Bond is allocable
to interest that has accrued under the terms of the Bond prior to its issue date
("Pre-Issuance Accrued Interest") and (ii) the Bond provides for a payment of
stated interest on the first payment date within one year of the issue date that
equals or exceeds the amount of the Pre-Issuance Accrued Interest, the Bond's
issue price may be computed by subtracting from the issue price the amount of
Pre-Issuance Accrued Interest. If the Bondholder opts to apply the Pre-Issuance
Accrued Interest Rule, the portion of the interest received on the first
Distribution Date equal to the Pre-Issuance Accrued Interest would be treated as
a return of such interest and would not be treated as a payment on the Bond.
Thus, where the Pre-Issuance Accrued Interest Rule applies, a Rate Bubble Bond
will not have original issue discount attributable to the First Distribution
Period, provided that the increased effective interest rate for that Period is
attributable solely to Pre-Issuance Accrued Interest, as typically will be the
case. The Tax Administrator intends to apply the Pre-Issuance Accrued Interest
Rule to each Rate Bubble Bond for which it is available if the Bond 's stated
interest otherwise would be qualified stated interest. If, however, the First
Distribution Period of a Rate Bubble Bond is longer than subsequent Distribution
Periods, the application of the Pre-Issuance Accrued Interest Rule typically
will not prevent disqualification of the Bond's stated interest because its
effective interest rate during the First Distribution Period typically will be
less than its stated interest rate. Thus, a Bond with a long First Distribution
Period typically will be a Teaser Bond, as discussed above. The Pre-Issuance
42
<PAGE>
Accrued Interest Rule will not apply to any amount paid at issuance for such a
Teaser Bond that is normally allocable to interest accrued under the terms of
such Bond before its issue date. All amounts paid for such a Teaser Bond at
issuance, regardless of how designated, will be included in the issue price of
such Bond for federal income tax accounting purposes.
It is not entirely clear how income should be accrued with respect to
Bonds, the payments on which consist entirely or primarily of a specified
nonvarying portion of the interest payable on one or more Mortgage Loans
("Interest Weighted Bonds"). Unless and until the Service provides contrary
administrative guidance on the income tax treatment of an Interest Weighted
Bond, the Tax Administrator will take the position that an Interest Weighted
Bond does not bear qualified stated interest, and will account for the income
thereon as described in " -- Interest Weighted Bonds and Non-VRDI Bonds" herein.
Some Interest Weighted Bonds may provide for a relatively small amount of
principal and for interest that can be expressed as qualified stated interest at
a very high fixed rate with respect to that principal ("Superpremium Bonds").
Superpremium Bonds technically are issued with amortizable premium. However,
because of their close similarity to other Interest Weighted Bonds it appears
more appropriate to account for Superpremium Bonds in the same manner as for
other Interest Weighted Bonds. Consequently, in the absence of further
administrative guidance, the Tax Administrator intends to account for
Superpremium Bonds in the same manner as other Interest Weighted Bonds. However,
there can be no assurance that the Service will not assert a position contrary
to that taken by the Tax Administrator, and, therefore, holders of Superpremium
Bonds should consider making a protective election to amortize premium on such
Bonds.
In view of the complexities and current uncertainties as to the manner of
inclusion in income of original issue discount on the Bonds, each investor
should consult his own tax advisor to determine the appropriate amount and
method of inclusion in income of original issue discount on the Bonds for
federal income tax purposes.
Variable Rate Bonds
A Bond may pay interest at a variable rate (a "Variable Rate Bond"). A
Variable Rate Bond that qualifies as a "variable rate debt instrument" as that
term is defined in the OID Regulations (a "VRDI") will be governed by the rules
applicable to VRDIs in the OID Regulations, which are described below. A
Variable Rate Bond qualifies as a VRDI under the OID Regulations if (i) the Bond
is not issued at a premium to its noncontingent principal amount in excess of
the lesser of (a) .015 multiplied by the product of such noncontingent principal
amount and the WAM (as that term is defined above in the discussion of the de
minimis rule) of the Bond or (b) 15 percent of such noncontingent principal
amount (an "Excess Premium"); (ii) stated interest on the Bond compounds or is
payable unconditionally at least annually at (a) one or more qualified floating
rates, (b) a single fixed rate and one or more qualified floating rates, (c) a
single "objective rate," or (d) a single fixed rate and a single objective rate
that is a "qualified inverse floating rate," and (iii) the qualified floating
rate or the objective rate in effect during an accrual period is set at a
current value of that rate (i.e. , the value of the rate on any day occurring
during the interval that begins three months prior to the first day on which
that value is in effect under the Bond and ends one year following that day).
However, if the Variable Rate Bond provides for any contingent payments (which
do not include qualified stated interest), the Tax Administrator intends to
account for the income thereon as described in
" -- Interest Weighted Bonds and Non-VRDI Bonds" herein.
Under the OID Regulations, a rate is a qualified floating rate if
variations in the rate reasonably can be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the debt
instrument is denominated. A qualified floating rate may measure contemporaneous
variations in borrowing costs for the issuer of the debt instrument or for
issuers in general. A multiple of a qualified floating rate is considered a
qualified floating rate only if the rate is equal to either (a) the product of a
qualified floating rate and a fixed multiple that is greater than zero but not
more than 1.35 or (b) the product of a qualified floating rate and a fixed
multiple that is greater than zero but not more than 1.35, increased or
decreased by a fixed rate. If a Bond provides for two or more qualified floating
rates that reasonably can be expected to have approximately the same values
throughout the term of the Bond, the qualified floating rates together will
constitute a single qualified floating rate. Two or more qualified floating
rates conclusively will be presumed to have approximately the same values
throughout the term of a Bond, if the values of all such rates on the issue date
of the Bond are within 25 basis points of each other.
A variable rate will be considered a qualified floating rate if it is
subject to a restriction or restrictions on the maximum stated interest rate (a
"Cap"), a restriction or restrictions on the minimum stated interest rate (a
"Floor"), a restriction or restrictions on the amount of increase or decrease in
the stated interest rate (a "Governor"), or other similar restriction only if:
(a) the Cap, Floor, or Governor is fixed throughout the term of the related Bond
or (b) the Cap, Floor, Governor, or similar restriction is not reasonably
expected, as of the issue date, to cause the yield on the Bond to be
significantly less or significantly more than the expected yield on the Bond
determined without such Cap, Floor, Governor, or similar restriction, as the
43
<PAGE>
case may be. Although the OID Regulations are unclear, it appears that a VRDI,
the principal rate on which is subject to a Cap, Floor, or Governor that itself
is a qualified floating rate, bears interest at an objective rate.
Under the OID Regulations, an objective rate is a rate (other than a
qualified floating rate) that (i) is determined using a single fixed formula,
(ii) is based on objective financial or economic information, and (iii) is not
based on information that either is within the control of the issuer (or a
related party) or is unique to the circumstances of the issuer (or related
party), such as dividends, profits, or the value of the issuer's (or related
party's) stock. That definition would include a rate that is based on changes
in a general inflation index. In addition, a rate would not fail to be an
objective rate merely because it is based on the credit quality of the issuer.
Under the OID Regulations if interest on a Variable Rate Bond is stated at
a fixed rate for an initial period of less than one year followed by a variable
rate that is either a qualified floating rate or an objective rate for a
subsequent period, and the value of the variable rate on the issue date is
intended to approximate the fixed rate, the fixed rate and the variable rate
together constitute a single qualified floating rate or objective rate. A
variable rate conclusively will be presumed to approximate an initial fixed rate
if the value of the variable rate on the issue date does not differ from the
value of the fixed rate by more than 25 basis points.
Under the OID Regulations, all interest payable on a Variable Rate Bond
that qualifies as a VRDI and provides for stated interest unconditionally
payable in cash or property at least annually at a single qualified floating
rate or a single objective rate (a "Single Rate VRDI Bond") is treated as
qualified stated interest. The amount and accrual of OID on a Single Rate VRDI
Bond is determined, in general, by converting such Bond into a hypothetical
fixed rate bond and applying the rules applicable to fixed rate bonds described
under "Original Issue Discount" above to such hypothetical fixed rate bond.
Qualified stated interest or original issue discount allocable to an accrual
period with respect to a Single Rate VRDI Bond also must be increased (or
decreased) if the interest actually accrued or paid during such accrual period
exceeds (or is less than) the interest assumed to be accrued or paid during such
accrual period under the related hypothetical fixed rate bond.
Except as provided below, the amount and accrual of OID on a Variable Rate
Bond that qualifies as a VRDI but is not a Single Rate VRDI Bond (a "Multiple
Rate VRDI Bond") is determined by converting such Bond into a hypothetical
equivalent fixed rate bond that has terms that are identical to those provided
under the Multiple Rate VRDI Bond, except that such hypothetical equivalent
fixed rate bond will provide for fixed rate substitutes in lieu of the qualified
floating rates or objective rates provided for under the Multiple Rate VRDI
Bond. A Multiple Rate VRDI Bond that provides for a qualified floating rate or
rates or a qualified inverse floating rate is converted to a hypothetical
equivalent fixed rate bond by assuming that each qualified floating rate or the
qualified inverse floating rate will remain at its value as of the issue date. A
Multiple Rate VRDI Bond that provides for an objective rate or rates is
converted to a hypothetical equivalent fixed rate bond by assuming that each
objective rate will equal a fixed rate that reflects the yield that reasonably
is expected for the Multiple Rate VRDI Bond. Qualified stated interest or
original issue discount allocable to an accrual period with respect to a
Multiple Rate VRDI Bond must be increased (or decreased) if the interest
actually accrued or paid during such accrual period exceeds (or is less than)
the interest assumed to be accrued or paid during such accrual period under the
hypothetical equivalent fixed rate bond.
Under the OID Regulations, the amount and accrual of OID on a Multiple Rate
VRDI Bond that provides for stated interest at either one or more qualified
floating rates or at a qualified inverse floating rate and in addition provides
for stated interest at a single fixed rate (other than an initial fixed rate
that is intended to approximate the subsequent variable rate) is determined
using the method described above for all other Multiple Rate VRDI Bonds except
that prior to its conversion to a hypothetical equivalent fixed rate bond, such
Multiple Rate VRDI Bond is treated as if it provided for a qualified floating
rate (or a qualified inverse floating rate), rather than the fixed rate. The
qualified floating rate (or qualified inverse floating rate) replacing the fixed
rate must be such that the fair market value of the Multiple Rate VRDI Bond as
of its issue date would be approximately the same as the fair market value of an
otherwise identical debt instrument that provides for the qualified floating
rate (or qualified inverse floating rate), rather than the fixed rate.
Bonds of certain Series may provide for interest based on a weighted
average of the interest rates on some or all of the Mortgage Loans securing such
Bonds ("Weighted Average Bonds"). Under the OID Regulations, it appears that
Weighted Average Bonds secured by Mortgage Loans that are exclusively ARM Loans
bear interest at an "objective rate" provided the ARM Loans themselves bear
interest at qualified floating rates. However, under the OID Regulations,
weighted Average Bonds secured by Mortgage Loans that do not bear interest at
qualified floating rates ("Non-Objective Weighted Average Bonds" or NOWA Bonds")
do not bear interest at an objective or a qualified floating rate and,
consequently, do not qualify as VRDIs. Accordingly, unless and until the Service
provides contrary administrative guidance on the income tax treatment of NOWA
Bonds, the Tax Administrator intends to treat such Bonds as debt obligations
that provide for one or more contingent
44
<PAGE>
payments, and will account for the income thereon as described in " -- Interest
Weighted Bonds and Non-VRDI Bonds" herein.
Bonds of certain Series may provide for the payment of interest at a rate
determined as the difference between two interest rate parameters, one of which
is a variable rate and the other of which is a fixed rate or a different
variable rate ("Inverse Floater Bonds"). Under the OID Regulations, Inverse
Floater Bonds generally bear interest at objective rates because their rates
either constitute "qualified inverse floating rates" under those Regulations or,
although not qualified floating rates themselves, are based on one or more
qualified floating rates. Consequently, if such Bonds are not issued at an
Excess Premium and their interest rates otherwise meet the test for qualified
stated interest, the income on such Bonds will be accounted for under the rules
applicable to VRDIs described above. However, an Inverse Floater Bond may have
an interest rate parameter equal to the weighted average of the interest rates
on some or all of the underlying Mortgage Loans in a case where one or more of
those rates is a fixed rate or otherwise may not qualify as a VRDI. Unless and
until the Service provides contrary administrative guidance on the income tax
treatment of such Inverse Floater Bonds, the Tax Administrator intends to treat
such Bonds as debt obligations that provide for one or more contingent payments,
and will account for the income thereon as described in " -- Interest Weighted
Bonds and Non-VRDI Bonds" herein.
Anti-Abuse Rule
Concerned that taxpayers might be able to structure debt instruments or
transactions, or to apply the bright-line or mechanical rules of the OID
Regulations in a way that produces unreasonable tax results, the Treasury issued
proposed and temporary regulations containing an anti-abuse rule on the same
date as the issuance of the OID Regulations. The proposed and temporary
regulations provide that if a principal purpose in structuring a debt
instrument, engaging in a transaction, or applying the OID Regulations is to
achieve a result that is unreasonable in light of the purposes of the applicable
statutes, the Service can apply or depart from the OID Regulations as necessary
or appropriate to achieve a reasonable result. A result is not considered
unreasonable under the proposed and temporary regulations, however, in the
absence of a substantial effect on the present value of a taxpayer's tax
liability.
Interest Weighted Bonds and Non-VRDI Bonds
The treatment of a NOWA Bond, a Variable Rate Bond that is issued at an
Excess Premium, or any other Variable Rate Bond that does not qualify as a VRDI
(each a "Non-VRDI Bond") or an Interest Weighted Bond is unclear under current
law. The OID Regulations are ambiguous as to whether interest payments (other
than qualified stated interest) on a Non-VRDI Bond or an Interest Weighted Bond
are considered to be contingent payments subject to special original issue
discount rules described in the next paragraph or whether such payments should
be treated as Deemed Principal Payments subject to the regular original issue
discount rules described in "Original Issue Discount" above. Moreover, to the
extent that the contingent payment rules are applicable, their impact on
instruments that are subject to Section 1272(a)(6) of the Code is unclear.
The OID Regulations contain provisions (the "Contingent Payment
Regulations") that address the federal income tax treatment of debt obligations
with one or more contingent payments ("Contingent Payment Obligations"). Under
the Contingent Payment Regulations, any variable rate debt instrument that is
not a VRDI is classified as a Contingent Payment Obligation. However, the
Contingent Payment Regulations, by their terms, do not apply to debt instruments
that are subject to Section 1272(a)(6) of the Code. In the absence of further
guidance, the Tax Administrator will account for Non-VRDI Bonds, Interest
Weighted Bonds, and any other Bonds that are Contingent Payment Obligations in
accordance with Code Section 1272(a)(6). Income will be accrued on such Bonds
based on a constant yield that is derived from a projected payment schedule as
of the Closing Date. The project payment schedule will take into account the
Pricing Payment Assumptions and the interest payments that are expected to be
made based on the value of any relevant indices on the issue date. To the extent
that actual payments differ from projected payments for a particular taxable
year, appropriate adjustments to interest income and expense accruals will be
made for that year. In the case of a Weighted Average Bond, the projected
payment schedule will be derived based on the assumption that the principal
balances of the Mortgage Loans that collateralize the Bond pay down pro rata.
The method described in the foregoing paragraph for accounting for Interest
Weighted Bonds, Non-VRDI Bonds, and any other Bonds that are Contingent Payment
Obligations is consistent with Code section 1272(a)(6) and the legislative
history thereto. Because of the uncertainty with respect to the treatment of
such Bonds under the OID Regulations, however, there can be no assurance that
the Service will not assert successfully that a method less favorable to
Bondholders will apply. In view of the complexities and the current
uncertainties as to income inclusions with respect to Non-VRDI Bonds, Interest
Weighted Bonds and other Bonds that are Contingent Payment Obligations, each
investor should consult his own tax advisor to determine the appropriate amount
and method of income inclusion on such Bonds for federal income tax purposes.
45
<PAGE>
Market Discount
A subsequent purchaser of a Bond at a discount from its outstanding
principal amount (or, in the case of a Bond having original issue discount, its
"adjustable issue price") will acquire such Bond with market discount. The
purchaser generally will be required to recognize the market discount (in
addition to any original issue discount remaining with respect to the Bond) as
ordinary income. A person who purchases a Bond at a price lower than the Bond's
outstanding principal amount but higher than its adjusted issue price does not
acquire the Bond with market discount, but will be required to report original
issue discount, appropriately adjusted to reflect the excess of the price paid
over the adjusted issue price. See "Original Issue Discount." A Bond will not be
considered to have market discount if the amount of such market discount is de
minimis, i.e., less than the product of (i) 0.25% of the remaining principal
amount (or, in the case of a Bond having original issue discount, the adjusted
issue price of such Bond), multiplied by (ii) the WAM of the Bond (determined as
for original issue discount) remaining after the date of purchase. Regardless of
whether the subsequent purchaser of a Bond with more than a de minimis amount of
market discount is a cash-basis or accrual-basis taxpayer, market discount
generally will be taken into income as principal payments (including, in the
case of a Bond having original issue discount any Deemed Principal Payments) are
received, in an amount equal to the lesser of (i) the amount of the principal
payment received or (ii) the amount of market discount that has "accrued" (as
described below), but that has not yet been included in income. The purchaser
may make a special election, which generally applies to all market discount
instruments held or acquired by the purchaser in the taxable year of election or
thereafter, to recognize market discount currently on an uncapped accrual basis
(the "Current Recognition Election"). In addition, the purchaser may make an All
OID Election with respect to a Bond purchased with market discount. See
" -- Original Issue Discount."
Until the Treasury promulgates applicable regulations, the purchaser of a
Bond with market discount generally may elect to accrue the market discount
either: (i) on the basis of a constant interest rate; (ii) in the case of a Bond
not issued with original issue discount, in the ratio of stated interest payable
in the relevant period to the total stated interest remaining to be paid from
the beginning of such period; or (iii) in the case of a Bond issued with
original issue discount, in the ratio of original issue discount accrued for the
relevant period to the total remaining original issue discount at the beginning
of such period. Regardless of which computation method is elected, the Pricing
Prepayment Assumptions must be used to calculate the accrual of market discount.
A Bondholder who has acquired any Bond with market discount generally will
be required to treat a portion of any gain on a sale or exchange of the Bond as
ordinary income to the extent of the market discount accrued to the date of
disposition under one of the foregoing methods, less any accrued market discount
previously reported as ordinary income as partial principal payments were
received. Moreover, such Bondholder generally must defer interest deductions
attributable to any indebtedness incurred or continued to purchase or carry the
Bond to the extent they exceed income on the Bond. Any such deferred interest
expense, in general, is allowed as a deduction not later than the year in which
the related market discount income is recognized. If a Bondholder makes a
Current Recognition Election or an All OID Election, the interest deferral rule
will not apply. Under the Proposed Contingent Payment Regulations, a secondary
market purchaser of a Non-VRDI Bond or an Interest Weighted Bond at discount
generally would continue to accrue interest and determine adjustments on such
Bond based on the original projected payment schedule devised by the issuer of
such Bond. See " -- Original Issue Discount -- Interest Weighted Bonds and
Non-VRDI Bonds" herein. The holder of such a Bond would be required, however, to
allocate the difference between the adjusted issue price of the Bond and its
basis in the Bond as positive adjustments to the accruals or projected payments
on the Bond over the remaining term of the Bond in a manner that is reasonable
(e.g., based on a constant yield to maturity).
Treasury regulations implementing the market discount rules have not yet
been issued, and uncertainty exists with respect to many aspects of those rules.
For example, the treatment of a Bond subject to redemption at the option of the
Issuer that is acquired at a market discount is unclear. It appears likely,
however, that the market discount rules applicable in such a case would be
similar to the rules pertaining to original issue discount. Due to the
substantial lack of regulatory guidance with respect to the market discount
rules, it is unclear how those rules will affect any secondary market that
develops for a given Class of Bonds. Prospective investors should consult their
own tax advisors regarding the application of the market discount rules to the
Bonds.
Amortizable Premium
A purchaser of a Bond who purchases the Bond at a premium over the total of
its Deemed Principal Payments may elect to amortize such premium under a
constant yield method that reflects compounding based on the interval between
payments on the Bonds. The legislative history of the 1986 Act indicates that
premium is to be accrued in the same manner as market
46
<PAGE>
discount. Accordingly, it appears that the accrual of premium on a Bond will be
calculated using the Pricing Prepayment Assumptions. Under the Code, except as
otherwise provided in Treasury regulations, amortized premium generally would be
treated as an offset to interest income on a Bond and not as a separate
deduction item. If a holder makes an election to amortize premium on a Bond,
such election will apply to all taxable debt instruments (including all Bonds)
held by the holder at the beginning of the taxable year in which the election is
made, and to all taxable debt instruments acquired thereafter by such holder,
and will be irrevocable without the consent of the Service. Purchasers who pay a
premium for the Bonds should consult their tax advisors regarding the election
to amortize premium and the method to be employed.
Amortizable premium on a Bond that is subject to redemption at the option
of the Seller generally must be amortized as if the optional redemption price
and date were the Bond's principal amount and maturity date if doing so would
result in a smaller amount of premium amortization during the period ending with
the optional redemption date. Thus, a Bondholder would not be able to amortize
any premium on a Bond that is subject to optional redemption at a price equal to
or greater than the Bondholder's acquisition price unless and until the
redemption option expires. In cases where premium must be amortized on the basis
of the price and date of an optional redemption, the Bond will be treated as
having matured on the redemption date for the redemption price and then having
been reissued on that date for that price. Any premium remaining on the Bond at
the time of the deemed reissuance will be amortized on the basis of (i) the
original principal amount and maturity date or (ii) the price and date of any
succeeding optional redemption, under the principles described above.
Under the Contingent Payment Regulations, a secondary market purchaser of a
Non-VRDI Bond on an Interest Weighted Bond at a premium generally would continue
to accrue interest and determine adjustments on such Bond based on the original
projected payment schedule devised by the issuer of such Bond. See " -- Original
Issue Discount -- Interest Weighted Bonds and Non-VRDI Bonds" herein. The holder
of such a Bond would allocate the difference between its basis in the Bond and
the adjusted issue price of the Bond as negative adjustments to the accruals or
projected payments on the Bond over the remaining term of the Bond in a manner
that is reasonable (e.g., based on a constant yield to maturity).
Gain or Loss on Disposition
If a Bond is sold, the Bondholder will recognize gain or loss equal to the
difference between the amount realized on the sale and his adjusted basis in the
Bond. The adjusted basis of a Bond generally will equal the cost of the Bond to
the Bondholder, increased by any original issue discount or market discount
previously includible in the Bondholder's gross income with respect to the Bond
and reduced by the portion of the basis of the Bond allocable to payments on the
Bond (other than qualified stated interest) previously received by the
Bondholder and by any amortized premium. Similarly, a Bondholder who receives a
scheduled or prepaid principal payment with respect to a Bond will recognize
gain or loss equal to the difference between the amount of the payment and the
allocable portion of his adjusted basis in the Bond. Except to the extent that
the market discount rules apply and except as provided below, any gain or loss
on the sale or other disposition of a Bond generally will be capital gain or
loss. Such gain or loss will be long-term gain or loss if the Bond is held as a
capital asset for more than 12 months.
If the holder of a Bond is a bank, thrift, or similar institution described
in Section 582 of the Code, any gain or loss on the sale or exchange of the Bond
will be treated as ordinary income or loss. In the case of other types of
holders, gain from the disposition of a Bond that otherwise would be capital
gain will be treated as ordinary income to the extent that the amount actually
includible in income with respect to the Bond by the Bondholder during his
holding period is less than the amount that would have been includible in income
if the yield on that Bond during the holding period had been 110% of a specified
U.S. Treasury borrowing rate as of the date that the Bondholder acquired the
Bond. Although the legislative history to the 1986 Act indicates that the
portion of the gain from disposition of a Bond that will be recharacterized as
ordinary income is limited to the amount of original issue discount (if any) on
the Bond that was not previously includible in income, the applicable Code
provision contains no such limitation.
A portion of any gain from the sale of a Bond that might otherwise be
capital gain may be treated as ordinary income to the extent that such Bond is
held as part of a "conversion transaction" within the meaning of Selection 1258
of the Code. A conversion transaction generally is one in which the taxpayer has
taken two or more positions in Bonds or similar property that reduce or
eliminate market risk, if substantially all of the taxpayer's return is
attributable to the time value of the taxpayer's net investment in such
transaction. The amount of gain realized in a conversion transaction that is
recharacterized as ordinary income generally will not exceed the amount of
interest that would have accrued on the taxpayer's net investment at 120% of the
appropriate "applicable federal rate" (which rate is computed and published
monthly by the Service) at the time the taxpayer entered into the conversion
transaction, subject to appropriate reduction for prior inclusion of interest
and other ordinary income from the transaction.
47
<PAGE>
Miscellaneous Tax Aspects
Backup Withholding. A Bond may, under certain circumstances, be subject to
"backup withholding" at the rate of 31% with respect to "reportable payments,"
which include interest payments and principal payments to the extent accrued
original issue discount as well as distributions of proceeds from a sale of
Bonds. This withholding generally applies if the Bondholder of a Bond (i) fails
to furnish the Trustee with its taxpayer identification number ("TIN"); (ii)
furnishes the Trustee or the Issuer an incorrect TIN; (iii) fails to report
properly interest, dividends or other "reportable payments" as defined in the
Code; or (iv) under certain circumstances, fails to provide the Trustee or the
Issuer or such Bondholder's securities broker with a certified statement, signed
under penalty of perjury, that the TIN is its correct number and that the
Bondholder is not subject to backup withholding. Backup withholding will not
apply, however, with respect to certain payments made to Bondholders, including
payments to certain exempt recipients (such as exempt organizations) and to
certain Nonresidents (as defined below) complying with requisite certification
procedures. Bondholders of the Bonds should consult their tax advisors as to
their qualification for exemption from backup withholding and the procedure for
obtaining the exemption.
The Trustee will report to the Bondholders and to the Internal Revenue
Service each calendar year the amount of any "reportable payments" during such
year and the amount of tax withheld, if any, with respect to payments on the
Bonds within a reasonable time after the end of each calendar year.
Foreign Bondholders. Under the Code, interest and original issue discount
income (including accrued interest or original issue discount recognized on sale
or exchange) paid or accrued with respect to Bonds held by Bondholders who are
nonresident alien individuals, foreign corporations, foreign partnerships or
certain foreign estates and trusts ("Nonresidents") or Bondholders holding on
behalf of a Nonresident generally will be treated as "portfolio interest" and
therefore will not be subject to any United States tax provided that (i) such
interest is not effectively connected with a trade or business in the United
States of the Bondholder and (ii) the Issuer (or other person who would
otherwise be required to withhold tax from such payments) is provided with an
appropriate statement that the beneficial owner of a Bond is a Nonresident.
Interest (including original issue discount) paid on Bonds to Bondholders who
are foreign persons will not be subject to withholding if such interest is
effectively connected with a United States business conducted by the Bondholder.
Such interest (including original issue discount) will, however, generally be
subject to the regular United States income tax.
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO
BONDHOLDERS AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT TO MANY
ASPECTS OF THOSE RULES, POTENTIAL INVESTORS SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE TAX TREATMENT OF THE ACQUISITION, OWNERSHIP, AND
DISPOSITION OF THE BONDS.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences," potential investors should consider the state
income tax consequences of the acquisition, ownership, and disposition of the
Bonds. State income tax law may differ substantially from the corresponding
federal law, and this discussion does not purport to describe any aspect of the
income tax laws of any state. Therefore, potential investors should consult
their own tax advisors with respect to the various state tax consequences of an
investment in the Bonds.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain requirements on those pension, profit sharing, and other
employee benefit plans to which it applies ("Plans") and on those persons who
are fiduciaries or parties in "interest" with respect to such Plans. In
considering an investment of the assets of a Plan in Bond, a fiduciary should
consider, among other things, (i) the purposes, requirements, and liquidity
needs of such Plan; (ii) the definition of Plan assets under ERISA and the
applicable U.S. Department of Labor ("DOL") regulations; (iii) whether the
investment satisfies the diversification requirements of Section 404(a)(1)(C) of
ERISA; (iv) whether such an investment is appropriate for the Plan and prudent,
considering the nature of the investment and the fact that no market in which
such fiduciary can sell or otherwise dispose of Offered Bonds is expected to
arise. The prudence of a particular investment must be determined by the
responsible fiduciary (usually the trustee or investment manager) with respect
to each Plan taking into account all of the facts and circumstances of the
investment.
Sections 406 and 407 of ERISA and Section 4975 of the Code prohibit certain
transactions that involve (i) a Plan and any party in interest under ERISA or
"disqualified person" under the Code with respect to the Plan and (ii) Plan
assets. A violation of those prohibited transaction rules may generate other
disqualified persons. Consequently, a Plan contemplating
48
<PAGE>
an investment in the Bonds should consider whether the Issuer, any other person
associated with the issuance and administration of the Bonds, or any affiliate
of the foregoing is or might become a party in interest or a disqualified person
with respect to the Plan. In addition, a Plan should consider whether other
persons who are parties in interest or disqualified persons might acquire
ownership rights in the Issuer or its assets by virtue of the "Look-Through
Rule" described below, or otherwise. In either case, the acquisition or holding
of Bonds by or on behalf of the Plan could be considered to give rise to an
indirect prohibited transaction under ERISA and the Code in the nature of an
extension of credit by the Plan. Conversely, if a party in interest or
disqualified person with respect to a Plan acquires or holds Bonds while the
Plan is deemed to own ownership rights in the Issuer or its assets by virtue of
the "Look-Through Rule" described below, an indirect prohibited transaction also
could arise. However, certain exemptions to the prohibited transaction rules
could be applicable to the situations described in this paragraph, depending on
the type and circumstances of the Plan fiduciary making the decision to acquire
the Bond (including a Bond recharacterized as an ownership interest in the
Issuer or its assets). Those exemptions potentially include Prohibited
Transaction Class Exemption ("PTCE") 90-1, regarding investments by insurance
company pooled separate accounts, PTCE 91-38, regarding investments by bank
collective investment funds, and PTCE 84-14, regarding transactions effected by
a "qualified professional asset manager."
If a Plan were deemed to have acquired indirectly ownership rights in the
Issuer or its assets, certain transactions involving the operations of the
Issuer might be deemed to be prohibited transactions under ERISA and the Code.
Regulations of the DOL set forth in 29 C.F.R. 2510.3-101 (the "Plan Asset
Regulations") define "plan assets" to include not only securities held by a Plan
but also the underlying assets of the Issuer of any equity securities (the
"Look-Through Rule") unless one or more exceptions specified in the regulations
are satisfied. The Plan Asset Regulations define an equity security as a
security other than a security that is treated as debt for state law purposes
and that has no substantial equity features. Consequently, to the extent a Class
of Bonds is treated as debt for purposes of the Plan Asset Regulations, the
Look-through Rule should not apply to a Plan's purchase or holding of Bonds of
that Class. If a Class of Bonds is treated as equity for those purposes (a
"Recharacterized Class"), however, the Look-Through Rule would apply unless one
or more exceptions specified in the Plan Asset Regulations is satisfied.
Under the Plan Asset Regulations, two exceptions might be available to a
Recharacterized Class of Bonds. The first (the "Publicly Offered Exception") is
available to a Recharacterized Class of Bonds that is registered under the
Securities Exchange Act of 1934, as amended, freely transferable, and held by
more than 100 unrelated investors. The second is available if, immediately after
the most recent acquisition of a Bond of a Recharacterized Class, benefit plan
investors (which include government plans and individual retirement accounts) do
not own 25% or more of the value of any Class of Recharacterized Bonds (the
"Insignificant Participation Exception"). Prospective Plan investors should be
aware that even if the Look-Through Rule does not apply to a Recharacterized
Class as a result of the applicability of the Publicly Offered Exception or the
Insignificant Participation Exception, the purchase of Bonds of such Class
nonetheless could constitute a prohibited transaction if the Underwriter and
certain of its affiliates were considered parties in interest or disqualified
persons, such as where the Underwriter is a fiduciary or other service provider
for a Plan. PTCE 75-1 generally exempts purchases by a Plan from an underwriter
who is a party in interest or disqualified person, if, among other things, the
underwriter is not acting as a fiduciary for the Plan in such circumstances.
Such a Plan considering the purchase of Bonds should exercise caution with
respect to such purchase and consult with its counsel regarding the availability
of relief under PTCE 75-1.
Due to the complexity of the rules and penalties under ERISA and the Code
applicable to Plans, potential Plan investors should consult their advisors and
counsel regarding (i) the characterization of each Class of Bonds as debt or
equity for ERISA purposes and (ii) the application of the Publicly Offered
Exception, the Insignificant Participation Exception or other available
exemptions from the prohibited transaction rules of ERISA and the Code.
Potential investors also should be aware that ERISA requires that the assets of
a Plan be valued at their fair market value as of the close of the plan year and
that the Issuer does not plan to provide any valuations to Bondholders.
LEGAL INVESTMENT
As set forth in the related Prospectus Supplement, one or more Classes of
Offered Bonds of any Series may constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") so
long as they are secured by first liens on residential properties and are rated
in one of the two highest rating categories by at least one nationally
recognized statistical rating organization and, as such, will be legal
investments for persons, trusts, corporations, partnerships, associations,
business trusts and business entities (including, but not limited to,
state-chartered savings banks, commercial banks, savings and loan associations
and insurance companies, as well as trustees and state government
49
<PAGE>
employee retirement systems) created pursuant to or existing, under the laws of
the United States or of any State (including the District of Columbia and Puerto
Rico) whose authorized investments are subject to State regulation to the same
extent that under applicable law, obligations issued by or guaranteed as to
principal and interest by the United States or any agency or instrumentality
thereof constitute legal investments for such entities. Bonds of a Series that
are secured by second liens on residential properties will not be treated as
"mortgage related securities" under SMMEA, regardless of the rating assigned
such Bonds.
Under SMMEA, if a State enacted legislation prior to October 4, 1991
specifically limiting the legal investment authority of any such entities with
respect to "mortgage related securities," the Bonds will constitute legal
investments for entities subject to such legislation only to the extent provided
in such legislation. Several states have enacted legislation overriding SMMEA.
SMMEA provides, however, that in no event will the enactment of any such
legislation affect the validity of any contractual commitment to purchase, hold
or invest in any securities, or require the sale or other disposition of any
securities, so long as such contractual commitment was made or such securities
acquired prior to the enactment of such legislation.
SMMEA also amended the legal investment authority of federally chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with mortgage
related securities without limitations as to the percentage of their assets
represented thereby; federal credit unions may invest in mortgage related
securities, and national banks may purchase mortgage related securities for
their own account without regard to the limitations generally applicable to
investment securities set forth in 12 U.S.C. Section 24 (Seventh), subject in
each case to such regulations as the applicable federal regulatory authority may
prescribe. Bonds that do not constitute "mortgage related securities" under
SMMEA will require registration, qualification or an exemption under applicable
state securities laws and may not be "legal investments" to the same extent as
"mortgage related securities" under SMMEA.
There may be restrictions on the ability of certain investors, including
depository institutions, either to purchase certain types of the Bonds or to
purchase Bonds representing more than a specified percentage of the investor's
assets. Investors should consult their own legal advisors in determining whether
and to what extent the Bonds constitute legal investments for such investors.
USE OF PROCEEDS
The Issuer will apply all or substantially all of the net proceeds from the
sale of each Series offered hereby and by the related Prospectus Supplement to
purchase the Mortgage Loans, to repay indebtedness that has been incurred to
obtain funds to acquire the Mortgage Loans, to establish the Reserve Fund, if
any, for the Series and to pay costs of structuring and issuing the Bonds.
PLAN OF DISTRIBUTION
The Issuer may sell the Bonds offered hereby either directly or through one
or more underwriters or underwriting syndicates or through designated agents.
The Issuer also may sell the Bonds initially to an affiliate, and such affiliate
may sell the Bonds, from time to time, either directly or through one or more
underwriters, underwriting syndicates or through designated agents. The Bonds of
a Series may be acquired by underwriters for their own account and may be resold
from time to time in one or more transactions, at a fixed public offering price
or prices, which may change, or at varying prices determined at the time of
sale. The Issuer also may authorize, from time to time, underwriters acting as
agents to offer and sell the Bonds upon the terms and conditions set forth in
the related Prospectus Supplement.
The related Prospectus Supplement or Supplements for each Series will set
forth the terms of the offering of such Series and of each Class of Bonds within
such Series, including the name or names of the underwriters, the proceeds to
and their use by the Issuer, and either the initial public offering price, the
discounts and commissions to the underwriters and any discounts or concessions
allowed or reallowed to certain dealers, or the method by which the price at
which the underwriters will sell the Bonds will be determined. If Bonds of a
Series are offered other than through underwriters, the related Prospectus
Supplement will contain information regarding the nature of such offering and
any agreements to be entered into between the Issuer and purchasers of Bonds of
such Series.
Underwriters, dealers and agents may be entitled, under agreements entered
into with the Issuer, to indemnification against and contribution toward certain
civil liabilities, including liabilities under the Securities Act of 1933.
Certain of the underwriters and their affiliates may engage in transactions
with, and perform services for, the Issuer or its affiliates.
50
<PAGE>
The place and time of delivery for the Bonds of a Series in respect of
which this Prospectus is delivered will be set forth in the related Prospectus
Supplement.
LEGAL MATTERS
Certain legal matters in connection with the Bonds offered hereby will be
passed upon for the Issuer by Hunton & Williams, Richmond, Virginia, and for the
underwriters by the firm specified in the related Prospectus Supplement.
FINANCIAL INFORMATION
Resource is not obligated with respect to the Bonds. Accordingly, the
Issuer has determined that financial statements of Resource are not material to
the offering made hereby. Any prospective purchaser who desires to review
financial information concerning the Issuer, however, will be provided with a
copy of the most recent financial statements of the Issuer upon request.
51
<PAGE>
GLOSSARY
There follows an abbreviated definition of certain capitalized terms used
in this Prospectus. The Indenture, the Master Servicing Agreement, the
Prospectus Supplement or the Servicing Agreement may contain a more complete
definition of certain of the terms defined herein and reference should be made
to the Indenture, the Master Servicing Agreement, the Prospectus Supplement and
the Servicing Agreement for a more complete definition of all such terms.
"Accounting Date" means with respect to each Payment Date the last day of
the month preceding the month in which such Payment Date occurs on such other
date as may be specified in the related Prospectus Supplement.
"Accretion Class" or "Accretion Bonds" means a Class of Bonds comprised of
Accretion Bonds upon which interest is accrued and is compounded and added to
the principal thereof periodically, but which is not entitled to payments of
principal or interest until a specified date or specified Classes of the same
Series have been paid in full.
"Additional Mortgage Collateral" means any Mortgage Loans or other Mortgage
Collateral added to the Trust Estate for a Series of Bonds (other than a
substitute Mortgage Loan) after the initial closing for the Series of Bonds.
"Advance" means as to any Mortgage Loan, any P&I Advance, T&I Advance or
Property Protection Advance made by a Servicer or a Special Servicer or, upon
the default by a Servicer on its obligation to make such an Advance, by the
Master Servicer or such other party as may be specified in the related
Prospectus Supplement.
"Affiliate" means any person or entity controlling, controlled by or under
common control with a specified entity. "Control" means the power to direct the
management and policies of a person or entity, directly or indirectly, whether
through ownership of voting securities, by contract or otherwise. "Controlling"
and "Controlled" will have meanings correlative to the foregoing.
"Bonds" means the Issuer's Collateralized Mortgage Bonds issued pursuant to
the Indenture.
"Bondholder" or "Holder" means the person in whose name a Bond is
registered in the Bond Register for the related Series.
"Book-Entry Bonds" means a Class or Classes of Bonds that are initially
issued in book-entry form through a depository.
"Borrower" means the individual or individuals obligated to repay a
Mortgage Loan. (The Borrower may be the beneficiary or beneficiaries of an
Illinois land trust when the Mortgaged Premises are located in Illinois.)
"Business Day" means any day that is not a Saturday, Sunday or other day on
which commercial banking institutions in the city in which the corporate trust
office of the Trustee is then located, or in the city or cities in which the
offices of the Master Servicer are then located, are authorized or obligated by
law or executive order to be closed.
"Class" means, collectively, all of the Bonds bearing the same designation.
"Class Interest Rate" means with respect to any Class of Bonds the annual
rate, which may be a variable rate, at which interest accrues on the Bonds of
such Class, as specified in the related Prospectus Supplement.
"Closing Date" means the date on which a Series of Bonds is issued as set
forth in the Prospectus Supplement.
"Code" means the Internal Revenue Code of 1986, as amended.
"Collateral" means the Mortgage Loans, other mortgage collateral, and any
funds and Insurance Policies pledged to secure a Series.
"Collateral Proceeds Account" means the account created and maintained by
the Trustee for each Series of Bonds.
"Collateral Value" means, unless otherwise specified in the related
Prospectus Supplement, with respect to a Mortgage Loan (or REO to the extent of
a Foreclosure of a Mortgage Loan), an amount generally equal to (i) the
Scheduled Principal Balance of such Mortgage Loan (or related REO) or (ii) as
specified in the related Prospectus Supplement, the Scheduled Principal Balance
of such Mortgage Loan multiplied by a fraction, the numerator of which is the
Net Rate of the Mortgage Loan and the denominator of which is the Collateral
Value Discount Rate (the "Interest Method").
"Collateral Value Discount Rate" means the percentage rate that, multiplied
by the required payments on the Mortgage Loans securing the Bonds, will assure
the availability of sufficient funds to pay on the Bonds.
52
<PAGE>
"Compound Value" means with respect to any Payment Date for an Accretion
Class, the original principal amount of such Class of Bonds, plus all interest
accrued and added to the principal thereof through the Accounting Date preceding
the Payment Date, compounded at the interest rate for such Class of Bonds, and
with respect to any calculation on a date other than a Payment Date, the
Compound Value as of the immediately preceding Accounting Date or (if prior to
the first Payment Date) the original principal amount of such Accretion Class of
Bonds. The principal amount of any Accretion Bond at any time will be equal to
its Compound Value. The Compound Value of an Accretion Bond will be reduced by
any payments of principal on such Bond.
"Condemnation Award" means any awards, payments, proceeds or damages
received pursuant to any action or proceeding relating to any condemnation or
other taking, whether direct or indirect, of the Mortgaged Premises or for
conveyances in lieu of condemnation.
"Converted Mortgage Loans" means a Mortgage Loan that, pursuant to the
terms of the related Note, has converted from an adjustable to a fixed Note Rate
or from one fixed Note Rate to a lower fixed Note Rate.
"Current Interest Class" or "Current Interest Bond" means any Class of
Bonds that bear interest at the Class Interest Rate, other than Accretion Bonds
or Principal-Only Bonds.
"Curtailment" means any partial prepayment of principal permitted under the
terms of a Note on a Mortgage Loan that otherwise is current.
"Custodial P&I Account" means the account established by each Servicer into
which the Servicer deposits collections of principal and interest on the
Mortgage Loans.
"Custodial Taxes and Insurance (T&I) Account" means an account maintained
by a Servicer specifically for the deposit and payment of required escrows.
"Cut-off Date" means the date specified in the Prospectus Supplement and
used as a basis for identifying which payments of principal of and interest due
on the Mortgage Loans are for the benefit of the Bondholders.
"Delinquency" means when all or part of the Borrower's Monthly Payment is
not paid on or before the Due Date.
"Discount Class" or "Discount Bonds" means any Class comprised of Bonds
that have a purchase price less than the Parity Price.
"Due Date" means the day of each month on which the Borrower's Monthly
Payment is due as stated in the Note.
"Due Period" means with respect to any Payment Date, the period commencing
on the second day of the calendar month preceding the calendar month in which
such Payment Date occurs and continuing through the first day of the calendar
month in which such Payment Date occurs.
"Eligible Investments" means those investments permitted under the
Indenture and acceptable to the Rating Agencies.
"Event of Default" means an event of default under the Indenture as
described under "The Indenture -- Events of Default."
"FHLMC" means Federal Home Loan Mortgage Corporation.
"Flood Insurance (Flood Insurance Policy)" means an Insurance Policy
insuring against flood damage to a Mortgaged Premises, required for Mortgaged
Premises located in "flood hazard" areas identified by the Secretary of HUD or
the Director of the Federal Emergency Management Agency.
"FNMA" means Federal National Mortgage Association.
"Foreclosure" means a proceeding pursuant to which a Security Instrument is
satisfied or released by foreclosure (whether by power of sale or judicial
proceeding), deed in lieu of foreclosure or any other comparable means.
"Hazard Insurance (Hazard Insurance Policy)" means replacement value
insurance coverage insuring against loss or damage from fire and other perils in
an amount not less than the greater of (i) the Unpaid Principal Balance of the
Mortgage Loan and (ii) 100% of the actual replacement value of the improvements,
annually adjusted, exclusive of foundations and excavations, naming the Issuer,
its successors and assigns as a loss payee, together with all riders and
endorsements thereto. Such coverage will include an inflation guard endorsement
and an agreed amount endorsement that suspends the applicability of any
co-insurance clause.
53
<PAGE>
"HUD" means the United States Department of Housing and Urban Development.
"Indenture" means the indenture between the Issuer and the Trustee,
pursuant to which a Series of Bonds is issued, as such indenture may be
supplemented or amended from time to time by a Series Supplement.
"Insurance Policy" or "Insurance Policies" means any insurance for a
Mortgage Loan required by the terms of the Mortgage Loan and the Servicing
Agreement, including Primary Mortgage Insurance, Hazard Insurance, Flood
Insurance, and Title Insurance.
"Insurance Proceeds" means proceeds payable from an Insurance Policy or a
Pool Insurance Policy.
"Issuer" means MERIT Securities Corporation, a Virginia corporation.
"Liquidation" means (i) application of a payment to a Mortgage Loan that
results in the release of the lien of the Security Instrument on any Mortgaged
Premises, whether through foreclosure, condemnation, prepayment in full or
otherwise or, with respect to REO, an REO Disposition or (ii) the sale of any
defaulted Mortgage Loan.
"Liquidation Proceeds" means the amount received by the Servicer or Special
Servicer in connection with any Liquidation of a Mortgage Loan.
"Losses" means and includes for any Prepayment Period (i) any Realized
Losses on a defaulted Mortgage Loan and (ii) any reduction by a bankruptcy court
of either the Unpaid Principal Balance or Note Rate of a Mortgage Loan subject
to a bankruptcy proceeding.
"Master Servicer" means Resource or the entity specified in the Prospectus
Supplement for a Series that will administer and supervise the performance by
the Servicers of their duties and responsibilities under Servicing Agreements in
respect to Mortgage Loans securing a Series.
"Master Servicer Custodial Account" means a trust account established by
the Master Servicer into which the Servicer remits by wire transfer the Servicer
Remittance in respect of the Mortgage Loans.
"Master Servicer Remittance Date" means the date specified in the Master
Servicing Agreement by which the Master Servicer must remit funds in the Master
Servicer Custodial Account to the Collateral Proceeds Account for a Series.
"Monthly Payment" means with respect to any Mortgage Loan, the total
monthly payment due in the applicable month under the terms of the Note (i.e.,
the sum of the Scheduled Payment, and the monthly escrow deposit to the
Custodial Taxes and Insurance Account).
"Mortgage Collateral" means the Mortgage Loans and certain other assets
evidencing interests in loans secured by residential property securing a Series
or any REO.
"Mortgage Insurer" means any insurance company or other entity that
provides a Primary Mortgage Insurance Policy.
"Mortgage Loan" means the one- to four-family residential mortgage loans
evidenced by the Notes and Security Instruments that the Issuer has pledged to
the Trustee as Collateral for a Series of Bonds.
"Mortgage Loan Documents" means the original Note, the original Security
Instrument, the original assignment of the Security Instrument and any original
intervening assignments, the original Title Insurance Policy and the appraisal
report made at the time the Mortgage Loan was originated, and all other
documents held by the custodian or the Servicer.
"Mortgage Pool" means the group of Mortgage Loans securing a Series of
Bonds.
"Mortgaged Premises" means land and improvements thereon subject to the
lien of a Security Instrument.
"Net Rate" means, with respect to any Mortgage Loan, the Note Rate thereon
minus applicable servicing and administration fees, expressed as a percentage of
the applicable Mortgage Loan.
"Non-Recoverable Advance" means any portion of an Advance previously made
or proposed to be made by the Servicer, Special Servicer or Master Servicer that
has not been previously reimbursed, which in the good faith judgment of the
Special Servicer or the Master Servicer (in the case of the Servicer and the
Master Servicer) will not, or in the case of a proposed P&I Advance, would not
ultimately be recoverable from future payments by the Borrower, Insurance
Proceeds, Condemnation Awards, Liquidation Proceeds or collections related to
the REO, with respect to the Mortgaged Premises for which the Advance was made
or is proposed to be made, or in the case of a proposed T&I Advance or Property
Protection
54
<PAGE>
Advance, would not be ultimately recoverable from future cash flows on the
Mortgage Loans pledged as collateral for a Series of Bonds.
"Note" means a manually executed written instrument evidencing the
Borrower's promise to repay a stated sum of money, plus interest, to the
noteholder by a specific date according to a schedule of principal and interest
payments.
"Note Rate" means, with respect to a Mortgage Loan, the interest rate
payable by the Borrower on the Mortgage Loan according to the terms of the Note.
"Offered Bonds" means the Bonds actually offered pursuant to a Prospectus
Supplement appended to this Prospectus.
"Original Mortgage Collateral" means Mortgage Collateral initially pledged
to the Trustee to secure a Series of Bonds.
"Originator" means a savings and loan association, savings bank, commercial
bank, credit union, insurance company, or similar institution or an HUD approved
mortgagee that originates a Mortgage Loan.
"Parity Price" is the price at which a Class has a yield to maturity that
is equal to its coupon, after giving effect to any payment delay.
"Participant" means Resource or an affiliate thereof.
"Payment Date" means as to a Series, the date specified in the related
Prospectus Supplement for payment on the Bonds of such Series.
"P&I Advance" means an advance of principal and interest (net of servicing
fees) by the Servicer or the Special Servicer (or, upon a default by such party,
by the Master Servicer or such other party specified in the related Prospectus
Supplement) on a Mortgage Loan subject to a Delinquency.
"Pool Insurer" means any insurance company or other person that provides a
Pool Insurance Policy for a Series.
"Pool Insurance Policy" means an insurance policy to cover any loss
(subject to certain limitations) by reason of default by the Borrowers of the
Mortgage Loans securing a Series to the extent not covered by any Primary
Mortgage Insurance Policy.
"Premium Class" or "Premium Bonds" means any Class comprised of Bonds that
have a purchase price greater than or equal to the Parity Price.
"Prepayment Period" means, as to any Payment Date, the time period used to
identify prepayments or other unscheduled payments of principal or interest
received with respect to Mortgage Collateral that will be used to pay
Bondholders on such Payment Date.
"Primary Mortgage Insurance Policy" means an insurance policy covering a
Mortgage Loan securing a Series against loss of the insured portion of the
Unpaid Principal Balance of the covered Mortgage Loan together with accrued and
unpaid interest thereon.
"Principal Distribution Amount" means, with respect to a current Payment
Date for a Series of Bonds, the amount, if any, by which (i) the aggregate
Collateral Value of the Mortgage Loans securing the Series as of the most recent
Payment Date (or, in regard to the first Payment Date, as of the Cut-off Date
for such Series) exceeds (ii) the aggregate Collateral Value of the Mortgage
Loans securing the Series as of the current Payment Date, unless otherwise
specified in the Prospectus Supplement.
"Principal-Only Class" or "Principal-Only Bonds" means a Class of Bonds
that does not pay or accrue interest.
"Property Protection Advance" means an Advance made by a Servicer or the
Special Servicer in connection with the protection of a Mortgaged Premises,
including, without limitation, expenses related to Foreclosure proceedings and
Servicing Fees.
"Rating Agency(ies)" means, for any Class of Bonds, any nationally
recognized statistical rating agency, or its successor, that on the Closing Date
rated such Class of the Bonds at the request of the Issuer. If such agency or a
successor is no longer in existence, "Rating Agency" will be such nationally
recognized statistical rating agency, or other comparable Person, designated by
the Issuer, notice of which designation will be given to the Trustee and the
Master Servicer. References herein to any rating category of a Rating Agency
will mean such rating category without regard to any plus or minus or numerical
designation.
55
<PAGE>
"Realized Loss" means, with respect to each defaulted Mortgage Loan or REO
as to which a Liquidation has been made, an amount equal to the sum of (a) the
Unpaid Principal Balance of the Mortgage Loan as of the date of such
Liquidation, (b) interest at the applicable Note Rate, from the date as to which
interest was last paid through the end of the calendar month in which the
Liquidation occurred, on the Unpaid Principal Balance of such Mortgage Loan
outstanding during each Due Period in which accrued interest was not paid, (c)
any Property Protection Advances and Advances for taxes, assessments and
comparable items and insurance premiums, as required by the Servicing Agreement
or Special Servicing Agreement and (d) any other expenses (including any
servicing related fees) related to the Liquidation of the Mortgage Loan or REO,
minus the sum of (i) any funds received in connection with the Liquidation of
the related Mortgage Loan or REO prior to or during the month in which such
Liquidation occurred, (ii) and any Insurance Proceeds received with respect to
such Mortgage Loan or REO.
"With respect to a Mortgage Loan subject to a loan modification, the
Realized Loss is an amount equal to the sum of (a) the Unpaid Principal Balance
of the Mortgage Loan as of the date of such modification, (b) interest at the
applicable Note Rate, from the date as to which interest was last paid through
the end of the calendar month in which the modification occurred, on the Unpaid
Principal Balance of such Mortgage Loan outstanding during each Due Period in
which accrued interest was not paid, (c) any Property Protection Advances and
Advances for taxes, assessments and comparable items and insurance premiums, as
required by the Servicing Agreement, the Master Servicing Agreement or the
Special Servicing Agreement and (d) any other expenses (including any servicing
related fees) related to the modification of the Mortgage Loan, minus the
product of (x) the ratio of the Scheduled Payment (net of the dollar equivalent
of all ongoing servicing related fees on the first Due Date) on the modified
Mortgage Loan divided by the Scheduled Payment (net of the dollar equivalent of
all servicing related fees on such Due Date) on the prior Mortgage Loan, and (y)
the Unpaid Principal Balance of the modified Mortgage Loan.
"Remittance Date" means, the date specified in the related Servicing
Agreement by which the funds in the Custodial P&I Account must be remitted to
the Master Servicer Custodial Account, which in no case will be later in any
month than the Master Servicer Remittance Date.
"REO" or "REO Properties" means Mortgaged Premises acquired by Foreclosure
or by deed-in-lieu of foreclosure.
"REO Disposition" means the receipt by the Servicer in connection with an
REO of Insurance Proceeds, Condemnation Awards and other payments and recoveries
that the Servicer recovers from the sale or other final disposition thereof.
"Reserve Fund" means, unless otherwise provided in the Prospectus
Supplement, any fund in the Trust Estate other than the Collateral Proceeds
Account.
"Resource" means Resource Mortgage Capital, Inc., a Virginia corporation.
"Scheduled Payment" means with respect to any Mortgage Loan, the scheduled
monthly payment of principal and interest at the Note Rate due in the applicable
month under the terms of the Note.
"Scheduled Principal Balance" means with respect to each Mortgage Loan (or
related REO) as of a determination date, the scheduled principal balance thereof
as of the Cut-off Date, increased by the amount of negative amortization, if
any, with respect thereto, and reduced by (a) the principal portion of all
Scheduled Payments due on or before such determination date, whether paid by the
Borrower or advanced by a Servicer or other party, (b) all amounts allocable to
unscheduled principal payments received on or before the last day of the
Prepayment Period preceding such date of determination, and (c) without
duplication, the amounts of any Realized Loss that has occurred with respect to
such Mortgage Loan.
"Securities Act" means the Securities Act of 1933, as amended.
"Security Instrument" means a written instrument creating a valid lien on
the Mortgaged Premises, including any riders thereto. A Security Instrument may
be in a form of a mortgage, deed of trust, deed to secure debt or security deed.
"Senior Bonds" or "Senior Class" means any Class of Bonds of a Series,
designated as such in the Prospectus Supplement, that is entitled to
preferential priority rights, as to a Subordinated Class of Bonds, to payment of
principal and interest from the proceeds of the Mortgage Loans and other assets
securing such Series.
"Series" means a group of Bonds issued pursuant to a separate Series
Supplement.
"Series Supplement" means an indenture that is supplemental to the
Indenture and that authorizes a particular Series.
56
<PAGE>
"Servicer Remittance" means a Servicer's aggregate payment due each month
to the Master Servicer Custodial Account for Mortgage Loans that have been
pledged as security for a Series of Bonds, which, unless otherwise specified in
the Prospectus Supplement for a Series of Bonds, is equal to (A) the sum of the
following:
(i) all payments of principal and interest with respect to the
Mortgage Loans and any REO (including net Liquidation and Insurance
Proceeds) collected during the related Due Period and deposited in the
Custodial P&I Account;
(ii) any Advance by the Servicer that represents principal of or
interest on a defaulted Mortgage Loan with respect to such Payment Date;
and
(iii) any Scheduled Payments due during, but collected prior to, the
related Due Period; less (B) the sum of the following:
(i) all amounts due the Servicer as the servicing fee, including late
charges, assumption fees, prepayment premiums and similar charges and fees
(but not default interest);
(ii) any Scheduled Payments collected but due on a date subsequent to
the related Due Period; and
(iii) all amounts required to reimburse the Servicer for any
Non-Recoverable Advances.
"Servicer(s)" means the entity or entities identified in the related
Prospectus Supplement that perform the servicing functions with respect to
Mortgage Loans included in the Trust Estate for a Series.
"Special Servicer" means the entity, as may be specified in the Prospectus
Supplement for a Series, that will service, make certain decisions and take
various actions with respect to delinquent or defaulted Mortgage Loans (or
related REO) pledged as security for a Series pursuant to the terms of a Special
Servicing Agreement between the Servicer or Master Servicer and the Special
Servicer.
"Stated Maturity Date" means, with respect to any Class of Bonds of a
Series, the date specified in such Bond of such Class as the fixed date on which
the final installment of the principal of such Bond is due and payable.
"Subordinated Bonds" or "Subordinated Class" means any Class of Bonds of a
Series as to which the right to receive payment of principal and interest from
the proceeds of the Mortgage Loans and other assets securing such Series is
subordinate to the priority rights of Bondholders of a Senior Class of Bonds of
such Series to the extent specified in the related Prospectus Supplement.
"Substitute Mortgage Collateral" means an item of Mortgage Collateral
pledged to the Trustee to secure a Series of Bonds in substitution for an item
of defective Original Mortgage Collateral.
"Substitute Mortgage Loan" means a Mortgage Loan pledged to secure a Series
of Bonds in substitution of a defaulted Mortgage Loan or REO securing a Series
of Bonds.
"Super-Premium Bond" means any Class comprised of Bonds that have a
purchase price significantly greater than the Parity Price as discussed under
"Certain Federal Income Tax Consequences" herein.
"Surplus" means amounts in the Collateral Proceeds Account in excess of the
amount required to pay principal of and interest on the Bonds of a Series and
certain expenses.
"T&I Advance" means an Advance by the Servicer or the Special Servicer of
escrow amounts for tax and insurance payments with respect to any Mortgage Loan
subject to a Delinquency.
"Title Insurance" or "Title Insurance Policy" means an American Land Title
Association (ALTA) mortgage loan title policy form 1970, or other form of Title
Insurance Policy acceptable to the Issuer, including all riders and endorsements
thereto.
"Trustee" means the bank, trust company or other fiduciary named in the
Prospectus Supplement for each Series of Bonds as the trustee under the
Indenture pursuant to which such Series is issued.
"Trust Estate" means, with respect to each Series of Bonds, all right,
title and interest in and to the Collateral pledged or assigned to the Trustee
for such Series of Bonds pursuant to the Indenture for that Series.
"Unpaid Principal Balance" means with respect to any Mortgage Loan, the
outstanding principal balance payable by the Borrower under the terms of the
Note.
57
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
(Seller)
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated expenses in connection with
the offering of $2,000,000,000 of the Collateralized Mortgage Bonds being
registered under this Registration Statement, other than underwriting discounts
and commission:
SEC Registration..............................$606,061
Printing and Engraving.........................400,000
Legal Fees and Expenses......................1,400,000
Accounting Fees and Expenses...................600,000
Trustee Fees and Expenses......................300,000
Blue Sky Fees and Expenses......................20,000
Rating Agency Fees.............................600,000
Miscellaneous................................1,280,000
TOTAL.........................$5,206,061
Item 15. Indemnification of Directors and Officers.
The Virginia Stock Corporation Act (the "Virginia Act") permits, and
the Company's Bylaws require, indemnification of the Company's directors and
officers in a variety of circumstances, which may include liabilities under the
Securities Act of 1933. Under Section 13.1-697 of the Virginia Act, a Virginia
corporation generally may indemnify its officers and directors in civil or
criminal actions if they acted in good faith and believed their conduct to be in
the best interests of the corporation and, in the case of criminal actions, had
no reasonable cause to believe that the conduct was unlawful. The Virginia Act
also permits a corporation to require, and the Company's Bylaws do require,
indemnification of officers and directors with respect to any action except in
the case of willful misconduct or knowing violation of the criminal law. In
addition, the Virginia Act limits the damages that may be assessed against a
director or officer of the Company in a shareholder or derivative proceeding to
the greater of (a) $100,000 or (b) the amount of cash compensation received by
him from the Company in the twelve months immediately preceding the act or
omission giving rise to liability. Since the directors and officers of the
Company will not be compensated, the maximum amount for which they may be held
liable is $100,000. This limit on liability will not apply in the event of
willful misconduct or a knowing violation of the criminal law or of federal or
state securities laws.
Reference is made to the Underwriting Agreement Standard Provisions filed as
an exhibit hereto for provisions relating to the indemnification of directors,
officers and controlling persons of the Company against certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
Item 16. Exhibits.
1.1 Underwriting Agreement Standard Provisions,
dated August 1994(1)
1.2 Underwriting Agreement Standard Provisions,
dated April 1995(5)
1.3 Underwriting Agreement Standard Provisions,
dated July 1995(7)
3.1 Amended and Restated Articles of Incorporation
of Registrant, effective April 19, 1995(5)
3.2 By-Laws of Registrant(1)
4.1 Indenture between Registrant and Trustee,
dated as of August 1, 1994(1)
4.2 Form of Supplemental Indenture between
Registrant and Trustee(1)
II - 1
<PAGE>
4.3 Indenture between Registrant and Trustee,
dated as of November 1, 1994(3)
4.4 Series 1 Indenture Supplement,
dated as of November 1, 1994,
by and between Registrant and Trustee (3)
4.5 Series 2 Indenture Supplement,
dated as of February 1, 1995,
by and between Registrant and Trustee(4)
4.6 Series 3 Indenture Supplement,
dated as of March 1, 1995,
by and between Registrant and Trustee(5)
4.7 Series 4 Indenture Supplement,
dated as of June 1, 1995,
by and between Registrant and Trustee(6)
4.8 Series 5 Indenture Supplement, dated as of
October 1, 1995, by and between
Registrant and Trustee(8)
4.9 Series 6 Indenture Supplement, dated as of
February 1, 1996, by and between
Registrant and Trustee(9)
4.10 Series 7 Indenture Supplement, dated as of
May 1, 1996, by and between
Registrant and Trustee(10)
4.11 Series 8 Indenture Supplement, dated as of
September 1, 1996, by and between
Registrant and Trustee(11)
5.1 Opinion of Hunton & Williams........................
8.1 Tax Opinion of Hunton & Williams re: Debt
Securities....................................
23.1 Consent of Hunton & Williams is contained in their
opinions filed as Exhibits 5.1 and 8.1
25.1 Form T-1............................................
99.1 Standard Provisions to Servicing Agreement(1)
99.2 Form of Servicing Agreement(1)
99.3 Standard Terms to Master Servicing Agreement,
dated as of August 1, 1994(1)
99.4 Form of Master Servicing Agreement(1)
99.5 Form of Prospectus Supplement for Bonds
secured by adjustable-rate mortgage loans(7)
99.6 Form of Financial Guaranty Assurance Policy(1)
II - 2
<PAGE>
99.7 Form of GEMICO Mortgage Pool Insurance Policy(1)
99.8 Form of PMI Mortgage Insurance Co. Pool Insurance Policy(1)
99.9 Form of Prospectus Supplement for Bonds
secured by fixed-rate mortgage loans(7)
99.10 Copy of Series 2 Bond Insurance Policy issued
by Financial Guaranty Insurance Company(4)
99.11 Saxon Mortgage Funding Corporation Servicing
Guide for Credit Sensitive Loans,
dated February 1, 1995(4)
99.12 Copy of Series 3 Financial Guaranty Insurance
Policy issued by Financial Security
Assurance Inc.(5)
99.13 Copy of Series 4 Financial Guaranty Insurance
Policy issued by Financial Security
Assurance Inc.(6)
99.14 Standard Terms to Master Servicing Agreement,
dated as of June 1, 1995(6)
99.15 Copy of Series 5 Financial Guaranty Insurance
Policy issued by MBIA Insurance Corporation(8)
99.16 Copy of Series 6 Financial Guaranty Insurance
Policy issued by MBIA Insurance Corporation(9)
99.17 Copy of Series 7 Financial Guaranty Insurance
Policy issued by MBIA Insurance Corporation(10)
99.18 Copy of Series 8 Financial Guaranty Insurance
Policy issued by Financial Security
Assurance Inc.(11)
- ----------------------
(1) Incorporated herein by reference to Exhibit to the Registrant's Registration
Statement on Form S-3 (No. 33-83524) filed August 31, 1994.
(2) Incorporated herein by reference to Exhibit to the Registrant's
Pre-Effective Amendment No. 1 to Registration Statement on Form S-3 (No.
33-83524) filed October 6, 1994.
(3) Incorporated herein by reference to Exhibit to the Registrant's Current
Report on Form 8-K (File No. 03992), filed December 19, 1994.
(4) Incorporated herein by reference to Exhibit to the Registrant's Current
Report on Form 8-K (File No. 03992), filed March 8, 1995.
(5) Incorporated herein by reference to Exhibit to the Registrant's Current
Report on Form 8-K (File No. 03992), filed April 21, 1995.
(6) Incorporated herein by reference to Exhibit to the Registrant's Current
Report on Form 8-K (File No. 03992), filed July 10, 1995.
(7) Incorporated herein by reference to Exhibit to the Registrant's
Post-Effective Amendment No. 1 to Registration Statement on Form S-3 (No.
33-83524) filed August 4, 1995.
II - 3
<PAGE>
(8) Incorporated herein by reference to Exhibit to the Registrant's Current
Report on Form 8-K (File No. 03992), filed November 15, 1995.
(9) Incorporated herein by reference to Exhibit to the Registrant's Current
Report on Form 8-K (File No. 03992), filed March 21, 1996.
(10) Incorporated herein by reference to Exhibit to the Registrant's Current
Report on Form 8-K (File No. 03992), filed June 19, 1996.
(11) Incorporated herein by reference to Exhibit to the Registrant's Current
Report on Form 8-K (File No. 03992), filed October 9, 1996.
Item 17. Undertakings.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events
arising after the effective date of the Registration Statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change in
the information set forth in the Registration Statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the
Registration Statement or any material change of such information in
the Registration Statement; provided, however, that paragraphs
(a)(1)(i) and (a)(1)(ii) do not apply if the information required to
be included in the post-effective amendment by those paragraphs is
contained in periodic reports filed by the Registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934
that are included by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II - 4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the County of Henrico, Commonwealth of Virginia, on November 5,
1996.
MERIT SECURITIES CORPORATION
By: /s/ Thomas H. Potts
Thomas H. Potts
Chairman of the Board
and President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Principal Executive Officer:
/s/ Thomas H. Potts
- ---------------------------------
Thomas H. Potts
Chairman of the Board
and President November 5, 1996
Principal Financial and Accounting Officer:
/s/ Lynn K. Geurin
- ---------------------------------
Lynn K. Geurin
Treasurer and Chief
Financial Officer November 5, 1996
Majority of the Board of Directors:
Thomas H. Potts, J. Thomas O'Brien, Jr.,
John C. Stevenson, Jr.
By: /s/ Thomas H. Potts
- ----------------------------------
Thomas H. Potts November 5, 1996
By: /s/ J. Thomas O'Brien, Jr.
- ----------------------------------
J. Thomas O'Brien, Jr. November 5, 1996
By: /s/ John C. Stevenson, Jr.
- ----------------------------------
John C. Stevenson, Jr. November 5, 1996
II - 5
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
EXHIBITS
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
MERIT Securities Corporation
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
November, 1996
INDEX TO EXHIBITS
Number Description Page
1.1 Underwriting Agreement Standard Provisions,
dated August 1994(1)
1.2 Underwriting Agreement Standard Provisions,
dated April 1995(5)
1.3 Underwriting Agreement Standard Provisions,
dated July 1995(7)
3.1 Amended and Restated Articles of Incorporation
of Registrant, effective April 19, 1995(5)
3.2 Bylaws of Registrant(1)
4.1 Indenture between Registrant and Trustee,
dated as of August 1, 1994(1)
4.2 Form of Supplemental Indenture between
Registrant and Trustee(1)
4.3 Indenture between Registrant and Trustee,
dated as of November 1, 1994(3)
4.4 Series 1 Indenture Supplement, dated as of
November 1, 1994, by and between
Registrant and Trustee(3)
4.5 Series 2 Indenture Supplement, dated as of
February 1, 1995, by and between
Registrant and Trustee(4)
4.6 Series 3 Indenture Supplement, dated as of
March 1, 1995, by and between
Registrant and Trustee(5)
4.7 Series 4 Indenture Supplement, dated as of
June 1, 1995, by and between
Registrant and Trustee(6)
<PAGE>
4.8 Series 5 Indenture Supplement, dated as of
October 1, 1995, by and between
Registrant and Trustee(8)
4.9 Series 6 Indenture Supplement, dated as of
February 1, 1996, by and between
Registrant and Trustee(9)
4.10 Series 7 Indenture Supplement, dated as of
May 1, 1996, by and between
Registrant and Trustee(10)
4.11 Series 8 Indenture Supplement, dated as of
September 1, 1996, by and between
Registrant and Trustee(11)
5.1 Opinion of Hunton & Williams................................
8.1 Tax Opinion of Hunton & Williams re: Debt
Securities.............................................
23.1 Consent of Hunton & Williams is contained in their
opinions filed as Exhibits 5.1 and 8.1
25.1 Form T-1....................................................
99.1 Standard Provisions to Servicing Agreement(1)
99.2 Form of Servicing Agreement(1)
99.3 Standard Terms to Master Servicing Agreement
dated as of August 1, 1994(1)
99.4 Form of Master Servicing Agreement(1)
99.5 Form of Prospectus Supplement for Bonds
secured by adjustable-rate mortgage loans(7)
99.6 Form of Financial Guaranty Assurance Policy(1)
99.7 Form of GEMICO Mortgage Pool Insurance Policy(1)
99.8 Form of PMI Mortgage Insurance Co. Pool Insurance Policy(1)
99.9 Form of Prospectus Supplement for Bonds
secured by fixed-rate mortgage loans(7)
<PAGE>
99.10 Copy of Series 2 Bond Insurance Policy
issued by Financial Guaranty Insurance Company(4)
99.11 Saxon Mortgage Funding Corporation Servicing
Guide for Credit Sensitive Loans, dated
February 1, 1995(4)
99.12 Copy of Series 3 Financial Guaranty Insurance
Policy issued by Financial Security
Assurance Inc.(5)
99.13 Copy of Series 4 Financial Guaranty Insurance
Policy issued by Financial Security
Assurance Inc.(6)
99.14 Standard Terms to Master Servicing Agreement,
dated as of June 1, 1995(6)
99.15 Copy of Series 5 Financial Guaranty Insurance
Policy issued by MBIA Insurance Corporation(8)
99.16 Copy of Series 6 Financial Guaranty Insurance
Policy issued by MBIA Insurance Corporation(9)
99.17 Copy of Series 7 Financial Guaranty Insurance
Policy issued by MBIA Insurance Corporation(10)
99.18 Copy of Series 8 Financial Guaranty Insurance
Policy issued by Financial Security Assurance Inc.(11)
- ----------------
(1) Incorporated herein by reference to Exhibit to the Registrant's Registration
Statement on Form S-3 (No. 33-83524), filed August 31, 1994.
(2) Incorporated herein by reference to Exhibit to the Registrant's
Pre-Effective Amendment No. 1 to Registration Statement on Form S-3 (No.
33-83524), filed October 6, 1994.
(3) Incorporated herein by reference to Exhibit to the Registrant's Current
Report on Form 8-K (File No. 03992), filed December 19, 1994.
(4) Incorporated herein by reference to Exhibit to the Registrant's Current
Report on Form 8-K (File No. 03992), filed March 8, 1995.
(5) Incorporated herein by reference to Exhibit to the Registrant's Current
Report on Form 8-K (File No. 03992), filed April 21, 1995.
<PAGE>
(6) Incorporated herein by reference to Exhibit to the Registrant's Current
Report on Form 8-K (File No. 03992), filed July 10, 1995.
(7) Incorporated herein by reference to Exhibit to the Registrant's
Post-Effective Amendment No. 1 to Registration Statement on Form S-3 (No.
33-83524), filed August 4, 1995.
(8) Incorporated herein by reference to Exhibit to the Registrant's Current
Report on Form 8-K (File No. 03992), filed November 15, 1995.
(9) Incorporated herein by reference to Exhibit to the Registrant's Current
Report on Form 8-K (File No. 03992), filed March 21, 1996.
(10) Incorporated herein by reference to Exhibit to the Registrant's Current
Report on Form 8-K (File No. 03992), filed June 19, 1996.
(11) Incorporated herein by reference to Exhibit to the Registrant's Current
Report on Form 8-K (File No. 03992), filed October 9, 1996.
Exhibit 5.1
November 5, 1996
MERIT Securities Corporation
4880 Cox Road
Glen Allen, Virginia 23060
Ladies and Gentlemen:
We have acted as counsel to MERIT Securities Corporation, a Virginia
corporation (the "Company"), in connection with the Company's registration of
$2,000,000,000 in principal amount of Collateralized Mortgage Bonds on Form S-3
(the "Registration Statement") filed with the Securities and Exchange Commission
under the Securities Act of 1933, as amended, and the Trust Indenture Act of
1939, as amended, with respect to the proposed sale of $2,000,000,000 in
principal amount of the Company's Collateralized Mortgage Bonds, issuable in one
or more series (the "Bonds"). In this capacity, we have examined the
Registration Statement, the Company's Articles of Incorporation and By-laws, the
records of corporate proceedings of the Company, the form of indenture between
the Company and Texas Commerce Bank National Association, as Trustee (the
"Indenture") and such other materials as we have deemed necessary to the
issuance of this opinion.
On the basis of the foregoing, we are of the opinion that:
1. The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the Commonwealth of Virginia.
2. When executed and authenticated in accordance with the provisions of
the Indenture and delivered to and paid for by the purchasers thereof, the Bonds
will have been duly authorized by the Company and will constitute valid and
binding obligations of the Company in accordance with and subject to the terms
of the Indenture.
<PAGE>
MERIT Securities Corporation
November 5, 1996
Page 2
We hereby consent to the references to our name in the Prospectus
contained in the Registration Statement and to the filing of this opinion as an
exhibit to the Registration Statement. In giving this consent, we do not admit
that we are within the category of persons whose consent is required by Section
7 of the Securities Act of 1933 or the rules and regulations promulgated
thereunder by the Securities and Exchange Commission.
Very truly yours,
HUNTON & WILLIAMS
Exhibit 8.1
November 5, 1996
MERIT Securities Corporation
4880 Cox Road
Glen Allen, Virginia 23060
Federal Income Tax Matters
Dear Sirs:
We have acted as counsel to MERIT Securities Corporation, a
Virginia corporation (the "Issuer"), in connection with the preparation of the
Registration Statement to which this opinion is attached (the "Registration
Statement"), which is being filed with the Securities and Exchange Commission
under the Securities Act of 1933, as amended (the "Act"), for the registration
under the Act of $2,000,000,000 additional aggregate principal amount of
Collateralized Mortgage Bonds (the "Bonds") to be issued by the Issuer. The
Bonds will be issued pursuant to an indenture, as supplemented and amended from
time to time, and an indenture supplement with respect to each series of Bonds
(collectively, the "Indenture"), between the Issuer and Texas Commerce Bank
National Association, as trustee (the "Trustee").
We have reviewed the originals or copies of (i) the Articles
of Incorporation, by-laws, and other corporate documents of the Issuer; (ii)
certain resolutions of the Board of Directors of the Issuer; (iii) the form of
an indenture; (iv) the Registration Statement and the prospectus included
therein; and (v) such other documents as we have deemed necessary or appropriate
as a basis for the opinion set forth below.
Based on the foregoing, we are of the opinion that the
statements and legal conclusions contained in the Registration Statement under
the caption "Certain Federal Income Tax Consequences" are correct in all
respects that are material to the holders of the Bonds, and the discussion
thereunder does not omit any material provision with respect to the matters
covered. Subject to the qualifications stated herein, we also are of the opinion
that, with respect to each series of Bonds issued pursuant to the Registration
Statement, if (i) the Issuer, the Trustee, and certain other parties to the
issuance transaction comply with all of the provisions of the related Indenture
and certain other documents to be prepared and executed in connection
<PAGE>
MERIT Securities Corporation
November 5, 1996
Page 2
with the issuance of such series of Bonds and (ii) the Issuer issues and sells
the Bonds as described in the Registration Statement and the related prospectus
supplement, the Bonds of such series will be treated for federal income tax
purposes as evidences of indebtedness and not as an ownership interest in the
collateral securing them or an equity interest in the Issuer or in a separate
association taxable as a corporation.
Although section 385 of the Internal Revenue Code of 1986, as
amended, authorizes the Department of the Treasury to issue regulations defining
instruments as equity or indebtedness for federal income tax purposes, no such
regulations have been issued. Furthermore, there are no controlling regulations,
published rulings, or judicial decisions involving securities with terms
substantially the same as the Bonds that discuss, for federal income tax
purposes, (i) whether the securities constitute equity or indebtedness or (ii)
whether the collateral relating to the securities has been pledged or sold to
the holders of the securities. Therefore, counsel will analyze all of the facts
and circumstances surrounding the issuance and sale of each series of Bonds and
will provide at closing a separate opinion with respect to each such series to
which this opinion applies. Our opinion regarding the characterization of the
Bonds of a given series as evidences of indebtedness will be based upon facts
and circumstances and upon rulings and judicial decisions involving situations
that we consider to be analogous.
You should be aware that this opinion and the discussion
contained in the Registration Statement under the caption "Certain Federal
Income Tax Consequences" represent conclusions as to the application to the
Bonds of existing law, regulations, administrative rules and practices, and
legislative history, including, but not limited to, the official explanation of
the Tax Reform Act of 1986. There can be no assurance, however, that contrary
positions will not be taken by the Internal Revenue Service or that existing law
will not change.
We hereby consent to the reference to our firm under the
caption "Certain Federal Income Tax Consequences" and to the filing of this
opinion as an Exhibit to the Registration Statement. In giving this consent, we
do not admit that we are in the category of persons whose consent is required by
Section 7 of the Act or the rules and regulations promulgated thereunder by the
Securities and Exchange Commission.
No opinion has been sought and none has been given concerning
the tax treatment of the issuance and sale of the Bonds under the laws of
Virginia or any other state.
Very truly yours,
HUNTON & WILLIAMS
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Statement of Eligibility Under the Trust Indenture
Act of 1939 of a Corporation Designated to Act as Trustee
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE
PURSUANT TO SECTION 305(b)(2) [Not Applicable.]
TEXAS COMMERCE BANK NATIONAL ASSOCIATION
(Exact name of trustee as specified in its charter)
Not applicable
(Jurisdiction of incorporation or organization
if not a U.S. national bank)
74-0800980
(I.R.S. Employer Identification No.)
712 Main Street, Houston, Texas 77002
(Address of principal executive offices) (Zip code)
Carol Kirkland, 712 Main Street, 26th Floor,
Houston, Texas 77002, (713) 216-2449
(Name, address and telephone number of agent for service)
MERIT Securities Corporation
(Exact name of obligor as specified in its charter)
Virginia 54-1736551
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4880 Cox Road
Glen Allen, Virginia 23060
(Address of principal executive offices) (Zip Code)
Collateralized Mortgage Bonds
(Title of the indenture securities)
1
<PAGE>
Item 1. General Information.
Furnish the following information as to the trustee--
(a) Name and address of each examining or supervising
authority to which it is subject.
Comptroller of the Currency, Washington, D. C.
Federal Deposit Insurance Corporation,
Washington, D. C.
The Board of Governors of the Federal Reserve System,
Washington, D. C.
(b) Whether it is authorized to exercise corporate trust
powers.
The trustee is authorized to exercise corporate trust powers.
Item 2. Affiliations with the obligor.
If the obligor is an affiliate of the trustee, describe each such
affiliation.
As of November 1, 1996
No such affiliation exists.
See Note, Page 9 hereof.
Item 3. Voting Securities of the trustee.
Furnish the following information as to each class of voting securities
of the trustee.
As of November 1, 1996
2
<PAGE>
Column A Column B
Title of Class Amount Outstanding
1 Texas Commerce Bank National Association 5,000,000
Common Stock
Item 4. Trusteeships under other indentures.
If the trustee is a trustee under another indenture under which any
other securities, or certificates of interest or participation in any other
securities, of the obligor are outstanding, furnish the following information:
As of November 1, 1996
(c) Title of the securities outstanding under each such other
indenture.
Texas Commerce Bank National Association is not a
trustee under another indenture under which any other
securities, or certificates of interest or participation in
any other securities, of the obligor are outstanding.
(d) A brief statement of the facts relied upon as a basis for the
claim that no conflicting interest within the meaning of
Section 310(b)(1) of the Act arises as a result of the
trusteeship under any such other indenture, including a
statement as to how the indenture securities will rank as
compared with the securities issued under such other
indenture.
Not applicable.
Item 5. Interlocking directorates and similar relationships
with obligor or underwriters.
If the trustee or any of the directors or executive officers of the
trustee is a director, officer, partner, employee, appointee, or representative
of the obligor or of any underwriter
- --------
1 Texas Commerce Equity Holdings, Inc., a Delaware
corporation, owns all of such shares, except for
directors' qualifying shares.
3
<PAGE>
for the obligor, identify each such person having any such connection and state
the nature of each such connection.
As of November 1, 1996
No such relationship exists.
See Note, Page 9 hereof.
Item 6. Voting securities of the trustee owned by the obligor or
its officials.
Furnish the following information as to the voting securities of the
trustee owned beneficially by the obligor and each director, partner and
executive officer of the obligor.
As of November 1, 1996
Based upon an examination of the books and records of
the trustee, inquiries made by the trustee and information
furnished to the trustee by the obligor, voting securities of
the trustee, owned beneficially, directly or indirectly, by
the obligor and its directors, partners and executive
officers, taken as a group, do not exceed 1% of the
outstanding voting securities of the trustee.
Item 7. Voting securities of the trustee owned by underwriters or
their officials.
Furnish the following information as to the voting securities of the
trustee owned beneficially by each underwriter for the obligor and each
director, partner, and executive officer of each such underwriter.
As of November 1, 1996
No single underwriter, its directors, partners and executive
officers, taken as a group, owned beneficially, directly or
indirectly, in excess of 1% of the outstanding voting
securities of the trustee.
See Note, Page 9 hereof.
4
<PAGE>
Item 8. Securities of the obligor owned or held by the trustee.
Furnish the following information as to securities of the obligor owned
beneficially or held as collateral security for obligations in default by the
trustee.
As of November 1, 1996
No such securities were so owned or held.
See Note, Page 9 hereof.
Item 9. Securities of underwriters owned or held by the trustee.
If the trustee owns beneficially or holds as collateral security for
obligations in default any securities of an underwriter for the obligor, furnish
the following information as to each class of securities of such underwriter any
of which are so owned or held by the trustee.
As of November 1, 1996
The trustee did not so own or hold in excess of 1% of any
class of security outstanding of any such person.
See Note, Page 9 hereof.
Item 10. Ownership or holdings by the trustee of voting
securities of certain affiliates or security holders
of the obligor.
If the trustee owns beneficially or holds as collateral security for
obligations in default voting securities of a person who, to the knowledge of
the trustee (1) owns 10% or more of the voting securities of the obligor or (2)
is an affiliate, other than a subsidiary, of the obligor, furnish the following
information as to the voting securities of such person.
As of November 1, 1996
No such securities were so owned or held.
See Note, Page 9 hereof.
5
<PAGE>
Item 11. Ownership or holdings by the trustee of any
securities of a person owning 50% or more of the
voting securities of the obligor.
If the trustee owns beneficially or holds as collateral security for
obligations in default any securities of a person who, to the knowledge of the
trustee, owns 50% or more of the voting securities of the obligor, furnish the
following information as to each class of securities of such person any of which
are so owned or held by the trustee.
As of November 1, 1996
No such securities were so owned or held.
See Note, Page 9 hereof.
Item 12. Indebtedness of the Obligor to the Trustee.
Except as noted in the instructions to the Form T-1, if the obligor is
indebted to the trustee, furnish the following information: nature of
indebtedness, amount outstanding and date due.
As of November 1, 1996
No such indebtedness exists.
See Note, Page 9 hereof.
Item 13. Defauts by the Obligor
(e) State whether there is or has been a default with respect
to the securities under this indenture. Explain the
nature of any such default.
As of November 1, 1996
No such default exists or has existed.
6
<PAGE>
(f) If the trustee is a trustee under another indenture under
which any other securities, or certificates of interest
or participation in any other securities, of the obligor
are outstanding, or is trustee for more than one
outstanding series of securities under the indenture,
state whether there has been a default under any such
indenture or series, identify the indenture or series
affected, and explain the nature of any such default.
As of November 1, 1996
Texas Commerce Bank National Association is not a
trustee under another indenture under which any other
securities, or certificates of interest or participation in
any other securities, of the obligor are outstanding and, as
of November 1, 1996, there are no defaults under any of the
outstanding series of securities under the indenture.
Item 14. Affiliations with the Underwriters.
If any underwriter is an affiliate of the trustee, describe each such
affiliation.
As of November 1, 1996
No such affiliation exists.
See Note, Page 9 hereof.
Item 15. Foreign Trustee.
Identify the order or rule pursuant to which the foreign trustee is
authorized to act as sole trustee under indentures qualified or to be qualified
under the Act.
Not applicable.
Item 16. List of Exhibits.
List below all exhibits filed as part of this statement of eligibility.
* 1. A copy of the articles of association of the
trustee as now in effect.
** 2. A copy of the certificate of authority of the
trustee to commence business.
7
<PAGE>
** 3. A copy of the certificate of authorization of the
trustee to exercise corporate trust powers issued by the Board
of Governors of the Federal Reserve System under date of
January 21, 1948.
4. A copy of the existing bylaws of the trustee.
5. A copy of each indenture referred to in Item 4,
if the obligor is in default. Not Applicable.
6. The consent of the United States institutional
trustees required by Section 321(b) of the Act.
7. A copy of the latest report of condition of the
trustee published pursuant to law or the requirements of
its supervising or examining authority.
8. A copy of any order pursuant to which the foreign
trustee is authorized to act as sole trustee under indentures
qualified or to be qualified under the Act. Not applicable.
9. Foreign trustees are required to file a consent
to service of process on Form F-X. Not applicable.
- ---------------
* Incorporated by reference to Exhibit bearing the same
Exhibit number submitted with the Form T-1 of Texas
Commerce Bank National Association with respect to
File
No. 33-51417.
** Incorporated by reference to Exhibit bearing the same
Exhibit number submitted with the Form T-1 of Texas
National Bank of Commerce of Houston with respect to File
No. 2-24599.
[Remainder of Page Intentionally Left Blank]
8
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939 the
trustee, Texas Commerce Bank National Association, a national banking
association organized and existing under the laws of the United States of
America, has duly caused this statement of eligibility to be signed on its
behalf by the undersigned, thereunto duly authorized, all in the City of
Houston, and State of Texas, on the 1st day of November, 1996.
TEXAS COMMERCE BANK NATIONAL ASSOCIATION
(Trustee)
By: /s/ Mary Jo Davis
--------------------------------------------
Name: Mary Jo Davis
Title: Vice President and Trust Officer
NOTE
The answers to this statement insofar as such answers relate to what
persons have been underwriters for any securities of the obligor within three
years prior to the date of filing this statement or will be the underwriters for
the indenture securities, or are owners of 10% or more of the voting securities
of the obligor, or are owners of 50% or more of the voting securities of the
obligor or are affiliates, and the amounts and percentages of such securities,
if any, owned by each of the foregoing, respectively, are based upon information
furnished to the trustee by the obligor and the underwriter. While the trustee
has no reason to doubt the accuracy of any such information, it cannot accept
any responsibility therefor. Accordingly, the trustee disclaims responsibility
as to the accuracy and completeness of the information received from the obligor
and the underwriter relating to the answers to items 2, 5, 7, 8, 9, 10, 11, 12
and 14.
Inasmuch as this statement is filed prior to the final determination of
all underwriters of the indenture securities, the answers to items 5, 7, 9 and
14 are based on incomplete information, but may be considered as correct unless
additional information is furnished by amendment.
9
<PAGE>
BYLAWS
TEXAS COMMERCE BANK NATIONAL ASSOCIATION
----------
SECTION 1: MEETINGS OF SHAREHOLDERS
SECTION 1.1. ANNUAL MEETINGS. The annual meeting of the shareholders of
the Association for the election of directors and for the transaction of such
other business as properly may come before such meeting, shall be held at the
principal banking office of the Association in Houston, Texas, or such other
place authorized by the Board of Directors ("Board"), at 10:30 a.m. on the
Wednesday before the third Tuesday in January or as soon thereafter as
practicable if, for any reason, the meeting cannot be held at such time or on
such date. The Chairman of the Board ("Chairman") and the Secretary of the
Association shall act as Chairman and Secretary, respectively, of the meeting.
SECTION 1.2. SPECIAL MEETINGS. Special meetings of the
shareholders of the Association may be called by the Chairman or upon the
direction of a majority of the Board.
SECTION 1.3. NOTICE. Unless otherwise provided by law or by the
Articles of Association, a notice of the time, place and purpose of every annual
and special meeting of the shareholders shall be given by first class mail,
postage prepaid, mailed at least ten days prior to the date of such meeting to
each shareholder of record at the shareholder's address as shown on the books of
the Association.
SECTION 1.4. PROXIES. Shareholders may vote at any
meeting of the shareholders by proxies duly authorized in writing, but no
officer or employee of the Association shall act as proxy. Proxies shall be
valid only for the meeting specified therein and any adjournments thereof.
SECTION 1.5. VOTING RIGHTS. Except as otherwise provided by law or
these Bylaws, each shareholder shall be entitled to one vote for each share of
stock held, and a majority of votes cast shall decide each matter submitted for
a vote.
SECTION 1.6 RECORD DATE. The record date for determining those
shareholders who shall have the right to receive notice of and to vote at
meetings of shareholders shall be set by the Board or, if the Board fails to set
such date, by the Chairman. The record date shall be not less than ten and not
more than fifty days prior to the date of the meeting.
- --------------------------------------------------------------------------------
Adopted January 11, 1995 Page 1 of 6
<PAGE>
SECTION 2: DIRECTORS
SECTION 2.1. NUMBER. Unless applicable law shall permit a greater
number, the Board of the Association shall consist of such number of persons,
not less than five nor more than twenty-five, as from time to time shall be
fixed and determined by a majority of the full Board or by resolution of a
majority of the outstanding shares of stock of the Association at the annual or
any special meeting of the shareholders.
SECTION 2.2. TERM. The directors of the Association shall hold office
until the annual meeting of shareholders next following their election and until
their successors have been elected and qualified unless removed according to the
provisions of the Articles of Association or these Bylaws.
SECTION 2.3. VACANCIES. Subject to the provisions of Section 2.1, any
vacancies occurring on the Board for any reason may be filled by a vote of a
majority of the remaining directors, and any director so appointed shall hold
office until the next annual meeting of shareholders or until a successor is
elected.
SECTION 2.4. ANNUAL MEETINGS. Following the annual meeting of the
shareholders, the Chairman or the Secretary of the meeting shall notify the
directors-elect of their election, and they shall meet promptly for the purposes
of electing officers of the Association for the ensuing year and for the
transaction of such organizational and other business as properly may come
before the meeting.
SECTION 2.5. REGULAR MEETINGS. Regular meetings of the Board shall be
held without notice at 10:30 a.m., or at such other time as the Chairman may
prescribe, on the Wednesday before the third Tuesday of each January, April,
July and October. Two other regular meetings of the Board also shall be held
each calendar year on such other dates and at such times as the Chairman may
prescribe, with notice of such meetings to be given to each member of the Board
by telegram, letter, telephone, telecopy or in person. Such meetings shall be
held at the principal office of the Association. If any regular meeting of the
Board shall fall upon a holiday, the meeting shall be held at the time and place
specified in this Section on the next banking business day unless some other
date shall be designated by a majority of the Board. A special meeting may be
held in lieu of a regular meeting in any given calendar month.
SECTION 2.6. SPECIAL MEETINGS. Special meetings of the Board may be
called either by the Chairman, or in his absence, by the President, or in his
absence, by any of the Vice Chairmen of the Board, or at the request of three or
more directors. Each member of the Board shall be given notice by telegram,
letter, telephone, telecopy or in person stating the time, place and purpose of
each such meeting.
SECTION 2.7. QUORUM. For the transaction of business, a quorum of the
Board shall consist of not less than a majority of the entire Board then in
office. If, at the time fixed for any meeting, a quorum is not present, the
directors in attendance may adjourn the meeting from time to time until a quorum
is obtained. The majority of those directors present and voting at any meeting
of the Board shall decide each matter considered.
- -------------------------------------------------------------------------------
Adopted January 11, 1995 Page 1 of 6
<PAGE>
SECTION 2.8. ADVISORY DIRECTORS. The Board may appoint such advisory
directors as it may deem appropriate, each of whom shall hold office until the
next annual meeting of the directors following their elections. The advisory
directors of the Association shall have the right to attend the meetings of the
Board held each January, April, July and October and to advise with the Board
concerning the affairs of the Association, but advisory directors shall not have
the right to vote.
SECTION 2.9. RETIREMENT OF DIRECTORS. No person shall be elected to
serve as a director or an advisory director of the Association who has attained
70 years of age at the time of such election except in accordance with this
Section. Any person currently serving on the Board of the Bank who had attained
71 years of age by April 17, 1985 shall be exempt from the provisions of this
Section. In addition, any former chief executive officer of Texas Commerce
Bancshares, Inc. shall be exempt from this Section for the ten years following
such person's retirement from such position. Any director or advisory director
of the Association who, during his or her term of office, ceases to be eligible
under the foregoing provisions to be elected to such office may continue to
serve the remainder of his or her term of office until the next annual meeting
of shareholders.
SECTION 3: OFFICERS
SECTION 3.1. CHAIRMAN. There shall be a Chairman, as designated by the
Board. The Chairman shall preside at all meetings of the Board. The Chairman
shall preside at all meetings of the Loan and Discount Committee at which the
Chairman is present, unless the Chairman shall elect to delegate this duty and
responsibility to another officer. The Chairman shall have supervision over and
exercise general executive and administrative powers relating to all of the
operations and business of the Association. The Chairman shall from time to time
assign all officers of this Association their respective powers, duties and
responsibilities and shall have and exercise such other powers and duties as
from time to time may be conferred upon or assigned to the Chairman.
SECTION 3.2. PRESIDENT. The President shall be a member of the Board.
The President shall have and may exercise any and all other powers and duties
pertaining by law, regulation or practice to the office of president or imposed
by these Bylaws. The President shall perform such executive and administrative
duties as may be assigned to the President by the Board, and in the case of the
absence or inability of the Chairman to act, the President shall perform the
duties of the Chairman during such absence or inability.
SECTION 3.3. VICE CHAIRMAN. The Board may appoint one or more of its
directors as Vice Chairmen. During the absence of the Chairman and the
President, the Vice Chairmen, in the order of their seniority as Vice Chairmen,
shall preside at the meetings of the Board. Each Vice Chairman shall perform
such executive and administrative duties as may be assigned to such Vice
Chairman by the Chairman.
- -------------------------------------------------------------------------------
Adopted January 11, 1995 Page 1 of 6
<PAGE>
SECTION 3.4. EXECUTIVE TRUST OFFICER. There shall be an Executive Trust
Officer of the Association, appointed by the Board, whose duties shall be to
manage, supervise and direct all of the activities of the Trust Department. The
Board may appoint other trust officers as it may deem appropriate with such
duties as may be designated by the Board or by the Executive Trust Officer.
SECTION 3.5. SECRETARY AND ASSISTANT SECRETARIES. The Board shall
appoint a Secretary, or other designated officer, who shall be secretary of the
Board and of the Association and shall keep accurate minutes of all meetings.
The Secretary shall attend to the giving of all notices required by these
Bylaws; shall be custodian of the corporate seal, records, documents and papers
of the Association; shall have and may exercise any and all other powers and
duties pertaining by law, regulation or practice, to the office of secretary or
cashier, or imposed by these Bylaws; and shall perform such duties as may be
assigned from time to time by the Board or the Chairman. The Board may appoint
one or more Assistant Secretaries and/or a Cashier, and each of the Assistant
Secretaries and Cashier so appointed shall have the same authority provided by
these Bylaws to the Secretary and such other duties as may be assigned by the
Board or the Chairman.
SECTION 3.6. OTHER OFFICERS. The Board may appoint one or more
Executive Vice Presidents, one or more Senior Vice Presidents, one or more Vice
Presidents, and such other officers with such titles as may from time to time be
deemed appropriate for the transaction of the business of the Association. Each
such officer shall have such duties as from time to time may be assigned to such
officer by the Chairman.
SECTION 3.7. TERM OF OFFICE. The Chairman, the Vice Chairmen and the
President shall hold their offices for the current year for which the Board, of
which they are members or advisory members, was elected unless they shall
resign, become disqualified or be removed. Such officers may be removed by the
Board with or without cause. Any vacancy occurring in such offices shall be
filled by the Board. All other persons shall hold the offices to which they are
elected subject to removal by the Chairman or by the Board.
SECTION 3.8. RECORDS OF THE ASSOCIATION. The Secretary shall be
responsible for the minute books of the Association, the organizational papers
of the Association, the Articles of Association, the returns of elections, the
Bylaws, the proceedings of regular and special meetings of the Board and of the
shareholders and the reports of the committees of the Board. The minutes of each
meeting shall be signed by either the Secretary or an Assistant Secretary or the
person acting in such capacity in the absence of the Secretary or an Assistant
Secretary and approved by the officer presiding at such meeting.
SECTION 4: COMMITTEES
SECTION 4.1. BOARD COMMITTEES. Each year at its annual organizational
meeting and at such other times as it deems necessary, the Board shall appoint
such committees, consisting of directors and/or advisory directors, as it deems
appropriate, specifying the authority and responsibilities of each such
committee. Such committees shall include at least those committees as are
required by law. Any advisory director appointed
- -------------------------------------------------------------------------------
Adopted January 11, 1995 Page 1 of 6
<PAGE>
to a committee shall have the right to attend meetings of the committee and to
advise the committee but shall not have the right to vote.
SECTION 4.2. MANAGEMENT COMMITTEES. Not less than annually the Chairman
shall appoint such management committees and subcommittees, comprised of
officers and/or employees of the Association, as the Chairman deems appropriate,
and those committees shall have such powers and responsibilities, not
inconsistent with these Bylaws or any resolution of the Board, as the Chairman
may specify.
SECTION 4.3. MINUTES. Each committee shall keep minutes of its
meetings, which shall be filed with the Secretary or an Assistant Secretary.
SECTION 4.4. QUORUM. At least half of the members of a committee shall
be required to constitute a quorum for the transaction of such committee's
business unless a greater number shall be specifically required in the case of a
Board committee by resolution or in the case of a management committee by the
Chairman.
SECTION 5: STOCK
SECTION 5.1. TRANSFER OF SHARES. The capital stock of the Association
shall be transferable on the stock certificate books of the Association, and all
such transfers shall be recorded therein.
SECTION 5.2. CERTIFICATES REPRESENTING SHARES. Certificates
representing shares of capital stock of the Association shall be in the form
approved by the Board and shall be signed manually or by facsimile signature by
the Chairman, the President, any Vice Chairman, Executive Vice President or
Senior Vice President, and by the Secretary, an Assistant Secretary, or the
Cashier. In case any officer who has signed or whose facsimile signature has
been placed upon the form of certificate shall have ceased to be such officer
before such certificate is issued, such certificate may be issued with the same
effect as if the officer were such officer at the date of issuance.
SECTION 6: SEAL
The seal of this Association shall be in such form as may be from time
to time prescribed by the Board. Each of the Secretary, the Assistant
Secretaries and such officers of the Association as the Board may direct shall
have authority to affix the corporate seal of this Association to any document
requiring such seal and to attest the same.
SECTION 7: EXECUTION OF INSTRUMENTS
All agreements, indentures, mortgages, deeds, conveyances, transfers,
certificates, declarations, receipts, discharges, releases, satisfactions,
settlements, petitions, schedules, accounts, affidavits, bonds, checks, drafts,
undertakings, proxies and other instruments or documents may be signed,
executed, acknowledged, verified, delivered or accepted in the name of and on
behalf of the Association by such officers as the Board may from time to time
direct or, if the Board has not directed, then by such officers as the Chairman
from
- ---------------------------------------------------------------------------
Adopted January 11, 1995 Page 1 of 6
<PAGE>
time to time directs. The provisions of this Section 7 are supplementary to any
other provision of these Bylaws.
SECTION 8: BANKING HOURS
Except as otherwise provided by law, the Association shall be open for
business on such days of the week and during such hours as the Chairman or his
designee may direct.
SECTION 9: INDEMNIFICATION
The Association shall indemnify and advance expenses to all directors,
advisory directors, officers, employees and agents of the Association, and to
all persons who are or were serving at the request of the Association as a
director, advisory director, officer, partner, venturer, proprietor, trustee,
employee, agent or similar functionary of another corporation, association,
partnership, joint venture, sole proprietorship, trust, employee benefit plan or
other enterprise to the maximum extent allowed by the Texas Business Corporation
Act or other applicable state law, Federal banking law and/or regulations.
SECTION 10: AMENDMENTS TO BYLAWS
These Bylaws may be amended, altered or repealed at any meeting of the
Board by a vote of a majority of the full Board. In addition, the Association's
shareholders may repeal, alter or amend these Bylaws even though the Bylaws also
may be amended or repealed by the Board.
------------------------------------------------------------------------
Adopted January 11, 1995 Page 1 of 6
<PAGE>
Exhibit 6
Securities & Exchange Commission
Washington, D.C. 20549
Gentlemen:
The undersigned is trustee under an Indenture dated as of November 1, 1994,
as the same may be supplemented from time to time by supplemental indentures
thereto, between MERIT Securities Corporation and Texas Commerce Bank National
Association, as Trustee, entered into in connection with the issuance
of its Collateralized Mortgage Bonds.
In accordance with Section 321(b) of the Trust Indenture Act of 1939,
the undersigned hereby consents that reports of examinations of the undersigned
hereby consents that reports of examinations of the undersigned, made by
Federal or State authorities authorized to make such examinations, may be
furnished by such authorities to the Securities & Exchange Commission
upon its request therefor.
Very truly yours,
TEXAS COMMERCE BANK
NATIONAL ASSOCIATION
By: /s/ Mary Jo Davis
-------------------------------------
Name: Mary Jo Davis
Title: Vice President and Trust Officer
<PAGE>
Exhibit 7
Federal Financial Institutions Examination Council
Board of Governors of the Federal Reserve System
OMB Number: 7100-0036
Federal Deposit Insurance Corporation
OMB Number: 3064-0052
Office of the Comptroller of the Currency
OMB Number: 1557-0081
Expires March 31, 1999
Please refer to page i, Table of Contents, for the required disclosure
of estimated burden.
Consolidated Reports of Condition and Income for
A Bank With Domestic and Foreign Offices - FFIEC 031
Report at the close of business June 30, 1996
(960930)
(RCRI 9999)
This report is required by law: 12 U.S.C. Section 324 (State member banks);
12 U.S.C. Section 1817 (State nonmember
banks); and 12 U.S.C. Section 161 (National banks).
This report form is to be filed by banks with branches and consolidated
subsidiaries in U.S. territories and possessions, Edge or Agreement
subsidiaries, foreign branches, consolidated foreign subsidiaries, or
International Banking Facilities.
NOTE: The Reports of Condition and Income must be signed by an authorized
officer and the Report of Condition must be attested to by not less than
two directors (trustees) for State nonmember banks and three directors for
State member and National banks.
I, Kenneth L. Tilton, Executive Vice President
Name and Title of Officer Authorized to Sign Report
of the named bank do hereby declare that these Reports of Condition and Income
(including the supporting schedules) have been prepared in conformance with the
instructions issued by the appropriate Federal regulatory authority and are true
to the best of my knowledge and belief.
/s/ Kenneth L. Tilton
Signature of Officer Authorized to Sign Report
Date of Signature
The Reports of Condition and Income are to be prepared in accordance with
Federal regulatory authority instructions. NOTE: These instructions may
in some cases differ from generally accepted accounting principles.
We, the undersigned directors (trustees), attest to the correctness of this
Report of Condition (including the supporting schedules) and declare that
it has been examined by us and to the best of our knowledge and belief has
been prepared in conformance with the instructions issued by the appropriate
Federal regulatory authority and is true and correct.
/s/
Director (Trustee)
/s/
Director (Trustee)
/s/
Director (Trustee)
For Banks Submitting Hard Copy Report Forms:
State Member Banks: Return the original and one copy to the appropriate
Federal Reserve District Bank.
State Nonmember Banks: Return the original only in the special return
address envelope provided. If express mail is used in lieu of the special
return address envelope, return the original only to the FDIC, c/o Quality
Data Systems, 2127 Espey Court, Suite 204, Crofton, MD 21114.
National Banks: Return the original only in the special return address
envelope provided. If express mail is used in lieu of the special return
address envelope, return the original only to the FDIC, c/o Quality Data
Systems, 2127 Espey Court, Suite 204, Crofton, MD 21114.
FDIC Certificate Number 03263
(RCRI 9050)
CALL NO. 197 31 09-30-96
STBK: 48-3926 00373 STCERT: 48-03263
TEXAS COMMERCE BANK NATIONAL ASSOCIA
712 MAIN STREET
HOUSTON, TX 77001
Board of Governors of the Federal Reserve System, Federal Deposit Insurance
Corporation, Office of the Comptroller of the Currency
<PAGE>
Legal Title of Bank: Texas Commerce Bank National Associaton
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 9/30/96 ST-BK: 48-3926 FFIEC 031
Page RI-1
Consolidated Report of Income
for the period January 1, 1996 - September 30, 1996
All Report of Income schedules are to be reported on a calendar year-to-date
basis in thousands of dollars.
Schedule RI--Income Statement
<TABLE>
<CAPTION>
1480
Dollar Amounts in Thousands RIAD Bill Mil Thou
<S> <C> <C> <C>
1. Interest Income:
a. Interest and fee income on loans:
(1) In domestic offices:
(a) Loans secured by real estate 4011 162,118 1.a.(1)(a)
(b) Loans to depository institutions 4019 1,920 1.a.(1)(b)
(c) Loans to finance agricultural production and other loans to farmers 4024 3,227 1.a.(1)(c)
(d) Commercial and industrial loans 4012 320,105 1.a.(1)(d)
(e) Acceptances of other banks 4026 0 1.a.(1)(e)
(f) Loans to individuals for household, family, and other personal
expenditures:
(1) Credit cards and related plans 4054 12,417 1.a.(1)(f)(1)
(2) Other 4055 147,975 1.a.(1)(f)(2)
(g) Loans to foreign governments and official institutions 4056 8,352 1.a.(1)(g)
(h) Obligations (other than securities and leases) of states and political
subdivisions in the U.S.:
(1) Taxable obligations 4503 0 1.a.(1)(h)(1)
(2) Tax-exempt obligations 4504 934 1.a.(1)(h)(2)
(i) All other loans in domestic offices 4058 56,706 1.a.(1)(i)
(2) In foreign offices, Edge and Agreement subsidiaries, and IBFs 4059 6,456 1.a.(2)
b. Income from lease financing receivables:
(1) Taxable leases 4505 7,761 1.b.(1)
(2) Tax-exempt leases 4307 0 1.b.(2)
c. Interest income on balances due from depository institutions: (1)
(1) In domestic offices 4105 141 1.c.(1)
(2) In foreign offices, Edge and Agreement subsidiaries, and IBFs 4106 0 1.c.(2)
d. Interest and dividend income on securities:
(1) U.S. Treasury securities and U.S. Government agency and corporation
obligations 4027 201,740 1.d.(1)
(2) Securities issued by states and political subdivisions in the U.S.:
(a) Taxable securities 4506 16 1.d.(2)(a)
(b) Tax-exempt securities 4507 13 1.d.(2)(b)
(3) Other domestic debt securities 3657 153 1.d.(3)
(4) Foreign debt securities 3658 0 1.d.(4)
(5) Equity securities (including investments in mutual funds) 3659 2,076 1.d.(5)
e. Interest income from trading assets 4069 234 1.e.
</TABLE>
__________
(1) Includes interest income on time certificates of deposit not held for
trading.
3
<PAGE>
Legal Title of Bank: Texas Commerce Bank National Associaton
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 9/30/96 ST-BK: 48-3926 FFIEC 031
Page RI-2
Schedule RI--Continued
<TABLE>
<CAPTION>
Year-to-date
Dollar Amounts in Thousands RIAD Bil Mil Thou
<S> <C> <C> <C> <C> <C>
1. Interest income (continued)
f. Interest income on federal funds sold and securities purchased under
agreements to resell in domestic offices of the bank and of its Edge
and Agreement subsidiaries, and in IBF's 4020 23,291 1.f.
g. Total Interest income (sum of items 1.a through 1.f) 4107 955,685 1.g.
2. Interest expense:
a. Interest on deposits:
(1) Interest on deposits in domestic offices:
(a) Transaction accounts (NOW accounts, ATS accounts, and telephone and
preauthorized transfer accounts) 4508 4,087 2.a.(1)(a)
(b) Nontransaction accounts:
(1) Money market deposit accounts (MMDAs) 4509 31,464 2.a.(1)(b)(1)
(2) Other savings deposits 4511 79,247 2.a.(1)(b)(2)
(3) Time certificates of deposit of $100,000 or more 4174 32,743 2.a.(1)(b)(3)
(4) All other time deposits 4512 99,501 2.a.(1)(b)(4)
(2) Interest on deposits in foreign offices, Edge and
Agreement subsidiaries, and IBFs 4172 12,028 2.a.(2)
b. Expense of federal funds purchased and securities sold under agreements to
repurchase in domestic offices of the bank and of its Edge and Agreement
subsidiaries, and in IBFs 4180 41,799 2.b.
c. Interest on demand notes issued to the U.S. Treasury, trading
liabilities, and other borrowed money 4185 28,603 2.c.
d. Interest on mortgage indebtedness and obligations under capitalized
leases 4072 1,153 2.d.
e. Interest on subordinated notes and debentures 4200 21,647 2.e.
f. Total interest expense (sum of items 2.a through 2.e) 4073 352,272 2.f.
3. Net interest income (item 1.g minus 2.f) RIAD 4074 603,413 3.
4. Provisions:
a. Provision for loan and lease losses RIAD 4230 0 4.a.
b. Provision for allocated transfer risk RIAD 4243 0 4.b.
5. Noninterest income:
a. Income from fiduciary activities 4070 87,616 5.a.
b. Service charges on deposit accounts in domestic offices 4080 109,707 5.b.
c. Trading revenue (must equal Schedule RI, sum of Memorandum
items 8.a through 8.d) A220 18,425 5.c.
d. Other foreign transaction gains (losses) 4076 0 5.d.
e. Not applicable
f. Other noninterest income:
(1) Other fee income 5407 56,932 5.f.(1)
(2) All other noninterest income* 5408 38,133 5.f.(2)
g. Total noninterest income (sum of items 5.a through 5.f) RIAD 4079 310,813 5.g.
6. a. Realized gains (losses) on held-to-maturity securities RIAD 3521 0 6.a.
b. Realized gains (losses) on available-for-sale securities RIAD 3196 5,860 6.b.
7. Noninterest expense:
a. Salaries and employee benefits 4135 316,368 7.a.
b. Expenses of premises and fixed assets (net or rental income)
(excluding salaries and employee benefits and mortgage interest) 4217 114,364 7.b.
c. Other noninterest expense* 4092 169,895 7.c.
d. Total noninterest expense (sum of items 7.a through 7.c) RIAD 4093 600,627 7.d.
8. Income (loss) before income taxes and extraordinary items and other
adjustments (item 3 plus or minus items 4.a, 4.b, 5.g, 6.a, 6.b, and
7.d) RIAD 4301 319,459 8.
9. Applicable income taxes (on item 8) RIAD 4302 113,981 9.
10. Income (loss) before extraordinary items and other adjustments (item 8
minus 9) RIAD 4300 205,478 10.
</TABLE>
__________
*Describe on Schedule RI-E--Explanations.
4
<PAGE>
Legal Title of Bank: Texas Commerce Bank National Associaton
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 9/30/96 ST-BK: 48-3926 FFIEC 031
Page RI-3
Schedule RI--Continued
<TABLE>
<CAPTION>
Year-to-date
Dollar Amounts in Thousands RIAD Bil Mil Thou
<S> <C> <C> <C> <C> <C>
11. Extraordinary items and other adjustments:
a. Extraordinary items and other adjustments, gross of income taxes * 4310 0 11.a.
b. Applicable income taxes (on items 11.a)* 4315 0 11.b
c. Extraordinary items and other adjustments, net of income taxes (item 11.a
minus 11.b) RIAD 4320 0 11.c.
12. Net income (loss) (sum of items 10 and 11.c) RIAD 4340 205,478 12.
</TABLE>
<TABLE>
<CAPTION>
I481
Memoranda Year-to-date
Dollar Amounts in Thousands RIAD Bil Mil Thou
<S> <C> <C> <C>
1. Interest expense incurred to carry tax-exempt securities, loans, and leases
acquired after August 7, 1986, that is not deductible for federal income tax
purposes 4513 150 M.1.
2. Income from the sale and servicing of mutual funds and annuities in domestic
offices (included in Schedule RI, item 8) 8431 9,418 M.2.
3.-4. Not applicable
5. Number of full-time equivalent employees on payroll at end of current period Number
(round to nearest whole number) 4150 8,746 M.5.
6. Not applicable
7. If the reporting bank has restated its balance sheet as a result of applying
push down accounting this calendar year, report the date of the bank's MM/DD/YY
acquisition 9106 00/00/00 M.7.
8. Trading revenue (from cash instruments and off-balance sheet derivative
instruments) (sum of Memorandum items 8.a through 8.d must equal
Schedule RI, item 5.c): Bill Mil Thou
a. Interest rate exposures 8757 8,018 M.8.a.
b. Foreign exchange exposures 8758 10,407 M.8.b.
c. Equity security and index exposures 8759 0 M.8.c.
d. Commodity and other exposures 8760 0 M.8.d.
9. Impact on income of off-balance sheet derivatives held for purposes other
than trading:
a. Net increase (decrease) to interest income 8761 10,370 M.9.a.
b. Net (increase) decrease to interest expense 8762 (1,720) M.9.b.
c. Other (noninterest) allocations 8763 223 M.9.c.
10. Credit losses on off-balance sheet derivatives (see instructions) A251 0 M.10.
</TABLE>
__________
*Describe on Schedule RI-E--Explanations.
5
<PAGE>
Legal Title of Bank: Texas Commerce Bank National Associaton
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 9/30/96 ST-BK: 48-3926 FFIEC 031
Page RI-4
Schedule RI-A--Changes in Equity Capital
Indicate decreases and losses in parentheses.
<TABLE>
<CAPTION>
I483
Dollar Amounts in Thousands RIAD Bil Mil Thou
<S> <C> <C> <C>
1. Total equity capital originally reported in the December 31, 1995, Reports
of Condition and Income 3215 1,596,159 1.
2. Equity capital adjustments from amended Reports of Income, net* 3216 0 2.
3. Amended balance end of previous calendar year (sum of items 1 and 2) 3217 1,596,159 3.
4. Net income (loss)(must equal Schedule RI, item 12) 4340 205,478 4.
5. Sale, conversion, acquisition, or retirement of capital stock, net 4346 0 5.
6. Changes incident to business combinations, net 4356 0 6.
7. LESS: Cash dividends declared on preferred stock 4470 0 7.
8. LESS: Cash dividends declared on common stock 4460 100,000 8.
9. Cumulative effect of changes in accounting principles from prior years* (see
instructions for this schedule) 4411 0 9.
10. Corrections of material accounting errors from prior years* (see
instructions for this schedule) 4412 0 10.
11. Change in net unrealized holding gains (losses) on available-for-sale
securities 8433 (52,837) 11.
12. Foreign currency transaction adjustments 4414 0 12.
13. Other transactions with parent holding company* (not included in items 5, 7
or 8 above) 4415 0 13.
14. Total equity capital end of current period (sum of items 3 through 13) (must
equal Schedule RC, item 28) 3210 1,648,800 14.
</TABLE>
__________
*Describe on Schedule RI-E--Explanations.
Schedule RI-B--Charge-offs and Recoveries and Changes
in Allowance for Loan and Lease Losses
Part I. Charge-offs and Recoveries on Loans and Leases
Part I excludes charge-offs and recoveries through
the allocated transfer risk reserve.
<TABLE>
<CAPTION>
I486
(Column A) (Column B)
Charge-offs Recoveries
Calendar year-to-date
Dollar Amounts in Thousands RIAD Bil Mil Thou RIAD Bil Mil Thou
<S> <C> <C> <C> <C> <C>
1. Loans secured by real estate:
a. To U.S. addressees (domicile) 4651 3,432 4661 3,764 1.a.
b. To non-U.S. addressees (domicile) 4652 0 4662 0 1.b.
2. Loans to depository institutions and acceptances of the banks:
a. To U.S. banks and other U.S. depository institutions 4653 0 4663 0 2.a.
b. To foreign banks 4654 0 4664 0 2.b.
3. Loans to finance agricultural production and other loans to farmers 4655 1,290 4665 5 3.
4. Commercial and industrial loans;
a. To U.S. addressees (domicile) 4645 27,600 4617 2,461 4.a.
b. To non-U.S. addressees (domicile) 4646 0 4618 0 4.b.
5. Loans to individuals for household, family, and other personal
expenditures:
a. Credit cards and related plans 4656 2,846 4666 292 5.a.
b. Other (includes single payment, installment, and all student loans) 4657 24,415 4667 7,552 5.b.
6. Loans to foreign governments and official institutions 4643 0 4627 5 6.
7. All other loans 4644 1,013 4628 1,460 7.
8. Lease financing receivables:
a. Of U.S. addressees (domicile) 4658 0 4668 0 8.a.
b. Of non-U.S. addressees (domicile) 4659 0 4669 0 8.b.
9. Total (sum of items 1 through 8) 4635 60,596 4605 15,539 9.
</TABLE>
6
<PAGE>
Legal Title of Bank: Texas Commerce Bank National Associaton
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 9/30/96 ST-BK: 48-3926 FFIEC 031
Page RI-4
Schedule RI-B--Continued
Part I. Continued
<TABLE>
<CAPTION>
(Column A) (Column B)
Charge-offs Recoveries
Memoranda Calendar year-to-date
Dollar Amounts in Thousands RIAD Bil Mil Thou RIAD Bil Mil Thou
<S> <C> <C> <C> <C> <C>
1-3. Not applicable
4. Loans to finance commercial real estate, construction, and land
development activities (not secured by real estate) included in
Schedule RI-B, part I, items 4 and 7, above 5409 0 5410 79 M.4.
5. Loans secured by real estate in domestic offices (included in
Schedule RI-B, part I, item 1, above):
a. Construction and land development 3582 450 3583 336 M.5.a.
b. Secured by farmland 3584 0 3585 0 M.5.b.
c. Secured by 1-4 family residential properties:
(1) Revolving, open-end loans secured by 1-4 family residential
properties and extended under lines of credit 5411 0 5412 0 M.5.c.(1)
(2) All other loans secured by 1-4 family residential properties 5413 1,513 5414 462 M.5.c.(2)
d. Secured by multifamily (5 or more) residential properties 3588 0 3589 57 M.5.d.
e. Secured by nonfarm nonresidential properties 3590 1,469 3591 2,909 M.5.e.
</TABLE>
Part II. Changes in Allowance for Loan and Lease Losses
<TABLE>
<CAPTION>
Dollar Amounts in Thousands RIAD Bil Mil Thou
<S> <C> <C> <C>
1. Balance originally reported in the December 31, 1995, Reports of Condition
and Income 3124 290,221 1.
2. Recoveries (must equal part I, item 9, column B above) 4605 15,539 2.
3. LESS: Charge-offs (must equal part I, item 9, column A above) 4635 60,596 3.
4. Provision for loan and lease losses (must equal Schedule RI, item 4.a) 4230 0 4.
5. Adjustments* (see instructions for this schedule) 4815 0 5.
6. Balance end of current period (sum of items 1 through 5)(must equal Schedule RC,
item 4.b) 3123 245,164 6.
</TABLE>
__________
*Describe on Schedule RI-E--Explanations.
Schedule RI-C--Applicable Income Taxes by Taxing Authority
Schedule RI-C is to be reported with the December Report of Income.
<TABLE>
<CAPTION>
I489
Dollar Amounts in Thousands RIAD Bil Mil Thou
<S> <C> <C> <C>
1. Federal 4780 N/A 1.
2. State and local 4790 N/A 2.
3. Foreign 4795 N/A 3.
4. Total (sum of items 1 through 3) (must equal sum of Schedule RI, items 9
and 11.b) 4770 N/A 4.
5. Deferred portion of item 4 RIAD 4772 N/A 5.
</TABLE>
7
<PAGE>
Legal Title of Bank: Texas Commerce Bank National Associaton
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 9/30/96 ST-BK: 48-3926 FFIEC 031
Page RI-6
Schedule RI-D--Income form International Operations
For all banks with foreign offices, Edge or Agreement subsidiaries, or IBFs
where international operations account for more than 10 percent of total
revenues, total assets, or net income.
Part I. Estimated Income from International Operations
<TABLE>
<CAPTION>
I492
Year-to-date
Dollar Amounts in Thousands RIAD Bil Mil Thou
<S> <C> <C> <C>
1. Interest income and expense booked at foreign offices, Edge and Agreement
subsidiaries, and IBFs:
a. Interest income booked 4837 N/A 1.a.
b. Interest expense booked 4838 N/A 1.b.
c. Net interest income booked at foreign offices, Edge and Agreement
subsidiaries, and IBFs (item 1.a minus 1.b) 4839 N/A 1.c.
2. Adjustments for booking location of international operations:
a. Net interest income attributable to international operations booked at
domestic offices 4840 N/A 2.a.
b. Net interest income attributable to domestic business booked at foreign
offices 4841 N/A 2.b.
c. Net booking location adjustment (item 2.a minus 2.b) 4842 N/A 2.c.
3. Noninterest income and expense attributable to international operations:
a. Noninterest income attributable to international operations 4097 N/A 3.a.
b. Provision for loan and lease losses attributable to international operations 4235 N/A 3.b.
c. Other noninterest expense attributable to international operations 4239 N/A 3.c.
d. Net non-interest income (expense) attributable to international operations (item
3.a minus 3.b and 3.c) 4843 N/A 3.d.
4. Estimated pretax income attributable to international operations before
capital allocation adjustment (sum of items 1.c, 2.c, and 3.d) 4844 N/A 4.
5. Adjustment to pretax income for internal allocations to international
operations to reflect the effects of equity capital on overall bank funding
costs 4845 N/A 5.
6. Estimated pretax income attributable to international operations after
capital allocation adjustment (sum of items 4 and 5) 4846 N/A 6.
7. Income taxes attributable to income from international operations as
estimated in item 6 4797 N/A 7.
8. Estimated net income attributable to international operations (item 6 minus 7) 4341 N/A 8.
<CAPTION>
Memoranda
Dollar Amounts in Thousands RIAD Bil Mil Thou
<S> <C> <C> <C>
1. Intracompany interest income included in item 1.a above 4847 N/A M.1.
2. Intracompany interest expense included in item 1.b above 4848 N/A M.2.
</TABLE>
Part II. Supplementary Details on Income from International Operations
Required by the Departments of Commerce and Treasury for Purposes of the U.S.
International Accounts and the U.S. National Income and Product Accounts
<TABLE>
<CAPTION>
Year-to-date
Dollar Amounts in Thousands RIAD Bil Mil Thou
<S> <C> <C> <C>
1. Interest income booked at IBFs 4849 N/A 1.
2. Interest expense booked at IBFs 4850 N/A 2.
3. Noninterest income attributable to international operations booked at
domestic offices (excluding IBFs):
a. Gains (losses) and extraordinary items 5491 N/A 3.a.
b. Fees and other noninterest income 5492 N/A 3.b.
4. Provision for loan and lease losses attributable to international operations
booked at domestic offices (excluding IBFs) 4852 N/A 4.
5. Other noninterest expense attributable to international operations booked at
domestic offices (excluding IBFs) 4853 N/A 5.
</TABLE>
8
<PAGE>
Legal Title of Bank: Texas Commerce Bank National Associaton
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 9/30/96 ST-BK: 48-3926 FFIEC 031
Page RI-7
Schedule RI-E--Explanations
Schedule RI-E is to be completed each quarter on a calendar year-to-date basis.
Detail all adjustments in Schedule RI-A and RI-B, all
extraordinary items and other adjustments in Schedule RI, and all
significant items of other noninterest income and other noninterest
expense in Schedule RI. (See instructions for details.)
<TABLE>
<CAPTION>
1495
Year-to-date
Dollar Amounts in Thousands RIAD Bil Mil Thou
<S> <C> <C> <C>
1. All other noninterest income (from Schedule RI, item 5.f.(2))
Report amounts that exceed 10% of Schedule RI, item 5.f.(2):
a. Net gains on other real estate owned 5415 6,122 1.a.
b. Net gains on sales of loans 5416 9,008 1.b.
c. Net gains on sales of premises and fixed assets 5417 0 1.c.
Itemize and describe the three largest other amounts that exceed 10% of
Schedule RI, item 5.f.(2):
d. Text 4461 Personalized check sales 4461 7,791 1.d.
e. Text 4462 Interest-income tax refund 4462 11,629 1.e.
f. Text 4463 Recovered servicing costs-FNMA 4463 1.f.
2. Other noninterest expense (from Schedule RI, item 7.c):
a. Amortization expense of intangible assets 4531 33,616 2.a.
Report amounts that exceed 10% of Schedule RI, item 7.c:
b. Net losses on other real estate owned 5418 0 2.b.
c. Net losses on sales of loans 5419 0 2.c.
d. Net losses on sales of premises and fixed assets 5420 0 2.d.
Itemize and describe the three largest amounts that exceed 10% of Schedule RI,
item 7.c.:
e. Text 4464 4464 2.e.
f. Text 4467 4467 2.f.
g. Text 4468 4468 2.g.
3. Extraordinary items and other adjustments (from Schedule RI, item 11.a) and
applicable income tax effect (from Schedule RI, item 11.b) (itemize and
describe all extraordinary items and other adjustments):
a. (1) Text 4469 4469 3.a.(1)
(2) Applicable income tax effect RIAD 4486 3.a.(2)
b. (1) Text 4487 4487 3.b.(1)
(2) Applicable income tax effect RIAD 4488 3.b.(2)
c. (1) Text 4489 4489 3.c.(1)
(2) Applicable income tax effect RIAD 4491 3.c.(2)
4. Equity capital adjustments from amended Reports of Income (from Schedule
RI-A, item 2) (itemize and describe all adjustments):
a. Text 4492 4492 4.a.
b. Text 4493 4493 4.b.
5. Cumulative effect of changes in accounting principles from prior years (from
Schedule RI-A, item 9) (itemize and describe all changes in accounting
principles):
a. Text 4494 4494 5.a.
b. Text 4495 4495 5.b.
6. Corrections of material accounting errors from prior years (from Schedule
RI-A, item 10 (itemize and describe all corrections):
a. Text 4496 4496 6.a.
b. Text 4497 4497 6.b.
</TABLE>
9
<PAGE>
Legal Title of Bank: Texas Commerce Bank National Associaton
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 9/30/96 ST-BK: 48-3926 FFIEC 031
Page RI-8
Schedule RI-E--Continued
<TABLE>
<CAPTION>
Year-to-date
Dollar Amounts in Thousands RIAD Bil Mil Thou
<S> <C> <C> <C>
7. Other transactions with parent holding company (from Schedule RI-A,
item 13) (itemize and describe all such transactions):
a. Text 4498 4498 7.a.
b. Text 4499 4499 7.b.
8. Adjustments to allowance for loan and lease losses (from Schedule RI-B,
part II, item 5) (itemize and describe all adjustments):
a. Text 4521 Provision for bank acquisitions 4521 48 8.a.
b. Text 4522 Sale of loans 4522 (330) 8.b.
9. Other explanations (the space below is provided for the bank to briefly
describe, at its option, any other significant items affecting the Report
of Income): I498 I499
No comment __ (RIAD 4769)
Other explanations (please type or print clearly):
(Text 4769)
</TABLE>
10
<PAGE>
Legal Title of Bank: Texas Commerce Bank National Associaton
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 9/30/96 ST-BK: 48-3926 FFIEC 031
Page RC-1
Consolidated Report of Condition for Insured Commercial
and State-Chartered Savings Banks for June 30, 1996
All schedules are to be reported in thousands of dollars. Unless otherwise
indicated, report the amount outstanding as of the last business day of the
quarter.
Schedule RC--Balance Sheet
<TABLE>
<CAPTION>
C400
Dollar Amounts in Thousands RCFD Bil Mil Thou
<S> <C> <C> <C>
ASSETS
1. Cash and balances due from depository institutions (from Schedule RC-A):
a. Noninterest-bearing balances and currency and coin(1) 0081 2,254,105 1.a.
b. Interest-bearing balances(2) 0071 5,108 1.b.
2. Securities:
a. Held-to-maturity securities (from Schedule RC-B, column A) 1754 562,182 2.a.
b. Available-for-sale securities (from Schedule RC-B, column D) 1773 3,628,762 2.b.
3. Federal funds sold and securities purchased under agreements to resell in
domestic offices of the bank and of its Edge and Agreement subsidiaries, and
in IBFs:
a. Federal funds sold 0276 1,920,175 3.a.
b. Securities purchased under agreements to resell 0277 16,624 3.b.
4. Loans and lease financing receivables:
a. Loans and leases, net of unearned income (from Schedule RC-C) RCFD 2122 12,271,297 4.a.
b. LESS: Allowance for loan and lease losses RCFD 3123 245,164 4.b.
c. LESS: Allocated transfer risk reserve RCFD 3128 0 4.c.
d. Loans and leases, net of unearned income, allowance,
and reserve (item 4.a. minus 4.b. and 4.c.) 2125 12,026,133 4.d.
5. Trading assets (from Schedule RC-D) 3545 22,296 5.
6. Premises and fixed assets (including capitalized leases) 2145 555,404 6.
7. Other real estate owned (from Schedule RC-M) 2150 14,977 7.
8. Investments in unconsolidated subsidiaries and associated companies
(from Schedule RC-M) 2130 0 8.
9. Customers' liability to this bank on acceptances outstanding 2155 8,162 9.
10. Intangible assets (from Schedule RC-M) 2143 431,465 10.
11. Other assets (from Schedule RC-F) 2160 366,998 11.
12. Total assets (sum of items 1 through 11) 2170 21,812,391 12.
</TABLE>
__________
(1) Includes cash items in process of collection and unposted debits.
(2) Includes time certificates of deposit not held for trading.
11
<PAGE>
Legal Title of Bank: Texas Commerce Bank National Associaton
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 9/30/96 ST-BK: 48-3926 FFIEC 031
Page RC-2
Schedule RC--Continued
<TABLE>
<CAPTION>
Dollar Amounts in Thousands Bil Mil Thou
<S> <C> <C> <C>
LIABILITIES
13. Deposits:
a. In domestic offices (sum of totals of columns A and C from Schedule RC-E,
part I) RCON 2200 16,081,065 13.a.
(1) Noninterest-bearing(1) RCON 6631 6,799,936 13.a.(1)
(2) Interest-bearing RCON 6636 9,281,129 13.a.(2)
b. In foreign offices, Edge and Agreement subsidiaries, and IBFs (from Schedule
RC-E, part II) RCFN 2200 520,669 13.b.
(1) Noninterest-bearing RCFN 6631 0 13.b.(1)
(2) Interest-bearing RCFN 6636 520,669 13.b.(2)
14. Federal funds purchased and securities sold under agreements to repurchase
in domestic offices of the bank of its Edge and Agreement subsidiaries, and
in IBFs:
a. Federal funds purchased RCFD 0278 241,848 14.a.
b. Securities sold under agreements to repurchase RCFD 0279 621,475 14.b.
15. a. Demand notes issued to the U.S. Treasury RCON 2840 2,049,072 15.a.
b. Trading liabilities (from Schedule RC-D) RCFD 3548 17,169 15.b.
16. Other borrowed money:
a. With a remaining maturity of one year or less RCFD 2332 28,114 16.a.
b. With a remaining maturity of more than one year RCFD 2333 96 16.b.
17. Mortgage indebtedness and obligations under capitalized leases RCFD 2910 26,186 17.
18. Bank's liability on acceptances executed and outstanding RCFD 2920 8,162 18.
19. Subordinated notes and debentures RCFD 3200 345,000 19.
20. Other liabilities (from Schedule RC-G) RCFD 2930 224,735 20.
21. Total liabilities (sum of items 13 through 20) RCFD 2948 20,163,591 21.
22. Limited-life preferred and related surplus RCFD 3282 0 22.
EQUITY CAPITAL
23. Perpetual preferred stock and related surplus RCFD 3838 0 23.
24. Common Stock RCFD 3230 612,893 24.
25. Surplus (exclude all surplus related to preferred stock) RCFD 3839 924,675 25.
26. a. Undivided profits and capital reserves RCFD 3632 175,828 26.a.
b. Net unrealized gains (losses) on available-for-sale securities RCFD 8434 (64,596) 26.b.
27. Cumulative foreign currency translation adjustments RCFD 3284 0 27.
28. Total equity capital (sum of items 23 through 27) RCFD 3210 1,648,800 28.
29. Total liabilities, limited-life preferred stock, and equity capital (sum of
items 21, 22, and 28) RCFD 3300 21,812,391 29.
Memorandum
To be reported only with the March Report of Condition.
1. Indicate in the box at the right the number of the statement below that best
describes the most comprehensive level of auditing work performed for the Number
bank by independent external auditors as of any date during 1995 RCFD 6724 N/A M.1.
</TABLE>
1 = Independent audit of the bank conducted in accordance with
generally accepted auditing standards by a certified public accounting
firm which submits a report on the bank.
2 = Independent audit of the bank's parent holding company conducted
in accordance with generally accepted auditing standards by a
certified public accounting firm which submits a report on the
consolidated holding company (but not on a bank separately).
3 = Directors' examination of the bank conducted in accordance with
generally accepted auditing standards by a certified public accounting
firm (may be required by state chartering authority).
4 = Directors' examination of the bank performed by other external
auditors (may be required by state chartering authority).
5 = Review of the bank's financial statements by external auditors.
6 = Compilation of the bank's financial statements by external
auditors.
7 = Other audit procedures (excluding tax preparation work).
8 = no external audit work.
__________
(1) Includes total demand deposits and noninterest-bearing time and
savings deposits.
12
<PAGE>
Legal Title of Bank: Texas Commerce Bank National Associaton
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 9/30/96 ST-BK: 48-3926 FFIEC 031
Page RC-3
Schedule RC-A--Cash and Balances Due From Depository Institutions
Exclude assets held for trading.
<TABLE>
<CAPTION>
C405
(Column A) (Column B)
Consolidated Domestic
Bank Offices
Dollar Amounts in Thousands RCFD Bil Mil Thou RCON Bil Mil Thou
<S> <C> <C> <C> <C> <C>
1. Cash items in process of collection, unposted debits, and
currency and coin 0022 2,067,673 1.
a. Cash items in process of collection and unposted debits 0020 1,750,374 1.a.
b. Currency and coin 0080 317,299 1.b.
2. Balances due from depository institutions in the U.S. 0082 38,897 2.
a. U.S. branches and agencies of foreign banks
(including their IBFs) 0083 5,008 2.a.
b. Other commercial banks in the U.S. and other depository
institutions in the U.S. (including their IBFs) 0085 33,889 2.b.
3. Balances due from banks in foreign countries and foreign
central banks 0070 11,728 3.
a. Foreign branches of other U.S. banks 0073 1,022 3.a.
b. Other banks in foreign countries and foreign central banks 0074 10,711 3.b.
4. Balances due from Federal Reserve Banks 0090 140,910 0090 140,910 4.
5. Total (sum of items 1 through 4) (total of column A must
equal Schedule RC, sum of items 1.a. and 1.b.) 0010 2,259,213 0010 2,259,208 5.
</TABLE>
<TABLE>
<CAPTION>
Memorandum RCON Bil Mil Thou
Dollar Amounts in Thousands
<S> <C> <C> <C>
1. Noninterest-bearing balances due from commercial banks
in the U.S. (included in items 2, column B above) 0050 33,789 M.1.
</TABLE>
Schedule RC-B--Securities
Exclude assets held for trading.
<TABLE>
<CAPTION>
C410
Held-to-maturity Available-for-sale
(Column A) (Column B) (Column C) (Column D)
Amortized Cost Fair Value Amortized Cost Fair Value(1)
Dollar Amounts in Thousands RCFD Bil Mil Thou RCFD Bil Mil Thou RCFD Bil Mil Thou RCFD Bil Mil Thou
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. U.S. Treasury securities 0211 17,974 0213 17,966 1286 859,701 1287 845,467 1.
2. U.S. Government agency and
corporation obligations
(exclude mortgage-backed
securities):
a. Issued by U.S. Government
agencies(2) 1289 0 1290 0 1291 0 1293 0 2.a.
b. Issued by U.S. Government-
sponsored agencies(3) 1294 36 1295 91 1297 0 1298 0 2.b.
</TABLE>
__________
(1) Includes equity securities without readily determinable
fair values at historical cost in item 6.c., column D.
(2) Includes Small Business Administration "Guaranteed Loan
Pool Certificates," U.S. Maritime Administration obligations,
and Export-Import Bank participation certificates.
(3) Includes obligations (other than mortgage-backed securities)
issued by the Farm Credit System, the Federal Home Loan Bank,
System, the Federal Home Loan Mortgage Corporation, the Federal
National Mortgage Association, the Financing Corporation,
Resolution Funding Corporation, the Student Loan Marketing
Association, and the Tennessee Valley Authority.
13
<PAGE>
Legal Title of Bank: Texas Commerce Bank National Associaton
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 9/30/96 ST-BK: 48-3926 FFIEC 031
Page RC-4
Schedule RC-B--Continued
<TABLE>
<CAPTION>
Held-to-maturity Available-for-sale
(Column A) (Column B) (Column C) (Column D)
Amortized Cost Fair Value Amortized Cost Fair Value(1)
Dollar Amounts in Thousands RCFD Bil Mil Thou RCFD Bil Mil Thou RCFD Bil Mil Thou RCFD Bil Mil Thou
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
3. Securities issued by states
and political subdivisions
in the U.S.
a. General obligations 1676 244 1677 245 1678 0 1679 0 3.a.
b. Revenue obligations 1681 40 1686 40 1690 0 1691 0 3.b.
c. Industrial development
and similar obligations 1694 0 1695 0 1696 0 1697 0 3.c.
4. Mortgage-backed securities
(MBS):
a. Pass-through securities:
(1) Guaranteed by GNMA 1698 0 1699 0 1701 1,242,861 1702 1,241,839 4.a.(1)
(2) Issued by FNMA and FHLMC 1703 543,888 1705 538,102 1706 1,265,214 1707 1,244,369 4.a.(2)
(3) Other pass-through
securities 1709 0 1710 0 1711 0 1713 0 4.a.(3)
b. Other mortgage-backed
securities (include CMOs,
REMICs, and stripped MBS):
(1) Issued or guaranteed by
FNMA, FHLMC, or GNMA 1714 0 1715 0 1716 249,378 1717 247,894 4.b.(1)
(2) Collateralized by MBS
issued or guaranteed
by FNMA, FHLMC, or GNMA 1718 0 1719 0 1731 3,026 1732 3,066 4.b.(2)
(3) All other mortgage-backed
securities 1733 0 1734 0 1735 0 1736 0 4.b.(3)
5. Other debt securities:
a. Other domestic debt
securities 1737 0 1738 0 1739 0 1741 0 5.a.
b. Foreign debt securities 1742 0 1743 0 1744 0 1746 0 5.b.
6. Equity securities:
a. Investments in mutual
funds 1747 0 1748 0 6.a.
b. Other equity securities
with readily determinable
fair values 1749 0 1751 0 6.b.
c. All other equity
securities(1) 1752 46,127 1753 46,127 6.c.
7. Total (sum of items 1 through
6) (total of column A must
equal Schedule RC, item 2.a)
(total of column D must equal
Schedule RC, item 2.b.) 1754 562,182 1771 556,444 1772 3,666,307 1773 3,628,762 7.
</TABLE>
__________
(1) Includes equity securities without readily determinable fair values at
historical cost in item 6.c., column D.
14
<PAGE>
Legal Title of Bank: Texas Commerce Bank National Associaton
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 9/30/96 ST-BK: 48-3926 FFIEC 031
Page RC-5
Schedule RC-B--Continued
<TABLE>
<CAPTION>
Memoranda C412
Dollar Amounts in Thousands RCFD Bil Mil Thou
<S> <C> <C> <C>
1. Pledged securities(2) 0416 2,160,864 M.1.
2. Maturity and repricing data for debt securities(2),(3),(4) (excluding those in
nonaccrual status):
a. Fixed rate debt securities with a remaining maturity of:
(1) Three months or less 0343 244,097 M.2.a.(1)
(2) Over three months through 12 months 0344 11,513 M.2.a.(2)
(3) Over one year through five years 0345 1,254,160 M.2.a.(3)
(4) Over five years 0346 2,382,578 M.2.a.(4)
(5) Total fixed rate debt securities (sum of Memorandum items 2.a.(1) through
2.a.(4) 0347 3,892,348 M.2.a.(5)
b. Floating rate debt securities with a repricing frequency of:
(1) Quarterly or more frequently 4544 252,469 M.2.b.(1)
(2) Annually or more frequently, but less frequently than quarterly 4545 0 M.2.b.(2)
(3) Every five years or more frequently, but less frequently than annually 4551 0 M.2.b.(3)
(4) Less frequently than every five years 4552 0 M.2.b.(4)
(5) Total floating rate debt securities (sum of Memorandum items 2.b.(1)
through 2.b.(4)) 4553 252,469 M.2.b.(5)
c. Total debt securities (sum of Memorandum items 2.a.(5) and 2.b.(5)) (must
equal total debt securities from Schedule RC-B, sum of items 1 through 5,
columns A and D, minus nonaccrual debt securities included in Schedule RC-N,
item 9, column C) 0393 4,144,817 M.2.c.
3. Not applicable
4. Held-to-maturity debt securities restructured and in compliance with
modified terms (included in Schedule RC-B, items 3 through 5, column A,
above) 5365 0 M.4.
5. Not applicable
6. Floating rate debt securities with a remaining maturity of one year or less
(2),(4) (included in Memorandum items 2.b.(1) through 2.b.(4) above) 5519 0 M.6.
7. Amortized cost of held-to-maturity securities sold or transferred to
available-for-sale or trading securities during the calendar year-to-date
(report the amortized cost at date of sale or transfer) 1778 0 M.7.
8. High-risk mortgage securities (included in the held-to-maturity and
available-for-sale accounts in Schedule RC-B, item 4.b.):
a. Amortized cost 8780 0 M.8.a.
b. Fair value 8781 0 M.8.b.
9. Structured notes (included in the held-to-maturity and available-for-sale
accounts in Schedule RC-B, items 2, 3, and 5):
a. Amortized cost 8782 0 M.9.a.
b. Fair value 8783 0 M.9.b.
</TABLE>
__________
(2) Includes held-to-maturity securities at amortized cost and
available-for-sale securities at fair value.
(3) Exclude equity securities, e.g., investments in mutual funds, Federal
Reserve stock, common stock, and preferred stock.
(4) Memorandum item 2 is not applicable to savings banks that must complete
supplemental Schedule RC-J.
15
<PAGE>
Legal Title of Bank: Texas Commerce Bank National Associaton
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 9/30/96 ST-BK: 48-3926 FFIEC 031
Page RC-6
Schedule RC-C--Loans and Lease Financing Receivables
Part I. Loans and Leases
Do not deduct the allowance for loan and lease losses from amounts reported in
this schedule. Report total loans and leases, net of unearned income. Exclude
assets held for trading.
<TABLE>
<CAPTION>
C415
(Column A) (Column B)
Consolidated Domestic
Bank Offices
Dollar Amounts in Thousands RCFD Bil Mil Thou RCON Bil Mil Thou
<S> <C> <C> <C> <C> <C>
1. Loans secured by real estate 1410 2,517,276 1.
a. Construction and land development 1415 481,236 1.a.
b. Secured by farmland (including farm residential and other improvements) 1420 17,774 1.b.
c. Secured by 1-4 family residential properties:
(1) Revolving, open-end loans secured by 1-4 family residential properties
and extended under lines of credit 1797 0 1.c.(1)
(2) All other loans secured by 1-4 family residential properties:
(a) Secured by first liens 5367 802,488 1.c.(2)(a)
(b) Secured by junior liens 5368 303,275 1.c.(2)(b)
d. Secured by multifamily (5 or more) residential properties 1460 158,758 1.d.
e. Secured by nonfarm nonresidential properties 1480 753,745 1.e.
2. Loans to depository institutions:
a. To commercial banks in the U.S. 1505 1,419 2.a.
(1) To U.S. branches and agencies of foreign banks 1506 0 2.a.(1)
(2) To other commercial banks in the U.S. 1507 1,419 2.a.(2)
b. To other depository institutions in the U.S. 1517 210 1517 210 2.b.
c. To banks in foreign countries 1510 7,284 2.c.
(1) To foreign branches of other U.S. banks 1513 0 2.c.(1)
(2) To other banks in foreign countries 1516 10,284 2.c.(2)
3. Loans to finance agricultural production and other loans to farmers 1590 37,301 1590 37,301 3.
4. Commercial and industrial loans:
a. To U.S. addressees (domicile) 1763 5,552,062 1763 5,515,953 4.a.
b. To non-U.S. addressees (domicile) 1764 197,916 1764 124,802 4.b.
5. Acceptances of other banks:
a. Of U.S. banks 1756 0 1756 0 5.a.
b. Of foreign banks 1757 0 1757 0 5.b.
6. Loans to individuals for household, family, and other personal expenditures
(i.e., consumer loans) (includes purchased paper) 1975 2,540,392 6.
a. Credit cards and related plans (includes check credit and other revolving
credit plans) 2008 130,467 6.a.
b. Other (includes single payment, installment, and all student loans) 2011 2,409,925 6.b.
7. Loans to foreign governments and official institutions (including foreign
central banks) 2081 163,506 2081 158,083 7.
8. Obligations (other than securities and leases) of states and political
subdivisions in the U.S. (includes nonrated industrial development
obligations) 2107 18,252 2107 18,252 8.
9. Other loans 1563 1,093,597 9.
a. Loans for purchasing or carrying securities (secured and unsecured) 1545 36,419 9.a.
b. All other loans (exclude consumer loans) 1564 1,057,178 9.b.
10. Lease financing receivables (net of unearned income) 2165 139,082 10.
a. Of U.S. addressees (domicile) 2182 124,505 10.a.
b. Of non-U.S. addressees (domicile) 2183 14,577 10.b.
11. LESS: Any unearned income on loans reflected in items 1-9 above 2123 0 2123 0 11.
12. Total loans and leases, net of unearned income (sum of items 1 through 10
minus item 11) (total of column A must equal Schedule RC, item 4.a.) 2122 12,271,297 2122 12,153,651 12.
</TABLE>
16
<PAGE>
Legal Title of Bank: Texas Commerce Bank National Associaton
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 9/30/96 ST-BK: 48-3926 FFIEC 031
Page RC-7
Schedule RC-C--Continued
Part I. Continued
<TABLE>
<CAPTION>
(Column A) (Column B)
Memoranda Consolidated Domestic
Bank Offices
Dollar Amounts in Thousands RCFD Bil Mil Thou RCON Bil Mil Thou
<S> <C> <C> <C> <C> <C>
1. Commercial paper included in Schedule RC-C, part I, above 1496 0 1496 0 M.1.
2. Loans and leases restructured and in compliance with modified terms (included
in Schedule RC-C, part I, above and not reported as past due or nonaccrual in
Schedule RC-N, Memorandum item 1):
a. Loans secured by real estate:
(1) To U.S. addressees (domicile) 1687 0 M.2.a.(1)
(2) To non U.S. addressees (domicile) 1689 0 M.2.a.(2)
b. All other loans and all lease financing receivables (exclude loans to
individuals for household, family, and other personal expenditures) 8691 219,523 M.2.b.
c. Commercial and industrial loans to and lease financing receivables of
non-U.S. addressees (domicile) included in Memorandum item 2.b. above 8692 0 M.2.c.
3. Maturity and repricing data for loans and leases(1) (excluding those in
nonaccrual status):
a. Fixed rate loans and leases with a remaining maturity of:
(1) Three months or less 0348 413,782 M.3.a.(1)
(2) Over three months through 12 months 0349 723,720 M.3.a.(2)
(3) Over one year through five years 0356 2,350,473 M.3.a.(3)
(4) Over five years 0357 1,416,118 M.3.a.(4)
(5) Total fixed rate loans and leases (sum of Memorandum items 3.a.(1)
through 3.a.(4)) 0358 4,904,093 M.3.a.(5)
b. Floating rate loans with a repricing frequency of:
(1) Quarterly or more frequently 4554 6,607,207 M.3.b.(1)
(2) Annually or more frequently, but less frequently than quarterly 4555 484,120 M.3.b.(2)
(3) Every five years or more frequently, but less frequently than annually 4561 83,518 M.3.b.(3)
(4) Less frequently than every five years 4564 53,893 M.3.b.(4)
(5) Total floating rate loans (sum of Memorandum items 3.b.(1)
through 3.b.(4)) 4567 7,228,738 M.3.b.(5)
c. Total loans and leases (sum of Memorandum items 3.a.(5) and 3.b.(5)) (must
equal the sum of total loans and leases, net, from Schedule RC-C, part I,
item 12, plus unearned income from Schedule RC-C, part I, item 11, minus
total nonaccrual loans and leases from Schedule RC-N, sum of items 1 through
8, column C) 1479 12,132,831 M.3.c.
d. Floating rate loans with a remaining maturity of one year or less
(included in Memorandum items 3.b.(1) through 3.b.(4) above) A246 2,566,515 M.3.d.
4. Loans to finance commercial real estate, construction, and land development
activities (not secured by real estate) included in Schedule RC-C, part I,
items 4 and 9, column A, page RC-6(2) 2746 384,935 M.4.
5. Loans and leases held for sale (included in Schedule RC-C, part I, above) 5369 321,225 M.5.
6. Adjustable rate closed-end loans secured by first liens on 1-4 family
residential properties (included in Schedule RC-C, part I, item 1.c.(2)(a), RCON Bil Mil Thou
column B, page RC-6) 5370 201,919 M.6.
</TABLE>
__________
(1) Memorandum item 3 is not applicable to savings banks that must complete
supplemental Schedule RC-J.
(2) Exclude loans secured by real estate that are included in Schedule RC-C,
part I, item 1, column A.
17
<PAGE>
Legal Title of Bank: Texas Commerce Bank National Associaton
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 9/30/96 ST-BK: 48-3926 FFIEC 031
Page RC-8
Schedule RC-D--Trading Assets and Liabilities
Schedule RC-D is to be completed only by banks with $1 billion or more in total
assets or with $2 billion or more in par/notional amount of off-balance sheet
derivative contracts (as reported in Schedule RC-L, items 14.a. through 14.e.,
columns A through D).
<TABLE>
<CAPTION>
C420
Dollar Amounts in Thousands Bil Mil Thou
<S> <C> <C> <C>
Assets
1. U.S. Treasury securities in domestic offices RCON 3531 0 1.
2. U.S. Government agency and corporation obligations in domestic offices
(exclude mortgage-backed securities) RCON 3532 0 2.
3. Securities issued by states and political subdivisions in the U.S. in
domestic offices RCON 3533 0 3.
4. Mortgage-backed securities (MBS) in domestic offices:
a. Pass-through securities issued or guaranteed by FNMA, FHLMC, or GNMA RCON 3534 0 4.a.
b. Other mortgage-backed securities issued or guaranteed by FNMA, FHLMC, or
GNMA (include CMOs, REMICs, and stripped MBS) RCON 3535 0 4.b.
c. All other mortgage-backed securities RCON 3536 0 4.c.
5. Other debt securities in domestic offices RCON 3537 0 5.
6. Certificates of deposit in domestic offices RCON 3538 0 6.
7. Commercial paper in domestic offices RCON 3539 0 7.
8. Bankers acceptances in domestic offices RCON 3540 0 8.
9. Other trading assets in domestic offices RCON 3541 19 9.
10. Trading assets in foreign offices RCFN 3542 0 10.
11. Revaluation gains on interest rate, foreign exchange rate, and other
commodity and equity contracts:
a. In domestic offices RCON 3543 22,277 11.a.
b. In foreign offices RCFN 3544 0 11.b.
12. Total trading assets (sum of items 1 through 11) (must equal Schedule RC,
item 5) RCFD 3545 22,296 12.
</TABLE>
<TABLE>
<CAPTION>
Liabilities Bil Mil Thou
<S> <C> <C> <C>
13. Liability for short positions RCFD 3546 0 13.
14. Revaluation losses on interest rate, foreign exchange rate, and other
commodity and equity contracts RCFD 3547 17,169 14.
15. Total trading liabilities (sum of items 13 and 14) (must equal Schedule
RC, item 15.b.) RCFD 3548 17,169 15.
18
<PAGE>
Legal Title of Bank: Texas Commerce Bank National Associaton
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 9/30/96 ST-BK: 48-3926 FFIEC 031
Page RC-9
Schedule RC-E--Deposit Liabilities
Part I. Deposits in Domestic Offices
</TABLE>
<TABLE>
<CAPTION>
C425
Nontransaction
Transaction Accounts Accounts
(Column A) (Column B) (Column C)
Total transaction Memo: Total Total
accounts (including demand deposits nontransaction
total demand (included in accounts
deposits) column A) (including MMDAs)
Dollar Amounts in Thousands RCON BIL Mil Thou RCON Bil Mil Thou RCON Bil Mil Thou
<S> <C> <C> <C> <C> <C> <C> <C>
Deposits of:
1. Individuals, partnerships,
and corporations 2201 5,377,180 2240 4,970,393 2346 9,832,235 1.
2. U.S. Government 2202 40,240 2280 38,771 2520 1,229 2.
3. States and political subdivisions
in the U.S. 2203 124,858 2290 56,756 2530 97,361 3.
4. Commercial banks in the U.S. 2206 484,507 2310 484,507 2550 0 4.
5. Other depository institutions
in the U.S. 2207 16,704 2312 16,704 2349 0 5.
6. Banks in foreign countries 2213 23,376 2320 23,376 2236 0 6.
7. Foreign governments and
official institutions
(including foreign central banks) 2216 1,516 2300 1,516 2377 0 7.
8. Certified and official checks 2330 81,859 2330 81,859 8.
9. Total (sum of items 1 through 8)
(sum of columns A and C must
equal Schedule RC, item 13.a) 2215 6,150,240 2210 5,673,882 2385 9,930,825 9.
</TABLE>
<TABLE>
<CAPTION>
Memoranda
Dollar Amounts in Thousands RCON Bil Mil Thou
<S> <C> <C> <C>
1. Selected components of total deposits (i.e., sum of item 9, columns A and C):
a. Total Individual Retirement Accounts (IRAs) and Keogh Plan accounts 6835 764,122 M.1.a.
b. Total brokered deposits 2365 2,000 M.1.b.
c. Fully insured brokered deposits (included in Memorandum item 1.b above):
(1) Issued in denominations of less than $100,000 2343 0 M.1.c.(1)
(2) Issued either in denominations of $100,000 or in denominations greater than
$100,000 and participated out by the broker in shares of $100,000 or less 2344 0 M.1.c.(2)
d. Maturity data for brokered deposits:
(1) Brokered deposits issued in denominations of less than $100,000 with
a remaining maturity of one year or less (included in Memorandum item
1.c.(1) above) A243 0 M.1.d.(1)
(2) Brokered deposits issued in denominations of $100,000 or more with a
remaining maturity of one year or less (included in Memorandum
item 1.b above) A244 0 M.1.d.(2)
e. Preferred deposits (uninsured deposits of states and political subdivisions
in the U.S. reported in item 3 above which are secured or collateralized as
required under state law) 5590 195,177 M.1.e.
2. Components of total nontransaction accounts (sum of Memorandum items 2.a
through 2.d must equal item 9, column C above):
a. Savings deposits:
(1) Money market deposit accounts (MMDAs) 6810 3,507,435 M.2.a.(1)
(2) Other savings deposits (excludes MMDAs) 0352 2,946,946 M.2.a.(2)
b. Total time deposits of less than $100,000 6648 2,614,197 M.2.b.
c. Time certificates of deposit of $100,000 or more 6645 846,810 M.2.c.
d. Open-account time deposits of $100,000 or more 6646 15,437 M.2.d.
3. All NOW accounts (included in column A above) 2398 476,358 M.3.
4. Not applicable
</TABLE>
19
<PAGE>
Legal Title of Bank: Texas Commerce Bank National Associaton
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 9/30/96 ST-BK: 48-3926 FFIEC 031
Page RC-10
Schedule RC-E--Continued
Part I. Continued
Memoranda (continued)
<TABLE>
<CAPTION>
Dollar Amounts in Thousands RCON Bil Mil Thou
<S> <C> <C> <C>
5. Maturity and repricing data for time deposits of less than $100,000
(sum of Memorandum items 5.a.(1) through 5.b.(3) must equal Memorandum
item 2.b above): (1)
a. Fixed rate time deposits of less than $100,000 with a remaining maturity
of:
(1) Three months or less A225 572,899 M.5.a.(1)
(2) Over three months through 12 months A226 1,311,895 M.5.a.(2)
(3) Over one year A227 667,226 M.5.a.(3)
b. Floating rate time deposits of less than $100,000 with a repricing
frequency of:
(1) Quarterly or more frequently A228 22,820 M.5.b.(1)
(2) Annually or more frequently, but less frequently than quarterly A229 31,539 M.5.b.(2)
(3) Less frequently than annually A230 7,818 M.5.b.(3)
c. Floating rate time deposits of less than $100,000 with a remaining
maturity of one year or less (included in Memorandum items 5.b.(1)
through 5.b.(3) above) A231 44,700 M.5.c.
6. Maturity and repricing data for time deposits of $100,000 or more (i.e., time
certificates of deposit of $100,000 or more and open-account time deposits
of $100,000 or more) (sum of Memorandum items 6.a.(1) through 6.b.(4) must
equal the sum of Memorandum items 2.c and 2.d above): (1)
a. Fixed rate time deposits of $100,000 or more with a remaining
maturity of:
(1) Three months or less A232 453,032 M.6.a.(1)
(2) Over three months through 12 months A233 334,692 M.6.a.(2)
(3) Over one year through five years A234 62,080 M.6.a.(3)
(4) Over five years A235 229 M.6.a.(4)
b. Floating rate time deposits of $100,000 or more with a
repricing frequency of:
(1) Quarterly or more frequently A236 10,592 M.6.b.(1)
(2) Annually or more frequently, but less frequently than quarterly A237 1,622 M.6.b.(2)
(3) Every five years or more frequently, but less frequently than annually A238 0 M.6.b.(3)
(4) Less frequently than every five years A239 0 M.6.b.(4)
c. Floating rate time deposits of $100,000 or more with a remaining maturity
of one year or less (included in Memorandum items 6.b.(1) through
6.b.(4) above) A240 9,412 M.6.c.
</TABLE>
__________
(1) Memorandum items 5 and 6 are not applicable to savings banks that must
complete supplemental Schedule RC-J.
20
<PAGE>
Legal Title of Bank: Texas Commerce Bank National Associaton
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 9/30/96 ST-BK: 48-3926 FFIEC 031
Page RC-11
Schedule RC-E--Continued
Part II. Deposits in Foreign Offices (including Edge and Agreement subsidiaries
and IBFs)
<TABLE>
<CAPTION>
Dollar Amounts in Thousands RCFN Bil Mil Thou
<S> <C> <C> <C>
Deposits of:
1. Individuals, partnerships, and corporations 2621 296,886 1.
2. U.S. banks (including IBFs and foreign branches of U.S. banks) 2623 143,688 2.
3. Foreign banks (including U.S. branches and agencies of foreign banks,
including their IBFs) 2625 80,095 3.
4. Foreign governments and official institutions (including foreign central
banks) 2650 0 4.
5. Certified and official checks 2330 0 5.
6. All other deposits 2668 0 6.
7. Total (sum of items 1 through 6)(must equal Schedule RC, item 13.b) 2200 520,669 7.
</TABLE>
<TABLE>
<CAPTION>
Memorandum
Dollar Amounts in Thousands RCFN Bil Mil Thou
<S> <C>
1. Time deposits with a remaining maturity of one year or less (included in
Part II, item 7 above) A245 520,669 M.1.
</TABLE>
Schedule RC-F--Other Assets
<TABLE>
<CAPTION> C430
Dollar Amounts in Thousands Bil Mil Thou
<S> <C> <C> <C>
1. Income earned, not collected on loans RCFD 2164 91,923 1.
2. Net deferred tax assets (1) RCFD 2148 83,314 2.
3. Excess residential mortgage servicing fees receivable RCFD 5371 0 3.
4. Other (itemize and describe amounts that exceed 25% of this item) RCFD 2168 191,761 4.
a. Text 3549 Net Swap Interest Receivable RCFD 3549 70,872 4.a.
b. Text 3550 RCFD 3550 4.b.
c. Text 3551 RCFD 3551 4.c.
5. Total (sum of items 1 through 4) (must equal Schedule RC, item 11) RCFD 2160 366,998 5.
</TABLE>
<TABLE>
<CAPTION>
Memorandum
Dollar Amounts in Thousands Bil Mil Thou
<S> <C> <C> <C>
1. Deferred tax assets disallowed for regulatory capital purposes RCFD 5610 0 M.1.
</TABLE>
Schedule RC-G--Other Liabilities
<TABLE>
<CAPTION> C435
Dollar Amounts in Thousands Bil Mil Thou
<S> <C> <C> <C>
1. a. Interest accrued and unpaid on deposits in domestic offices (2) RCON 3645 23,526 1.a.
b. Other expenses accrued and unpaid (includes accrued income taxes payable) RCFD 3646 182,075 1.b.
2. Net deferred tax liabilities (1) RCFD 3049 0 2.
3. Minority interest in consolidated subsidiaries RCFD 3000 0 3.
4. Other (itemize and describe amounts that exceed 25% of this item) RCFD 2938 19,134 4.
a. Text 3552 Accts payable - Crestar NA RCFD 3552 4.a.
b. Text 3553 RCFD 3553 4.b.
c. Text 3554 RCFD 3554 4.c.
5. Total (sum of items 1 through 4) (must equal Schedule RC, item 20) RCFD 2930 224,735 5.
</TABLE>
__________
(1) See discussion of deferred income taxes in Glossary entry on "income taxes."
(2) For savings banks, include "dividends" accrued and unpaid on deposits.
21
<PAGE>
Legal Title of Bank: Texas Commerce Bank National Associaton
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 9/30/96 ST-BK: 48-3926 FFIEC 031
Page RC-12
Schedule RC-H--Selected Balance Sheet Items for Domestic Offices
<TABLE>
<CAPTION>
C440
Domestic Offices
Dollar Amounts in Thousands RCON Bil Mil Thou
<S> <C> <C> <C>
1. Customers' liability to this bank on acceptances outstanding 2155 8,162 1.
2. Bank's liability on acceptances executed and outstanding 2920 8,162 2.
3. Federal funds sold and securities purchased under agreements to resell 1350 1,936,799 3.
4. Federal funds purchased and securities sold under agreements to repurchase 2800 863,323 4.
5. Other borrowed money 3190 28,210 5.
EITHER
6. Net due from own foreign offices, Edge and Agreement subsidiaries, and IBFs 2163 N/A 6.
OR
7. Net due to own foreign offices, Edge and Agreement subsidiaries, and IBFs 2941 403,215 7.
8. Total assets (excludes net due from foreign offices, Edge and Agreement
subsidiaries, and IBFs) 2192 21,693,407 8.
9. Total liabilities (excludes net due to foreign offices, Edge and Agreement
subsidiaries, and IBFs) 3129 19,641,391 9.
</TABLE>
Items 10-17 include held-to-maturity and available-for-sale securities in
domestic offices.
<TABLE>
<CAPTION>
RCON Bil Mil Thou
<S> <C> <C> <C>
10. U.S. Treasury securities 1779 863,441 10.
11. U.S. Government agency and corporation obligations (exclude mortgage-backed
securities) 1785 36 11.
12. Securities issued by states and political subdivisions in the U.S. 1786 284 12.
13. Mortgage-backed securities (MBS):
a. Pass-through securities:
(1) Issued or guaranteed by FNMA, FHLMC, or GNMA 1787 3,030,096 13.a.(1)
(2) Other pass-through securities 1869 0 13.a.(2)
b. Other mortgage-backed securities (include CMOs, REMICs, and stripped MBS):
(1) Issued or guaranteed by FNMA, FHLMC, or GNMA 1877 247,894 13.b.(1)
(2) All other mortgage-backed securities 2253 3,066 13.b.(2)
14. Other domestic debt securities 3159 0 14.
15. Foreign debt securities 3160 0 15.
16. Equity securities:
a. Investments in mutual funds 3161 0 16.a.
b. Other equity securities with readily determinable fair values 3162 0 16.b.
c. All other equity securities 3169 46,127 16.c.
17. Total held-to-maturity and available-for-sale securities (sum of items 10
through 16) 3170 4,190,944 17.
</TABLE>
<TABLE>
<CAPTION>
Memorandum (to be completed only by banks with IBFs and other "foreign" offices)
Dollar Amounts in Thousands RCON Bil Mil Thou
<S> <C> <C> <C>
EITHER
1. Net due from the IBF of the domestic offices of the reporting bank 3051 N/A M.1.
OR
2. Net due to the IBF of the domestic offices of the reporting bank 3059 N/A M.2.
</TABLE>
22
<PAGE>
Legal Title of Bank: Texas Commerce Bank National Associaton
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 9/30/96 ST-BK: 48-3926 FFIEC 031
Page RC-13
Schedule RC-I--Selected Assets and Liabilities of IBFs
To be completed only by banks with IBFs and other "foreign" offices.
<TABLE>
<CAPTION>
C445
Dollar Amounts in Thousands RCFN Bil Mil Thou
<S> <C> <C> <C>
1. Total IBF assets of the consolidated bank (component of Schedule RC,
item 12) 2133 N/A 1.
2. Total IBF loans and lease financing receivables (component of Schedule RC-C,
part I, item 12, column A) 2076 N/A 2.
3. IBF commercial and industrial loans (component of Schedule RC-C, part I,
item 4, column A) 2077 N/A 3.
4. Total IBF liabilities (component of Schedule RC, item 21) 2898 N/A 4.
5. IBF deposit liabilities due to banks, including other IBFs (component of
Schedule RC-E, part II, items 2 and 3) 2379 N/A 5.
6. Other IBF deposit liabilities (component of Schedule RC-E, part II, items 1,
4, 5, and 6 2381 N/A 6.
</TABLE>
Schedule RC-K-Quarterly Averages (1)
<TABLE>
<CAPTION> C455
Dollar Amounts in Thousands Bil Mil Thou
<S> <C> <C> <C>
ASSETS
1. Interest-bearing balances due from depository institutions RCFD 3381 5,108 1.
2. U.S. Treasury securities and U.S. Government agency and corporation
obligations(2) RCFD 3382 3,723,626 2.
3. Securities issued by states and political subdivisions in the U.S.(2) RCFD 3383 284 3.
4. a. Other debt securities(2) RCFD 3647 3,079 4.a.
b. Equity securities(3) (includes investments in mutual funds and Federal
Reserve stock) RCFD 3648 46,127 4.b.
5. Federal funds sold and securities purchased under agreements to resell in
domestic offices of the bank and of its Edge and Agreement subsidiaries, and in IBFs RCFD 3365 688,160 5.
6. Loans:
a. Loans in domestic offices:
(1) Total loans RCON 3360 11,980,124 6.a.(1)
(2) Loans secured by real estate RCON 3385 2,557,899 6.a.(2)
(3) Loans to finance agricultural production and other loans to farmers RCON 3386 44,023 6.a.(3)
(4) Commercial and industrial loans RCON 3387 5,726,647 6.a.(4)
(5) Loans to individuals for household, family, and other personal expenditures RCON 3388 2,478,353 6.a.(5)
b. Total loans in foreign offices, Edge and Agreement subsidiaries, and IBFs RCFN 3360 119,622 6.b.
7. Trading assets RCFD 3401 20,833 7.
8. Lease financing receivables (net of unearned income) RCFD 3484 148,216 8.
9. Total assets(4) RCFD 3368 19,816,163 9.
LIABILITIES
10. Interest-bearing transaction accounts in domestic offices (NOW accounts,
ATS accounts, and telephone and preauthorized transfer accounts) (exclude
demand deposits) RCON 3485 388,983 10.
11. Nontransaction accounts in domestic offices:
a. Money market deposit accounts (MMDAs) RCON 3486 3,058,709 11.a.
b. Other savings deposits RCON 3487 2,948,575 11.b.
c. Time certificates of deposit of $100,000 or more RCON 3345 871,520 11.c.
d. All other time deposits RCON 3469 2,645,768 11.d.
12. Interest-bearing deposits in foreign offices, Edge and Agreement
subsidiaries, and IBFs RCFN 3404 313,200 12.
13. Federal funds purchased and securities sold under agreements to repurchase
in domestic offices of the bank and of its Edge and Agreement subsidiaries,
and in IBFs RCFD 3353 1,250,237 13.
14. Other borrowed money RCFD 3355 22,791 14.
</TABLE>
__________
(1) For all items, banks have the option of reporting either (1) an
average of daily figures for the quarter, or (2) an average of weekly
figures (i.e., the Wednesday of each week of the quarter).
(2) Quarterly averages for all debt securities should be based on
amortized cost.
(3) Quarterly averages for all equity securities should be based on
historical cost.
(4) The quarterly average for total assets should reflect all debt
securities (not held for trading) at amortized cost, equity securities
with readily determinable fair values at the lower of cost or fair
value, and equity securities without readily determinable fair values
at historical cost.
23
<PAGE>
Legal Title of Bank: Texas Commerce Bank National Associaton
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 9/30/96 ST-BK: 48-3926 FFIEC 031
Page RC-14
Schedule RC-L-Off-Balance Sheet Items
Please read carefully the instructions for the preparation of Schedule
RC-L. Some of the amounts reported in Schedule RC-L are regarded as
volume indicators and not necessarily as measures of risk.
<TABLE>
<CAPTION>
C460
Dollar Amounts in Thousands RCFD Bil Mil Thou
<S> <C> <C> <C>
1. Unused commitments:
a. Revolving, open-end lines secured by 1-4 family residential properties,
e.g., home equity lines 3814 0 1.a.
b. Credit card lines 3815 0 1.b.
c. Commercial real estate, construction, and land development:
(1) Commitments to fund loans secured by real estate 3816 534,507 1.c.(1)
(2) Commitments to fund loans not secured by real estate 6550 300,758 1.c.(2)
d. Securities underwriting 3817 0 1.d.
e. Other unused commitments 3818 8,352,738 1.e.
2. Financial standby letters of credit and foreign office guarantees 3819 1,076,660 2.
a. Amount of financial standby letters of credit conveyed to others RCFD 3820 97,289 2.a.
3. Performance standby letters of credit and foreign office guarantees 3821 123,286 3.
a. Amount of performance standby letters of credit conveyed to others RCFD 3822 2,713 3.a.
4. Commercial and similar letters of credit 3411 126,670 4.
5. Participations in acceptances (as described in the instructions) conveyed to
others by the reporting bank 3428 0 5.
6. Participations in acceptances (as described in the instructions) acquired by
the reporting (nonaccepting) bank 3429 0 6.
7. Securities borrowed 3432 61,931 7.
8. Securities lent (including customers' securities lent where the customer is
indemnified against loss by the reporting bank) 3433 17,974 8.
9. Loans transferred (i.e., sold or swapped) with recourse that have been
treated as sold for Call Report purposes:
a. FNMA and FHLMC residential mortgage loan pools:
(1) Outstanding principal balance of mortgages transferred as of the report
date 3650 0 9.a.(1)
(2) Amount of recourse exposure on these mortgages as of the report date 3651 0 9.a.(2)
b. Private (nongovernment-issued or -guaranteed) residential mortgage loan
pools:
(1) Outstanding principal balance of mortgages transferred as of the report
date 3652 0 9.b.(1)
(2) Amount of recourse exposure on these mortgages as of the report date 3653 0 9.b.(2)
c. Farmer Mac agricultural mortgage loan pools:
(1) Outstanding principal balance of mortgages transferred as of the report
date 3654 0 9.c.(1)
(2) Amount of recourse exposure on these mortgages as of the report date 3655 0 9.c.(2)
d. Small business obligations transferred with recourse under Section 208
of the Riegle Community Development and Regulatory Improvement Act of 1994:
(1) Outstanding principal balance of small business obligations transferred
as of the report date A249 0 9.d.(1)
(2) Amount of retained recourse on these obligations as of the report date A250 0 9.d.(2)
10. When-issued securities:
a. Gross commitments to purchase 3434 0 10.a.
b. Gross commitments to sell 3435 0 10.b.
11. Spot foreign exchange contracts 8765 479,249 11.
12. All other off-balance sheet liabilities (exclude off-balance sheet
derivatives) (itemize and describe each component of this item over 25% of
Schedule RC, item 28, "Total equity capital") 3430 0 12.
a. TEXT 3555 Mortgage servicing with recourse RCFD 3555 12.a.
b. TEXT 3556 RCFD 3556 12.b.
c. TEXT 3557 RCFD 3557 12.c.
d. TEXT 3558 RCFD 3558 12.d.
</TABLE>
24
<PAGE>
Legal Title of Bank: Texas Commerce Bank National Associaton
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 9/30/96 ST-BK: 48-3926 FFIEC 031
Page RC-15
Schedule RC-L--Continued
<TABLE>
<S> <C>
13. All other off-balance sheet assets (exclude off-balance sheet derivatives)
(itemize and describe each component of this item over 25% of Schedule RC,
item 28, "Total equity capital") 5591 0 13.
a. Text 5592 RCFD 5592 13.a.
b. Text 5593 RCFD 5593 13.b.
c. Text 5594 RCFD 5594 13.c.
d. Text 5595 RCFD 5595 13.d.
</TABLE>
<TABLE>
<CAPTION>
C461
(Column A) (Column B) (Column C) (Column D)
Dollar Amounts in Thousands Interest Rate Foreign Exchange Equity Derivative Commodity and
Off-balance Sheet Derivatives Contracts Contracts Contracts Other Contracts
Position Indicators Tril Bil Mil Thou Tril Bil Mil Thou Tril Bil Mil Thou Tril Bil Mil Thou
<S> <C> <C> <C> <C> <C>
14. Gross amounts (e.g., notional amounts)
(for each column, sum of items 14.a
through 14.e must equal sum of items
15,16.a, and 16.b):
a. Future contracts 400,000 187,500 0 0 14.a.
RCFD 8693 RCFD 8694 RCFD 8695 RCFD 8696
b. Forward contracts 0 430,187 0 0 14.b.
RCFD 8697 RCFD 8698 RCFD 8699 RCFD 8700
c. Exchange-traded option contracts:
(1) Written options 0 0 0 0 14.c.(1)
RCFD 8701 RCFD 8702 RCFD 8703 RCFD 8704
(2) Purchased options 1,000,000 0 0 0 14.c.(2)
RCFD 8705 RCFD 8706 RCFD 8707 RCFD 8708
d. Over-the-counter option contracts:
(1) Written options 267,952 5,322 0 0 14.d.(1)
RCFD 8709 RCFD 8710 RCFD 8711 RCFD 8712
(2) Purchased options 1,467,952 15,322 0 0 14.d.(2)
RCFD 8713 RCFD 8714 RCFD 8715 RCFD 8716
e. Swaps 5,855,844 0 0 0 14.e.
RCFD 3450 RCFD 3826 RCFD 8719 RCFD 8720
15. Total gross notional amount of derivative
contracts held for trading 3,517,761 638,331 0 0 15.
RCFD A126 RCFD A127 RCFD 8723 RCFD 8724
16. Total gross notional amount of derivative
contracts held for purposes other
than trading:
a. Contracts marked to market 990,000 0 0 0 16.a.
RCFD 8725 RCFD 8726 RCFD 8727 RCFD 8728
b. Contracts not marked to market 4,483,987 0 0 0 16.b.
RCFD 8729 RCFD 8730 RCFD 8731 RCFD 8732
</TABLE>
25
<PAGE>
Legal Title of Bank: Texas Commerce Bank National Associaton
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 9/30/96 ST-BK: 48-3926 FFIEC 031
Page RC-16
Schedule RC-L--Continued
<TABLE>
<CAPTION>
(Column A) (Column B) (Column C) (Column D)
Dollar Amounts in Thousands Interest Rate Foreign Exchange Equity Derivative Commodity and
Off-balance Sheet Derivatives Contracts Contracts Contracts Other Contracts
Position Indicators RCFD Bil Mil Thou RCFD Bil Mil Thou RCFD Bil Mil Thou RCFD Bil Mil Thou
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
17. Gross fair values of
derivative contracts:
a. Contracts held for trading:
(1) Gross positive fair value 8733 23,950 8734 6,069 8735 0 8736 0 17.a.(1)
(2) Gross negative fair value 8737 18,840 8738 7,133 8739 0 8740 0 17.a.(2)
b. Contracts held for purposes
other than trading that
are marked to market:
(1) Gross positive fair value 8741 0 8742 0 8743 0 8744 0 17.b.(1)
(2) Gross negative fair value 8745 5,008 8746 0 8747 0 8748 0 17.b.(2)
c. Contracts held for purposes
other than trading that are
not marked to market:
(1) Gross positive fair value 8749 65,839 8750 0 8751 0 8752 0 17.c.(1)
(2) Gross negative fair value 8753 1,712 8754 0 8755 0 8756 0 17.c.(2)
</TABLE>
<TABLE>
<CAPTION>
Memoranda Dollar Amounts in Thousands RCFD Bil Mil Thou
<S> <C> <C> <C>
1.-2. Not applicable
3. Unused commitments with an original maturity exceeding one year that are
reported in Schedule RC-L, items 1.a through 1.e, above (report only the
unused portions of commitments that are fee paid or otherwise legally
binding) 3833 5,479,865 M.3.
a. Participations in commitments with an original maturity
exceeding one year conveyed to others RCFD 3834 39,889 M.3.a.
4. To be completed only by banks with $1 billion or more in total assets:
Standby letters of credit and foreign office guarantees (both financial and
performance) issued to non-U.S. addresses (domicile) included in Schedule
RC-L, items 2 and 3, above 3377 44,624 M.4.
5. Installment loans to individuals for household, family, and other personal
expenditures that have been securitized and sold without recourse (with
servicing retained), amounts outstanding by type of loan:
a. Loans to purchase private passenger automobiles (to be completed
for the September report only) 2741 0 M.5.a.
b. Credit cards and related plans (TO BE COMPLETED QUARTERLY) 2742 0 M.5.b.
c. All other consumer installment credit (including mobile home loans) 2743 0 M.5.c.
(to be completed for the September report only)
</TABLE>
26
<PAGE>
Legal Title of Bank: Texas Commerce Bank National Associaton
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 9/30/96 ST-BK: 48-3926 FFIEC 031
Page RC-17
Schedule RC-M--Memoranda
<TABLE>
<CAPTION>
C465
Dollar Amounts in Thousands RCFD Bil Mil Thou
<S> <C> <C> <C>
1. Extensions of credit by the reporting bank to its executive officers,
directors, principal shareholders, and their related interests as of the
report date:
a. Aggregate amount of all extensions of credit to all executive officers,
directors, principal shareholders, and their related interests. 6164 22,690 1.a.
b. Number of executive officers, directors, and principal shareholders to whom
the amount of all extensions of credit by the reporting bank (including
extensions of credit to related interests) equals or exceeds the lesser of
$500,000 or 5 percent of total capital as defined for this Number
purpose in agency regulations. RCFD 6165 4 0 1.b.
2. Federal funds sold and securities purchased under agreements to resell with
U.S. branches and agencies of foreign banks(1) (included in Schedule RC,
items 3.a and 3.b) 3405 0 2.
3. Not applicable.
4. Outstanding principal balance of 1-4 family residential mortgage loans
serviced for others (include both retained servicing and purchased
servicing):
a. Mortgages serviced under a GNMA contract 5500 0 4.a.
b. Mortgages serviced under a FHLMC contract:
(1) Serviced with recourse to servicer 5501 0 4.b.(1)
(2) Serviced without recourse to servicer 5502 0 4.b.(2)
c. Mortgages serviced under a FNMA contract:
(1) Serviced under a regular option contract 5503 0 4.c.(1)
(2) Serviced under a special option contract 5504 0 4.c.(2)
d. Mortgages serviced under other servicing contracts 5505 0 4.d.
5. To be completed only by banks with $1 billion or more in total assets:
Customers' liability to this bank on acceptances outstanding (sum of items
5.a and 5.b must equal Schedule RC, item 9):
a. U.S. addresses (domicile) 2103 5,638 5.a.
b. Non-U.S. addresses (domicile) 2104 2,524 5.b.
6. Intangible assets:
a. Mortgage servicing rights 3164 0 6.a.
b. Other identifiable intangible assets:
(1) Purchased credit card relationships 5506 0 6.b.(1)
(2) All other identifiable intangible assets 5507 100,464 6.b.(2)
c. Goodwill 3163 331,001 6.c.
d. Total (sum of items 6.a through 6.c) (must equal Schedule RC, item 10) 2143 431,465 6.d.
e. Amount of intangible assets (included in item 6.b.(2) above) that have been
grandfathered or are otherwise qualifying for regulatory capital purposes 6442 0 6.e.
7. Mandatory convertible debt, net of common or perpetual preferred stock
dedicated to redeem the debt 3295 0 7.
</TABLE>
__________
(1) Do not report federal funds sold and securities purchased under agreements
to resell with other commercial banks in the U.S. in this item.
27
<PAGE>
Legal Title of Bank: Texas Commerce Bank National Associaton
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 9/30/96 ST-BK: 48-3926 FFIEC 031
Page RC-18
Schedule RC-M--Continued
<TABLE>
<CAPTION>
Dollar Amounts in Thousands Bil Mil Thou
<S> <C> <C> <C>
8. a. Other real estate owned:
(1) Direct and indirect investments in real estate ventures RCFD 5372 0 8.a.(1)
(2) All other real estate owned:
(a) Construction and land development in domestic offices RCON 5508 2,404 8.a.(2)(a)
(b) Farmland in domestic offices RCON 5509 0 8.a.(2)(b)
(c) 1-4 family residential properties in domestic offices RCON 5510 762 8.a.(2)(c)
(d) Multifamily (5 or more) residential properties in domestic offices RCON 5511 0 8.a.(2)(d)
(e) Nonfarm nonresidential properties in domestic offices RCON 5512 11,811 8.a.(2)(e)
(f) In foreign offices RCFN 5513 0 8.a.(2)(f)
(3) Total (sum of items 8.a.(1) and 8.a.(2)) (must equal Schedule RC, item 7) RCFD 2150 14,977 8.a.(3)
b. Investments in unconsolidated subsidiaries and associated companies:
(1) Direct and indirect investments in real estate ventures RCFD 5374 0 8.b.(1)
(2) All other investments in unconsolidated subsidiaries and associated
companies RCFD 5375 0 8.b.(2)
(3) Total (sum of items 8.b.(1) and 8.b.(2)) (must equal Schedule RC, item 8) RCFD 2130 0 8.b.(3)
c. Total assets of unconsolidated subsidiaries and associated companies RCFD 5376 0 8.c.
9. Noncumulative perpetual preferred stock and related surplus included in
Schedule RC, item 23, "Perpetual preferred stock and related surplus" RCFD 3778 0 9.
10. Mutual fund and annuity sales in domestic offices during the quarter
(include proprietary, private label, and third party products):
a. Money market funds RCON 6441 7,930,069 10.a.
b. Equity securities funds RCON 8427 18,729 10.b.
c. Debt securities funds RCON 8428 1,445 10.c.
d. Other mutual funds RCON 8429 93,511 10.d.
e. Annuities RCON 8430 7,524 10.e.
f. Sales of proprietary mutual funds and annuities (included in items 10.a
through 10.e above) RCON 8784 3,714,622 10.f.
</TABLE>
<TABLE>
<CAPTION>
Dollar Amounts in Thousands
Memorandum RCFD Bil Mil Thou
<S> <C> <C> <C>
1. Interbank holdings of capital instruments (to be completed for the December
report only):
a. Reciprocal holdings of banking organizations' capital instruments 3836 N/A M.1.a.
b. Nonreciprocal holdings of banking organizations' capital instruments 3837 N/A M.1.b.
</TABLE>
28
<PAGE>
Legal Title of Bank: Texas Commerce Bank National Associaton
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 9/30/96 ST-BK: 48-3926 FFIEC 031
Page RC-19
Schedule RC-N--Past Due and Nonaccrual Loans, Leases, and Other Assets
The FFIEC regards the information reported in all of Memorandum item 1, in
items 1 through 10, column A, and in Memorandum items 2 through 4, column A,
as confidential.
<TABLE>
<CAPTION>
C470
(Column A) (Column B) (Column C)
Past due Past due 90 Nonaccrual
30 through 89 days or more
days and still and still
accruing accruing
Dollar Amounts in Thousands RCFD Bil Mil Thou RCFD Bil Mil Thou RCFD Bil Mil Thou
<S> <C> <C> <C> <C> <C> <C> <C>
1. Loans secured by real estate:
a. To U.S. addresses (domicile) 1245 53,682 1246 12,273 1247 67,514 1.a.
b. To non-U.S. addresses (domicile) 1248 0 1249 0 1250 0 1.b.
2. Loans to depository institutions and
acceptances of other banks:
a. To U.S. banks and other U.S. depository
institutions 5377 0 5378 0 5379 0 2.a.
b. To foreign banks 5380 0 5381 0 5382 0 2.b.
3. Loans to finance agricultural production
and other loans to farmers 1594 198 1597 0 1583 2,626 3.
4. Commercial and industrial loans:
a. To U.S. addresses (domicile) 1251 92,130 1252 29,465 1253 62,753 4.a.
b. To non-U.S. addresses (domicile) 1254 4,759 1255 0 1256 1 4.b.
5. Loans to individuals for household, family,
and other personal expenditures:
a. Credit cards and related plans 5383 1,132 5384 402 5385 2,130 5.a.
b. Other (includes single payment,
installment and all student loans) 5386 49,870 5387 24,175 5388 0 5.b.
6. Loans to foreign governments and official
institutions 5389 0 5390 0 5391 25 6.7.
7. All other loans 5459 21,346 5460 1,315 5461 3,417 7.
8. Lease financing receivables:
a. Of U.S. addresses (domicile) 1257 0 1258 0 1259 0 8.a.
b. Of non-U.S. addresses (domicile) 1271 0 1272 0 1791 0 8.b.
9. Debt securities and other assets (exclude
other real estate owned and other
repossessed assets) 3505 0 3506 0 3507 0 9.
</TABLE>
Amounts reported in items 1 through 8 above include guaranteed and unguaranteed
portions of past due and nonaccrual loans and leases. Report in item 10 below
certain guaranteed loans and leases that have already been included in the
amounts reported in items 1 through 8.
<TABLE>
<CAPTION>
RCFD Bil Mil Thou RCFD Bil Mil Thou RCFD Bil Mil Thou
<S> <C> <C> <C> <C> <C> <C> <C>
10. Loans and leases reported in items 1
through 8 above which are wholly or
partially guaranteed by the U.S.
Government. 5612 17,419 5613 18,455 5614 3,401 10.
a. Guaranteed portion of loans and leases
included in item 10 above. 5615 17,105 5616 18,455 5617 2,721 10.a.
</TABLE>
29
<PAGE>
Legal Title of Bank: Texas Commerce Bank National Associaton
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 9/30/96 ST-BK: 48-3926 FFIEC 031
Page RC-20
Schedule RC-N--Continued
<TABLE>
<CAPTION> C473
(Column A) (Column B) (Column C)
Past due Past due 90 Nonaccrual
30 through 89 days or more
days and still and still
accruing accruing
Memoranda
Dollar Amounts in Thousands RCFD Bil Mil Tho RCFD Bil Mil Thou RCFD Bil Mil Thou
<S> <C> <C> <C> <C> <C> <C> <C>
1. Restructured loans and leases included
in Schedule RC-N, items 1 through 8,
above (and not reported in Schedule RC-C,
part I, Memorandum item 2) 1658 0 1659 0 1661 2,407 M.1.
2. Loans to finance commercial real estate,
construction, and land development
activities (not secured by real estate)
included in Schedule RC-N, items 4
and 7, above 6558 3,309 6559 0 6560 965 M.2.
<CAPTION>
RCON Bil Mil Thou RCON Bil Mil Thou RCON Bil Mil Thou
<S> <C> <C> <C> <C> <C> <C> <C>
3. Loans secured by real estate in domestic
offices
(included in Schedule RC-N, item 1, above):
a. Construction and land development 2759 3,363 2769 6,046 3492 38,776 M.3.a.
b. Secured by farmland 3493 54 3494 0 3495 449 M.3.b.
c. Secured by 1-4 family residential
properties:
(1) Revolving, open-end loans secured by
1-4 family residential properties and
extended under lines of credit 5398 0 5399 0 5400 0 M.3.c.(1)
(2) All other loans secured by 1-4 family
residential properties 5401 21,309 5402 4,654 5403 9,931 M.3.c.(2)
d. Secured by multifamily (5 or more)
residential properties 3499 11,245 3500 0 3501 586 M.3.d.
e. Secured by nonfarm nonresidential
properties 3502 17,711 3503 1,573 3504 17,772 M.3.e.
</TABLE>
<TABLE>
<CAPTION>
(Column A) (Column B)
Past due 30 Past due 90
through 89 days days or more
RCFD Bil Mil Thou RCFD Bil Mil Thou
<S> <C> <C> <C> <C> <C>
4. Interest rate, foreign exchange rate, and
other commodity and equity contracts:
a. Book value of amounts carried as assets 3522 0 3528 0 M.4.a.
b. Replacement cost of contracts with a
positive replacement cost 3529 0 3530 0 M.4.b.
</TABLE>
30
<PAGE>
Legal Title of Bank: Crestar Bank
Address: P.O. Box 26665
City, State Zip: Richmond, VA 23261-6665
FDIC Certificate No.: 00832
Call Date: 6/30/96 ST-BK: 51-2430 FFIEC 031
Page RC-21
Schedule RC-O--Other Data for Deposit Insurance Assessments
<TABLE>
<CAPTION> C475
Dollar Amounts in Thousands RCON Bil Mil Thou
<S> <C> <C> <C>
1. Unposted debits (see instructions):
a. Actual amount of all unposted debits 0030 N/A 1.a.
or
b. Separate amount of unposted debits:
(1) Actual amount of unposted debits to demand deposits 0031 0 1.b.(1)
(2) Actual amount of unposted debits to time and savings deposits (1) 0032 0 1.b.(2)
2. Unposted credits (see instructions):
a. Actual amount of all unposted credits 3510 N/A 2.a.
or
b. Separate amount of unposted credits:
(1) Actual amount of unposted credits to demand deposits 3512 0 2.b.(1)
(2) Actual amount of unposted credits to time and savings deposits (1) 3514 0 2.b.(2)
3. Uninvested trust funds (cash) held in bank's own trust department (not
included in total deposits in domestic offices) 3520 6,866 3.
4. Deposits of consolidated subsidiaries in domestic offices and in insured
branches in Puerto Rico and U.S. territories and possessions (not included
in total deposits):
a. Demand deposits of consolidated subsidiaries 2211 2,457 4.a.
b. Time and savings deposits (1) of consolidated subsidiaries 2351 16 4.b.
c. Interest accrued and unpaid on deposits of consolidated subsidiaries 5514 0 4.c.
5. Deposits in insured branches in Puerto Rico and U.S. territories and
possessions:
a. Demand deposits in insured branches (included in Schedule RC-E, Part II) 2229 0 5.a.
b. Time and savings deposits (1) in insured branches (included in Schedule
RC-E, Part II) 2383 0 5.b.
c. Interest accrued and unpaid on deposits in insured branches (included in
Schedule RC-G, item 1.b) 5515 0 5.c.
Item 6 is not applicable to state nonmember banks that have not been authorized
by the Federal Reserve to act as pass-through corespondents.
6. Reserve balances actually passed through to the Federal Reserve by the
reporting bank on behalf of its respondent depository institutions that are
also reflected as deposit liabilities of the reporting bank:
a. Amount reflected in demand deposits (included in Schedule RC-E, Part I, item 4 or 5,
column B) 2314 1,047 6.a.
b. Amount reflected in time and savings deposits (1) (included in Schedule
RC-E, Part I, item 4 or 5, column A or C, but not column B) 2315 0 6.b.
7. Unamortized premiums and discounts on time and savings deposits:(1)
a. Unamortized premiums 5516 1,548 7.a.
b. Unamortized discounts 5517 0 7.b.
8. To be completed by banks with "Oakar deposits."
Total "Adjusted Attributable Deposits" of all institutions acquired under
Section 5(d)(3) of the Federal Deposit Insurance Act (from most recent FDIC
Oakar Transaction Worksheet(s)) 5518 N/A 8.
9. Deposits in lifeline accounts 5596 9.
10. Benefit-responsive "Depository Institution Investment Contracts" (included
in total deposits in domestic offices) 8432 0 10.
</TABLE>
__________
(1) For FDIC insurance assessment purposes, "time and savings deposits"
consists of nontransaction accounts and all transaction accounts other than
demand deposits.
31
<PAGE>
Legal Title of Bank: Texas Commerce Bank National Associaton
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 9/30/96 ST-BK: 48-3926 FFIEC 031
Page RC-22
Schedule RC-O--Continued
<TABLE>
<CAPTION>
Dollar Amounts in Thousands RCON Bil Mil Thou
<S> <C> <C> <C>
11. Adjustments to demand deposits in domestic offices reported in Schedule
RC-E for certain reciprocal demand balances:
a. Amount by which demand deposits would be reduced if reciprocal demand
balances between the reporting bank and savings associations were reported
on a net basis rather than a gross basis in Schedule RC-E 8785 0 11.a.
b. Amount by which demand deposits would be increased if reciprocal demand
balances between the reporting bank and the U.S. branches and agencies of
foreign banks were reported on a gross basis rather than a net basis in
Schedule RC-E A181 0 11.b.
c. Amount by which demand deposits would be reduced if cash items in process of
collection were included in the calculation of net reciprocal demand
balances between the reporting bank and the domestic offices of U.S. banks
and savings associations in Schedule RC-E A182 0 11.c.
</TABLE>
Memoranda (to be completed each quarter except as noted)
<TABLE>
<CAPTION>
Dollar Amounts in Thousands RCON Bil Mil Thou
<S> <C> <C> <C>
1. Total deposits in domestic offices of the bank (sum of Memorandum items 1a.
(1) and 1.b.(1) must equal schedule RC, item 13.a):
a. Deposit accounts of $100,000 or less:
(1) Amount of deposit accounts of $100,000 or less 2702 8,468,331 M.1.a.(1)
(2) Number of deposit accounts of $100,000 or less (to be completed for the
June report only) Number
RCON 3779 N/A M.1.a.(2)
b. Deposit accounts of more than $100,000:
(1) Amount of deposit accounts of more than $100,000 2710 7,612,734 M.1.b.(1)
Number
(2) Number of deposit accounts of more than $100,000 RCON 2722 17,502 M.1.b.(2)
2. Estimated amount of uninsured deposits in domestic offices of the bank:
a. An estimate of your bank's uninsured deposits can be determined by
multiplying the number of deposit accounts of more than $100,000 reported
in Memorandum item 1.b.(2) above by $100,000 and subtracting the result from
the amount of deposit accounts of more than $100,000 reported in Memorandum
item 1.b.(1) above.
Indicate in the appropriate box at the right whether your bank has a method or
procedure for determining a better estimate of uninsured deposits than the
estimate described above Yes No
6861 X M.2.a.
b. If the box marked Yes has been checked, report the estimate of uninsured
deposits determined by using your bank's method or procedure RCON Bil Mil Thou
5597 N/A M.2.b.
</TABLE>
Person to whom questions about the Reports of Condition and Income should be
directed: C477
Karen Gatenby, Vice President (713)216-5263
Name and Title (TEXT 8901) Area code/phone number/extension
(TEXT 8902)
32
<PAGE>
Legal Title of Bank: Texas Commerce Bank National Associaton
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 9/30/96 ST-BK: 48-3926 FFIEC 031
Page RC-23
Schedule RC-R--Regulatory Capital
This schedule must be completed by all banks as follows: Banks that
reported total assets of $1 billion or more in Schedule RC, item 12,
for June 30, 1995, must complete items 2 through 9 and Memoranda items
1 and 2. Banks with assets of less than $1 billion must complete
items 1 through 3 below or Schedule RC-R in its entirety, depending on
their response to item 1 below.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1. Test for determining the extent to which Schedule RC-R must be completed.
To be completed only by banks with total assets of less than $1 billion. C480
Indicate in the appropriate box at the right whether the bank has total capital Yes No
greater than or equal to eight percent of adjusted total assets. RCFD 6056 1.
</TABLE>
For purposes of this test, adjusted total assets equals total assets
less cash, U.S. Treasuries, U.S. Government agency obligations, and 80
percent of U.S. Government-sponsored agency obligations plus the
allowance for loan and lease losses and selected off-balance sheet
items as reported on Schedule RC-L (see instructions).
If the box marked YES has been checked, then the bank only has to complete
items 2 and 3 below. If the box marked NO has been checked, the bank must
complete the remainder of this schedule.
A NO response to item 1 does not necessarily mean that the bank's actual
risk-based capital ratio is less than eight percent or that the bank is not
in compliance with the risk-based capital guidelines.
NOTE: All banks are required to complete items 2 and 3 below. See optional
worksheet for items 3.a through 3.f.
<TABLE>
<CAPTION>
(Column A) (Column B)
Subordinated Debt (1) Other
and Intermediate Limited-
Term Preferred Life Capital
Stock Instruments
Dollar Amounts in Thousands RCFD Bil Mil Thou RCFD Bil Mil Thou
<S> <C> <C> <C> <C> <C>
2. Subordinated debt (1) and other limited-life capital
instruments (original weighted average maturity of
at least five years) with a remaining maturity of:
a. One year or less 3780 0 3786 0 2.a.
b. Over one year through two years 3781 0 3787 0 2.b.
c. Over two years through three years 3782 0 3788 0 2.c.
d. Over three years through four years 3783 0 3789 0 2.d.
e. Over four years through five years 3784 0 3790 0 2.e.
f. Over five years 3785 345,000 3791 0 2.f.
3. Amounts used in calculating regulatory capital ratios
(report amounts determined by the bank for its own
internal regulatory capital analyses): RCFD Bil Mil Thou
a. Tier 1 capital 8274 1,281,931 3.a.
b. Tier 2 capital 8275 557,260 3.b.
c. Total risk-based capital 3792 1,839,191 3.c.
d. Excess allowance for loan and lease losses A222 32,904 3.d.
e. Risk-weighted assets A223 16,947,905 3.e.
f. "Average total assets" A224 19,384,698 3.f.
</TABLE>
Items 4-9 and Memoranda items 1 and 2 are to be completed by banks that
answered NO to item 1 above and by banks with total assets of $1 billion or
more.
<TABLE>
<CAPTION>
(Column A) (Column B)
Assets Credit Equiv-
Recorded alent Amount
on the of Off-Balance
Balance Sheet Sheet Items(2)
RCFD Bil Mil Thou RCFD Bil Mil Thou
<S> <C> <C> <C> <C> <C>
4. Assets and credit equivalent amounts of off-balance sheet items
assigned to the Zero percent risk category:
a. Assets recorded on the balance sheet:
(1) Securities issued by, other claims on, and claims unconditionally
guaranteed by, the U.S. Government and its agencies and other OECD
central governments 3794 2,396,580 4.a.(1)
(2) All other 3795 514,307 4.a.(2)
b. Credit equivalent amount of off-balance sheet items 3796 31,034 4.b.
</TABLE>
__________
(1) Exclude mandatory convertible debt reported in Schedule RC-M, item 7.
(2) Do not report in column B the risk-weighted amount of assets reported in
column A.
33
<PAGE>
Legal Title of Bank: Texas Commerce Bank National Associaton
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 9/30/96 ST-BK: 48-3926 FFIEC 031
Page RC-24
Schedule RC-R--Continued
<TABLE>
<CAPTION>
(Column A) (Column B)
Assets Credit Equiv-
Recorded alent Amount
on the of Off-Balance
Balance Sheet Sheet Items (1)
Dollar Amounts in Thousands RCFD Bil Mil Thou RCFD Bil Mil Thou
<S> <C> <C> <C> <C> <C>
5. Assets and credit equivalent amounts of off-balance
sheet items assigned to the 20 percent risk category:
a. Assets recorded on the balance sheet:
(1) Claims conditionally guaranteed by the U.S. Government
and its agencies and other OECD central governments 3798 450,519 5.a.(1)
(2) Claims collateralized by securities issued by the
U.S. Government and its agencies and other OECD
central governments; by securities issued by U.S.
Government-sponsored agencies; and by cash on deposit 3799 114,158 5.a.(2)
(3) All other 3800 5,813,050 5.a.(3)
b. Credit equivalent amount of off-balance sheet items 3801 214,206 5.b.
6. Assets and credit equivalent amounts of off-balance
sheet items assigned to the 50 percent risk category:
a. Assets recorded on the balance sheet 3802 795,647 6.a.
b. Credit equivalent amount of off-balance sheet items 3803 80,719 6.b.
7. Assets and credit equivalent amounts of off-balance sheet
items assigned to the 100 percent risk category:
a. Assets recorded on the balance sheet 3804 11,950,960 7.a.
b. Credit equivalent amount of off-balance sheet items 3805 3,704,743 7.b.
8. On-balance sheet asset values excluded from the calculation
of the risk-based capital ratio (2) 3806 22,334 8.
9. Total assets recorded on the balance sheet (sum of items
4.a, 5.a, 6.a, 7.a, and 8, column A)(must equal Schedule RC,
item 12 plus items 4.b and 4.c) 3807 22,057,555 9.
</TABLE>
Memoranda
<TABLE>
<CAPTION>
Dollar Amounts in Thousands RCFD Bil Mil Thou
<S> <C> <C> <C>
1. Current credit exposure across all off-balance sheet derivative contracts
covered by the risk-based capital standards 8764 77,053 M.1.
</TABLE>
<TABLE>
<CAPTION>
With a remaining maturity of
(Column A) (Column B) (Column C)
One year or less Over one year Over five years
through five years
RCFD Tril Bil Mil Thou RCFD Tril Bil Mil Thou RCFD Tril Bil Mil Thou
<S> <C> <C> <C> <C> <C> <C> <C>
2. Notional principal amounts of
off-balance sheet derivative
contracts (3):
a. Interest rate contracts 3809 3,608,910 8766 4,150,514 8767 564,372 M.2.a.
b. Foreign exchange contracts 3812 399,641 8769 45,866 8770 0 M.2.b.
c. Gold contracts 8771 0 8772 0 8773 0 M.2.c.
d. Other precious metals contracts 8774 0 8775 0 8776 0 M.2.d.
e. Other commodity contracts 8777 0 8778 0 8779 0 M.2.e.
f. Equity derivative contracts A000 0 A001 0 A002 0 M.2.f.
</TABLE>
__________
(1) Do not report in column B the risk-weighted amount of assets
reported in column A.
(2) Include the difference between the fair value and the amortized
cost of available-for-sale securities in item 8 and report the
amortized cost of these securities in items 4 through 7 above. Item 8
also includes on-balance sheet asset values (or portions thereof) of
off-balance sheet interest rate, foreign exchange rate, and commodity
contracts and those contracts (e.g., futures contracts) not subject to
risk-based capital. Exclude from item 8 margin accounts and accrued
receivables as well as any portion of the allowance for loan and lease
losses in excess of the amount that may be included in Tier 2 capital.
(3) Exclude foreign exchange contracts with an original maturity of 14
days or less and all futures contracts.
34
<PAGE>
Legal Title of Bank: Texas Commerce Bank National Associaton
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 9/30/96 ST-BK: 48-3926 FFIEC 031
Page RC-25
Optional Narrative Statement Concerning the Amounts Reported in the
Reports of Condition and Income at close of business on June 30, 1996
Texas Commerce Bank National Association Houston, Texas
Legal Title of Bank City State
The management of the reporting bank may, if it wishes, submit a brief
narrative statement on the amounts reported in the Reports of
Condition and Income. This optional statement will be made available
to the public, along with the publicly available data in the Reports
of Condition and Income, in response to any request for individual
bank report data. However, the information reported in column A and
in all of Memorandum item 1 of Schedule RC-N is regarded as
confidential and will not be released to the public. BANKS CHOOSING
TO SUBMIT THE NARRATIVE STATEMENT SHOULD ENSURE THAT THE STATEMENT
DOES NOT CONTAIN THE NAMES OR OTHER IDENTIFICATIONS OF INDIVIDUAL BANK
CUSTOMERS, REFERENCES TO THE AMOUNTS REPORTED IN THE CONFIDENTIAL
ITEMS IN SCHEDULE RC-N, OR ANY OTHER INFORMATION THAT THEY ARE NOT
WILLING TO HAVE MADE PUBLIC OR THAT WOULD COMPROMISE THE PRIVACY OF
THEIR CUSTOMERS. Banks choosing not to make a statement may check the
"No comment" box below and should make no entries of any kind in the
space provided for the narrative statement; i.e., DO NOT enter in this
space such phrases as "No statement," "Not applicable," "N/A," "No
comment," and "None."
The optional statement must be entered on this sheet. The statement
should not exceed 100 words. Further, regardless of the number of
words, the statement must not exceed 750 characters, including
punctuation, indentation, and standard spacing between words and
sentences. If any submission should exceed 750 characters, as
defined, it will be truncated at 750 characters with no notice to the
submitting bank and the truncated statement will appear as the bank's
statement both on agency computerized records and in computer-file
releases to the public.
All information furnished by the bank in the narrative statement must
be accurate and not misleading. Appropriate efforts shall be taken by
the submitting bank to ensure the statement's accuracy. The statement
must be signed, in the space provided below, by a senior officer of
the bank who thereby attests to its accuracy.
If, subsequent to the original submission, material changes are
submitted for the data reported in the Reports of Condition and
Income, the existing narrative statement will be deleted from the
files, and from disclosure; the bank, at its option, may replace it
with a statement, under signature, appropriate to the amended data.
The optional narrative statement will appear in agency records and in
release to the public exactly as submitted (or amended as described in
the preceding paragraph) by the management of the bank (except for the
truncation of statements exceeding the 750-character limit described
above). THE STATEMENT WILL NOT BE EDITED OR SCREENED IN ANY WAY BY
THE SUPERVISORY AGENCIES FOR ACCURACY OR RELEVANCE. DISCLOSURE OF THE
STATEMENT SHALL NOT SIGNIFY THAT ANY FEDERAL SUPERVISORY AGENCY
HAS VERIFIED OR CONFIRMED THE ACCURACY OF THE INFORMATION CONTAINED
THEREIN. A STATEMENT TO THIS EFFECT WILL APPEAR ON ANY PUBLIC RELEASE
OF THE OPTIONAL STATEMENT SUBMITTED BY THE MANAGEMENT OF THE REPORTING
BANK.
No comment [] (RCON 6979) C471 C472
BANK MANAGEMENT STATEMENT (please type or print clearly):
(TEXT 6980)
_____________________________________ _________________
Signature of Executive Officer of Bank Date of Signature
35
<PAGE>
Legal Title of Bank: Texas Commerce Bank National Associaton
Address: P.O. Box 2558
City, State Zip: Houston, TX 77252-2558
FDIC Certificate No.: 03263
Call Date: 9/30/96 ST-BK: 48-3926 FFIEC 031
Page RC-26
THIS PAGE IS TO BE COMPLETED BY ALL BANKS
<TABLE>
<S> <C>
OMB No. for OCC: 1557-0081
OMB No. For FDIC: 3064-0052
OMB No. For Federal Reserve: 7100-0036
Expiration Date: 3/31/99
Special Report
(Dollar Amounts in Thousands)
Close of Business FDIC Certificate Number
Date
9/30/96 03263 C-700
31
LOANS TO EXECUTIVE OFFICERS (Complete as of each Call Report Date)
The following information is required by Public Laws 90-44 and 102-
242, but does not constitute a part of the Report of Condition. With
each Report of Condition, these Laws require all banks to furnish a
report of all loans or other extensions of credit to their executive
officers made since the date of the previous Report of Condition.
Data regarding individual loans or other extensions of credit are not
required. If no such loans or other extensions of credit were made
during the period, insert "none" against subitem (a). (Exclude the
first $15,000 of indebtedness of each executive officer under bank
credit card plan.) See Sections 215.2 and 215.3 of Title 12 of the
Code of Federal Regulations (Federal Reserve Board Regulation O) for
the definitions of "executive officer" and "extension of credit,"
respectively. Exclude loans and other extensions of credit to
directors and principal shareholders who are not executive officers.
</TABLE>
<TABLE>
<S> <C> <C> <C>
a. Number of loans made to executive officers since the
previous Call Report date RCFD 3561 1 a.
b. Total dollar amount of above loans (in thousands of
dollars) RCFD 3562 394 b.
c. Range of interest charged on above loans
(example: 9 3/4% = 9.75) RCFD 7701 8.25% to
RCFD 7702 8.25% c.
</TABLE>
<TABLE>
<CAPTION>
SIGNATURE AND TITLE OF OFFICER AUTHORIZED TO SIGN REPORT DATE (Month, Day, Year)
<S> <C>
/s/ PETER C. TOMS, SENIOR VICE PRESIDENT 7/29/96
</TABLE>
<TABLE>
<S> <C>
NAME AND TITLE OF PERSON TO WHOM INQUIRIES MAY BE DIRECTED (TEXT 8903) AREA CODE/PHONE NUMBER/EXTENSION
(TEXT 8904)
Karen Gatenby, Vice President (713)216-5263
</TABLE>
FDIC 8040/53 (6/95)
36
