-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S5RtkRXOaCrO1YD+Mi9QU4EkVWvrBSJeolnSpzwr1QCBwjAW3nk1YFmme5WUSYyv VzLcSf9hBqj6gqGSrv3BcA== 0000950109-99-001186.txt : 19990402 0000950109-99-001186.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950109-99-001186 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST INTERNATIONAL BANCORP INC CENTRAL INDEX KEY: 0001040339 STANDARD INDUSTRIAL CLASSIFICATION: BLANK CHECKS [6770] IRS NUMBER: 061151731 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-22861 FILM NUMBER: 99581050 BUSINESS ADDRESS: STREET 1: 280 TRUMBULL STREET CITY: HARTFORD STATE: CT ZIP: 06103 BUSINESS PHONE: 8607270700 MAIL ADDRESS: STREET 1: ONE COMMERCIAL PLZ CITY: HARTFORD STATE: CT ZIP: 06103 10-K 1 FORM 10-K FIRST INTERNATIONAL BANCORP, INC. - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ------------ For the fiscal year ended December 31, 1998 Commission file no. 0-22861 ------------ FIRST INTERNATIONAL BANCORP, INC. (Exact name of registrant as specified in its charter) Delaware 06-1151731 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 280 Trumbull Street Hartford, CT 06103 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (860) 727-0700 ------------ Securities Registered Pursuant to Section 12(b) of the Act: (Title of each class) Common Stock, par value $.10 per share Securities Registered Pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 or Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ___ As of March 12, 1999, the aggregate market value of the voting stock held by non-affiliates of the Registrant, based on the closing price of the common stock as reported by the Nasdaq Stock Market of $11.875 was approximately $59,542,782. As of March 12, 1999, the Registrant had 7,957,587 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Part II, items 5, 6, 7, 7A and 8 are incorporated by reference to First International Bancorp's, Inc. 1998 Annual Report to Shareholders which is included as an exhibit hereto. Part III, items 10, 11, 12 and 13 are incorporated by reference to First International Bancorp, Inc.'s definitive proxy statement to stockholders which will be filed with the Securities and Exchange Commission no later than 120 days after December 31, 1998. - -------------------------------------------------------------------------------- TABLE OF CONTENTS PART 1 Page No. ITEM 1. BUSINESS 1 ITEM 2. PROPERTIES 24 ITEM 3. LEGAL PROCEEDINGS 25 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 25 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS 26 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA 26 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 26 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 26 ABOUT MARKET RISK ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 26 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 26 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 26 ITEM 11. EXECUTIVE COMPENSATION 26 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 26 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 26 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K 27 PART 1 ITEM 1: BUSINESS General Overview First International Bancorp, Inc., a Delaware corporation, is a one bank holding company incorporated in 1985 and regulated by the Board of Governors of the Federal Reserve System. Its principal asset and subsidiary is First International Bank, N.A. (the "Bank"), a national banking association established in 1955 and regulated by the Office of the Comptroller of the Currency (the "OCC"). In 1998, the Bank established three special purpose subsidiaries to facilitate loan securitizations and sales to a commercial paper conduit. The Bank changed its name from First National Bank of New England on February 1, 1999 to more closely reflect the markets it serves. In September 1997, the Company completed an underwritten public offering whereby 1,955,000 shares of common stock were issued for net proceeds of $23.8 million. On March 26, 1999, the Company sold its last retail branch and its checking, savings and money market accounts. The Company retained its certificates of deposit and continues to offer certificates of deposit to retail and brokered depositors. (See "Changes in Funding Sources" for further discussion of the funding sources to be used by the Company.) The Company specializes in providing credit, trade and financial solutions to small and medium size manufacturing companies located in the United States and in international emerging markets. The Company serves its target market by offering flexible and attractive terms to borrowers and manages its credit risk through the combined utilization of commercial loan guarantee programs made available by three U. S. federal agencies: the U. S. Small Business Administration (the "SBA"), the U. S. Department of Agriculture (the "USDA"), and the Export-Import Bank of the U. S. ("Ex-Im Bank"), as well as through the use of private credit insurance policies. For the federal fiscal year ending September 30, 1998, the Company was the country's largest Ex-Im Bank lender measured by number of transactions; the second largest USDA Business and Industry lender measured by dollar volume; and the tenth largest SBA 7(a) lender measured by dollar volume (and the largest in New England). The Company maintains preferred status for government guaranteed lending programs in several jurisdictions. 1 Changes in Funding Sources During 1998 and the first quarter of 1999, the Company entered into transactions that effected changes in the manner in which the Company obtains funding for its lending business. Such transactions included: . the sale of the Company's last branch, including checking, savings and money market accounts totaling approximately $150 million; . establishment of a warehouse loan facility, pursuant to which up to $75 million is available to the Company (based upon the contractual advance rates against the qualifying principal balance of the loans pledged to secure the facility); . a commitment for a second warehouse loan facility pursuant to which up to $50 million would be available to the Company (based upon the contractual advance rates against the qualifying principal balance of the loans pledged to secure the facility; the pledged loans will consist of the unguaranteed portion of loans guaranteed by the SBA); this facility is subject to SBA approval and satisfactory negotiation of final terms with all parties. . establishment of a commercial paper conduit facility, pursuant to which the Company has the right to sell commercial revolving lines of credit and other qualifying loans during the term of the facility. The Company will be required to retain ownership of subordinated interests in the loans sold to provide a credit enhancement to the purchaser in varying percentages depending on the type of loan sold. The Company sold loans totaling approximately $21 million in December 1998 under this facility; . a securitization transaction completed in June 1998 pursuant to which the Company received approximately $24 million from a sale of the unguaranteed portions of loans originated by the Company that were guaranteed in part by the SBA; and . a securitization transaction in December 1998 pursuant to which the Company received approximately $55 million from a sale of other commercial loans originated by the Company. Following the sale of the Company's checking, savings and money market accounts, the Company expects to obtain funding for its operations from retail and brokered certificates of deposits, warehouse lines of credit, the sale of loans on a loan-by-loan basis, private placement securitizations and from the sale of loans to a commercial paper conduit. Loan Originations Management believes that the specialized market knowledge and experience of the Company's lending officers, combined with a broad range of commercial and international financing products, enable the Company to satisfy the needs of its small and medium size manufacturing clients. Brand recognition for the Company is maintained by incorporating the servicemark 2 Financing Manufacturers Worldwide(R) in its logos. The Company's domestic and international lending relationships generally range from $150,000 to $2.5 million. The Company's Commercial business units underwrite lines of credit, term loans, industrial mortgages and trade financing for businesses located in the Northeast, Mid-atlantic, and Midwest regions of the United States. Commercial lenders operate from the Company's Hartford, Connecticut headquarters, as well as from regional representative offices located in Boston and Springfield, Massachusetts; Providence, Rhode Island; Morristown, New Jersey; Pittsburgh and Philadelphia, Pennsylvania; Rochester, New York; Washington D.C.; Detroit, Michigan; and Cleveland, Ohio. The Company plans to continue its U. S. expansion in 1999 by opening additional representative offices. The Company's domestic loan officers are trained to understand the specific financial needs of small and medium size manufacturers, and to use government guaranteed and other commercial loan products to respond to those needs. Domestic loan officers participate in industrial trade organizations representing the Company's target market and conduct other marketing activities to reach potential borrowers. The Company's International business units underwrite Ex-Im Bank guaranteed and insured and private sector insured short and medium term loans to small and medium size manufacturers located in various international emerging markets. The International business units also underwrite Ex-Im Bank guaranteed revolving lines of credit to U.S. manufacturers and in 1998, began offering privately insured loans to U.S. importers of foreign-made goods. See "International Banking Services and Products." International lending activities support trade flows between the United States and emerging markets. The Company's International business units operate from its Hartford, Connecticut headquarters and are assisted in their efforts by contractual international marketing representatives, or "master agents", many of whom are actively involved in providing financial, accounting, consulting and/or engineering services to manufacturers in their home countries. Contractual marketing arrangements have been established with professionals in Argentina, Brazil, Central America, India, Indonesia, Korea, Mexico, Philippines, Poland, South Africa, Turkey and West Africa. The Company began lending internationally in 1994 and has increased these loan originations from $397,000 in 1994 to $1.8 million in 1995, $13.6 million in 1996, $60.9 million in 1997 and $110.4 million in 1998. Underwriting The Company's underwriting activities are initiated from each of its lending offices and supported and approved at the Hartford, Connecticut headquarters. Commercial lending officers analyze the creditworthiness of proposed borrowers and evaluate each borrower's financial statements, credit reports, business plans and other data to determine if the credit and proposed collateral satisfy the Company's specific lending standards and policies. All credit memoranda are reviewed by an independent credit officer and may require additional approval depending on the particular circumstances of the financing package. Domestic and international loans undergo a substantially identical approval process. 3 Loan Sales and Securitizations The Company seeks to achieve high returns while meeting the growing credit needs of its target market by selling a portion of its commercial and international loans on a non-recourse, servicing-retained basis. A separate Capital Markets business unit was established in 1996 to sell loans (or the unguaranteed portions of loans), including domestic and international loans, that lack federal guarantees. The Capital Markets business unit directs its resources toward identifying non-government guaranteed secondary loan markets to generate non-interest income and as a further means of mitigating credit risk, leveraging capital and replenishing liquidity. In 1998, the Company began securitizing and selling certain whole loans and the unguaranteed portions of certain government guaranteed loans that it originates, and selling commercial revolving lines of credit to a commercial paper conduit. In such securitization and commercial paper transactions, the Company sells a pool of loans to a trust, which in turn issues certificates representing beneficial ownership interests in the trust or which issues notes and sells such securities through private placement transactions. In order to provide credit enhancement for the certificates or notes, the Company will generally retain subordinated certificates or notes and establish a cash reserve account. The Company also records an interest-only strip in connection with the transactions. For all securitizations and sales, the Company is the servicer of the underlying loans. In 1998 the Bank established three special purpose subsidiaries to facilitate completion of these transactions. Business Strategy The Company's strategy is to serve small and medium size manufacturers through the following key activities: Domestic Loan Origination Activities. Commercial business units currently operate from the Hartford, Connecticut headquarters, as well as from regional loan production or "representative" offices located in Boston and Springfield, Massachusetts; Providence, Rhode Island; Pittsburgh and Philadelphia, Pennsylvania; Morristown, New Jersey; Rochester, New York; Washington D.C.; Detroit, Michigan and Cleveland, Ohio. The Company intends to continue to expand into new markets by opening additional representative offices as marketing diligence is completed. Financing Trade with International Emerging Markets. The International business units operating from the Hartford, Connecticut headquarters are assisted in their efforts abroad by contractual relationships with international master agents in Argentina, Brazil, Central America, India, Indonesia, Korea, Mexico, Philippines, Poland, South Africa, Turkey and West Africa. The master agents are actively involved in providing professional financial services to small and medium size manufacturers in their home countries. The Company also provides working capital to U.S. manufacturers who export to, and in 1998 the Company began financing U.S. imports from, international emerging markets. 4 Lending Activities and Policies The Company's distribution of domestic and international commercial loan originations are detailed below:
For the Years Ended ------------------------------------------ December 31, 1998 December 31, 1997 ------------------- ------------------- Loan Originations Principal Percentage Principal Percentage --------- ---------- --------- ---------- (Dollars in thousands) Domestic: SBA loans.......................................... $122,178 31% $100,382 33% USDA loans......................................... 45,162 12% 30,404 10% Other commercial loans............................. 113,888 29% 84,975 28% -------- -------- -------- -------- Total domestic banking............................ 281,228 72% 215,761 71% International: Ex-Im working capital lines........................ 37,276 10% 30,347 10% Ex-Im medium term loans............................ 48,248 12% 60,852 19% Other international loans.......................... 24,925 6% -- -- -------- -------- -------- -------- Total international banking....................... 110,449 28% 91,199 29% -------- -------- -------- -------- Total commercial loan originations................ $391,677 100% $306,960 100% ======== ======== ======== ========
Marketing Domestic Lending The Company originates domestic loans through its 53 commercial loan officers in eleven offices who seek to establish long-term relationships with their clients. The Company believes it is uniquely positioned to serve its domestic market through an ability to provide clients with a flexible combination of lines of credit, term loans and mortgages for industrial property and trade financing. The Company generally utilizes the SBA, USDA Ex-Im Bank and/or privately insured loan guarantee and insurance programs as a part of a financing package in light of an applicant's particular situation. The Company's participation in these programs enables it to provide clients with longer loan terms than are typically available to small and medium size manufacturers. Commercial loan officers are responsible for marketing, underwriting, servicing, monitoring and collecting payments on their portfolio of loans. The Company believes that this broad range of responsibilities enables the commercial loan officers to establish strong working relationships with both existing and prospective clients and promotes strong client service and prudent loan portfolio management. Commercial loan officers are encouraged to keep apprised of market conditions through frequent contact with clients and potential borrowers, to develop specific knowledge of their clients' businesses, and to offer flexible structuring of loan products. In consultation with the borrower, a commercial loan officer will evaluate the financing needs of the business and then recommend the best way to structure the lending transaction to fit the client's unique needs. 5 The marketing efforts by commercial loan officers include participation in trade associations serving the needs of small and medium size manufacturers; contacting accountants, attorneys and other professionals known by the Company to have contact with businesses in need of financing; personal visits; direct mail solicitations; and referrals from existing clients. Since the target client of both domestic and international loan officers is often the same, there is an active cross-selling effort between these two areas. Marketing Agreements In addition to the marketing efforts of the Bank's domestic lending officers, the Bank is seeking to market its domestic loan products through marketing agreements with various trade and cooperative associations. In 1998, the Bank entered into such agreements ("Marketing Agreements") with the National Rural Utilities Cooperative Finance Corporation, and with various regional chapters of the National Tooling & Machining Association. The Marketing Agreements provide, among other things, for the applicable trade or cooperative association to develop and implement a marketing plan pursuant to which the Bank has implemented an expedited and streamlined credit application and approval process for association members who desire commercial term loans from the Bank. The Bank retains the sole discretion as to the credit standards to be applied and as to whether to make any particular loan. The Marketing Agreements further provide for the Bank to pay quarterly and annual compensation to such trade and cooperative associations based upon the amount of loans made by the Bank to the members of the associations. International Lending The Company has four international loan officers in the Trade Finance business unit who target U.S. exporters eligible for trade financing programs, including those supported by Ex-Im Bank. These loan officers market pre-export working capital lines of credit. This International business unit has also recently begun targeting U. S. buyers of goods from certain international emerging markets. As with the domestic lending relationships, the Trade Finance business unit is responsible for marketing, underwriting, servicing, monitoring and collecting its portfolio of loans. The Company has twelve international loan officers in its Americas and Asia/Africa/Europe business units who target foreign purchasers of U. S. goods eligible for short and medium term financing supported by Ex-Im Bank guarantees and private sector insurance. These International business units are also responsible for marketing, underwriting, servicing, monitoring and collecting payments on their portfolios of loans. Internationally, the Company has established contractual marketing relationships with professional firms in twelve emerging markets who, in the course of conducting their primary business, have frequent contact with local manufacturers who require financing to purchase U.S. goods or are manufacturing goods for export to the U. S. Prior to entering into relationships with these "Master Agents," the Company conducts due diligence, including visiting the prospective 6 representative and conducting local diligence concerning their business reputation and legal status. The Company also requires that each Master Agent be trained on the Company's products and services at the Hartford, Connecticut headquarters. Each Master Agent markets, on behalf of the Company, Ex-Im Bank guaranteed and insured short and medium terms loans and privately insured export loans in its respective market. Once the Master Agent develops a lead with a potential borrower, it directs the prospect to a U.S.-based loan officer who completes the application process. The Master Agent receives a negotiated fee when a loan referral made to the Company has been underwritten and closed. The Master Agent assists the loan officer in obtaining certain information from the applicant and in responding to inquiries of the applicant, but does not have any direct underwriting responsibilities. All decisions with respect to referrals of Master Agents are made by the Company, which retains full control over international loan originations. Marketing efforts include visits to and direct mail solicitation of, U.S.-based exporters of capital goods, direct mail solicitation of foreign-based manufacturers and industrial trade organizations and in-country marketing by the Company's network of Master Agents. The Company also entered into a contractual strategic marketing alliance with Panalpina, Inc., a leading international freight forwarding company to provide access to additional trade finance opportunities. Domestic Lending Services and Products Loan Products and the Origination Process The commercial loans originated by the Company include industrial mortgage loans (i.e., loans to businesses collateralized by industrial real property), equipment term loans and revolving lines of credit to manufacturers, wholesalers and distributors, many of which are exporters. The typical commercial borrower is a privately owned and operated company with annual sales of $2 million to $25 million, employing 10-175 workers, which has been in business for at least three years. A number of the Company's borrowers have a proprietary product line, export their products and/or have a geographically diverse client base. The Company is typically the borrower's primary lender and provides loans which are collateralized by assets of the borrower. The Company originates loans to a variety of industries; however, based upon its loss experience and economic forecasts, the Company may decide to de-emphasize industries from time to time. The interest rates accruing on the Company's commercial loans are typically Prime-based, changing monthly or quarterly when the Prime Rate changes. The Company also makes fixed rate loans from time to time. The Company originates certain loans for sale through loan purchase programs pre-established with investors. The term of a loan depends upon whether the loan is guaranteed or is underwritten for a loan purchase program. Government guarantee programs give clients access to longer term financing and slower amortization than otherwise available. A government guaranteed mortgage loan has a maximum term and amortization of up to 30 years, while the term and amortization of an unguaranteed mortgage loan typically does not exceed 15 years. Equipment loans are underwritten to correspond to the useful life of the 7 equipment and generally range from 5-15 years. SBA guaranteed working capital term loans range from 7-10 years, while unguaranteed working capital revolving lines of credit have one-year terms. Medium term loans are generally fully amortizing. The primary collateral sought by the Company for commercial loans consists of liens which are generally first liens, on owner-occupied industrial real estate, equipment, inventory and/or accounts receivable, although additional collateral may include junior liens on residential properties. The Company generally requests the personal guarantee of the principals of a business because the Company believes this induces the guarantor to facilitate repayment of the loan. In striving to meet the credit needs of its clients, the Company utilizes government guarantee loan programs which allow it to offer longer-term loans while mitigating the credit risk to the Company through the government guarantee. The two government guarantee loan programs utilized by the Company's Commercial business units to provide financing to its niche market are discussed below. SBA Guaranteed Loan Originations The Company utilizes the SBA's 7(a) loan program for eligible borrowers. The Company has Preferred Lender status in nineteen SBA "districts." Preferred Lender status allows the Bank to approve loans on behalf of the SBA, with the national SBA processing center's concurrence that the applicant meets the SBA eligibility requirements. The SBA generally completes its eligibility review within 24 hours of submission. The Company has Certified Lender status in twenty districts. Certified Lender status entitles the Bank to 72-hour turnaround from local SBA district offices for approval of loan applications. The SBA's 7(a) loan program provides for a guarantee equal to 75% of the principal balance, up to a maximum guarantee of $750,000 per borrower. The Company makes SBA loans to businesses which qualify under agency regulations as a "small business." The primary operative SBA eligibility criterion are privately-owned manufacturers employing fewer than 500 workers. Loans may generally be used for the acquisition or refinancing of plant and equipment, working capital and debt consolidation. In the event of default, the SBA and Company share in any collections or collateral on a pari passu basis. For example, if a loan carries a 75% guarantee, the SBA receives 75% of all collections while the Company receives 25% of such amounts, beginning with the initial recovery. The SBA also reimburses the Company's collection costs on a similar basis. If the SBA establishes that any resulting loss is attributable to a failure by the Company to comply with SBA policies and procedures in connection with the origination, documentation or funding of a loan, the SBA may decline to pay the guaranteed amount, or if the guaranty has already been paid, may seek recovery of funds from the Company. With respect to guaranteed SBA loan participations which have been sold, the SBA will first honor its guarantee and then 8 seek compensation from the Company in the event that a loss is deemed to be attributable to such failure to comply with SBA policies and procedures. USDA Guaranteed Loan Originations The Company utilizes the Business and Industry Program ("B&I Program") of the USDA when applicable based on an applicant's geographical location and other characteristics. The B&I Program provides for 80% guarantees on loans with principal balances up to $5 million and 70% guarantees on loans with principal balances up to $10 million and, therefore, enables the Company to provide financing to borrowers with greater needs than those eligible for SBA loans and non-guaranteed commercial loans from the Company, due to legal lending limit constraints. The stated purpose of this program is to support industry, employment and general economic and environmental conditions in rural communities, which are defined as towns with fewer than 50,000 inhabitants. Such loans may be utilized for acquisition, improvement or refinancing of plant, equipment, working capital and debt consolidation. Loans to be guaranteed under the B&I Program are submitted to the USDA district office and, depending on that office's loan authority, may be required to be forwarded to the national USDA for approval. The USDA approved the Company as a Certified Lender in 1997, making it one of the first USDA Certified Lenders nationally. As a Certified Lender, the Company is recognized as a "Subject Matter Expert" and is able to reserve funds, which facilitates the processing of USDA loans. The guarantee of the USDA also provides for pari passu recovery of collection proceeds, and for recourse to the Company similar to that discussed above for SBA loans in the event the Company is found to have been negligent in the origination, documentation or funding of USDA loans. Domestic Underwriting For the Company's domestic underwriting process, the Company's staff seeks to: (i) analyze borrowers' credit profiles; (ii) assess the collateral underlying a loan; (iii) assure compliance with eligibility requirements for inclusion under any applicable guarantee programs; and (iv) obtain or provide appropriate documentation for the transaction. Domestic lending officers receive and assemble initial applications, analyze the creditworthiness of proposed borrowers, prepare credit memoranda, and aided by staff, prepare any required government guarantee loan application forms and conduct credit and trade reference checks. In the course of analyzing the creditworthiness of prospective borrowers, commercial lending officers evaluate each applicant's and any guarantors' financial statements, credit reports, appraisals and other information regarding the value of collateral the experience, strength and continuity of the borrower's management business plans and other data to determine if the credit and collateral satisfy the Company's standards and compliance with any applicable government guaranteed loan program requirements. Such standards may include debt service coverage ratios, or other financial ratios, reasonableness of the borrower's projections (when submitted), the 9 experience, strength and continuity of the borrower's management, the financial condition of individual guarantors, the value of collateral, and compliance with government guarantee loan program requirements. The originating officer performs on-site inspections to determine the condition of a borrower's facility, the manner in which business is being conducted, the condition and maintenance of assets, the existence of environmental issues, and other market conditions. Originating lending officers have no authority to approve a loan on their own. Subject to approval by the Credit Policy Officer, the business manager of each commercial business unit and the Company's Division Executives have lending authority in accordance with their experience. Any loans above this lending authority must be approved by the Loan Committee of the Bank's Board of Directors. All loans to a borrower and its affiliates are aggregated to determine whether they are within an individual's lending authority. Upon initial approval by a business manager, the credit memorandum must be approved by the Credit Policy Officer, who reports to the Chief Credit Officer. The Credit Policy Officer reviews the memorandum and supporting file for compliance with internal Company policy as well as applicable government guarantee requirements. If additional approvals are required, the credit memorandum is forwarded to the appropriate parties as noted above. If the financing package includes a government guaranteed loan, the application is forwarded to the applicable government agency as required. The Company performs a credit analysis on all applications, considering the type and value of the assets collateralizing a loan, the characteristics of the borrower, the borrower's industry, and the anticipated debt service ratio. The Company generally requires that a borrower's most recently completed fiscal year financial statements demonstrate historical debt service coverage ratio of at least 1.25 to 1. If requested funding is for plant or line of business expansions, consideration may also be given to projected results and, therefore, certain loans may be granted when historical debt service coverage is less than 1.25 to 1. Real property taken as primary collateral for a loan is valued by an independent appraiser in accordance with federal banking regulations, and the appraisal is then subject to an internal review in accordance with such regulations. Equipment serving as primary collateral for a loan is generally valued by an independent equipment appraiser. The Company will generally obtain a Phase I environmental report completed in accordance with the standards of the American Society for Testing and Materials on any commercial real property to be mortgaged. Additional environmental reporting and remediation are required prior to closing if environmental issues either exist or are suspected. The Company's standard underwriting criteria details the maximum advance rates which are utilized for each type of collateral. Commercial property is generally given a collateral value for underwriting purposes equal to 80% of the appraised value; finished goods and raw material are generally valued at 50% of book value; trade accounts receivable under 90 days are generally valued at 75% of book value. 10 Although the maximum prescribed collateral values are generally utilized in the Company's analyses, there may be instances where the maximum values are reduced or, due to the borrower's situation, special consideration may be given to applications exceeding the general standards. Proposed exceptions to the Company's loan policy are reviewed by the approving officers and Loan Committee, when applicable. Decisions to approve such loans are made on a case-by-case basis and depends upon the overall creditworthiness of the applicant. The overall trends in underwriting exceptions are monitored by the Chief Credit Officer and the Company's Loan Committee. International Lending Services and Products The Company's International Lending business units underwrite revolving lines of credit to U.S. manufacturers, short and medium term loans to foreign buyers of U.S. goods, short term loans to U.S. buyers of foreign goods, and letters of credit issued in connection with such facilities. The International lending business units include the following:
Business Units/Territory Products Used Description - ------------------------ ------------- ------------ Trade Finance (principally the Working capital line of credit; 90% One year revolving line of credit Northeast, Mid-atlantic and Midwest) Ex-Im guaranteed; indexed to U.S. to U.S. manufacturers Prime, variable daily; U.S. dollar collateralized by export accounts denomination receivable and inventory 90-360 day U.S. import term loan; Financing of accounts receivable discount note; 95% privately insured due from U.S. manufacturer purchasing goods from international emerging markets; unsecured Americas (principally Argentina, Short and medium term loan; 100% 1- to 5-year term loans to foreign Brazil, Central America, Mexico) guaranteed by Ex-Im Bank or privately purchasers of qualified U.S. made insured (generally 95%); indexed to inventory and equipment; unsecured Asia/Africa/Europe (principally 6-month LIBOR, variable semi-annually; or secured by equipment India, Indonesia, Korea, Philippines, U.S. dollar denominated Poland, South Africa, Turkey and West Africa)
Ex-Im Bank is an independent agency of the U.S. whose mission is to facilitate export financing of U.S. goods and services by neutralizing the effect of export credit subsidies from other governments and absorbing credit risks that the private sector will not accept. The Company 11 utilizes the Ex-Im Bank's loan guarantee and insurance programs designed to support small and medium size U.S. exporters. In 1997 the Company received Ex-Im Bank's annual "Small Business Bank of the Year" award. International Lending - United States Export Working Capital and U.S. Import Loan Products and the Origination Process The typical U.S. client for the Company's international products is a U.S.-based manufacturer with sales of $2 million to $25 million and export financing needs. The Trade Finance business unit handles these clients, which comprise the same target profile as for the Company's domestic loan officers. The one-year revolving Ex-Im Bank working capital lines of credit are indexed to WSJ Prime and adjust daily. The primary collateral for these loans includes export-related accounts receivable and inventory. The accounts receivable are generally insured under an Ex-Im Bank insurance policy, private export credit insurance or an acceptable letter of credit. Open accounts receivable may qualify as collateral if approved in advance by the Company and Ex-Im Bank. Borrowers must submit borrowing base certificates to the Company to evidence the availability of acceptable collateral when an advance is requested, and monthly thereafter. The Company is one of approximately twelve lenders in the U.S. with "AA Level Delegated Authority" status with respect to Ex-Im Bank's working capital loan guarantee program and, therefore, has authority to approve working capital lines up to $5 million per borrower, up to an aggregate portfolio of $75 million without prior Ex-Im Bank approval. In the event of a loan default, the Company and Ex-Im Bank share in all loan recovery proceeds on a pari passu basis in accordance with the 90% guaranteed/10% unguaranteed ratio. The Company also has the responsibility to ensure that loans are underwritten, documented and funded in accordance with Ex-Im Bank polices and procedures in order to avoid loss of the guarantee. The loans made by the Company to finance the purchase by U.S. manufacturers of goods from international emerging markets are unsecured loans which are discounted at origination to yield a market rate. The Company has obtained a credit risk policy from a private sector insurance company to insure loans made under this program. In the event of a loan default, the insurance company will pay the Company, subject to certain deductibles, 95% of the principal balance, plus accrued interest. The Company has the responsibility to ensure that loans are underwritten, documented and funded in accordance with the insurance policy in order to avoid loss of the insurance. 12 International Lending - Emerging Markets Short and Medium Term Loan Products and the Origination Process Emerging market-based clients of the Company's Americas and Asia/Africa/Europe business units are typically small and medium size manufacturers requiring financing to purchase equipment, components and raw materials from the U.S. The Company primarily uses Ex-Im Bank guarantee and insurance programs to mitigate its credit risk to the borrower. In 1998, as an alternative to the Ex-Im Bank product, the Company obtained a credit risk insurance policy for short and medium term loans to manufacturers in certain international emerging markets from a private sector insurance company. The underwriting criteria are substantially the same under both the Ex-Im Bank and privately insured programs, although Ex-Im Bank imposes U.S. content measurements. The Ex-Im Bank guarantee or insurance provides a 100% cover on the medium term loans and generally a 95% cover on the short-term loans. The private sector insurance policy generally insures 95% of the short and medium term loans. With the private sector insurance policy, the Company has discretionary credit approval authority for loans up to $750,000 which meet the underlying criteria of the private sector insurance policy. The Company tends to utilize the insurance policy for smaller dollar requests to facilitate approval time. Medium term loans are generally 3-5 years in term, and finance the acquisition of qualified U.S.-made capital goods. The Ex-Im Bank program allows the financing of up to the lower of 85% of purchase price or 100% of U.S. content. Certain other U.S. content and product requirements must also be met. The loans range in size from $150,000 to $10 million and are U.S. dollar-denominated. Although the purchase of the equipment is being financed, the Ex-Im Bank loans are unsecured; the Company relies on the borrower's cash flow and the 100% Ex-Im Bank guarantee or Ex-Im insurance. The Company does obtain a security interest in the equipment being underwritten pursuant to the private sector insurance policy. International lending officers are responsible for marketing, underwriting, servicing, monitoring and collecting their portfolios of loans. Because the medium term loans are fully amortizing with semi-annual payments, there is less post-closing analysis required for performing loans than for other types of loans made by the Company. In the event of default, Ex-Im Bank handles the liquidation of Ex-Im guaranteed medium term loans and pays the Company 100% of the principal balance, plus accrued interest. See "Delinquency and Collection Activities." International Lending Underwriting International lending officers receive and assemble initial applications, analyze the creditworthiness of proposed borrowers, prepare memoranda, and aided by staff prepare the required Ex-Im Bank and private sector insurance loan application forms and conduct credit and 13 trade reference checks. For short and medium term loans, in-country Master Agents, where applicable, aid in the transaction by obtaining required financial or operational data from borrowers and generally assist in the loan origination and closing process. The Company's international lending officers will often visit the prospective U.S. borrower's place of business and perform on-site inspections. The Company will generally instruct its in-country Master Agents to make such inspections of foreign borrowers. Although certain of the international loans are unsecured, site inspections are conducted in most cases because such information is helpful in assessing a borrower's operations. The approval process is substantially similar to that followed by the commercial lending officers. The Credit Policy Officer reviews the memorandum and supporting file for compliance with internal Company policies as well as applicable Ex-Im Bank or private insurer program parameters. As with the domestic lending, exceptions to the Company's and Ex-Im Bank's loan policies are entertained on a case-by-case basis by the approving loan officers, and acceptance of exceptions depends upon the overall creditworthiness of the applicant. Working capital lines of credit are collateralized by export-related inventory and accounts receivable less than 90 days old; such collateral has maximum prescribed collateral values of 75% and 90%, respectively. As is the case with respect to domestic loans, the collateral value required to support a loan is based on the borrower's individual circumstances, and applications exceeding the Company's general standards may receive special consideration. For short and medium term loans, debt service coverage and operating history are reviewed in the underwriting process. The lending officer also considers the availability to the borrower of U.S. dollars and other "hard" currency revenue sources from sales to the U.S. and other stable currency markets. While most working capital lines of credit are within the Company's "AA Delegated Authority", applications which do not comply with and/or are above the Company's authority, and all Ex-Im Bank short and medium term loans, require Ex-Im Bank approval. U.S. import loans in excess of $500,000, and short and medium term loans in excess of $750,000, require approval from the private sector insurance company if they are to carry such insurance. Capital Markets and Loan Servicing Capital Markets Activities The Capital Markets business unit was established in July 1996 to assume responsibility for the non-recourse, servicing-retained sale of SBA, USDA and Ex-Im Bank government guaranteed loans and to identify markets for the sale of non-guaranteed mortgage, term and revolving loans on a non-recourse, servicing-retained basis. In 1998, the Capital Markets business unit completed the two securitizations of the unguaranteed portions of SBA loans and certain whole commercial loans and a sale of revolving lines of credit to a commercial paper conduit. Such 14 capital markets activities allow the Company to leverage capital, replenish liquidity, mitigate the risk of balance sheet exposure to any single borrower, and reduce reliance on government guaranteed loan programs for revenue. The guaranteed portions of SBA and USDA loans are generally sold during the quarter of origination on a single loan basis to established brokers. Brokers generally pool the SBA guaranteed portions. USDA loans are individually sold. The guaranteed portions of the Ex-Im Bank loans and lines of credit are sold to various parties, including Private Funding Export Funding Corporation ("PEFCO"). PEFCO is a private corporation established with the support of the United States Treasury and Ex-Im Bank to assist in financing exports of U.S. goods and services by making direct loans to foreign importers of U.S. made goods, and to provide liquidity support for private sector lending utilizing Ex-Im Bank programs. The Company is a 1% shareholder and one of among approximately 50 PEFCO shareholders, with a common stock investment of $599,000 at December 31, 1998. SBA and USDA regulations permit the Company to sell a portion of the unguaranteed amount of loans originated under their respective programs. In accordance with SBA and USDA regulations, the Company is required to retain a 5% interest in the unguaranteed portion of the loan when some of the unguaranteed portion is sold on a loan-by-loan basis. SBA regulations require that the Company hold retained interests in the unguaranteed portion of securitized loans equal to 10% of the transaction. Upon the sale of such unguaranteed portions, the Company shares in the payment stream and collateral on a pari passu basis with all (guaranteed and unguaranteed) investors, beginning with the initial recovery. In 1998 the Company completed commercial loan securitization transactions and sales to a commercial paper conduit involving the issuance of $113.3 million of senior and subordinated securities. Approximately 56% of the $117.1 million loans included in the securitizations were originated in 1998. In connection with the SBA Loan Backed Series 1998-1, completed in June 1998, a $24.2 million Class A certificate, rated AA by Moody's Investor Services, Inc. was sold in a private placement. A $2.7 million Class B certificate, rated BBB by Moody's Investor Services, Inc. is held by the Company. In connection with the Business Loan Trust 1998-A backed by commercial term loan securitization and completed in December 1998, a $55 million senior note, rated AAA by Duff and Phelps Credit Rating Co. and Aaa by Moody's Investor Services, Inc. was sold in a private placement. A $3.2 million A rated note, a $3.2 million BBB rated note and a $3.1 million unrated note are held by the Company from this securitization. A $21.4 million sale to an asset-backed commercial paper conduit facility also occurred in December. The Company holds a $3.8 million subordinated interest to the senior $21.4 million loans sold in the commercial paper sale. The Capital Markets business unit has developed a list of potential buyers of non-guaranteed mortgage loans, term loans and revolving lines of credit and devotes substantial resources to the identification of such buyers. A primary objective in the negotiation and sale of such loans is the Company's retention of sole responsibility for borrower contact. Investors meet with borrowers only in rare circumstances, and generally rely on the Company to prudently service and monitor 15 lending relationships. The Company believes that this is important to maintain client relationships and also reflects investor confidence in its servicing ability and reputation. Loan Servicing Activities At December 31, 1998, the total loan portfolio managed by the Company was $779.1 million as compared to $573.5 million at December 31, 1997. The Company services substantially all of the loans it originates, whether securitized, sold to investors or held in portfolio. Servicing includes collecting payments from borrowers and remitting applicable payments and required reports to any investors; accounting for principal, interest and any real estate taxes or other escrow receipts and payments; contacting delinquent borrowers; supervising foreclosures; and liquidating collateral when required. Other than tasks performed by the assigned lending officers, loan servicing functions are centralized in the Hartford, Connecticut headquarters. The Company receives servicing fees on loans serviced for others in varying amounts, as determined under the particular terms of the sale. Management believes that servicing most loans originated enhances the Company's relationship with borrowers. This contact allows the Company to continue to offer its loan and deposit products to clients who may need additional financing. Further, such arrangements provide an additional and profitable revenue stream that is less cyclical than the business of originating and selling loans. After a loan is closed, the Loan Servicing business unit reviews the loan files to confirm that loans were originated in accordance with any applicable government guarantee program guidelines and Company policies. Thereafter, the loan officers and the Loan Review business unit conduct periodic reviews of the borrower's financial condition. Delinquency and Collection Activities The assigned loan officer retains responsibility for routine collection of his or her portfolio. The Company attempts to collect all loans on a 30-day basis, leaving very few loans past due 30 days or more at any month end. An officer's initial collection efforts generally begin when an account is 15 days past due. At 20 days past due, a reminder notice is sent to the borrower and the officer again attempts to contact the borrower to determine the reason for the delinquency and if the account will be brought current. If a borrower is unable to make a payment within 30 days of the due date as of month-end, and has not made acceptable alternative arrangements with the Company, the officer issues a past due letter requiring the borrower to make the required payment within 10 business days by certified or cashiers check. If payment is not remitted on time, the account is transferred to the Company's Asset Recovery business unit for consideration of additional collection procedures, including issuance of a demand letter and possible liquidation of collateral. 16 The Asset Recovery business unit is responsible for contacting the borrower and analyzing its current and projected financial condition, the reasons leading to the delinquency and the value of the collateral available to the Company. The Asset Recovery Officer then proposes a workout plan to the Chief Credit Officer and other involved members of senior management. The Asset Recovery business unit will also provide any required notices and generally seek to comply with applicable government guarantee program or investor requirements. If a modification of loan terms or other acceptable workout cannot be achieved within a reasonable time frame, the Company will liquidate the collateral securing the loan. The Company prefers not to take title to real property or equipment unless required to facilitate the collection process. The Company solicits assistance from the principals of the delinquent borrower to effect the liquidation of any property, with title remaining in the borrower's name, thereby avoiding a lengthy foreclosure or repossession process and exposure to the Company regarding environmental or other liability issues. The Company has generally found principals of borrowers to be cooperative in assisting the Company to liquidate collateral efficiently. The Company follows the same general workout procedures for substantially all of the loans serviced. If a loan carries an SBA guarantee, the responsible SBA District Office will be notified of the delinquency and will be presented with a liquidation plan within 60-90 days of such delinquency. Unless the SBA objects, the Company will carry out the terms of the liquidation plan. As a Preferred Lender, the Bank has responsibility and authority over liquidation procedures on all SBA guaranteed loans serviced. Any loss after liquidation of collateral is allocated pro rata between the guaranteed and unguaranteed portions of an SBA Loan. After an SBA loan becomes 60-90 days past due, the SBA, at the Company's request, will repurchase the guaranteed portion of the principal balance of the loan at par from the secondary market investor, together with accrued interest covering a period of up to 120 days. USDA procedures require that the Company file a liquidation plan when it is believed action should be taken on a delinquent loan, which is generally when the loan is 60-90 days delinquent. The USDA has 30 days to review the plan. The Company will then execute the approved plan or work with the USDA to arrive at a mutually acceptable plan. Any loss after liquidation of collateral is allocated pro rata between the guaranteed and unguaranteed portions of the USDA loan. The holder of the guaranteed portion may request that the USDA repurchase the guaranteed portion at any time, or the Company will request repayment on such holder's behalf when liquidation is complete. The USDA does not impose any restrictions on the number of days for which interest will be paid on the guaranteed portions. The liquidation of delinquent working capital and medium term Ex-Im Bank loans is handled by Ex-Im Bank. The Company may submit a claim for repurchase at any time between 30 and 120 days after a delinquency occurs, but at no time may such claim be made more than 150 days after the delinquency. Ex-Im Bank will make payment under its guarantee within 30 days after acceptance of the Company's request. In the event of default on a private sector insured loan, the Company handles the liquidation of the loan during a 150 day waiting period. At the end of the waiting period, subject to certain 17 deductibles being satisfied, the private sector insurance company pays the Company 95% of the principal balance, plus accrued interest. At that time the insurance company assumes the liquidation of the loan. The Company retains responsibility for the proper documentation and servicing of all loans serviced for others, and may incur losses related to such loans if it is found to be negligent by a guaranteeing agency, insurer or investor in carrying out these duties. Unguaranteed and uninsured loans or unguaranteed and uninsured portions of loans held by investors are subject to negotiated servicing agreements, which in some cases, provide investors with the option of assuming responsibility for all collection efforts after a loan becomes 60-90 days delinquent. If the Company is contractually responsible for collection efforts, the servicing agreements generally require that the investor pre-approve liquidation actions. Credit Risk Management The Chief Credit Officer has primary responsibility for credit risk management, ensuring the appropriateness of underwriting criteria and application thereof, the implementation of RISCOPE/sm/, (the Company's proprietary commercial risk assessment model), and the independent analyses of loans by the Loan Review business unit. The Credit Policy Officer, who reports to the Chief Credit Officer, reviews all credit memoranda for compliance with the requirements of government guarantee programs and Company credit policies. If, based on particular facts and circumstances, policy exceptions are proposed by lending officers, the Credit Policy Officer will ensure that all appropriate policy exceptions are documented and approved by the authorized party. The Chief Credit Officer periodically evaluates the nature and trends of such exceptions, reporting them quarterly to the Board of Directors' Loan Committee. The Bank "risk rates" its loan portfolio by monitoring changes in the financial condition of borrowers, assessing overall economic trends, and assigning numerical rating to individual loans. The Company applies a nine tiered risk rating system. The rating system, in conjunction with other available quantitative and qualitative data, is utilized to assist management in its quarterly evaluation of the adequacy of the Allowance for Loan Losses. The assigned lending officer has primary responsibility for risk ratings, and such officer's decisions are periodically reviewed by the Loan Review business unit. Risk ratings are based on the borrower's operating cash flow, industry, product line, earnings, assets, liability, management experience, debt capacity, and prior credit history with the Company. The Company has developed a proprietary risk analysis model, RISCOPE/sm/, used in the initial underwriting, post-closing loan monitoring and rating process by lending officers and the Loan Review business unit. RISCOPE/sm/ assists the Company in quantifying the credit risk of commercial clients. The model takes into account quantitative and qualitative factors and was 18 designed to analyze the Company's primary client base: small and medium size manufacturers. Additionally, the model helps management identify weaknesses in credits earlier than might otherwise be done if payment default were their only manifestation. The Loan Review business unit reviews the loan portfolio to evaluate the appropriateness of officer risk ratings and overall trends in the portfolio. Loan Review results are reported to the Loan Committee of the Board quarterly. Private Banking Historically, the Company's Private Banking business unit provided funding for the Company by managing its deposit base, which consisted of demand deposits, money market accounts and time certificates of deposits, by targeting the commercial depository accounts of small and medium size manufacturers, as well as the personal accounts of their principals, and by offering a full array of financial products. Subsequent to the sale of the Company's checking, savings and money market accounts, the Private Banking business unit will continue to solicit retail certificates of deposit. The Company has entered into a contractual agreement with CIGNA Financial Services, Inc. with respect to providing investment, brokerage and cash management services. The Company's Private Banking business unit has not yet introduced these services as legal and regulatory diligence is currently underway. Once introduced, all investment services will be supported by CIGNA Financial Services' registered representatives. Competition The Company competes for clients with other commercial and savings banks, finance companies, mutual funds, insurance companies, brokerage and investment banking firms and certain other nonfinancial institutions, many of whom are able to devote far greater resources than the Company to market, underwrite and service loans to the same client base. The Company competes by emphasizing its expertise and knowledge of its clients' businesses, commitment to service, flexibility in structuring financial transactions, and strong relationships. Through the combined utilization of government guaranteed loan programs, the Company is able to provide flexible longer-term financing than would otherwise be available to borrowers. Regulation and Supervision Holding Company Regulation The Company is registered as a bank holding company and regulated and subject to periodic examination by the Federal Reserve Bank ("FRB") under the Bank Holding Company Act ("BHCA"). 19 Pursuant to FRB regulations, the Company is limited to the business of owning, managing or controlling banks and engaging in certain other bank-related activities, including those activities that the FRB determines from time to time to be closely related to banking. The BHCA requires, among other things, the prior approval of the FRB if a bank holding company proposes to (i) acquire all or substantially all of the assets of a bank, (ii) acquire direct or indirect ownership or control of more than 5% of the outstanding voting stock of any bank (unless it already owns a majority of such bank's voting shares) or (iii) merge or consolidate with any other bank holding company. As a bank holding company, the Company is required by the FRB to act as a source of financial strength and to take measures to preserve and protect the Bank. As a result, the Company may be required to inject capital in the Bank if such a need arises. The FRB may charge a bank holding company such as the Company with unsafe and unsound practices for failure to commit resources to a subsidiary bank when required. To be considered regulatory capital, loans from the Company to the Bank must be on terms subordinate in right of payment to deposits and to most other indebtedness of the Bank. The FRB, OCC and Federal Deposit Insurance Corporation (the "FDIC") collectively have extensive enforcement authority over bank holding companies and national banks in the United States. This enforcement authority, initiated generally for violations of law and unsafe and unsound practices, includes, among other things, the ability to assess civil money penalties, to initiate injunctive actions and to terminate deposit insurance in extreme cases. The bank regulatory agencies' enforcement authority was substantially enhanced by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") and the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). FIRREA significantly increased the amount of civil money penalties and expanded the grounds for imposing such penalties. Also, under FIRREA, should a Bank failure result in a loss to the FDIC, any other FDIC-insured subsidiaries of the Company could be required to compensate the FDIC for the estimated amount of the loss. Additionally, pursuant to FDICIA, the Company in the future could have the potential obligation to guarantee the capital restoration plans of any undercapitalized FDIC-insured subsidiaries it may control. Interstate Banking As of September 29, 1995, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "RNA") permitted adequately capitalized and managed bank holding companies to acquire control of banks in any state. Additionally, beginning on June 1, 1997, the RNA enabled banks to branch across state lines, although individual states are authorized to permit interstate branches earlier or to elect to opt out entirely. 20 Regulation of the Bank General The Bank, as an FDIC-insured national bank, is subject to regulation primarily by the OCC, and secondarily by the FDIC. As a national bank, the Bank is a member of the Federal Reserve System and its operations are subject to certain FRB regulations. Various other federal and state consumer laws and regulations also affect the operations of the Bank. As a national bank, the Bank may be able to engage in certain activities approved by the OCC which the FRB would not necessarily approve for the Company. The OCC has been particularly aggressive in recent years in allowing national banks to undertake an ever-increasing range of securities and insurance activities. Along these lines, pursuant to certain revisions of the OCC's regulations pertaining to banking activities effective on December 31, 1996, national banks are permitted on a case-by-case basis to operate subsidiaries engaging in activities not permissible for the Bank itself. Although the revised regulations do not authorize any specific new activities, it is expected that national banks, if eligible and if they obtain the approval of the OCC, will use these regulations to expand further into the insurance and securities businesses. The revised OCC regulations contain "fire walls" intended to protect a national bank from the risks taken by a subsidiary, including imposing a 10% cap on the amount of bank capital that may be invested in a new subsidiary, as well as requirements that extensions of credit to an operating subsidiary be fully-collateralized and that transactions between the bank and subsidiary be conducted at arm's-length. The parent national bank's exposure to any losses the subsidiary may incur are limited to the bank's equity investment in the subsidiary. Parent national banks are required to be well-capitalized both before and after an investment is made. Since OCC approval is required on a case-by-case basis for an eligible bank to engage in activities not permissible for the bank to conduct directly, the effect of these revised regulations on the operations of national banks is unclear. Further, it is expected that Congress will consider new banking legislation in the near future addressing these revisions. As a national bank, the Bank may ordinarily lend up to 15% of its capital on an unsecured basis to any one borrower, and may lend up to an additional 10% of its capital to that same borrower on a fully secured basis involving readily liquid collateral having an established market value as determined by reliable and continuously available price quotations, and equal at least to the amount borrowed. In addition, there are various other circumstances in which the Bank may lend in excess of such limits, including authority to lend up to 35% of capital and surplus when the loan is secured by documents of title to readily marketable staples, unlimited authority if loans are guaranteed by a U.S. government agency, and certain other exceptions relevant to international trade finance. Federal law also imposes additional restrictions on the Bank with respect to loans and credit to certain related parties and transactions with the Company's principal stockholders, officers, directors and affiliates. Extensions of credit to such persons (i) must be made on substantially 21 the same terms (including interest rates and collateral) as, and follow credit underwriting procedures not less stringent than, those prevailing for comparable transactions with members of the general public, and (ii) must not involve more than the normal risk of repayment or present other unfavorable features. Capital Adequacy The federal bank regulatory authorities have adopted risk-based capital guidelines to which the Bank is subject. The guidelines establish a systematic framework that makes regulatory capital requirements more sensitive to differences in risk profile among banking organizations, takes off-balance sheet exposures into explicit account in assessing capital adequacy, and minimizes disincentives to holding liquid, low-risk assets. These risk-based capital ratios are determined by allocating assets and specified off-balance sheet financial instruments into four weighting categories, with higher levels of capital required for the categories perceived as representing greater risk. Under these guidelines, a banking organization's capital is divided into two tiers. The first tier ("Tier 1") includes common equity, perpetual preferred stock (excluding auction rate, money market or remarketable issues) and minority interests held by others in a consolidated subsidiary, less goodwill and any disallowed intangibles. Supplementary ("Tier 2") capital includes, among other items, cumulative and limited-life preferred stock, mandatory convertible securities, subordinated debt and the allowance for loan and lease losses, subject to certain limitations and less required deductions as provided by regulation. Banking organizations are required to maintain a risk-based capital ratio of total capital (Tier 1 plus Tier 2) to risk-weighted assets of 8%, of which at least 4% must be Tier 1 capital. Federal bank regulatory authorities may, however, set higher capital requirements when a banking organization's particular circumstances warrant. As a general matter, banking organizations are expected to maintain capital ratios well above the regulatory minimums. In addition, federal bank regulatory authorities have established guidelines for a minimum leverage ratio (Tier 1 capital to average total assets). These guidelines provide for a minimum leverage ratio of 3% for banking organizations that meet certain specified criteria, including excellent asset quality, high liquidity, low interest rate exposure and the highest regulatory rating. Banking organizations not meeting these criteria or which are experiencing or anticipating significant growth are required to maintain a leverage ratio which exceeds the 3% minimum by a least 100 to 200 basis points. The risk based capital and leverage ratios of the Bank as of December 31, 1998 and December 31, 1997 are set forth in Note 7 to the Company's Consolidated Financial Statements. Failure to meet applicable capital guidelines could subject a bank or bank holding company to a variety of enforcement remedies available to the federal bank regulatory authorities, including limitation on the ability to pay dividends, the issuance of a capital directive to increase capital and, in the case of a bank, the termination of deposit insurance by the FDIC or (in severe cases) the appointment of a conservator or receiver. 22 Dividends The Bank is subject to legal limitations on the frequency and amount of dividends that can be paid to the Company. The OCC, in general, also has the power to prohibit the payment of dividends by the Bank which would otherwise be permitted under applicable regulations if the OCC determines that such dividends would constitute an unsafe or unsound practice. OCC approval is required for the payment of dividends by the Bank in any calendar year if the total of all dividends declared by the Bank in that year exceeds the current year's net income combined with the retained net income of the two preceding years. "Retained net income" means the net income of a specified period less any common or preferred stock dividends declared for that period. Moreover, no dividends may be paid by a national bank in excess of its undivided profits account. In addition, the FRB and the FDIC have issued policy statements which provide that, as a general matter, insured banks and bank holding companies may pay dividends only out of current operating earnings. There are also statutory limits on other transfers of funds to the Company and any other future non-banking subsidiaries of the Company by the Bank, whether in the form of loans or other extensions of credit, investments or asset purchases. Such transfers by the Bank generally are limited in amount to 10% of the Bank's capital and surplus to the Company and any such future subsidiary of the Company, or 20% in the aggregate to the Company and all such subsidiaries. Furthermore, such loans and extensions of credit are required to be fully collateralized in specified amounts depending on the nature of the collateral involved. FDICIA FDICIA was enacted on December 19, 1991. It substantially revised the bank regulatory and funding provisions of the Federal Deposit Insurance Act and made significant revisions to other federal banking statutes. A central feature of FDICIA is the requirement that the federal banking agencies take "prompt corrective action" with respect to depository institutions that do not meet minimum capital requirements. Pursuant to FDICIA, the federal bank regulatory authorities have adopted regulations setting forth a five-tiered system for measuring the capital adequacy of the depository institutions they supervise. Under these regulations, a depository institution is classified in one of the following capital categories: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." Based on the Bank's current regulatory capital position, management believes that the Bank is "well capitalized." FDICIA generally prohibits the Bank from making any capital distribution (including payment of a cash dividend) or paying any management fees to the Company if the Bank would thereafter be undercapitalized. Undercapitalized depository institutions are subject to growth limitations and are required to submit a capital restoration plan acceptable to federal banking agencies. If a 23 depository institution fails to submit an acceptable plan, it is treated as if it is "significantly undercapitalized." Significantly undercapitalized depository institutions may be subject to a number of other requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, reduce total assets, and stop accepting deposits from correspondent banks. Critically undercapitalized institutions are subject to the appointment of a receiver or conservator, generally within 90 days of the date of such institution is determined to be critically undercapitalized. Community Reinvestment Act The Federal Community Reinvestment Act (the "CRA") requires the OCC to evaluate the Bank's performance in helping to meet the credit needs of the community. The Bank defines its CRA marketplace as Hartford County. This definition is not intended to restrict the availability of credit services throughout the Bank's general service area, but represents a special commitment the Bank has made to provide lending and depository services to the community. As a part of the CRA program, the Bank is subject to periodic examinations by the OCC and maintains comprehensive records of its CRA activities for this purpose. Following its most recent examination in March 1998, the Bank received a rating of "Satisfactory." The Bank is specifically interested in making financing available to small and medium size manufacturers in its defined lending area. The Bank evaluates credit applications without regard to race, color, religion, national origin, gender, marital status or age, and does not discriminate against any loan applicant whose income may come entirely or in part from any public assistance program, or against any applicant who has exercised in good faith any right under the Consumer Protection Act. The Company maintains preferred status with the SBA, USDA and Ex-Im Bank which enables it to provide access to credit products that might otherwise be unavailable. ITEM 2. PROPERTIES The Company leases approximately 50,000 square feet in Hartford, Connecticut to house its headquarters and lending and support staff. The Company maintains leased space for representative offices in Boston and Springfield, Massachusetts; Providence, Rhode Island; Morristown, New Jersey; Rochester, New York; Philadelphia and Pittsburgh, Pennsylvania; Washington, D.C.; Detroit, Michigan; and Cleveland, Ohio. The Company's leases generally provide for two five-year renewal options and options on additional space. Management believes that its existing facilities are adequate for their present and proposed uses and that suitable facilities will be available on reasonable terms for any additional space required. 24 ITEM 3. LEGAL PROCEEDINGS Neither the Company nor the Bank is involved in any legal proceedings except for routine litigation incidental to the business of banking, none of which is expected to have a material adverse effect on the Company's financial position, results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of 1998 to a vote of security holders through solicitation of proxies or otherwise. 25 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information required by this item may be found on the inside back cover of the Company's 1998 Annual Report to Shareholders, which is incorporated by reference and is filed as Exhibit 13.1 hereto. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA Information required by this item may be found on page 4 of the Company's 1998 Annual Report to Shareholders, which is incorporated by reference and is filed as Exhibit 13.1 hereto. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information required by this item may be found on pages 5 through 20 of the Company's 1998 Annual Report to Shareholders, which is incorporated by reference and is filed as Exhibit 13.1 hereto. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information required by this item may be found on pages 16 through 18 of the Company's 1998 Annual Report to Shareholders, which is incorporated by reference and is filed as Exhibit 13.1 hereto. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information required by this item may be found on pages 21 through 43 of the Company's 1998 Annual Report to Shareholders, which is incorporated by reference and is filed as Exhibit 13.1 hereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEMS 10 - 13 Information required by these items may be found in the Company's Proxy Statement which is incorporated by reference. 26 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K A. The following documents are filed as a part of this report: 1. Financial Statements set forth on pages 21 through 43 of the 1998 Annual Report to Shareholders which is filed herewith as Exhibit 13.1. (i) Report of Independent Accountants (ii) Consolidated Balance Sheets as of December 31, 1998 and 1997 (iii) Consolidated Statements of Income for the Years Ended December 31, 1998, 1997 and 1996 (iv) Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1998, 1997 and 1996 (v) Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 2. Financial Schedules: None required. 3. Exhibits: Exhibit Number Description ------ ----------- 3.1 Amended and Restated Certificate of Incorporation of the Registrant.* 3.2 Amended and Restated By-laws of the Registrant.* 10.1 Employment Agreement among Registrant, First National Bank of New England and Brett N. Silvers dated April 15, 1994; as amended by Letter Agreement dated July 3, 1997.* 10.2 Promissory Note of Brett N. Silvers, payable to the Registrant, dated June 30, 1994, as amended.* 10.3 Stock Pledge Agreement, dated June 30, 1994, between the Registrant and Brett N. Silvers, as amended.* 10.4 Amended and Restated 1996 Stock Option Plan.* 10.5 1994 Incentive Stock Option Plan, as amended.* 10.6 401(k) Plan.* 10.7 Lease between Cambridge One Commercial Plaza, LLC and the Bank dated June 1, 1997.* 10.8 First Amendment of Lease between Cambridge One Commercial Plaza, LLC and the Bank dated November 30, 1998. 27 10.9 Second Amendment of Lease between Cambridge One Commercial Plaza, LLC and the Bank dated as of March 26, 1999. 10.10 Employment Agreement between the Bank and Leslie A. Galbraith dated August 25, 1997.* 10.11 Employment Agreement Amendment between the Bank and Leslie A. Galbraith dated December 2, 1998. 10.12 Revolving Commercial Loan Warehouse and Security Agreement among Prudential Securities Credit Corporation, First National Bank of New England and First International Bancorp, Inc., dated as of December 4, 1998. 10.13 Loan Purchase and Servicing Agreement among FNBNE Funding Corp., First National Bank of New England, First Union National Bank, Variable Funding Capital Corporation, First Union Capital Markets, a division of Wheat First Securities, Inc. and Marine Midland Bank, dated as of December 23, 1998. 10.14 Pooling and Servicing Agreement between Marine Midland Bank and First National Bank of New England, dated as of May 31, 1998. 10.15 Sale and Servicing Agreement between FNBNE Business Loan Trust 1998-A and First National Bank of New England, dated as of December 1, 1998. 13.1 1998 Annual Report to Shareholders. 21.1 Subsidiaries of Registrant. 23.1 Consent of PricewaterhouseCoopers LLP 27.1 Financial Data Schedule for the Year Ended December 31, 1998. 99 Agreement for Purchase and Sale of Assets and Assumption of Liabilities between First National Bank of New England and Hudson United Bank, dated as of December 31, 1998.** * Denotes an exhibit which has previously been filed as an exhibit to the Company's Registration Statement on Form S-1, Commission File No. 333-31339. ** Denotes an exhibit which has previously been filed as an exhibit to the Company's Report on Form 8-K, Commission File No. 0-22861. B. Reports on Form 8-K. The Company did not file any Current Reports on Form 8-K during the quarter ended December 31, 1998. The Company did file a Report on Form 8-K dated January 8, 1999 to report the signing of the Agreement for Purchase and Sale of Assets and Assumption of Liabilities between First National Bank of New England (now known as First International Bank, N.A.) and Hudson United Bank, dated December 31, 1998. 28 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 29, 1999 First International Bancorp, Inc. By: /s/ Brett N. Silvers ----------------------------- Brett N. Silvers Chief Executive Officer Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: Signature Title Date --------- ----- ---- /s/ Brett N. Silvers - ------------------------- Brett N. Silvers Chief Executive Officer March 29, 1999 /s/ Michael R. Carter - ------------------------- Michael R. Carter Director March 29, 1999 /s/ Arnold L. Chase - ------------------------- Arnold L. Chase Director March 29, 1999 /s/ Cheryl A. Chase - ------------------------- Cheryl A. Chase Director March 29, 1999 /s/ Frank P. Longobardi - ------------------------- Frank P. Longobardi Director March 29, 1999 /s/ Leslie A. Galbraith - ------------------------- Leslie A. Galbraith Executive Vice President, March 29, 1999 Secretary and Treasurer 29 EX-10.8 2 FIRST AMENDMENT OF LEASE EXHIBIT 10.8 FIRST AMENDMENT OF LEASE ------------------------ The Parties agree to the following effective as of the date of this instrument: SECTION I. THE PARTIES. - --------- ----------- 1.1 CAMBRIDGE ONE COMMERCIAL PLAZA, LLC, a Connecticut limited liability company with a place of business in care of Cambridge Realty Partners, LLC, 280 Trumbull Street, Hartford, Connecticut 06103, is hereinafter referred to as "LANDLORD". 1.2 FIRST NATIONAL BANK OF NEW ENGLAND, a national banking association with a place of business at One Commercial Plaza, Hartford, Connecticut 06103, is hereinafter referred to as "TENANT". SECTION II. THE LEASE. - ---------- --------- Landlord and Tenant entered into a Lease Agreement dated as of June 1, 1997, for premises in the building known as One Commercial Plaza and located at 280 Trumbull Street, Hartford, Connecticut. The Lease Agreement is referred to herein as the "LEASE". All terms defined in the Lease shall have the same meaning in this instrument unless redefined in this instrument. SECTION III. AMENDMENTS TO THE LEASE. - ----------- ----------------------- 3.1 AMENDMENT TO SECTION 1.2 OF THE LEASE. ------------------------------------- The following is hereby added to Section 1.2 of the Lease at the end thereof: In addition, from and after the Expansion C Commencement Date (defined below), the Premises shall also include the premises set forth below: Expansion Space C 14,813 rentable square feet on the third floor. The foregoing corresponds to the hatched area shown on Exhibit B-7 ----------- attached hereto and hereby made a part of this Lease. Such space is hereinafter referred to as "Expansion Space C". Exhibit B-7 attached to this Amendment is hereby incorporated into and made part - ----------- of the Lease. 3.2 AMENDMENT TO SECTION 2.2 OF THE LEASE. ------------------------------------- The following is hereby added to Section 2.2 of the Lease at the end thereof: Landlord hereby leases to Tenant, and Tenant accepts from Landlord, Expansion Space C effective on the Expansion Space C Commencement Date, as such term is hereinafter defined. With respect to Expansion Space C, Tenant may give Landlord written notice at any time prior to October 15, 1999, that it has elected to add Expansion Space C to the Premises effective on any date prior to November 1, 1999, but not sooner than fifteen (15) days after such notice. Effective on the date specified in such notice, Expansion Space C shall be added to the Premises and considered part thereof. If Tenant does not give such notice specifying a date prior to November 1, 1999, then automatically effective on November 1, 1999 (the earlier of the date so specified or November 1, 1999, the "EXPANSION SPACE C COMMENCEMENT DATE"), without notice or writing of any kind, Expansion Space C shall be added to the Premises and considered part thereof. Upon the earlier of (i) November 1, 1999, or (ii) the date that is sixty (60) days after the Expansion Space C Commencement Date, the Base Rent shall increase by the amount of Base Rent attributable to Expansion Space C specified in Article 3 hereof, and additional rent shall increase to reflect the increase in Tenant[_]s Share attributable to Expansion Space C as specified in Article 4 hereof. Notwithstanding anything to the contrary herein, however, the parties acknowledge and agree that (i) [_]Base Operating Expenses[_] in respect of Expansion Space C shall mean and refer to Operating Expenses for calendar year 1998, (ii) "Base Taxes" in respect of Expansion Space C shall mean and refer to Taxes payable by Landlord with respect to the Property for the 1998 tax year, and (iii) "Base Electric Expenses" in respect of Expansion Space C shall mean and refer to Electric Expenses for calendar year 1998. 3.3 AMENDMENT TO SECTION 3.2 OF THE LEASE. ------------------------------------- The following is hereby added to Section 3.2 of the Lease at the end thereof: Upon the earlier of (i) November 1, 1999, or (ii) the date that is sixty (60) days after the Expansion Space C Commencement Date, the annual Base Rent shall increase by Two Hundred Eighty-one Thousand Four Hundred Forty-seven and 50/100 Dollars ($281,447.00), and each monthly installment of Base Rent shall increase by Twenty-three Thousand Four Hundred Fifty-three and 92/100 Dollars ($23,453.92). 3.4 AMENDMENT TO SECTION 4.3 OF THE LEASE. ------------------------------------- The following is hereby added to Section 4.3 of the Lease at the end thereof: Upon the earlier of (i) November 1, 1999, or (ii) the date that is sixty (60) days after the Expansion Space C Commencement Date, Tenant[_]s Share shall increase by 2.199 percent, and each monthly installment of additional rent shall increase accordingly. -2- 3.5 AMENDMENT TO SECTION 6.1 OF THE LEASE. ------------------------------------- The following is hereby added to Section 6.1 of the Lease at the end thereof: Tenant has inspected Expansion Space C and accepts it in its "as is" condition. Landlord and Tenant shall sign a Work Letter Agreement in the form attached hereto as Exhibit D-1 (the "EXPANSION ----------- SPACE C WORK LETTER"). Tenant shall perform Tenant's Work, as defined in the Expansion Space C Work Letter, in accordance with the terms of the Expansion Space C Work Letter and the terms of this Section 6 of the Lease. Exhibit D-1 attached to this Amendment is hereby incorporated into and made part - ----------- of the Lease. 3.6 AMENDMENT TO SECTION 24 OF THE LEASE. ------------------------------------ Section 24 of the Lease is hereby amended to delete the address of the Landlord to which notices shall be sent and to substitute the following therefor: Cambridge One Commercial Plaza, LLC c/o Cambridge Realty Partners, LLC 280 Trumbull Street Hartford, CT 06103 Attention: Mark R. Stone SECTION VI. BROKERS. - ---------- ------- Each party covenants, warrants and represents that it has not dealt with any real estate broker or salesman in the finding, negotiation or execution of this instrument. Each party agrees to indemnify and hold the other party harmless against any and all claims for any brokerage commissions and/or any finder's fee and all costs, expenses and liabilities in connection therewith, including without limitation, attorneys' fees, court costs and expenses, arising out of any dealings or negotiations the indemnifying party had with any broker and/or finder in the finding, negotiation or execution of this instrument. SECTION V. GENERAL CLAUSES. - --------- --------------- 5.1 Except as modified by this instrument, Landlord and Tenant ratify and confirm the terms of this Lease. 5.2 Terms defined in the Lease shall have the same meaning in this instrument as in the Lease unless redefined in this instrument. 5.3 The Lease and this instrument are binding on Landlord and Tenant and their respective heirs, successors and assigns. 5.4 Tenant's obligation to pay amounts due and owing prior to termination or expiration of the Lease shall survive such termination or expiration. -3- 5.5 The word "includes" means "includes without limitation". The word "include" means "include without limitation". The word "any" means "any and all". The word "until" means "unless and until". IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of November 30, 1998. Witnessed by: LANDLORD: CAMBRIDGE ONE COMMERCIAL PLAZA, LLC By: One Commercial Management, LLC, Its Managing Member By: Levstone Commercial Management Corp., Its Managing Member - ---------------------- By: /s/ Mark R. Stone -------------------------------- - ---------------------- Name: Mark R. Stone Title: Vice President TENANT: FIRST NATIONAL BANK OF NEW ENGLAND By: /s/ Leslie Galbraith - ---------------------- ------------------------------- Name: Leslie Galbraith - ---------------------- Title: Executive Vice President -4- EXHIBIT B-7 EXPANSION SPACE C EXHIBIT D-1 ------------ EXPANSION SPACE C WORK LETTER AGREEMENT This Expansion Space C Work Letter Agreement (the "WORK LETTER") is entered into by CAMBRIDGE ONE COMMERCIAL PLAZA, LLC, a Connecticut limited liability company with a place of business in care of Cambridge Realty Partners, LLC, 280 Trumbull Street, Hartford, Connecticut 06103 (hereinafter referred to as "LANDLORD"), and FIRST NATIONAL BANK OF NEW ENGLAND, a national banking association with a place of business at One Commercial Plaza, Hartford, Connecticut 06103 (hereinafter referred to as "TENANT") in connection with a certain First Amendment to Lease dated as of November ___, 1998, with respect to space at the building sometimes known as One Commercial Plaza and located at 280 Trumbull, Hartford Connecticut (the "LEASE"). Landlord and Tenant agree as follows: 1. Plans. All design and architectural services and mechanical plans ----- required for work in the Premises shall be prepared by Tenant at Tenant's sole cost and expense and shall be subject to Landlord's prior review and approval, which approval shall not be unreasonably withheld or delayed. Tenant acknowledges that approvals withheld or delayed because of action or inaction of any mortgagee are reasonably withheld or delayed. 2. Tenant's Work. Tenant accepts Expansion Space C in "as is" ------------- condition. 2.01 Tenant shall, prior to doing any construction work in Expansion Space C, submit to Landlord for Landlord's review and approval final and complete dimensional and detailed plans and drawings of partition layouts, including openings, ceiling and lighting layouts, and any and all other information as may be necessary to complete Expansion Space C, with a completion schedule for the same (all such plans are hereinafter referred to as "TENANT'S PLANS"), which Tenant's Plans shall be prepared at Tenant's sole cost and expense. Tenant shall provide to Landlord and any Superior Mortgagee, as defined in the Lease, a certificate that the work contemplated by Tenant[_]s Plans complies with all laws, permits, and governmental approvals. 2.02 Following Landlord's approval of Tenant's Plans, but not earlier than the Expansion C Commencement Date, Tenant shall proceed to improve and equip Expansion Space C in accordance with Tenant's Plans ("TENANT'S WORK"). 2.03 As a contribution toward the cost of improving and equipping Expansion Space C in accordance with Tenant's Plans, Landlord agrees, subject to the conditions set forth in this Section 2.03, to pay Tenant, at the time and in the manner hereinafter specified, an amount equal to the lesser of (i) $177,756.00 ($12.00 per rentable square foot) or (ii) the amount of the total actual costs incurred by Tenant for the labor and materials furnished or supplied by or on behalf of Tenant in completing Tenant's Work as shown on the final version of Tenant's Plans. Landlord's obligation to pay such amount for Expansion Space C is subject to the requirement that each of the following conditions, circumstances, or events shall first exist or occur: (i) Tenant shall have completed, or caused the completion of, all of Tenant's Work; (ii) a certificate of occupancy for the Expansion Space C shall have been issued by the appropriate governmental official and a copy thereof shall be delivered to Landlord by Tenant; (iii) the Lease shall be in full force and effect; (iv) Tenant shall be occupying the Expansion Space C under the Lease, without default thereunder; (v) Tenant shall have delivered to Landlord "as built" plans of Expansion Space C, certified by a registered architect or engineer to be substantially correct; (vi) Tenant shall have delivered to Landlord full and complete lien waivers of all persons or entities having lien rights with respect to Expansion Space C by reason of all labor and materials furnished or supplied in connection with Tenant's Work; and (vii) Tenant shall have delivered to Landlord and the City of Hartford, Department of Licenses and Inspections ("L&I"), a certified statement of actual costs as required by the Municipal Code of the City of Hartford then in effect, indicating that Tenant's Work has been duly performed and completed, setting forth the total actual costs for all labor and materials furnished or supplied to Tenant in connection with Tenant's Work, which statement shall be accompanied by evidence of all expenditures for labor and materials furnished or supplied to Tenant, including, but not limited to, receipted bills, cancelled checks, and any other items Landlord may request, together with a statement from L&I that it has accepted and approved the statement of actual costs submitted to it. To the extent feasible under the terms of Landlord[_]s financing facility, Landlord shall make reasonable efforts to pay the aforesaid amount to Tenant in cash promptly, but in no event later than thirty (30) days after Tenant shall have satisfied all of the above conditions. To the extent not so feasible, Landlord may issue to Tenant a credit against Base Rent during the two (2) months of the Lease term which immediately follow the month in which Tenant has satisfied all of the conditions set forth above, with any balance paid in cash within such 30-day period. 3. Tenant's Expense. Any materials or work described in the final ---------------- version of Tenant's Plans is included in Tenant's Work. Tenant's Work shall be performed and completed at Tenant's sole cost and expense, subject only to the contribution provided for in Section 2.03. 4. Special Work. ------------ (a) If upon receiving the final version of Tenant's Plans or any changes of final version of Tenant's Plans, it is Landlord's reasonable opinion that the work called for in Tenant's Plans includes Special Work (as such term is hereinafter defined), Landlord shall promptly notify Tenant thereof. Tenant shall revise Tenant's Plans to eliminate the need for such Special Work. -2- (b) The term "SPECIAL WORK" shall mean (i) work that would require changes to the Building or (ii) work that would require Landlord to expend funds to prepare the Premises for the performance of Tenant's Work. 5. Use of Landlord's Services and Equipment. In the event Tenant, its ---------------------------------------- servants, agents and independent contractors shall utilize any services of Landlord's personnel or shall utilize any equipment, machinery or other items which are the property of Landlord, in connection with Tenant's improvements to, or alterations of the Premises, Tenant shall pay Landlord for such services or equipment and machinery use, an amount equal to the market value of such services of equipment and machinery use. 6. Right of Set-Off. In the event Tenant shall be or become indebted ---------------- to Landlord pursuant to the provisions of this Work Letter, Landlord may deduct and set-off the amount of such indebtedness against the sum due Tenant pursuant to Section 2.03 of this Exhibit D-1. Any sum due Landlord from Tenant under the provisions of this Exhibit D-1 in excess of the sum due Tenant from Landlord pursuant to Section 2.03 of this Exhibit D-1, shall be deemed additional rent and shall be due and payable by Tenant with the first monthly installment of Base Rent coming due under the Lease after Tenant has satisfied all of the conditions set forth in Section 2.03 above (or in the exercise of reasonable diligence should have satisfied the same). In witness whereof the parties have executed this Work Letter Agreement as of November 30, 1998. Witnessed by: LANDLORD: CAMBRIDGE ONE COMMERCIAL PLAZA, LLC By: One Commercial Management, LLC Its Managing Member _________________ By: Levstone Commercial Management Corp. Its Manager _________________ By: /s/ Mark R. Stone ---------------------------- Its Vice President TENANT: _________________ FIRST NATIONAL BANK OF NEW ENGLAND _________________ By: /s/ Leslie Galbraith ------------------------------------- Its Executive Vice President -3- EX-10.9 3 SECOND AMENDMENT OF LEASE EXHIBIT 10.9 SECOND AMENDMENT OF LEASE ------------------------- The Parties agree to the following, effective as of the date of this instrument: SECTION I. THE PARTIES. - --------- ----------- 1.1 CAMBRIDGE ONE COMMERCIAL PLAZA, LLC, a Connecticut limited liability company with a place of business in care of Cambridge Realty Partners, LLC, 280 Trumbull Street, Hartford, Connecticut 06103, is hereinafter referred to as "LANDLORD". 1.2 FIRST INTERNATIONAL BANK, NATIONAL ASSOCIATION (formerly First National Bank of New England), a national banking association with a place of business at One Commercial Plaza, Hartford, Connecticut 06103, is hereinafter referred to as "TENANT". SECTION II. THE LEASE. - ---------- --------- Landlord and Tenant entered into a Lease Agreement dated as of June 1, 1997, for premises in the building known as One Commercial Plaza and located at 280 Trumbull Street, Hartford, Connecticut, which Lease Agreement was amended by a First Amendment of Lease dated November 30, 1998. The Lease Agreement, as so amended, is referred to herein as the "LEASE". All terms defined in the Lease shall have the same meaning in this instrument unless redefined in this instrument. SECTION III. AMENDMENTS TO THE LEASE. - ----------- ----------------------- 3.1 AMENDMENT TO SECTION 1.2 OF THE LEASE. ------------------------------------- The space consisting of 3,800 rentable square feet on the ground floor of the Building identified in the Lease as the "RETAIL SPACE" and depicted on Exhibit B-1 thereto is hereby withdrawn from the effect of the Lease and deleted - ----------- from the Premises. All possession and control of such Retail Space revert to Landlord, and Tenant surrenders all rights and claims thereto. The space consisting of 469 rentable square feet on the concourse floor of the building depicted on Exhibit B-8 attached hereto (the "ADDITIONAL STORAGE ----------- SPACE") is hereby submitted to the effect of the lease and added to the Premises. Exhibit B-8 attached hereto is hereby made part of the Lease. ------------ The reference in Section 1.2 to "Retail Space 3,800 rentable square feet on the ground floor" is hereby deleted. A reference to "Additional Storage Space 469 rentable square feet on the concourse floor" is added to Section 1.2, and a reference to Exhibit B-8 is hereby added to the list ----------- of exhibits in the last sentence in Section 1.2. 3.2 AMENDMENT TO SECTION 3.1 OF THE LEASE. ------------------------------------- The first paragraph of Section 3.1 of the Lease is hereby deleted and the following substituted in lieu thereof: Tenant shall pay Landlord as base rent (the "BASE RENT") for each year during the Term the sum of Five Hundred Thirty-nine Thousand Twenty- nine and 50/100 Dollars ($539,029.50) payable in equal monthly installments of Forty-four Thousand Nine Hundred Nineteen and 13/100 Dollars ($44,919.13) due in advance on the first day of each month during the Term, except that the Base Rent at the rate of Four Thousand Six Hundred Ninety and No/100 Dollars ($4,690.00) per annum for the Additional Storage Space shall not be payable until April 1, 1999. In the second sentence of Section 3.1, the reference to "Retail Space $17.50" is hereby deleted. In the second sentence of Section 3.1, a reference to "Additional Storage Space $10.00" is added. 3.3 AMENDMENT TO SECTION 4.1 OF THE LEASE. ------------------------------------- In Section 4.1, paragraph (a), the phrase "5.695 percent" is hereby deleted, and the phrase "5.130 percent" is substituted in lieu thereof. In Section 4.1, paragraph (d), the phrase "9.419 percent" is hereby deleted, and the phrase "8.458 percent" is substituted in lieu thereof. 3.4 AMENDMENT TO SECTION 5.1 OF THE LEASE. ------------------------------------- The first sentence of Section 5.1 of the Lease is hereby deleted and the following is substituted in lieu thereof: Tenant shall use the Premises only for general office purposes and for no other purpose. 3.5 AMENDMENT TO SECTION 16.3 OF THE LEASE. -------------------------------------- The last sentence of Section 16.3 is hereby deleted. 3.6 AMENDMENT TO SECTION 20.1 OF THE LEASE. -------------------------------------- The second paragraph of Section 20.1 is hereby deleted in its entirety. 3.7 AMENDMENT TO SECTION 34.1(B) OF THE LEASE. ----------------------------------------- Section 34.1 of the Lease is hereby amended by adding the words "and the Additional Storage Space" to the second line of subsection (b) thereof after the words "except that the Base Rent for the Storage Space". -2- 3.8 AMENDMENT TO SECTION 34.5 OF THE LEASE. -------------------------------------- The last paragraph of Section 34.5 is hereby deleted and the following substituted in lieu thereof: For the purpose of determining Market Rent, the parties shall use as a guideline the then market rent for similar space available in similar buildings in Hartford's central business district, including the Building. 3.9 AMENDMENT TO ARTICLE 35 OF THE LEASE. ------------------------------------ Article 35 is deleted in its entirety. Such deletion shall not affect any of Tenant's rights with respect to the Building directory as contained in Section 12.3 of the Lease. 3.10 AMENDMENT TO ARTICLE 36 OF THE LEASE. ------------------------------------ Article 36 is deleted in its entirety. Section IV. GENERAL CLAUSES. - ---------- --------------- 4.1 Except as modified by this instrument, Landlord and Tenant ratify and confirm the terms of this Lease. 4.2 Terms defined in the Lease shall have the same meaning in this instrument as in the Lease unless redefined in this instrument. 4.3 The Lease and this instrument are binding on Landlord and Tenant and their respective heirs, successors and assigns. 4.4 Tenant's obligation to pay amounts due and owing prior to termination or expiration of the Lease shall survive such termination or expiration. 4.5 The word "includes" means "includes without limitation". The word "include" means "include without limitation". The word "any" means "any and all". The word "until" means "unless and until". -3- IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of March 26, 1999. Witnessed by: LANDLORD: CAMBRIDGE ONE COMMERCIAL PLAZA, LLC By: One Commercial Management, LLC, Its Managing Member By: Levstone Commercial Management Corp., Its Managing Member ______________________ ______________________ By /s/ Mark R. Stone -------------------------- Name: Mark R. Stone Title: Vice President TENANT: ______________________ FIRST INTERNATIONAL BANK, NATIONAL ASSOCIATION ______________________ By: /s/ Leslie A. Galbraith --------------------------- Name: Leslie A. Galbraith Title: President -4- EX-10.11 4 EMPLOYMENT AGMNT AMENDMENT / LESLIE A. GALBRAITH EXHIBIT 10.11 December 2, 1998 Leslie A. Galbraith 53 Collie Brook Road East Hampton, CT 06424 Dear Leslie: Reference is made to that certain employment agreement (the "Employment Agreement") dated August 25, 1997 between First National Bank of New England (now known as First International Bank, National Association) (the "Bank") and you. The Bank and you agree that the Employment Agreement is amended to provide that, beginning as of the date hereof, you will be employed as President, Chief Operating Officer and Chief Financial Officer of the Bank (or equivalent titles) in accordance with the terms and conditions of the Employment Agreement. Except to the extent expressly amended herein, the Employment Agreement remains unmodified and in full force and effect in accordance with its terms. Please sign in the space provided below to indicate your acceptance of the foregoing. Very truly yours, FIRST INTERNATIONAL BANK, NATIONAL ASSOCIATION /s/ Brett N. Silvers By:___________________________________ Brett N. Silvers Its Chairman and Chief Executive Officer Agreed to: /s/ Leslie A. Galbraith _____________________________ EX-10.12 5 REVOLVING COMMERCIAL LOAN WHSE&SECURITY AGREEMENT EXHIBIT 10.12 EXECUTION COPY -------------- REVOLVING COMMERCIAL LOAN WAREHOUSE AND SECURITY AGREEMENT ---------------------------------------------------------- REVOLVING COMMERCIAL LOAN WAREHOUSE AND SECURITY AGREEMENT, dated as of December 4, 1998 (as amended or otherwise modified from time to time, this "Agreement") among PRUDENTIAL SECURITIES CREDIT CORPORATION, a Delaware --------- corporation, having an office at One Seaport Plaza, New York, New York 10292 (the "Lender"), and FIRST NATIONAL BANK OF NEW ENGLAND, a national bank, having ------ its principal office at 280 Trumbull Street, Hartford, Connecticut 06103 (the "Borrower"), and its parent, FIRST INTERNATIONAL BANCORP, INC., a Delaware - --------- corporation, having its principal office at 280 Trumbull Street, Hartford, Connecticut 06103 (the "Guarantor"). --------- WHEREAS, the Lender intends to lend and the Borrower intends to borrow up to a maximum of $75,000,000 to fund the origination of Commercial Loans (as ---------- defined herein); and WHEREAS, the Lender's Affiliate, Prudential Securities Incorporated ("PSI"), will have the right of first refusal, but not the obligation, to act as --- the sole manager (such role as sole manager, the "Manager Role") on any ------------ securities issuances ("Securitizations") sponsored by the Borrower or one of its --------------- Affiliates relating to up to $250,000,000 of the Commercial Loans, on the terms and under the conditions set forth in the Engagement Letter, dated as of December 4, 1998, among PSI, the Borrower and the Guarantor (the "Engagement ---------- Letter"). Such Securitizations shall be structured in a manner as shall be - ------ consented to by PSI. NOW, THEREFORE, in consideration of the promises and for other good and valuable consideration, the parties hereto hereby agree as follows: Section 1. The Loan. (a) Subject to the terms of this Agreement: --------- -------- 1. The Lender agrees to lend to the Borrower up to $75,000,000, (such borrowing, the "Loan") to be made in one or more advances (each, an "Advance"). ---- ------- The Borrower agrees that the Loan shall be used to finance fixed or adjustable rate Commercial Loans underwritten pursuant to Borrower's underwriting guidelines that are to be included in a Securitization, as such Commercial Loans are identified to the Lender in writing and in electronic form from time to time. All Commercial Loans financed hereunder shall be closed loans; i.e., this facility shall not be used for "wet" or "table" fundings. The Lender may refuse to lend against any Commercial Loan(s) which the Lender reasonably believes will 1 not be eligible for inclusion in a securitized pool either (x) due to the characteristics of such Commercial Loan or (y) due to the expected aggregate characteristics of the Commercial Loans. 2. Each Advance shall be made on a date up to one week prior to the Maturity Date referred to below (each such date, a "Funding Date"); provided ------------ -------- that: (i) (a) the conditions precedent to the making of the Advances set forth in Sections 1(a)4 and 1(a)5 hereof shall be satisfied and (b) the Lender shall have received officers' certificates, dated the date of such Advance and signed by a duly authorized officer of the Borrower and the Guarantor, certifying that (x) the representations and warranties of the Borrower and the Guarantor, as applicable, in Section 4 hereof shall be true and correct on and as of such Funding Date as if made on and as of such date, and (y) no Event of Default shall have occurred and be continuing or would exist after the making of the Advance on such Funding Date; (ii) the Lender shall have received (A) in connection with each Advance, a receipt from the Custodian (as defined below) to the effect that it has received the original notes relating to the Commercial Loans that are being pledged in connection with the Advance being made on such Funding Date; and (B) prior to the initial Advance: (1) a legal opinion from counsel to the Borrower and the Guarantor, in the form of Exhibit B attached hereto; (2) the Secured Note (as defined herein) executed by the Borrower (3) the Custody Agreement (as defined herein) executed by the Borrower and the Custodian; (4) the Guarantee, in the form of Exhibit E hereto, executed by the Guarantor, (5) a receipt from the Custodian to the effect that it has received the assignment of Collateral and power of attorney referred to in Sections 2(f) and (g) of the Custody Agreement (as defined below), and (6) the payment of a one time commitment fee in the amount of $600,000 by the Borrower to the Lender; (iii) the Lender has satisfactorily completed its due diligence investigation of the Commercial Loans being pledged on such Funding Date; (iv) if any Commercial Loan to be pledged to the Lender pursuant to an Advance shall have an outstanding principal balance greater than or equal to $1,000,000, the Borrower shall have delivered to the Lender, at least three Business Days prior to the related Funding Date, a credit memorandum, in form and substance satisfactory to the Lender, containing, among other things, an environmental report for any real estate pledged as collateral for such Commercial Loan. 2 (v) the Borrower shall have delivered to the Lender and the Custodian the Commercial Loan Schedule with respect to the Commercial Loans that are being pledged on such Funding Date; and (vi) no other Advance shall have been made in the same calendar week as such Funding Date. 3. The Loan shall accrue interest daily on its outstanding principal amount, with interest calculated on the basis of actual days elapsed and a 360-day year. The daily interest rate on the outstanding principal amount of the Loan shall be LIBOR plus 1.20% and shall be reset on each Business Day. Interest which accrues during each calendar month shall be payable on the first Business Day of the following month, with any outstanding interest due and payable in its entirety on the date of termination of this Agreement (including the Maturity Date). "LIBOR" means the London interbank offered rate for one-month U.S. ----- dollar deposits on the basis of the offered rates of the Reference Banks for one-month U.S. Dollar Deposits, as such rates appear on Telerate Page 3750, as of 11:00 a.m. (New York Time) reset daily, as determined by Lender in its sole discretion. Any amounts pre-paid or required to be repaid under this Agreement prior to the Maturity Date may be re-borrowed, subject to the terms and conditions of this Agreement, until the Maturity Date. 4. Not later than 4:00 p.m. New York time three Business Days prior to the proposed Funding Date for an Advance, the Borrower shall deliver to the Lender (i) a written notice in the form of Exhibit D hereto (the "Funding ------- Notice") and (ii) an electronic disk or tape, in a mutually satisfactory form to be agreed upon by the Lender and the Borrower, detailing certain specified characteristics of the Commercial Loans previously pledged and those Commercial Loans proposed to be pledged in connection with such Advance (each such schedule, a "Commercial Loan Schedule"). ------------------------ 5. The Borrower shall reimburse the Lender for any of the Lender's out-of-pocket costs and attorneys' fees and expenses incurred by the Lender in connection with this Agreement, such costs not to exceed $35,000 (plus related attorneys' disbursements) up to the date hereof. In addition, the Borrower shall reimburse the Lender for any of the Lender's out-of-pocket costs and expenses incurred in connection with its due diligence review, such costs not to exceed $20,000 in the aggregate up to and including the Maturity Date. 3 (b) The amount of each Advance shall not exceed the lesser of (i) 85.0% of the aggregate outstanding principal balance of the Commercial Loans proposed to be pledged to the Lender in connection with such Advance as of the related Cut-Off Date, minus in the event that a Collateral Deficiency Situation ----- exists as of the date of such Advance, the Restoration Amount as of the date of such Advance and (ii) the product of (x) the Market Value of the Commercial Loans proposed to be pledged in connection with such Advance and (y) 0.85 (such product, the "Borrowing Base"), minus (z) in the event that a Collateral -------------- ----- Deficiency Situation exists as of the date of such Advance, the Restoration Amount as of the date of such Advance. For purposes of this Agreement: Affiliate means, as to any Person, any other Person controlling, --------- controlled by or under common control with such Person. "Control" means the power to direct the management and policies of a Person, directly or indirectly, whether through ownership of voting securities, by contract or otherwise. "Controlled" and "Controlling" have meanings correlative to the foregoing. Business Day means any day other than (i) a Saturday or Sunday or (ii) ------------ a day on which banking institutions in New York City or London are authorized or obligated to be closed. Collateral Deficiency Situation shall be deemed to be existing as of ------------------------------- any day on which (i) the outstanding principal amount of the Loan as of such day (including accrued interest but excluding the amount of any Advance to be made on such day) exceeds (ii) the lesser of (a) the Borrowing Base of the Commercial Loans then pledged to the Lender (disregarding the Commercial Loans, if any, proposed to be pledged to the Lender on such day) and (b) the Market Value of the Commercial Loans theretofore pledged to the Lender (disregarding the Commercial Loans, if any, proposed to be pledged to the Lender on such day). Commercial Loan has the meaning set forth in Section 2. --------------- Commercial Loan Schedule means each schedule of Commercial Loans ------------------------ listing the Commercial Loans which have been or are to be pledged by the Borrower in connection with (x) each Advance or (y) a Collateral Deficiency, such schedule identifying each Commercial Loan by address of and the name of the underlying obligor and setting forth as to each Commercial Loan at least the following information: (i)the address and name of the underlying obligor, (ii) the original principal amount, (iii) the Cut-Off Date, (iv) the principal outstanding as of the related Cut-Off 4 Date, (v) the account number, (vi) the amount of any change in the outstanding principal balance of each Commercial Loan since the date of the last delivered Commercial Loan Schedule, (vii)the paid-through date, (viii) a description of the related collateral, (ix) if the primary collateral includes real estate, the related loan-to-value ratio of such property, (x) the interest rate, (xi) whether such Commercial Loan bears a fixed or floating rate of interest, (xii) the original term, (xiii) the remaining term (xiv) the loan type and (xv) any other information that Lender may reasonably request. Cut-Off Date means, as of any date, the close of business on the date ------------ set forth in the related Commercial Loan Schedule. In no event shall the Cut-Off Date precede by more than two weeks the date on which the related Commercial Loan Schedule is delivered. GAAP means generally accepted accounting principals applied on a ---- consistent basis. Loan Documents means this Agreement, as it may be renewed, extended or -------------- continued from time to time the Secured Note, the Custody Agreement, the Guaranty, and any other document, instrument or agreement executed by the Borrower, the Guarantor or the Custodian in connection herewith or therewith, as any of the same may be amended, extended or replaced from time to time. Reference to any specific Loan Document in this Agreement or any other Loan Document shall be deemed to include any amendment, extension or replacement thereof. Market Value means, as of any date and with respect to any Commercial ------------ Loan, the servicing-released fair market value of such Commercial Loan as of such date as determined by the Lender (or an Affiliate thereof) in its sole discretion. Person means any individual, corporation, partnership, joint venture, ------ association, limited liability company, joint-stock company, trust (including any beneficiary thereof), unincorporated organization or government or any agency or political subdivision thereof. Pledged Commercial Loan means, as of any date of determination, any ----------------------- Commercial Loan for which the related note is then held by the Custodian as bailee for the Lender for purposes of perfecting the Lender's security interest. Reference Banks means leading banks selected by the Lender and engaged --------------- in transactions in Eurodollar deposits in the international Eurocurrency market (i) with an established 5 place of business in London, (ii) whose quotations appear on Telerate Page 3750 on the Funding Date in question, (iii) which have been designated as such by the Custodian and (iv) not controlling, controlled by, or be under common control with, the Borrower. Restoration Amount means, as of any date of determination, the amount, ------------------ if any, by which (i) the outstanding principal amount of the Loan as of such date (including accrued interest, but excluding the amount of any Advance to be made on such date) exceeds (ii) the lesser of (a) the Borrowing Base of the Commercial Loans theretofore pledged to the Lender (disregarding any Commercial Loans proposed to be pledged to the Lender on such date) and (b) the Market Value of the Commercial Loans theretofore pledged to the Lender (disregarding any Commercial Loans proposed to be pledged to the Lender on such date). (c) The Loan shall mature on December 3, 1999, as such date may be extended by means of a Credit Increase Confirmation and Note Amendment (the "Maturity Date"), pursuant to the terms of Section 1(f) below. ------------- (d) The Loan is pre-payable at any time without premium or penalty (except as otherwise provided herein), in whole or in part; provided, that Pledged Commercial Loans may not be removed from this facility (including in connection with any prepayment of the Loan in part) with the result that, in the Lender's sole reasonable determination, the remaining Pledged Commercial Loans are, in the aggregate, materially inferior as Collateral (as defined in section 3(b) below) as compared to the pool of Pledged Commercial Loans immediately prior to such removal. In addition, no Pledged Commercial Loans may be removed from this facility with the result that a Collateral Deficiency Situation would then exist. Notwithstanding the foregoing, however, a Pledged Commercial Loan may in any event be removed from this facility if (i) such Pledged Commercial Loan has been paid in full by the obligor, (ii) such Pledged Commercial Loan breaches one or more of the representations and warranties listed in Section 4(b) below, (iii) the Lender has advised the Borrower that the Lender believes that any such Pledged Commercial Loan is unacceptable for inclusion in a Securitization or (iv) such Pledged Commercial Loan is to be included in a Securitization for which PSI is acting in the Manager Role or which PSI has been offered but has not elected to accept the Manager Role in accordance with the terms of the Engagement Letter. If the Borrower intends to prepay the Loan in whole or in substantial part from a source other than the proceeds of a Securitization, the Borrower shall give two Business Days' written notice to the Lender. 6 (e) If the Loan is not repaid in whole on or prior to the Maturity Date, the Loan, if continued by the Lender as provided in paragraph (f) below, shall, commencing on the Maturity Date, bear interest at a rate per annum equal to LIBOR plus 5.00% until repaid. (f) In the event the Loan is not repaid in whole on or prior to the Maturity Date, the Lender shall have the option, in its sole discretion, to continue the Loan on the Maturity Date through the last day of the month following the Maturity Date and, thereafter, on a month-to-month basis through the last day of each succeeding month. If the Lender elects to continue the Loan as aforesaid, it shall deliver notice of such election to the Borrower by means of a Credit Increase Confirmation and Note Amendment in the form of Exhibit C no later than 3:00 p.m. on the Business Day preceding the then scheduled date of maturity of the Loan (any such preceding date, an "Election -------- Date"). If no such notice is delivered, the Loan shall immediately and - ---- automatically become due and payable without any further action by the Lender on the day following such Election Date, and in such event the Lender may exercise all rights and remedies available to it as the holder of a first perfected security interest under the Uniform Commercial Code of the State of New York (the "New York UCC"). ------------ (g) The Loan shall be evidenced by the secured promissory note of the Borrower in the form attached hereto as Exhibit A (the "Secured Note"). ------------ (h) If any Pledged Commercial Loan is removed from the facility provided hereby except (i) in connection with a Securitization for which PSI is acting in the Manager Role or for which PSI has been offered, but has not elected to accept, the Manager Role in accordance with the terms of the Engagement Letter, (ii) in connection with such Commercial Loan being paid in full (iii) for the purpose of curing a breach of a representation and warranty, (iv) if the Lender has advised the Borrower that the Lender believes that any such Pledged Commercial Loan is unacceptable for inclusion in a Securitization, or (v) if the Lender does not continue the Maturity Date until the earlier to occur of (x) December 3, 2000 or (y) the Termination Date (as such term is defined and set forth in the Engagement Letter), then an amount equal to 1.0% of the average outstanding principal balance of such Commercial Loan during the time it was a Pledged Commercial Loan shall be paid by Borrower to the Lender on the date such Commercial Loan is removed from this facility. Section 2. Purpose of Loan. The Borrower agrees that the Loan shall --------- --------------- be used to finance the following types of 7 commercial loans: equipment loans, working capital term loans and loans secured by mortgages on commercial real estate (such loans being the "Commercial ---------- Loans"). Unless removed as permitted hereunder, Commercial Loans shall be sold - ----- to a trust or other vehicle acceptable to Lender to be established in a Securitization, and shall be pledged to secure the Loan as such Commercial Loans are identified to the Lender and the Custodian in writing and in electronic form from time to time. Each of the Commercial Loans shall be loans made to small business concerns either (a) originated by the Borrower pursuant to its published underwriting criteria existing at the time the Commercial Loans were originated if such Commercial Loans were originated prior to the date hereof and if such criteria was different than the criteria heretofore supplied to the Lender, (b) originated by the Borrower pursuant to its published underwriting criteria heretofore supplied to the Lender (or if such criteria have been changed, the terms of such new underwriting criteria shall have been supplied to Lender and are acceptable to Lender) or (c) originated by third parties and re- underwritten by the Borrower on terms consistent with its published underwriting criteria (or pursuant to underwriting criteria presented to and acceptable to Lender); provided, however, that the Lender shall have the right to conduct such -------- ------- review of any such Commercial Loans as the Lender may, in its sole discretion, decide to conduct. The Lender may decline to include in the facility any Commercial Loan. Section 3. Custody of Original Notes and Loan Documents. (a) Prior --------- -------------------------------------------- to the time that the Borrower requests any Advance by the Lender with respect to any Commercial Loan, the Borrower shall cause to be delivered to the Custodian, at the offices of the Custodian located in New York, New York, or at any such other place as the parties hereto may select from time to time, the originals of all notes evidencing any Commercial Loan in which the Lender is to be granted a security interest pursuant to this Agreement. Upon delivery to the Custodian by the Borrower (or by the title company as directed by the Borrower) of any note evidencing a Commercial Loan, the Custodian will immediately execute and deliver to the Lender and Borrower the Initial Trust Receipt and Certification, in the form attached as Exhibit A to the Custody Agreement, as provided in Section 3(a) of the Custody Agreement. Delivery of the note or notes to the Custodian and the Custodian's continuous possession of such note or notes shall be a condition precedent to any such Commercial Loan being considered as Collateral (as defined in (b) below) for the purposes of the computation of the amount of any Advance or the Loan under this Agreement. (b) Within 30 days after Borrower delivers to the Custodian a note evidencing a Commercial Loan, Borrower shall deliver to Marine Midland Bank, as custodian (the "Custodian") on 8 behalf of the Lender, the documents and instruments listed in Section 2(b)-(e) of that certain Commercial Loan Custody Agreement dated as of December 4, 1998 (the "Custody Agreement") among the Borrower, the Custodian and the Lender. ----------------- (Such documents and instruments, including without limitation all mortgages relating thereto (with respect to each Pledged Commercial Loan, the related "Loan File"), and the original note or notes evidencing and relating to the Commercial Loans, together with any proceeds thereof, are hereinafter referred to as the "Collateral.") Within three days of delivery to the Custodian by the ---------- Borrower (or by the title company as directed by the Borrower) of the Loan File relating to a Commercial Loan, the Custodian will execute and deliver to the Lender, with a copy to the Borrower, the Final Trust Receipt and Certification, in the form attached as Exhibit B to the Custody Agreement, as provided in Section 3(b) of the Custody Agreement. The Borrower hereby pledges all of its right, title and interest in and to the Collateral to the Lender to secure the repayment of principal of and interest on the Loan and all other amounts owing to the Lender hereunder (collectively, the "Secured Obligations"). ------------------- (c) Whenever any Pledged Commercial Loan is removed from this facility, as permitted hereunder, all files held by the Custodian relating to such removed Pledged Commercial Loan shall be returned to the Borrower in the manner set forth in the Custody Agreement. Section 4. Representations, Warranties and Covenants. (a) The --------- ----------------------------------------- Borrower and Guarantor, as applicable, represent and warrant to the Lender that: (i) The Borrower has been duly organized and is validly existing as a national banking association under the laws of the United States. The Guarantor has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware. (ii) They are duly licensed as a "Licensee" or are otherwise qualified in each state in which they transact business where the ownership or leasing of their properties or the conduct of their business requires such license or qualification and are not in default of such state's applicable law, rules and regulations. They have the requisite power and authority and legal right to own and grant a lien on all of their right, title and interest in and to the Collateral, and to execute and deliver, engage in the transactions contemplated by, and perform and observe 9 the terms and conditions of, this Agreement, the Custody Agreement and the other Loan Documents, as applicable. (iii) At all times after the Custodian has received an original note and Loan File relating to a Commercial Loan from the Borrower and until payment in full of the Loan, the Borrower will not commit any act in violation of applicable laws, or regulations promulgated with respect thereto. (iv) Each of the Borrower and the Guarantor is solvent and is not in default under any mortgage, borrowing agreement or other instrument or agreement pertaining to indebtedness for borrowed money, and the execution, delivery and performance by the Borrower and the Guarantor of this Agreement and the other Loan Documents, as applicable, and the execution by the Borrower of the Secured Note do not conflict with any term or provision of the charter, certificate of incorporation or by-laws of any of them or any law, rule, regulation, order, judgment, writ, injunction or decree applicable to any of them of any court, regulatory body, administrative agency or governmental body having jurisdiction over any of them and will not result in any violation of any mortgage, instrument or agreement pertaining to indebtedness for borrowed money. (v) All financial statements of the Borrower or the Guarantor furnished to the Lender do not omit to disclose any material liabilities or other facts relevant to the Borrower's or the Guarantor's condition. All certificates of the Borrower or the Guarantor or any of their officers furnished to the Lender are true and complete. All such financial statements have been prepared in accordance with GAAP. No financial statement or other financial information as of a date later than the date set forth in the Guarantor's most recent 10-K or 10-Q filing under the Securities Exchange Act of 1934, as amended, has been furnished by the Borrower to another lender of the Borrower that has not been furnished to the Lender. (vi) Except as have been previously obtained, no consent, approval, authorization or order of, registration or filing with, or notice to any governmental authority or court is required under applicable law in connection with the execution, delivery and performance by them of this Agreement and the other Loan Documents, as applicable. (vii) There is no action, proceeding or investigation pending or, to the best knowledge of any of them, threatened against any of them before any court, administrative agency or other tribunal (A) asserting the invalidity of this 10 Agreement, as applicable, or the other Loan Documents, as applicable, (B) seeking to prevent the consummation of any of the transactions contemplated by this Agreement or the other Loan Documents, as applicable, or (C) which might materially and adversely affect the validity of the Commercial Loans or the performance by any of them of their obligations under, or the validity or enforceability of, this Agreement or the other Loan Documents, as applicable. (viii) There has been no adverse change in the business, operations, financial condition, properties or prospects of the Borrower and the Guarantor taken as a whole since the date set forth in the Guarantor's most recent 10-K or 10-Q filing under the Securities Exchange Act of 1934, as amended, which would have a material adverse affect on their ability to perform their respective obligations under this Agreement or the other Loan Documents, as applicable. (ix) This Agreement and the other Loan Documents, as applicable, have been duly authorized, executed and delivered by the Borrower and the Guarantor, as applicable, all requisite corporate action having been taken, and each is valid, binding and enforceable against the Borrower and the Guarantor, as the case may be, in accordance with its terms. (x) When a note and the related Loan File evidencing a Commercial Loan and the other Loan Documents are delivered to the Custodian, the security interest granted pursuant to this Agreement will constitute a fully-perfected first priority security interest in the Collateral in favor of the Lender. (xi) The Boards of Directors of the Borrower and the Guarantor have approved the transactions contemplated by this Agreement and the other Loan Documents, such approvals have been duly noted in the minutes of the Boards of Directors of the Borrower and the Guarantor and, from the time of execution of this Agreement and the other Loan Documents, will be continuously an official record (as such term is used in Section 13(e)(1)(D) of the Federal Deposit Insurance Act, as amended by the Financial Institution Reform, Recovery and Enforcement Act and as in effect on the date hereof) of the Borrower and the Guarantor. (xii) At the time of origination of a Commercial Loan, in all instances where commercial real property serves as the primary collateral for such Commercial Loan, the related mortgaged property was free of contamination from toxic substances or hazardous wastes requiring action under 11 applicable laws or is subject to ongoing environmental rehabilitation, and the Borrower has no knowledge of any such contamination from toxic substances or hazardous waste material on any mortgaged property unless such items are below action levels or such mortgaged property is subject to ongoing environmental rehabilitation. (b) With respect to every Commercial Loan and related note and Loan File delivered to the Custodian and pledged to the Lender to secure the Loan, the Borrower and the Guarantor represent and warrant to the Lender that: (i) Such note evidencing a Commercial Loan and the related Loan File are complete and authentic and all signatures thereon are genuine. (ii) Such Commercial Loan was (a) originated by the Borrower pursuant to its published underwriting criteria existing at the time the Commercial Loans were originated if such Commercial Loans were originated prior to the date hereof and if such criteria was different than the criteria heretofore supplied to the Lender, (b) originated by the Borrower pursuant to its published underwriting criteria heretofore supplied to the Lender (or if such criteria have been changed, the terms of such new underwriting criteria shall have been supplied to Lender) or (c) originated by third parties and re-underwritten by the Borrower on terms consistent with its published underwriting criteria (or pursuant to other underwriting criteria previously supplied to Lender), and such Commercial Loan arose from a bona fide loan, complying with all applicable state and Federal laws and regulations, to Persons having legal capacity to contract and is not subject to any defense, set-off or counterclaim. (iii) All amounts represented to be payable on such Commercial Loan are, in fact, payable in accordance with the provisions of such Commercial Loan. (iv) No payment default or material non-payment default has occurred in any provisions of such Commercial Loan. (v) Any real property subject to any security interest granted by an obligor in connection with any Commercial Loan is not subject to any other encumbrances other than (i) a stated prior mortgage or mortgages, (ii) liens for taxes not yet due and payable or similar governmental charges not yet due and payable or still subject to payment without interest or penalty or (iii) zoning 12 restrictions, utility easements, covenants or conditions and restrictions of record and other encumbrances, which will neither defeat nor render invalid such security interest or the priority thereof nor materially impair the marketability or value of such real property nor be violated by the existing improvements or the intended use thereof. (vi) The Borrower holds good and indefeasible title to, and is the sole owner of, such Commercial Loan, subject to no liens, charges, mortgages, participations, encumbrances or rights of any Person. (vii) Each Commercial Loan conforms to the description thereof as set forth on the related Commercial Loan Schedule delivered to the Custodian and the Lender. (viii) The Commercial Loans do not have characteristics which are materially worse than those of other loans made to small business concerns financed by the Borrower during the twelve-month period preceding the related Funding Date. (ix) Each Commercial Loan will be eligible for inclusion in a pool to be securitized; the Lender may refuse to lend against any Commercial Loan which the Lender believes will not be eligible for inclusion in such a securitized pool either (x) due to the characteristics of such Commercial Loan or (y) due to the expected aggregate characteristics of all Commercial Loans. (x) No Commercial Loan shall have been originated in, or be subject to the laws of, any jurisdiction under which the sale, transfer and assignment of such Commercial Loan under this Agreement shall be unlawful, void or voidable. (c) The Borrower and the Guarantor covenant with the Lender that, during the term of this facility: 1. The Borrower's Tangible Net Worth (determined in accordance with GAAP) shall not be less than $40,000,000. 2. The Borrower's Tangible Net Worth shall not be less than its Tangible Net Worth as shown on the Borrower's audited financial statements as of September 30, 1998 (as delivered previously to the Lender) plus fifty ---- percent (50%) of all accumulated positive net income from September 30, 1998 less $4,000,000. "Tangible Net Worth" means the difference between (x) net - ---- ------------------ worth determined in accordance with GAAP less (y) the sum of (i) receivables from stockholders or Affiliates of the Borrower and (ii) intangible assets determined in accordance with GAAP 13 (which include assets such as copyrights, patents, trademarks, goodwill, computer programs, capitalized advertising costs, organization costs, licenses, leases, franchises, exploration permits, and import and export permits, etc.). 3. The Borrower's leverage ratio shall not exceed 8:1, such ratio being the ratio of (x) the Borrower's total liabilities, less subordinated debt maturing in more than one year, to (y) the Borrower's Tangible Net Worth (determined as set forth above). 4. The Borrower will continue to be a wholly-owned subsidiary of the Guarantor. 5. The Borrower will continue to maintain for itself and its subsidiaries insurance coverage with respect to employee dishonesty, forgery or alteration, theft, disappearance and destruction, robbery and safe burglary, property (other than money and securities) and computer fraud in an aggregate amount of at least $4,000,000, and shall name Lender as a loss payee. 6. All subordinated debt will remain subordinate to the Loan and no payments of principal will be made on such subordinated debt so long as the Loan is outstanding; provided, however that (a) principal payments (plus accrued interest to the date of redemption) on subordinated debt may be made from the proceeds of new equity offerings in an equivalent or greater amount, and (b) regularly scheduled payments of interest on subordinated debt may be made for so long as no payment default or other Event of Default hereunder has occurred and is continuing. 7. Notwithstanding anything to the contrary contained herein, with the prior written consent of the Lender (not to be unreasonably withheld) Borrower is permitted to assign its rights hereunder to, and the Loan can be assumed by, another wholly-owned subsidiary of the Guarantor (the "Assignee") -------- (in which case all of the provisions of this Agreement shall, to the same extent as they apply to the Borrower hereunder, apply to the Assignee rather than to the Borrower) on the condition that (a) the Assignee acquires substantially all of the Borrower's assets relating to its commercial lending business, including without limitation, Borrower's interest in the Commercial Loans, (b) the Assignee assumes substantially all of the Borrower's liabilities relating to its commercial lending business, including without limitation, the Loan, but expressly excluding the Borrower's deposits, (c) Lender receives such documents evidencing (a) and (b) above as Lender shall reasonably request, and (d) Borrower and Assignee execute and deliver to Lender such amendments to this Agreement and the other Loan Documents and such opinions of counsel as Lender shall reasonably request in order to evidence 14 that the Assignee has assumed all of the Borrower's rights and obligations, and is bound by all of the Borrower's agreements, set forth herein. 8. The Borrower and Guarantor shall make available to Lender and its agents and employees, upon reasonable prior notice and during normal business hours, the books and records of the Borrower and the Guarantor relating to the Pledged Commercial Loans and the transactions contemplated hereby. Section 5. Mandatory Prepayment of Loan. (a) Upon discovery by the --------- ---------------------------- Borrower, the Guarantor, the Custodian or the Lender of any breach of any of the representations and warranties listed in Section 4 preceding, the party discovering such breach shall promptly give notice of such discovery to the others. The Lender has the right to require, in its unreviewable discretion, the Borrower to repay the Loan in part with respect to (i) any Commercial Loan which breaches one or more of the representations and warranties listed in Section 4(b) preceding or (ii) any Commercial Loan which the Lender reasonably believes to be unacceptable for inclusion in a Securitization; provided, however, that the Borrower may, in lieu of repaying the Loan in part, substitute one or more other Commercial Loans, in replacement for any Commercial Loan described in (i) or (ii) above. (b) If any Commercial Loan, as indicated on any Commercial Loan Schedule delivered pursuant to Section 9 hereof, becomes thirty (30) or more days delinquent in payment, the Lender may require the Borrower to prepay the Loan in part with respect to such Commercial Loan; provided, however, that the Borrower may, in lieu of repaying the Loan in part, substitute one or more other Commercial Loans, in replacement for any Commercial Loan that has become thirty (30) or more days delinquent in payment. (c) If the Borrower awards a Securitization or whole-loan trade involving any Pledged Commercial Loan to any party including but not limited to an investment banking house, agent or underwriter other than PSI, or to a group of managers which does not include PSI, then, in addition to any other rights or remedies Lender has (including, but not limited to, amounts owed to the Lender under Section 1(h) hereof), (x) the Lender may demand that the Borrower prepay any portion of the Loan evidenced hereby relating to the dollar amount of the Pledged Commercial Loans to be included in such Securitization or whole loan trade, in which PSI has not been selected for participation, for payment within five Business Days of the demand for prepayment and (y) the Lender may refuse to make further Advances hereunder if such 15 Advances would relate to Pledged Commercial Loans to be included in such Securitization or whole-loan trade in which PSI has not been selected for participation. The Borrower shall give immediate notice, by facsimile transmission, to the attention of Jeff French at the Lender, (fax 212-214-7678) and Joe Donovan and Andrew Yuder at PSI (fax 212-778-7403), of any decision to award the Manager Role or to name any group of managers for any Securitization or whole-loan trade involving any Pledged Commercial Loans. (d) If, on any date other than a Funding Date, the Lender determines that a Collateral Deficiency Situation exists, the Lender shall so notify the Borrower, and the Borrower, within three (3) Business Days, shall either (i) pay to the Lender the Restoration Amount or (ii) deliver to the Custodian on behalf of the Lender additional Commercial Loans with an aggregate Market Value at least equal to the Restoration Amount. The provisions of Section l(b) shall govern with regard to a Collateral Deficiency Situation as of a Funding Date; provided, however, that if the Collateral Deficiency Situation results from a release by the Lender of its lien, such Collateral Deficiency Situation shall be remedied as aforesaid on the business day on which such Collateral Deficiency Situation arises. Section 6. Guaranty; Additional Documents. (a) Guaranty. In support --------- ------------------------------ -------- of the Secured Obligations, the Guarantor, in its capacity as guarantor (the "Guarantor"), shall execute and deliver to the Lender a guaranty in the form of Exhibit E hereto (the "Guaranty"). -------- (b) Further Documents. The Borrower and the Guarantor will execute and deliver, or cause to be executed and delivered, to the Lender from time to time, such confirmatory or supplementary security agreements, financing statements, reaffirmations and consents and such other documents, instruments or agreements as the Lender may reasonably request, which are in the Lender's judgment necessary or desirable to obtain for the Lender the benefit of the Collateral. Section 7. Servicing. The Borrower shall service the Commercial Loans --------- --------- with the degree of skill and care consistent with that which the Borrower customarily exercises with respect to similar loans owned, managed or serviced by it and all applicable industry standards. The Borrower shall comply with all applicable state and federal laws and regulations; shall maintain all state and federal licenses and franchises necessary for it to perform its servicing responsibilities hereunder and shall not impair the rights of the Lender in any Commercial Loans or for payment thereunder. 16 Section 8. No Oral Modifications; Successors and Assigns. No --------- --------------------------------------------- provisions of this Agreement shall be waived or modified except by a writing duly signed by the authorized agents of the Lender, the Borrower and the Guarantor. This Agreement shall be binding upon the successors and assigns of the parties hereto. Section 9. Reports. (a) The Borrower shall provide the Lender with --------- ------- an electronic disk or tape (each, a "Supplemental Commercial Loan Schedule") ------------------------------------- (i) three Business Days prior to each Funding Date, (ii) within 10 Business Days after the end of each month, and (iii) within two Business Days following any request made by the Lender or any Affiliate thereof for such a report, setting forth, on a loan-by-loan basis, all the information contained in the definition of "Commercial Loan Schedule" herein, plus the current principal balance outstanding of each Commercial Loan as of the end of the prior calendar month and the change in the current principal balance outstanding of each Commercial Loan since the date of the last delivered Commercial Loan Schedule or Supplemental Commercial Loan Schedule, as the case may be. Such Supplemental Commercial Loan Schedule will also contain delinquency information concerning (x) all Commercial Loans then held in this warehouse facility and (y) any Commercial Loans proposed to be delivered to this facility on the next Funding Date. The Supplemental Commercial Loan Schedule shall be in a format as may be agreed upon by the Borrower and the Lender from time to time. (b) The Borrower shall provide the Lender and the Custodian with a "hard-copy" Commercial Loan Schedule or Supplemental Commercial Loan Schedule meeting the requirements of the Custody Agreement on each date on which an electronic disk or tape is delivered to the Lender (or a designated Affiliate thereof); the electronic disk or tape and the Commercial Loan Schedule shall each relate to the same Cut-Off Date. (c) The Borrower shall furnish to Lender (i) promptly, copies of any material and adverse notices (including, without limitation, notices of defaults, breaches, potential defaults or potential breaches) given to or received from its other lenders, (ii) immediately, notice of the occurrence of any "Event of Default" hereunder or of any situation which the Borrower reasonably expects to develop into an "Event of Default" hereunder, (iii) copies of the Guarantor's annual and quarterly financial statements reflecting any public filings made to the Securities and Exchange Commission, provided that any annual Form 10-K filing shall be furnished no later than 90 days after each year-end and any quarterly Form 10-Q filing shall be furnished no later than 45 days after each quarter end, (iv) annual audited financial statements 90 days after each year-end, (v) three (3) 17 days prior to the date of each Advance (the date of which Advance shall be no later than two (2) weeks after the receipt of the Supplemental Commercial Loan Schedule delivered pursuant to Section 9 (a) (ii) above), portfolio performance data with respect to the Commercial Loans (vi) any other financial information reasonably requested by the Lender and (vii) an officer's certificate within ten (10) Business Days after the end of each quarter to the effect that the covenants set forth in Section 4(c) are true on such date and containing therein the mathematical calculations used to determine Tangible Net Worth and all required ratios. All required financial statements, information and reports shall be prepared in accordance with GAAP, or, if applicable to SEC filings, SEC accounting regulations. Section 10. Events of Default. Each of the following shall constitute ---------- ----------------- an "Event of Default" hereunder: ---------------- (a) Failure of the Borrower to (i) make any payment of interest or principal or any other sum which has become due, whether by acceleration or otherwise, under the terms of the Secured Note, this Agreement or any other Loan Document evidencing or securing indebtedness of the Borrower to the Lender or (ii) pay or deliver the Restoration Amount; (b) Assignment or attempted assignment by the Borrower of this Agreement or any rights hereunder, without first obtaining the specific written consent of the Lender, or the granting by the Borrower of any security interest, lien or other encumbrance on any Collateral to other than the Lender; (c) The filing by or against the Borrower, the Guarantor or any Affiliate thereof of a petition for liquidation, reorganization, arrangement or adjudication as a bankrupt or similar relief under the bankruptcy, insolvency or similar laws of the United States or any state or territory thereof or of any foreign jurisdiction; the failure of the Borrower or such Affiliate to secure dismissal of any such petition filed against it within thirty (30) days of such filing; the making of any general assignment by the Borrower or any Affiliate for the benefit of creditors; the appointment of a receiver or trustee for the Borrower or any such Affiliate, or for any part of the Borrower's or such Affiliate's assets; the institution by the Borrower or any Affiliate of any other type of insolvency proceeding (under the Bankruptcy Code or otherwise) or of any formal or informal proceeding, for the dissolution or liquidation of, settlement of claims against, or winding up of the affairs of, the Borrower or any Affiliate; the institution of any such proceeding against the Borrower or any Affiliate if the Borrower or such Affiliate shall fail to secure dismissal thereof within thirty (30) days thereafter; the consent by the Borrower or any 18 Affiliate to any type of insolvency proceeding against the Borrower or such Affiliate (under the Bankruptcy Code or otherwise); the occurrence of any event or existence of any condition which could be the ground, basis or cause for any proceeding or petition described in this Section; (d) Any materially adverse change in the financial condition of the Borrower or the Guarantor or the existence of any other condition which, in the Lender's sole determination, constitutes an impairment of the Borrower's or the Guarantor's ability to perform their obligations under this Agreement or the Borrower's obligations under the Secured Note; (e) Failure to service the Commercial Loans in substantial compliance with the servicing requirements set forth in Section 7 hereof; (f) A breach by the Borrower or the Guarantor of (i) any representation or warranty set forth in Sections 4(a) hereof, (ii) any the covenants set forth in Sections 4(c) and 9 hereof, or (iii) a use by the Borrower of the proceeds of the Loan for a purpose other than as set forth in Section 2 hereof; (g) The Borrower, the Guarantor or any of their Affiliates shall default in (i) any payment of principal or interest of any indebtedness (other than the Loan) or guarantee obligation (other than the Guarantee) beyond the grace period, if any, provided therefor in the instruments or agreements pursuant to which such indebtedness was created (not to exceed 14 days), or in (ii) the observance or performance of any other provision of such indebtedness or guarantee, and the lender or beneficiary thereunder shall have the ability to declare an "event of default" under such instrument or agreement, which would result in either an acceleration of the indebtedness created thereunder or the termination of future funding commitments to the Borrower or Guarantor. Section 11. Remedies Upon Default. (a) Upon the happening of one or ---------- --------------------- more Events of Default, the Lender may (x) refuse to make further Advances hereunder and (y) immediately declare the principal of the Secured Note then outstanding to be immediately due and payable, together with all interest thereon and fees and expenses accruing under this Agreement; provided that, upon -------- the occurrence of the Event of Default referred to in Section 10(c), such amounts shall immediately and automatically become due and payable without any further action by any Person or entity. Upon such declaration or such automatic acceleration, the balance then outstanding on the Secured Note shall become immediately due and payable without presentation, demand or further notice of any kind to the Borrower. 19 (b) Upon the occurrence of an Event of Default, the Lender may assume all collection and servicing functions (including, without limitation, the establishment of new addresses and accounts to receive all payments on the Pledged Commercial Loans) or may appoint a successor servicer designated by the Lender to assume those functions. At all times following such events, for so long as the Loan or any portion thereof is outstanding, the Lender shall have the right to collect and receive all further payments made on the Collateral, and if any such payments are received by the Borrower, the Borrower shall not commingle the amounts received with other funds of the Borrower and shall promptly remit all such payments received over to the Lender. (c) Following the occurrence and during the continuance of an Event of Default, interest shall accrue on the Loan at a default interest rate of LIBOR plus 5.00%. Section 12. Indemnification. The Borrower agrees to hold the Lender ---------- --------------- (which term shall include all Affiliates, officers, directors, employees and agents of Lender and its Affiliates) harmless from and indemnifies the Lender against all liabilities, losses, damages, judgments, costs and expenses of any kind which may be imposed on, incurred by, or asserted against the Lender relating to or arising out of this Agreement, the other Loan Documents or any transaction contemplated hereby or thereby resulting from anything other than the Lender's gross negligence or willful misconduct. The Borrower also agrees to reimburse the Lender for all reasonable expenses in connection with the enforcement of this Agreement and the other Loan Documents including without limitation the reasonable fees and disbursements of counsel. The Borrower's agreements in this Section shall survive the payment in full of the Secured Note and the expiration or termination of this Agreement. The Borrower hereby acknowledges that, notwithstanding the fact that the Secured Note is secured by the Collateral, the obligations of the Borrower under the Secured Note are recourse obligations of the Borrower. Section 13. Power of Attorney. The Borrower hereby authorizes the ---------- ----------------- Lender, at the Borrower's expense, to file such financing statement or statements relating to the Collateral without the Borrower's signature thereon as the Lender at its option may deem appropriate, and appoints the Lender as the Borrower's attorney-in-fact to execute any such financing statement or statements in the Borrower's name and to perform all other acts which the Lender deems appropriate to perfect and continue the security interest granted hereby and to protect, preserve and realize upon the Collateral, including, but not limited to, the right to endorse notes, complete blanks in 20 documents and sign assignments on behalf of the Borrower as its attorney-in- fact. This Power of Attorney is coupled with an interest and is irrevocable without the Lender's consent. Notwithstanding the foregoing, the power of attorney hereby granted may be exercised only during the occurrence and continuance of any Event of Default hereunder. SECTION 14. GOVERNING LAW; AGREEMENT CONSTITUTES SECURITY AGREEMENT. ---------- ------------------------------------------------------- THIS AGREEMENT IS INTENDED BY THE PARTIES HERETO TO BE GOVERNED BY NEW YORK LAW, WITHOUT GIVING EFFECT TO PRINCIPALS OF CONFLICTS OF LAW, AND TO CONSTITUTE A SECURITY AGREEMENT WITHIN THE MEANING OF THE NEW YORK UCC. Section 15. Lender May Act Through Affiliates. The Lender may, from ---------- --------------------------------- time to time, designate one or more Affiliates for the purpose of performing any action hereunder. Section 16. Notices. All demands, notices and communications relating ---------- ------- to this Agreement shall be in writing and shall be deemed to have been duly given if mailed, by registered or certified mail, return receipt requested, or by overnight courier, or, if by other means, when received by the other party or parties at the address shown below, or such other address as may hereafter be furnished to the other party or parties by like notice. Any such demand, notice or communication hereunder shall be deemed to have been received on the date delivered to or received at the premises of the addressee (as evidenced, in the case of registered or certified mail, by the date noted on the return receipt). If to the Borrower: First National Bank of New England 280 Trumbull Street Hartford, CT 06103 Attention: Leslie Galbraith Telephone: 860-241-2529 Fax Number: 860-241-2501 If to the Guarantor: First International Bancorp, Inc. 280 Trumbull Street Hartford, CT 06103 Attention: Leslie Galbraith Telephone: 860-241-2529 Fax Number: 860-241-2501 21 With a copy to: Bruce C. Silvers, Esq. Bingham Dana LLP 100 Pearl Street Hartford, CT 06103 Telephone: 860-541-3043 Fax Number: 860-527-5188 If to the Lender: Prudential Securities Credit Corporation One Seaport Plaza Credit Analysis Department New York, New York 10292 Attention: Jeff French Telephone: (212) 214-7558 Fax Number: (212) 214-7678 With copies to: Prudential Securities Incorporated One New York Plaza Investment Banking Group New York, New York 10292 Attention: Andrew Yuder Phone Number: (212) 778-2581 Fax Number: (212) 778-7403 Richard L. Fried, Esq. Stroock & Stroock & Lavan LLP 180 Maiden Lane New York, New York 10038 Phone Number: (212) 806-6047 Fax Number: (212) 806-6006 Section 17. Severability. Any provision of this Agreement which is ---------- ------------ prohibited, unenforceable or not authorized in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition, unenforceability or non-authorization, without invalidating the remaining provisions hereof or affecting the validity, enforceability or legality of such provision in any other jurisdiction. Section 18. Counterparts. This Agreement may be executed by the ---------- ------------ parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but 22 all such counterparts shall together constitute one and the same instrument. Section 19. Headings. The section headings contained herein are for ---------- -------- convenience of reference only and shall not define or limit any of the terms and provisions hereof. [Rest of Page Intentionally Left Blank] 23 IN WITNESS WHEREOF, the parties have executed this Agreement the date and year first above written. FIRST NATIONAL BANK OF NEW ENGLAND By: ------------------------------- Name: Title: FIRST INTERNATIONAL BANCORP, INC. By: ------------------------------ Name: Title: PRUDENTIAL SECURITIES CREDIT CORPORATION By: ------------------------------- Name: Title: 24 EXHIBIT A --------- SECURED NOTE Dated as of December 4, 1998 FOR VALUE RECEIVED, the undersigned, FIRST NATIONAL BANK OF NEW ENGLAND, a national bank, whose address is 280 Trumbull Street,, Hartford, Connecticut 06103 (the "Borrower"), promises to pay to the order of PRUDENTIAL SECURITIES CREDIT CORPORATION, a Delaware corporation, whose address is One Seaport Plaza, New York, New York 10292(the "Lender") on or before the Maturity Date the amount then outstanding under that certain Revolving Commercial Loan Warehouse and Security Agreement dated as of December 4, 1998 (the "Agreement"). Capitalized terms used herein and not defined herein shall have their respective meanings as set forth in the Agreement. The holder of this Note is authorized to record the date and amount of each Advance and the date and amount of each repayment of principal thereof on the schedule annexed hereto and any such recordation shall constitute prima ----- facie evidence of the accuracy of the amount so recorded; provided that the - ----- -------- failure of the holder hereof to make such recordation (or any error in such recordation) shall not affect the obligations of the Borrower hereunder or under the Agreement. MAXIMUM RATE OF INTEREST: It is intended that the rate of interest ------------------------ herein shall never exceed the maximum rate, if any, which may be legally charged on the Loan evidenced by this Note ("Maximum Rate"), and if the provisions for interest contained in this Note would result in a rate higher than the Maximum Rate, interest shall nevertheless be limited to the Maximum Rate and any amounts which may be paid toward interest in excess of the Maximum Rate shall be applied to the reduction of principal, or, at the option of the Lender, returned to the Borrower. DUE DATE: The Loan evidenced hereby not paid before the Maturity Date -------- shall be due and payable on the Maturity Date. PLACE OF PAYMENT: All payments hereon shall be made, and all notices ---------------- to the Lender required or authorized hereby shall be given, at the office of the Lender at the address designated in the heading of this Note, or to such other place as the Lender may from time to time direct by written notice to the Borrower. A-1 PAYMENT AND EXPENSES OF COLLECTION: All amounts payable hereunder are ---------------------------------- payable by wire transfer in immediately available funds to the account number specified by the Lender, in lawful money of the United States. Payments remitted by the Borrower via wire transfer initiated after 1:00 p.m. New York City shall be deemed to be received on the next business day. The Borrower agrees to pay all costs of collection when incurred, including, without limiting the generality of the foregoing, reasonable attorneys' fees through appellate proceedings, and to perform and comply with each of the covenants, conditions, provisions and agreements contained in every instrument now evidencing or securing said indebtedness. SECURITY: This Note is issued pursuant to the Agreement and is -------- secured by a pledge of the collateral described therein. Notwithstanding the pledge of the collateral, the Borrower hereby acknowledges, admits and agrees that the Borrower's obligations under this Note are recourse obligations of the Borrower to which the Borrower pledges its full faith and credit. DEFAULTS: Upon the happening of an Event of Default (as defined in -------- the Agreement), the Lender shall have all rights and remedies set forth in the Agreement. The failure to exercise any of the rights and remedies set forth in the Agreement shall not constitute a waiver of the right to exercise the same or any other option at any subsequent time in respect of the same event or any other event. The acceptance by the Lender of any payment hereunder which is less than payment in full of all amounts due and payable at the time of such payment shall not constitute a waiver of the right to exercise any of the foregoing rights and remedies at that time or at any subsequent time or nullify any prior exercise of any such rights and remedies without the express consent of Lender, except as and to the extent otherwise provided by law. WAIVERS: The Borrower, and any indorsers or guarantors hereof, ------- severally waive diligence, presentment, protest and demand and also notice of protest, demand, dishonor and nonpayments of this Note, and expressly agree that this Note, or any payment hereunder, may be extended from time to time, and consent to the acceptance of further collateral, the release of any collateral for this Note, the release of any party primarily or secondarily liable hereon, and that it will not be necessary for the Lender, in order to enforce payment of this Note, to first institute or exhaust Lender's remedies against the Borrower or any other party liable hereon or against any collateral for this Note. None of the foregoing shall affect the liability of the Borrower and any indorsers or guarantors hereof. No extension A-2 of time for the payment of this Note, or an installment hereof, made by agreement by the lender with any Person now or hereafter liable for the payment of this Note, shall affect the liability under this Note of the Borrower, even if the Borrower is not a party to such agreement; provided, however, the Lender and the Borrower, by written agreement between them, may affect the liability of the Borrower. TERMINOLOGY: If more than one party joins in the execution of this ----------- Note, the covenants and agreements herein contained shall be the joint and several obligation of each and all of them and of their respective heirs, executors, administrators, successors and assigns, and relative words herein shall be read as if written in the plural when appropriate. Any reference herein to the Lender shall be deemed to include and apply to every subsequent holder of this Note. Words of masculine or neuter import shall be read as if written in the neuter or masculine or feminine when appropriate. AGREEMENT: Reference is made to the Agreement for provisions as to --------- Advances, rates of interest, mandatory principal repayments, collateral and acceleration. APPLICABLE LAW: THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED UNDER -------------- THE LAWS OF THE STATE OF NEW YORK, THE LAWS OF WHICH THE BORROWER HEREBY EXPRESSLY ELECTS TO APPLY TO THIS NOTE. THE BORROWER AGREES THAT ANY ACTION OR PROCEEDING BROUGHT TO ENFORCE OR ARISING OUT OF THIS NOTE MAY BE COMMENCED IN THE SUPREME COURT OF THE STATE OF NEW YORK, OR IN THE DISTRICT COURT OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK. FIRST NATIONAL BANK OF NEW ENGLAND By: ------------------------------ Name: Title: A-3 Schedule to Secured Note ------------
Amount of Total Amount of Principal Principal Date Advance Repaid Outstanding - ------------------- --------------------- ----------------- ---------------- $ - ------------------- ---------------------- ----------------- ---------------- $ - ------------------- ---------------------- ----------------- ---------------- $ - ------------------- ---------------------- ----------------- ---------------- $ - ------------------- ---------------------- ----------------- ---------------- $ - ------------------- ---------------------- ----------------- ---------------- $ - ------------------- ---------------------- ----------------- ---------------- $ - ------------------- ---------------------- ----------------- ---------------- $ - ------------------- ---------------------- ----------------- ---------------- $ - ------------------- --------------------- ----------------- ----------------
A-4 EXHIBIT B --------- FORM OF LEGAL OPINION --------------------- December 4, 1998 Prudential Securities Credit Corporation One Seaport Plaza Credit Analysis Department New York, NY 10292 Prudential Securities Incorporated One New York Plaza Investment Banking Group New York, NY 10292 Re: First National Bank of New England ---------------------------------- Ladies and Gentlemen: We have acted as counsel to First National Bank of New England, a banking corporation organized under the laws of the United States (the "Borrower"), and First International Bancorp, Inc., a Delaware corporation (the "Guarantor"), in connection with the Revolving Commercial Loan Warehouse and Security Agreement dated as of December 4, 1998 (the "Warehouse Loan Agreement"), among the Borrower, the Guarantor, and Prudential Securities Credit Corporation (the "Lender"), and the transactions contemplated thereby. Capitalized terms used herein and not otherwise defined shall have the respective meanings given such terms in the Warehouse Loan Agreement. This opinion is rendered to you pursuant to Section 1(a)(2)(ii)(B)(1) of the Warehouse Loan Agreement. Although we act generally as counsel to the Borrower and the Guarantor, our representation is limited to matters individually referred to us by the Borrower's or Guarantor's management. As to all matters of fact (including factual conclusions and characterizations and descriptions of purpose, intention or other state of mind), we have relied, with your permission, entirely upon (a) the representations and warranties of the Borrower and Guarantor (the "Loan Parties") set forth in the Warehouse Loan Agreement and each of the other documents executed in connection therewith by the Loan Parties which have been provided to us, and (b) certificates of certain of B-1 the officers of the Loan Parties and have assumed, without independent inquiry, the accuracy of those representations, warranties, and certificates. For purposes of our opinion rendered in paragraph 1 below, with respect to the incorporation, organization, existence, qualification, or standing of any Loan Party, our opinion relies entirely upon and is limited by those certificates of public officials attached hereto as Exhibit A. --------- In connection with this opinion, we have examined originals or copies of the following documents: (i) the Warehouse Loan Agreement; (ii) the Secured Note; (iii) the Guaranty; (iv) the Custody Agreement; (v) the Articles of Association (the "Borrower's Charter") of the Borrower, certified by the Comptroller of the Currency as of , 1998, and certified by an officer of the Borrower as of the date hereof as being true, complete and correct and in full force and effect; (vi) the Restated Certificate of Incorporation (the "Guarantor's Charter" and, together with the Borrower's Charter, the "Charters") of the Guarantor, certified by the Secretary of State of the State of Delaware as of 1, 1998, and certified by an officer of the Guarantor as of the date hereof as being true, complete and correct and in full force and effect; (vii) the By-Laws of the Borrower (the "Borrower's By-Laws"), certified by an officer of the Borrower as of the date hereof as being true, complete and correct and in full force and effect; (viii) the By-Laws of the Guarantor (the "Guarantor's By-Laws" and, together with the Borrower's By-Laws, the "By-Laws") (the Charters and the By- Laws together being referred to sometimes herein as the "Governing Documents"), certified by an officer of the Guarantor as of the date hereof as being true, complete and correct and in full force and effect; (ix) the certificate of certain officers of the Borrower, as of the date hereof, as to certain actions taken by the B-2 Board of Directors of the Borrower at a meeting held on _________, 1998; (x) the certificate of certain officers of the Guarantor, as of the date hereof, as to certain actions taken by the Board of Directors of the Guarantor at a meeting held on ________, 1998; and (xi) those certificates of certain public officials with respect to the Loan Parties attached hereto as Exhibit A. --------- The documents specified in paragraphs (i) through (iv) above are referred to herein, collectively, as the "Loan Documents". This opinion is based entirely on our review of the documents listed in the preceding paragraph, and we have made no other documentary review or investigation of any kind whatsoever for purposes of this opinion. We have assumed the genuineness of all signatures, the conformity to the originals of all documents reviewed by us as copies, the authenticity and completeness of all original documents reviewed by us in original or copy form and the legal competence of each individual executing any document. For purposes of this opinion, we have made such examination of law as we have deemed necessary. This opinion is limited solely to the internal substantive laws of the State of Connecticut as applied by courts located in Connecticut without regard to choice of law, the federal laws of the United States of America (except for Federal and state securities or blue sky laws, as to which we express no opinion in this letter), and the Delaware General Corporation Law as applied by courts located in Delaware (the "DGCL"), and we express no opinion as to the laws of any other jurisdiction. To the extent to which this opinion deals with matters governed by or relating to the laws of the State of New York, by which the Warehouse Loan Agreement and certain of the other Loan Documents are stated to be governed, we have assumed, with your permission and without any independent investigation, that such laws are identical to the internal substantive laws of the State of Connecticut. No opinion is given herein as to the choice of law or internal substantive rules of law that any court or other tribunal may apply to the transactions contemplated by the Warehouse Loan Agreement and the other Loan Documents. Our opinion is further subject to the following exceptions, qualifications and assumptions, all of which we understand to be acceptable to you: B-3 (a) We have assumed without any independent investigation that (i) each party to the Warehouse Loan Agreement and the other Loan Documents, other than the Loan Parties, at all times relevant thereto, is validly existing and in good standing under the laws of the jurisdiction in which it is organized, and is qualified to do business and in good standing under the laws of each jurisdiction where such qualification is required generally or necessary in order for such party to enforce its rights under such Loan Documents, and (ii) each party to the Warehouse Loan Agreement and the other Loan Documents, at all times relevant thereto, had and has the full power, authority and legal right under its certificate of incorporation, partnership agreement, by-laws, and other governing organizational documents, and the applicable corporate, partnership, or other enterprise legislation and other applicable laws, as the case may be (other than, to the limited extent the same may be applicable to the Loan Parties and relevant to our opinions expressed below, the Loan Parties with respect to the Governing Documents, the federal laws of the United States of America, and the DGCL), to execute, and to perform its obligations under, the Warehouse Loan Agreement and the other Loan Documents. (b) We have assumed without any independent investigation (i) that each of the Loan Parties has received the agreed to and stated consideration for the incurrence of the Loans and other obligations applicable to it under the terms of the Warehouse Loan Agreement and the other Loan Documents, (ii) that each of the Warehouse Loan Agreement and the other Loan Documents is a valid and binding obligation of each party thereto other than the Loan Parties, and (iii) that each of the Warehouse Loan Agreement and the other Loan Documents is a valid and binding obligation of the Loan Parties to the extent that laws other than those of the State of Connecticut are relevant thereto (other than the federal laws of the United States of America, and the DGCL, but only to the limited extent the same may be applicable to the Loan Parties and relevant to our opinions expressed below). (c) The enforcement of any obligations of any of the Loan Parties under any of the Warehouse Loan Agreement or the other Loan Documents may be limited by bankruptcy, insolvency, reorganization, moratorium, marshaling or other laws and rules of law affecting the enforcement generally of creditors' rights and remedies (including such as may deny giving effect to waivers of debtors' or B-4 guarantors' rights); and we express no opinion as to the status under any fraudulent conveyance laws or fraudulent transfer laws of any of the obligations of any of the Loan Parties under any of the Warehouse Loan Agreement or the other Loan Documents. (d) We express no opinion as the availability of any specific or equitable relief of any kind, or as to the enforceability of any particular provision of any of the Warehouse Loan Agreement or the other Loan Documents relating to remedies after default. (e) The enforcement of any of your rights may in all cases be subject to an implied duty of good faith and fair dealing and to general principles of equity (regardless of whether such enforceability is considered in a proceeding at law or in equity) and, as to any of your rights to collateral security, will be subject to a duty to act in a commercially reasonable manner. (f) We express no opinion as to the enforceability of any particular provision of any of the Warehouse Loan Agreement or the other Loan Documents relating to (i) waivers of rights to object to jurisdiction or venue, or consents to jurisdiction or venue, (ii) waivers of rights to (or methods of) service of process, or other rights or benefits bestowed by operation of law, (iii) waivers of any applicable defenses, setoffs, recoupments, or counterclaims, (iv) waivers or variations of provisions which are not capable of waiver or variation under the Uniform Commercial Code of the State of Connecticut (the "Connecticut UCC"), (v) the grant of powers of attorney to the Lender, (vi) exculpation or exoneration clauses, indemnity clauses, and clauses relating to releases or waivers of unmatured claims or rights, or (vii) the providing for a penalty rate of interest or late charges on overdue or defaulted obligations, or the payment of any premium, liquidated damages, or other amount which may be held by any court to be a "penalty" or a "forfeiture". We express no opinion as to the effect of suretyship defenses, or defenses in the nature thereof, with respect to the obligations of any applicable guarantor, joint obligor, surety, accommodation party, or other secondary obligor. (g) No opinion is given herein as to the effect of so-called "usury savings clauses" or other provisions of the Warehouse Loan Agreement or the other Loan Documents purporting to deal with compliance with usury laws or B-5 other laws relating to limitations on the amount of interest or other similar charges which lenders may make or receive in connection with lending transactions. (h) When any opinion set forth below is given to our knowledge, or to the best of our knowledge, or with reference to matters of which we are aware or which are known to us, or with a similar qualification, that knowledge is limited to the actual knowledge of the individual lawyers in this firm who have participated directly and substantively in the specific transactions to which this opinion relates and without any special or additional investigation undertaken for the purposes of this opinion. (i) We express no opinion as to the effect of events occurring, circumstances arising, or changes of law becoming effective or occurring, after the date hereof on the matters addressed in this opinion letter, and we assume no responsibility to inform you of additional or changed facts, or changes in law, of which we may become aware. (j) We have assumed, based solely upon certificates of certain officers of the Loan Parties, that (i) the Guarantor is the corporate parent of the Borrower, owning all of its outstanding stock; (ii) the Guaranty is necessary or convenient to the conduct, promotion or attainment of the business of the Borrower; and (iii) the Custodian is not an affiliate of, or controlled by, the Borrower or the Guarantor. (k) We have made no examination of, and no opinion is given herein as to, any Loan Party's title to or other ownership rights in, the accuracy of the descriptions of, or the existence of any liens, charges, encumbrances, restrictions or limitations on, or adverse claims against, any of the property or assets of any Loan Party. We have assumed without any independent investigation that each Loan Party has rights in the Collateral and any other assets in which it purports to grant a security interest under the Loan Documents, and that each of the Loan Documents executed by each Loan Party that purports to grant collateral creates a valid security interest in such portion of the Collateral and any such other assets in which a security interest may be created by contract to secure the obligations of such Loan Party to the extent that laws other than those of the State of Connecticut are relevant thereto. We express no opinion as to the B-6 priority or (except to the extent specifically set forth in paragraphs 6 and 7 below) the attachment, validity, or perfection of any security interest, mortgage, or other lien or encumbrance with respect to any of the property or assets of any Loan Party. Further, we express no opinion as to any security interest in any Collateral or any other assets excluded from, or not governed by, Article 9 of the Connecticut UCC. We call your attention to the following: (i) there exist certain limitations, resulting from the operation of Section 9-306 of the Connecticut UCC, on the perfection of any security interest in proceeds of collateral, such that further action (in or out of Connecticut) may be necessary to maintain perfection of such interests; (ii) Section 552 of the federal Bankruptcy Code limits the extent to which property acquired by a debtor after the commencement of a case under the Bankruptcy Code may be subject to a security interest resulting from any security agreement entered into by the debtor before the commencement of the case; and under Section 547 of the Bankruptcy Code, a security interest that is deemed transferred within the relevant period set forth in Section 547(e) of the Bankruptcy Code may be avoidable under certain circumstances; and (iii) the security interests in the Collateral may be subject to the limitations set forth in Section 9-318 of the Connecticut UCC; and, in any event, any security interests in the assets of any Loan Party may be subject to the economic effects of valid recoupments, offsets, counterclaims, and similar rights of the makers of the promissory notes included in the Collateral or other contractual parties, the terms of contracts between any Loan Party and such other parties, and any claims or defenses of such other parties against any Loan Party arising under or extrinsic to such contracts. (l) We express no opinion as to the effect on the opinions expressed herein of (i) the compliance or non-compliance of the Lender or any other party (other than the Loan Parties) to the Loan Documents with any state, federal or other laws or regulations applicable to it or (ii) the legal or regulatory status or the nature of the business of any such Lender or other party. B-7 (m) We have assumed without any independent investigation that the Custodian will maintain physical possession of the promissory notes included in the Collateral and that the Custodian will not hold any such notes in a securities account. In addition to the foregoing, with respect to the opinions set forth in paragraph 7 below, our opinion is further subject to the following assumptions, limitations and exceptions: (n) we have assumed that (i) the promissory notes that are included in the Collateral (the "Collateral Notes") are instruments as defined in the Connecticut UCC and are not investment property as defined in the Connecticut UCC, (ii) the Borrower is the owner of the Collateral Notes, (iii) the Collateral Notes will be delivered to the Lender or an agent for the Lender in New York and perfection of the security interest granted to the Lender in the Collateral Notes will be governed by the Uniform Commercial Code of the State of New York (the "NY UCC") and that the effect of such delivery in New York and perfection being governed by the New York UCC will be the same as it would be if delivery were made in Connecticut and perfection were governed by the Connecticut UCC, (iv) the Collateral Notes will not constitute "proceeds" of other collateral within the meaning of (S)9-306 of the Connecticut UCC and are not subject to a security interest described in (S)(S)9-304(4) or 9-304(5) of the Connecticut UCC which provide for 21 day periods during which a security interest in instruments can be perfected without taking or continuing possession of the instrument, (v) the Custodian is not affiliated with the Borrower and neither the Borrower nor the Custodian has any right, directly or indirectly, to control the business affairs of the other, and (vi) neither the Borrower, the Lender nor Custodian has any notice of adverse claims to the Collateral Notes. (o) no opinion is expressed herein as to whether the Collateral Notes constitute negotiable instruments or as to whether the Lender or Custodian will be a holder in due course of such instruments. Based upon the foregoing, and subject to the limitations and qualifications set forth below, we are of the opinion that: 1. The Borrower is validly existing as a national banking association under the laws of the United States. The Guarantor is a corporation validly existing and in corporate B-8 good standing under the laws of the State of Delaware. Each of the Loan Parties has the requisite corporate power and authority to enter into and to perform its obligations under each of the Warehouse Loan Agreement and the other Loan Documents to which it is a party. 2. The execution and delivery by each of the Loan Parties of the Warehouse Loan Agreement and the other Loan Documents to which it is a party, and the performance by each of the Loan Parties of its obligations under each of the Warehouse Loan Agreement and the other Loan Documents to which it is a party, are within such Loan Party's corporate powers and have been duly authorized by all requisite corporate action on the part of such Loan Party. Each of the Loan Parties has duly executed and delivered each of the Loan Documents to which it is a party. 3. Each of the Warehouse Loan Agreement and the other Loan Documents to which each of the Loan Parties is a party constitutes a valid and binding agreement of such Loan Party, enforceable against such Loan Party in accordance with its respective terms. 4. The execution and delivery by each of the Loan Parties of each of the Loan Documents to which it is a party and the consummation of the transactions contemplated thereby and compliance by such Loan Party with the provisions thereof (i) will not conflict with or result in a breach or default (or give rise to any right of termination, cancellation or acceleration) under any of the provisions of the Governing Documents of such Loan Party or, to the best of our knowledge, any other material agreement binding upon such Loan Party of which we are aware, except for such conflict, breach or default as to which requisite waivers or consents have been obtained, (ii) will not violate any law, statute, rule or regulation of the State of Connecticut, the DGCL or the federal laws of the United States of America or, to the best of our knowledge, any judgment, order, writ, injunction or decree of any court or other tribunal located in the State of Connecticut of which we are aware, applicable to such Loan Party or any of its properties or assets, and (iii) to the best of our knowledge, will not result in the creation or imposition of any lien (other than liens evidenced by the Loan Documents in favor of the Lender) on any asset of such Loan Party. Except for the filings necessary to create, record or perfect, or maintain the perfection of, or to enforce, the security interests created by the Loan Documents, to the best of our knowledge, no consent or approval by, or any notification of or filing with, any court, public body or authority of the State of Connecticut is required to be obtained by any of the Loan Parties in connection with the B-9 execution, delivery and performance by such Loan Party of each of the Loan Documents to which it is a party or the consummation by such Loan Party of the transactions contemplated thereby. 5. To our knowledge, but without having investigated any governmental records or court dockets, and without having made any other independent investigation, there is no action, suit or proceeding pending against any of the Loan Parties or any of their respective assets before any court or arbitrator or any governmental body, agency or official, in which there is a reasonable possibility of an adverse decision which could reasonably be expected to affect materially and adversely the consolidated financial position of the Borrower, or which in any manner draws into question the validity of the Warehouse Loan Agreement or the other Loan Documents. 6. The provisions of the Warehouse Loan Agreement are effective under the Connecticut UCC to create a valid, attached security interest in favor of the Lender in all right, title and interest of the Borrower in the Collateral, to the extent that Article 9 of the Connecticut UCC is applicable. 7. Upon the delivery to the Custodian of the promissory notes included in the Collateral, and assuming the continued possession at all times by the Custodian or the Lender of such promissory notes, the Lender will have a perfected security interest in such promissory notes under the Connecticut UCC, and such security interest will have priority over other security interests in such promissory notes that can be perfected under Article 9 of the Connecticut UCC. This opinion is delivered solely to you and for your benefit in connection with the Warehouse Loan Agreement and may not be relied upon by you for any other purpose or furnished or referred to, or relied upon, by any other person or entity for any reason without our prior written consent. Very truly yours, B-10 Exhibit C --------- CREDIT INCREASE CONFIRMATION AND NOTE AMENDMENT Dated ______________ Reference is made to (x) the Revolving Commercial Loan Warehouse and Security Agreement, dated as of December 4, 1998 (the "Revolving Warehouse Agreement") among Prudential Securities Credit Corporation (the "Lender"), First National Bank of New England (the "Borrower") and First International Bancorp, Inc. (the "Guarantor") and(y) the Secured Note dated as of December 4, 1998 (the "Note") from the Borrower to the Lender. Section 1. - --------- The "Maturity Date" referenced in the Revolving Warehouse Agreement and in the Note shall be ______________________. The maximum Loan amount available under the Revolving Warehouse Agreement and in the Note shall be _________________. [Any other changes.] Section 2. - --------- As amended by Section 1 hereof all provisions of the Revolving Warehouse Agreement and of the Note are reconfirmed as of the date hereof. The Borrower and the Guarantor, in addition, hereby reconfirm and remake as of the date hereof each and every of their respective representations, warranties and covenants set forth in the Revolving Warehouse Agreement. C-1 FIRST NATIONAL BANK OF NEW ENGLAND By:_________________________________ Name: Title: FIRST INTERNATIONAL BANCORP, INC. By:_________________________________ Name: Title: PRUDENTIAL SECURITIES CREDIT CORPORATION By:_________________________________ Name: Title: C-2 Exhibit D --------- FUNDING NOTICE -------------- ___________, __, 19__ Prudential Securities Credit Corporation One Seaport Plaza Treasury Department New York, NY 10292 Attention: Robert Troiano Fax: (212) 214-7535 Re: Revolving Commercial Loan Warehouse and Security Agreement, dated as of December 4, 1998 ("Agreement") ------------------------------- Ladies and Gentlemen: Reference is made to the Agreement for defined terms used herein. Pursuant to Section 1(a)4 of the Agreement, this letter constitutes notice that the undersigned desires to obtain an Advance on __________ __, 19__, in the principal amount of $____________, constituting ___% of the aggregate outstanding principal balance of the Commercial Loans shown on the attached Commercial Loan Schedule, as of the Cut-Off Date shown thereon. This letter will further certify that: (1) the undersigned has no notice or knowledge of any Event of Default; (2) the representations and warranties in the Agreement relating to the Commercial Loans shown on the attached Commercial Loan Schedule are true and correct as of the date hereof; (3) each of the conditions to an Advance listed in Section 1(a)2. of the Agreement are true and correct as of the date hereof and shall be true and correct on the date of the Advance requested herein, before and after giving effect thereto. FIRST NATIONAL BANK OF NEW ENGLAND By:____________________________________ Name: Title: cc: Prudential Securities Credit Corporation Dan Lynch - Fax: (212) 214-7533 D-1 Prudential Securities Incorporated Peter Austin - Fax: (212) 778-7401 Lina Hsu - Fax: (212) 778-3716 Marine Midland Bank Susan Barstock - Fax: (212) 658-6425 D-2 Exhibit E --------- GUARANTY In order to induce PRUDENTIAL SECURITIES CREDIT CORPORATION ("Lender") to lend up to $75,000,000 to FIRST NATIONAL BANK OF NEW ENGLAND ("Borrower"), a wholly- owned subsidiary of FIRST INTERNATIONAL BANCORP, INC., pursuant to the Revolving Commercial Loan Warehouse and Security Agreement, dated as of December 4, 1998 (the "Warehouse Agreement"), to fund the origination of certain Commercial Loans, FIRST INTERNATIONAL BANCORP, INC. (the "Guarantor") hereby absolutely, unconditionally and irrevocably guarantees, as a primary obligor and not merely as a surety, the due and punctual payment of the Borrower's obligations under the Warehouse Agreement and the related Note when and as due, whether at stated payment dates, at maturity, by acceleration or otherwise, and all other obligations of the Borrower to the Lender pursuant to the Warehouse Agreement, including without limitation all of the Lender's out-of-pocket costs and attorneys' fees and expenses associated therewith (the "Obligations"). The Guarantor further agrees that the Obligations may be extended and renewed, in whole or in part, in accordance with the provisions of the Warehouse Agreement, without notice to or further assent from it, and that it will remain bound upon its guarantee notwithstanding any extension or renewal of any Obligations by the Lender. Capitalized terms used herein but not defined herein shall have the meaning set forth in the Warehouse Agreement. In furtherance of the foregoing and not in limitation of any other right which the Lender may have at law or in equity against the Guarantor by virtue hereof, upon the occurrence of an event requiring the payment by the Borrower of any Obligations, the Guarantor hereby promises to and will, upon receipt of written demand by the Lender, forthwith pay, or cause to be paid, to the Lender in cash the amount of such unpaid Obligations. Upon payment by the Guarantor of any sums to the Lender as provided above, all rights of the Guarantor against the Borrower arising as a result thereof by way of right of subrogation or otherwise shall in all respects be subordinated and junior in right of payment to the prior indefeasible payment in full of all the Obligations to the Lender. The Guarantor waives presentment to, demand of payment from and protest to the Borrower of any of the Obligations, and also waives notice of acceptance of its guarantee and notice of protest for nonpayment. The obligations of the Guarantor hereunder shall not be affected by (a) the failure of the Lender E-1 to assert any claim or demand or to enforce any right or remedy against the Borrower under the provisions of the Warehouse Agreement or otherwise; (b) any rescission, waiver, amendment or modification of any of the terms or provisions of the Warehouse Agreement or any other agreement or (c) the release of any security held by the Lender for the Obligations or any of them. The Guarantor further agrees that its guarantee constitutes a guarantee of payment when due and not of collection, and waives any right to require that any resort be had by the Lender to any security held for payment of the Obligations. The representations, warranties and covenants relating to the Guarantor set forth in Section 4 to the Warehouse Agreement are incorporated herein by reference, and such representations and warranties are true and correct on the date hereof. The obligations of the Guarantor hereunder shall not be subject to any reduction, limitation, impairment or termination for any reason, including, without limitation, any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to any defense or setoff, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality or unenforceability of the Obligations or otherwise. Without limiting the generality of the foregoing, the obligations of the Guarantor hereunder shall not be discharged or impaired or otherwise affected by the failure of the Lender to assert any claim or demand or to enforce any remedy under the Warehouse Agreement or any other agreement, by any waiver or modification on any thereof, by any default, failure or delay, willful or otherwise, in the performance of the Obligations, or by any other act or omission which may or might in any manner or to any extent vary the risk of the Guarantor or otherwise operate as a discharge of the Guarantor as a matter of law or equity. The Guarantor further agrees that its guarantee shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of principal of or interest on any Obligation is rescinded or must otherwise be restored by the Lender upon the bankruptcy or reorganization of the Borrower or otherwise, all as though such payment had not been made. The Guarantor hereby irrevocably and unconditionally consents to submit to the exclusive jurisdiction of the federal and New York State courts located in the City of New York for any action, suit or proceeding instituted by the Lender to enforce this Guaranty. The Guarantor further agrees that service of any E-2 process, summons, notice or documents by U.S. registered or certified mail to the Guarantor's address set forth below shall be effective service of process for any such proceeding. The Guarantor hereby irrevocably and unconditionally waives any objection the Guarantor may have at any time to the venue or forum of any such proceeding brought in such a court. E-3 IN WITNESS WHEREOF, the undersigned has executed this Guaranty on the day and year set forth below. Date: December 4, 1998 FIRST INTERNATIONAL BANCORP, INC. By:__________________________________ Name: Title: Address of Guarantor: First International Bancorp, Inc. 280 Trumbull Street Hartford, Connecticut 06103 Tel. No. 860-241-2529 Fax No. 860-241-2501 Attention: Leslie Galbraith Accepted: PRUDENTIAL SECURITIES CREDIT CORPORATION, Lender By:_________________________________ Name: Title: E-4 ACKNOWLEDGMENT STATE OF____________) ):ss.: COUNTY OF___________) On this _____ day of December, 1998, before me came__________________________, the _____________ of FIRST INTERNATIONAL BANCORP, INC. to me known to be the Guarantor described in, and who executed the foregoing instrument, and acknowledged that (s)he executed the same. ____________________________________ Notary Public Commission Expires________________ E-5 EX-10.13 6 LOAN PURCHASE AND SERVICING AGREEMENT EXECUTION COPY EXHIBIT 10.13 ================================================================================ $65,000,000 LOAN PURCHASE AND SERVICING AGREEMENT Dated as of December 23, 1998 Among FNBNE FUNDING CORP. as the Seller ------------- FIRST NATIONAL BANK OF NEW ENGLAND as the Servicer --------------- the INVESTORS named herein ------------- VARIABLE FUNDING CAPITAL CORPORATION as a Purchaser -------------- FIRST UNION CAPITAL MARKETS, a division of WHEAT FIRST SECURITIES, INC. as the Deal Agent ----------------- FIRST UNION NATIONAL BANK as the Liquidity Agent ---------------------- and MARINE MIDLAND BANK as the Collateral Custodian and Backup Servicer ----------------------------------------------- ================================================================================ TABLE OF CONTENTS -----------------
Page ARTICLE I DEFINITIONS.................................................................................. 1 Section 1.1 Certain Defined Terms..................................................................... 1 --------------------- Section 1.2 Other Terms............................................................................... 25 ----------- Section 1.3 Computation of Time Periods............................................................... 25 --------------------------- ARTICLE II THE PURCHASE FACILITY........................................................................ 25 Section 2.1 Purchases of Asset Interests.............................................................. 25 ---------------------------- Section 2.2 The Initial Purchase and Incremental Purchases............................................ 26 ---------------------------------------------- Section 2.3 Reduction of the Purchase Limit........................................................... 27 ------------------------------- Section 2.4 Determination of Yield.................................................................... 27 ---------------------- Section 2.5 Percentage Evidenced by Asset Interest.................................................... 27 -------------------------------------- Section 2.6 Dividing or Combining Asset Interests..................................................... 27 ------------------------------------- Section 2.7 Settlement Procedures..................................................................... 28 --------------------- Section 2.8 [Reserved.]............................................................................... 30 ----------- Section 2.9 Substitution of Loans..................................................................... 30 --------------------- Section 2.10 Collections and Allocations............................................................... 31 --------------------------- Section 2.11 Payments, Computations, Etc............................................................... 31 --------------------------- Section 2.12 Optional Repurchase...................................................................... 32 ------------------- Section 2.13 Fees...................................................................................... 32 ---- Section 2.14 Increased Costs; Capital Adequacy; Illegality............................................. 33 --------------------------------------------- Section 2.15 Taxes..................................................................................... 34 ----- Section 2.16 Assignment of the Purchase Agreement...................................................... 36 ------------------------------------ ARTICLE III CLOSING; CONDITIONS OF CLOSING AND PURCHASES................................................. 36 Section 3.1 Conditions to Closing and Initial Purchase................................................ 36 ------------------------------------------ Section 3.2 Conditions Precedent to All Purchases and Remittances of Collections...................... 37 -------------------------------------------------------------------- ARTICLE IV REPRESENTATIONS AND WARRANTIES............................................................... 38 Section 4.1 Representations and Warranties of the Seller.............................................. 38 -------------------------------------------- Section 4.2 Representations and Warranties of Seller Relating to the Agreement and the Loans.......... 42 -------------------------------------------------------------------------------- Section 4.3 Representations and Warranties of the Seller Relating to the Purchase Limit and Capital --------------------------------------------------------------------------------------- Limit..................................................................................... 44 ----- ARTICLE V GENERAL COVENANTS OF THE SELLER.............................................................. 44 Section 5.1 General Covenants......................................................................... 44 ----------------- Section 5.2 Covenants of Seller....................................................................... 44 ------------------- Section 5.3 Release of Lien........................................................................... 48 --------------- Section 5.4 Hedging Agreement......................................................................... 49 ----------------- Section 5.5 Retransfer of Ineligible Loans............................................................ 50 ------------------------------ Section 5.6 Retransfer of Assets...................................................................... 51 -------------------- Section 5.7 Year 2000 Compatibility................................................................... 52 -----------------------
i ARTICLE VI ADMINISTRATION AND SERVICING OF LOANS........................................................ 52 Section 6.1 Appointment and Acceptance; Duties........................................................ 52 ---------------------------------- Section 6.2 Duties and Responsibilities of the Servicer and the Collateral Custodian.................. 52 ------------------------------------------------------------------------ Section 6.3 Authorization of the Servicer............................................................. 56 ----------------------------- Section 6.4 Collection of Payments.................................................................... 57 --------------------- Section 6.5 Servicer Advances......................................................................... 58 ----------------- Section 6.6 Realization Upon Defaulted Loans.......................................................... 59 -------------------------------- Section 6.7 Representations and Warranties of Backup Servicer and Collateral Custodian................ 59 -------------------------------------------------------------------------- Section 6.8 Maintenance of Insurance Policies......................................................... 61 --------------------------------- Section 6.9 Representations and Warranties of Servicer................................................ 61 ------------------------------------------ Section 6.10 Covenants of Servicer..................................................................... 63 --------------------- Section 6.11 Covenants of Backup Servicer and Collateral Custodian..................................... 64 ----------------------------------------------------- Section 6.12 Servicing Compensation.................................................................... 65 ---------------------- Section 6.13 Custodial Compensation.................................................................... 65 ---------------------- Section 6.14 Payment of Certain Expenses by Servicer................................................... 65 --------------------------------------- Section 6.15 Reports................................................................................... 65 ------- Section 6.16 Annual Statement as to Compliance......................................................... 66 --------------------------------- Section 6.17 Annual Independent Public Accountant's Servicing Reports.................................. 66 -------------------------------------------------------- Section 6.18 Adjustments............................................................................... 67 ----------- Section 6.19 Merger or Consolidation of the Servicer................................................... 67 --------------------------------------- Section 6.20 Limitation on Liability of the Servicer and Others........................................ 68 ------------------------------------------------- Section 6.21 Indemnification of the Seller, the Deal Agent, the Liquidity Agent and the Secured ---------------------------------------------------------------------------------- Parties................................................................................... 68 ------- Section 6.22 The Servicer and Backup Servicer Not to Resign............................................ 69 ---------------------------------------------- Section 6.23 Access to Certain Documentation and Information Regarding the Loans....................... 69 ------------------------------------------------------------------- Section 6.24 Backup Servicer........................................................................... 70 --------------- Section 6.25 Identification of Records................................................................. 72 ------------------------- Section 6.26 Servicer Termination Events............................................................... 72 --------------------------- Section 6.27 Appointment of Successor Servicer......................................................... 73 -------------------------------- Section 6.28 Notification.............................................................................. 74 ------------ Section 6.29 Protection of Right, Title and Interest in Assets......................................... 74 ------------------------------------------------- Section 6.30 Release of Loan Files..................................................................... 75 --------------------- ARTICLE VII EARLY AMORTIZATION EVENTS.................................................................... 75 Section 7.1 Early Amortization Events................................................................. 75 ------------------------- ARTICLE VIII INDEMNIFICATION.............................................................................. 77 Section 8.1 Indemnities by the Seller................................................................. 77 ------------------------- ARTICLE IX THE DEAL AGENT AND THE LIQUIDITY AGENT....................................................... 80 Section 9.1 Authorization and Action.................................................................. 80 ------------------------ Section 9.2 Delegation of Duties...................................................................... 80 -------------------- Section 9.3 Exculpatory Provisions.................................................................... 81 ---------------------- Section 9.4 Reliance.................................................................................. 82 -------- Section 9.5 Non-Reliance on Deal Agent, Liquidity Agent and Others.................................... 82 ------------------------------------------------------ Section 9.6 Reimbursement and Indemnification......................................................... 83 ---------------------------------
ii Section 9.7 Deal Agent and Liquidity Agent in their Individual Capacities............................ 83 ------------------------------------------------------------- Section 9.8 Successor Deal Agent or Liquidity Agent.................................................. 83 --------------------------------------- ARTICLE X ASSIGNMENTS; PARTICIPATIONS.................................................................. 84 Section 10.1 Assignments and Participations........................................................... 84 ------------------------------ ARTICLE XI MISCELLANEOUS................................................................................ 87 Section 11.1 Amendments and Waivers................................................................... 87 ---------------------- Section 11.2 Notices, Etc............................................................................. 88 ------------ Section 11.3 [Reserved.].............................................................................. 88 ----------- Section 11.4 No Waiver, Rights and Remedies........................................................... 88 ------------------------------ Section 11.5 Binding Effect........................................................................... 88 -------------- Section 11.6 Term of this Agreement................................................................... 89 ---------------------- Section 11.7 GOVERNING LAW; CONSENT TO JURISDICTION; WAIVER OF OBJECTION TO VENUE..................... 89 -------------------------------------------------------------------- Section 11.8 WAIVER OF JURY TRIAL..................................................................... 89 -------------------- Section 11.9 Costs, Expenses and Taxes................................................................ 89 ------------------------- Section 11.10 No Proceedings........................................................................... 90 -------------- Section 11.11 Recourse Against Certain Parties......................................................... 90 -------------------------------- Section 11.12 Protection of Ownership Interest; Appointment of Deal Agent as Attorney-in-Fact.......... 91 ------------------------------------------------------------------------------- Section 11.13 Confidentiality.......................................................................... 92 --------------- Section 11.14 Execution in Counterparts; Severability; Integration..................................... 93 ----------------------------------------------------
iii EXHIBITS -------- EXHIBIT A Form of Notice of Sale EXHIBIT B Form of Lock-Box Notice EXHIBIT C "Limited Purpose" Provisions EXHIBIT D Form of Assignment and Acceptance EXHIBIT E Form of Monthly Report EXHIBIT F Form of Servicer's Certificate EXHIBIT G Credit and Collection Policies EXHIBIT H Form of Purchase Certificate EXHIBIT I Form of Hedging Agreement (including Schedule and Confirmation) EXHIBIT J Form of Officer's Certificate as to Solvency EXHIBIT K Form of Officer's Closing Certificate EXHIBIT L Form of Power of Attorney SCHEDULES --------- SCHEDULE I Conditions Precedent SCHEDULE II Concentration and Mix Requirements SCHEDULE III Tradenames, Fictitious Names and "Doing Business As" Names SCHEDULE IV List of Loans SCHEDULE V Locations of Loan Documents SCHEDULE VI Lock-Box Banks and Lock-Box Accounts iv THIS LOAN PURCHASE AND SERVICING AGREEMENT (the "Agreement") is made as of December 23, 1998, among: (1) FNBNE FUNDING CORP., a Delaware corporation, as borrower (the "Seller"); (2) FIRST NATIONAL BANK OF NEW ENGLAND, a national banking association, ("FNBNE"), as servicer (the "Servicer"); (3) the financial institutions listed on the signature pages of this Agreement under the heading "Investors" and their respective successors and assigns (the "Investors"); (4) VARIABLE FUNDING CAPITAL CORPORATION, a Delaware corporation ("VFCC"); (5) FIRST UNION CAPITAL MARKETS, a division of WHEAT FIRST SECURITIES, INC. ("FCM"), as deal agent (the "Deal Agent"); (6) FIRST UNION NATIONAL BANK ("First Union"), as liquidity agent (the "Liquidity Agent"); and (7) MARINE MIDLAND BANK ("Marine Midland"), as collateral custodian (the "Collateral Custodian") and as backup servicer (the "Backup Servicer"). IT IS AGREED as follows: ARTICLE I DEFINITIONS SECTION 1.1 CERTAIN DEFINED TERMS. --------------------- (a) Certain capitalized terms used throughout this Agreement are defined above or in this Section 1.1. (b) As used in this Agreement and its exhibits, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined). Addition Date: With respect to any Additional Loans, the date on which such - ------------- Additional Loans become Pool Assets. Additional Loans: All Loans that become Pool Assets after the Closing Date (or, - ---------------- if no Purchase is made on the Closing Date, then on the date of the initial Purchase hereunder). Adjusted Eurodollar Rate: On any day, an interest rate per annum equal to the - ------------------------ quotient, expressed as a percentage and rounded upwards (if necessary), to the nearest 1/100 of 1%, obtained by dividing (i) the LIBOR Rate, as applicable, on such day by (ii) the decimal equivalent of 100% minus the Eurodollar Reserve Percentage on such day. Administration Agreement: That certain Amended and Restated Administration - ------------------------- Agreement executed between VFCC and FCM, as the same may be amended, supplemented, or otherwise modified from time to time. Adverse Claim: A lien, security interest, pledge, charge, encumbrance or other - ------------- right or claim of any Person. Affected Party: As defined in Section 2.14(a). - -------------- Affiliate: With respect to a Person means any other Person controlling, - --------- controlled by or under common control with such Person. For purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" or "controlled" have meanings correlative to the foregoing. Aggregate Outstanding Loan Balance: As of any date of determination, the sum of - ---------------------------------- the Outstanding Loan Balances of all Eligible Loans included as part of the Asset Pool on such date. Aggregate Unpaids: At any time, an amount, equal to the sum of all Yield - ----------------- (accrued and to accrue), Capital and all other amounts owed hereunder, under any Hedging Agreement (including, without limitation, payments in respect of the termination of any such Hedging Agreement) or under any fee letter delivered by the Originator to the Deal Agent and the Purchasers and outstanding at such time (whether due or accrued). Agent's Account: A special account (account number 01 41 96 47) in the name of - --------------- the Deal Agent or, so long as VFCC is the sole Purchaser hereunder, in the name of VFCC, at Bankers Trust Company. Agreement: This Loan Purchase and Servicing Agreement, dated as of December 23, - --------- 1998, as amended, modified, supplemented or restated from time to time. AIG: National Union Fire Insurance Company of Pittsburgh, PA, which is a member - --- company of American International Group, Inc. AIG Loan: A Loan to an Obligor that is a short term import loan, with a term of - -------- 360 days or less and with interest and principal payable at maturity, a portion of the Outstanding Loan Balance of which is insured by the AIG Policy. 2 AIG Policy: That policy no. 649-8512, dated July 28, 1998, of AIG in favor of - ---------- FNBNE, which insures the AIG Loans, as such policy or successor policy may be replaced or renewed from time to time, so long as the Deal Agent, as agent for the Secured Parties, is (i) named as a loss payee, or as an additional insured, on such policy and on such renewal or replacement policy or (ii) otherwise satisfied that the AIG Policy inures to its benefit. Amortization Period: The period beginning on the Termination Date and ending on - ------------------- the Collection Date. Asset: All right, title and interest of the transferring party to and under any - ----- and all of the following: (i) the Transferred Loans, and all monies due or to become due in payment of such Loans on and after the related Transfer Date; (ii) any Related Property securing the Transferred Loans including all proceeds from any sale or other disposition of such Related Property; (iii) the Loan Documents; (iv) the Lock-Box Account, all funds held in such account, and all certificates and instruments, if any, from time to time representing or evidencing the Lock-Box Account or such funds; (v) the Cash Collateral Account, all funds held in such account, and all certificates and instruments, if any, from time to time representing or evidencing the Cash Collateral Account or such funds; (vi) the Collection Account, all funds held in such account, and all certificates and instruments, if any, from time to time representing or evidencing the Collection Account or such funds; (vii) all Collections and all other payments made or to be made in the future with respect to such Loans or by the Obligor thereunder and under any guarantee or similar credit enhancement with respect to such Loans, including but not limited to SBA guarantees and the AIG Policy; (viii) all payments received pursuant to any Hedging Agreement or Hedge Transaction; and (ix) all income and Proceeds of the foregoing. 3 Asset Interest: At any time, an undivided variable percentage ownership - -------------- interest in all Assets. Each Asset Interest shall be calculated in accordance with Section 2.5. The undivided percentage interest of an Asset Interest shall equal C+R ------ AOLB where: C = equals the Capital in respect of such Asset Interest. R = equals the aggregate Reserves in respect of such Asset Interest. AOLB = equals the Aggregate Outstanding Loan Balance. Asset Pool: At any time, all then outstanding Assets. - ---------- Assignment and Acceptance: An assignment and acceptance entered into by an - ------------------------- Investor and an Eligible Assignee, and accepted by the Deal Agent, in substantially the form of Exhibit D hereto. Available Collections: As defined in Section 2.7 hereof. - --------------------- Average Default Ratio: For any Determination Date, the arithmetic average of - --------------------- the Default Ratios, expressed as percentages, for the three (3) Collection Periods ended on such date, except that (i) in the case of the first Determination Date following the Closing Date, the "Average Default Ratio" shall be the Default Ratio for the Collection Period ended on such date, and (ii) in the case of the second Determination Date following the Closing Date, the "Average Default Ratio" shall be the arithmetic average of the Default Ratios for the two (2) Collection Periods ended on such date. Average Net Loss Ratio: For any Determination Date, the arithmetic average of - ---------------------- the Net Loss Ratios, expressed as percentages, for the three (3) Collection Periods ended on such date, except that (i) in the case of the first Determination Date following the Closing Date, the "Average Net Loss Ratio" shall be the Net Loss Ratio for the Collection Period ended on such date, and (ii) in the case of the second Determination Date following the Closing Date, the "Average Net Loss Ratio" shall be the arithmetic average of the Net Loss Ratios for the two (2) Collection Periods ended on such date. Backup Servicer: Marine Midland Bank, and its permitted successors and assigns. - --------------- Backup Servicer Fee: As set forth in the Backup Servicer and Collateral - ------------------- Custodian Fee Letter. Backup Servicer and Collateral Custodian Fee Letter: The letter, dated as of - --------------------------------------------------- the Closing Date, among FNBNE, the Seller, the Backup Servicer, the Collateral Custodian, the Deal Agent and 4 First Union, setting forth among other things the Backup Servicer Fee and the Collateral Custodian Fee. Bankruptcy Code: The Federal Bankruptcy Code, as amended from time to time - --------------- (Title 11 of the United States Code). Base Rate: On any date, a fluctuating rate of interest per annum equal to the - --------- higher of (a) the Prime Rate or (b) the Federal Funds Rate plus one-half of one percent (0.5%). Benefit Plan: Any employee benefit plan as defined in Section 3(3) of ERISA in - ------------ respect of which the Seller or any ERISA Affiliate of the Seller is, or at any time during the immediately preceding six years was, an "employer" as defined in Section 3(5) of ERISA. Breakage Costs: Any amount or amounts as shall compensate a Purchaser for any - -------------- loss, cost or expense incurred by such Purchaser (as determined in such Purchaser's sole discretion) as a result of a prepayment by the Seller of Capital or Yield pursuant to the terms hereof. Business Day: Any day of the year other than a Saturday or a Sunday on which - ------------ (a) banks are not required or authorized to be closed in New York City, Charlotte, North Carolina, and Hartford, Connecticut, and (b) if the term "Business Day" is used in connection with the Adjusted Eurodollar Rate, means the foregoing only if such day is also a day of year on which dealings in United States dollar deposits are carried on in the London interbank market. Capital: The sum of the amounts paid to the Seller for the initial Purchase and - ------- in connection with each Incremental Purchase pursuant to Section 2.2, reduced from time to time by Collections and other payments received and distributed to Purchasers on account of such Capital pursuant to Section 2.7; provided, -------- however, that such Capital shall not be reduced by any distribution of any - ------- portion of Principal Collections if at any time such distribution is rescinded or must be returned for any reason. Capital Limit: At any time the sum of (i) the Aggregate Outstanding Loan - ------------- Balance for all Eligible Loans that are Commercial Loans multiplied by the Purchase Rate with respect to Commercial Loans, (ii) the Aggregate Outstanding Loan Balance for all Eligible Loans that are SBA Loans multiplied by the Purchase Rate with respect to SBA Loans, and (iii) the Aggregate Outstanding Loan Balance for all Eligible Loans that are AIG Loans multiplied by the Purchase Rate with respect to AIG Loans. Cash Collateral Account: As defined in Section 6.4(g). - ----------------------- Casualty Loss: With respect to any item of Related Property, the loss, theft, - ------------- damage beyond repair or governmental condemnation or seizure of such item of Related Property. Change in Control: The date on which (i) any Person or "group" acquires any - ----------------- "beneficial ownership" (as such terms are defined under Rule 13d-3 of, and Regulation 13D under, the 5 Securities Exchange Act of 1934, as amended), either directly or indirectly, of membership interests or other equity interests or any interest convertible into any such interest in the Originator having more than fifty percent (50%) of the voting power for the election of directors of the Originator, if any, under ordinary circumstances, or (ii) (except in connection with any Securitization or in connection with the sale of Assets under the Purchase Agreement) the Originator sells, transfers, conveys, assigns or otherwise disposes of all or substantially all of the assets of the Originator; provided, however, it shall -------- ------- not be a Change in Control for any one or more of the following Persons, individually or collectively, to gain more than fifty percent (50%) of such voting power: Arnold Chase, Cheryl Chase, Rhoda L. Chase, David T. Chase, Brett N. Silvers, Nancy W. Silvers, and any family members, Affiliates, and heirs of any of the foregoing (collectively, the "Permitted Owners"), and any trusts, partnerships or other entities as to which the sole beneficiaries are any of the Permitted Owners. Charged-Off Loan: Any Loan (i) for which an Insolvency Event has occurred with - ---------------- respect to the related Obligor, (ii) for which the related Obligor has suffered any other change which materially and adversely affects its viability as a going concern, or (iii) which is or otherwise should be written off as uncollectible by the Servicer in accordance with the Credit and Collection Policies. Closing Date: December 23, 1998. - ------------ Code: The Internal Revenue Code of 1986, as amended. - ---- Collateral Custodian: Marine Midland Bank, and its permitted successors and - -------------------- assigns. Collateral Custodian Fee: As set forth in the Backup Servicer and Collateral - ------------------------ Custodian Fee Letter. Collection Account: As defined in Section 2.10. - ------------------ Collection Date: The date following the Termination Date on which the aggregate - --------------- outstanding Capital has been reduced to zero, the Purchasers have received all Yield and other amounts due to the Purchasers in connection with this Agreement each Hedge Transaction has been terminated and each Hedge Counterparty has received all amounts owing to it under its respective Hedging Agreement and the Deal Agent has received all amounts due to it in connection with this Agreement. Collection Period: Each calendar month, except in the case of the first - ----------------- Collection Period, the period beginning on the Closing Date to and including the last day of the calendar month in which the Closing Date occurs. Collections: With respect to any Transferred Loan, all cash collections or - ----------- other cash proceeds of such Loan received by the Servicer, Originator or Seller from or on behalf of any Obligor in payment of any amounts owed in respect of such Loan, including, without limitation, any Interest Collections, any Principal Collections, Deemed Collections, Insurance Proceeds, interest 6 earnings in the Collection Account, all recoveries on Charged-Off Loans, and all payments received pursuant to any Hedging Agreement or Hedge Transaction. Commercial Line of Credit: A revolving, line of credit Loan to an Obligor that - ------------------------- is neither an SBA Loan nor an AIG Loan. Commercial Loans: All of the Commercial Lines of Credit and the Commercial Term - ---------------- Loans. Commercial Term Loan: A term loan to an Obligor that is neither an SBA Loan nor - -------------------- an AIG Loan. Commercial Paper Notes: On any day, any short-term promissory notes issued by - ---------------------- VFCC with respect to financing its purchase of any Asset Interest hereunder. Commitment: For each Investor, the commitment of such Investor to purchase - ---------- Asset Interests from the Seller in an amount not to exceed the amount set forth opposite such Investor's name on the signature pages of this Agreement, as such amount may be modified in accordance with the terms hereof. Commitment Fee: As defined in Section 2.13(a) hereof. - -------------- Commitment Termination Date: December 23, 2001 or such later date to which the - --------------------------- Commitment Termination Date may be extended (if extended) in the sole discretion of VFCC and each Investor in accordance with the terms of Section 2.1(b). Conversion: As defined in Section 2.1(c). - ---------- Cost of Funds Adjustment: The difference by which the CP Rate exceeds the - ------------------------ Adjusted Eurodollar Rate. CP Rate: For any Fixed Period, the per annum rate equivalent to the weighted - ------- average of the per annum rates paid or payable by VFCC from time to time as interest on or otherwise (by means of interest rate hedges or otherwise) in respect of the promissory notes issued by VFCC that are allocated, in whole or in part, by the Deal Agent (on behalf of VFCC) to fund or maintain the Asset Interest during such period, as determined by the Deal Agent (on behalf of VFCC) and reported to the Seller and the Servicer, which rates shall reflect and give effect to (i) the commissions of placement agents and dealers in respect of such promissory notes, to the extent such commissions are allocated, in whole or in part, to such promissory notes by the Deal Agent (on behalf of VFCC), (ii) any incremental carrying costs associated with the issuance of such promissory notes maturing on dates other than those dates on which funds are received by VFCC, and (iii) other borrowings by VFCC, including, without limitation, borrowings to fund small or odd dollar amounts that are not easily accommodated in the commercial paper market; provided, however, that if any component of such rate -------- ------- is a discount rate, in calculating the "CP Rate," the 7 Deal Agent shall for such component use the rate resulting from converting such discount rate to an interest bearing equivalent rate per annum. Credit and Collection Policies: Those credit, collection, customer relation and - ------------------------------ service policies of the Originator and the Servicer as of the date hereof relating to the Loans and related Loan Documents, set forth in Exhibit G, as the --------- same may be amended or modified from time to time in accordance with Section 6.10(e). Deal Agent: FCM, as Deal Agent hereunder, together with its successors and - ---------- assigns. Deemed Collections: On any day, an amount equal to the unpaid balance - ------------------ (including any principal and accrued interest thereon) of any Loan included in the Asset Pool if on such day (a) the Deal Agent, as agent for the Secured Parties, does not have a valid perfected security interest in such Loan and any Related Property, or (b) a Warranty Event has occurred with respect to such Loan. Defaulted Loan: As of any day of determination, a Loan (i) as to which the - -------------- Obligor thereof has failed to make any payment, or part thereof, required to be made thereunder for 60 days following the due date thereof, or (ii) that is a Charged-Off Loan. Default Ratio: For any Collection Period, the percentage equivalent of a - ------------- fraction, the numerator is which is the product of (a) the Outstanding Loan Balance of Defaulted Loans at the end of such Collection Period, and (b) 12, and the denominator of which is the Outstanding Loan Balance of Additional Loans added to the Asset Pool during such Collection Period. Delinquent: On any day with respect to any Loan and any specified time period - ---------- any payment, or portion thereof, due with respect thereto, has not been made by the Obligor of such loan for the specified time period from the due date of such payment. Derivatives: Any exchange-traded or over-the-counter (i) forward, future, - ----------- option, swap, cap, collar, floor, foreign exchange contract, any combination thereof, whether for physical delivery or cash settlement, relating to any interest rate, interest rate index, currency, currency exchange rate, currency exchange rate index, debt instrument, debt price, debt index, depository instrument, depository price, depository index, equity instrument, equity price, equity index, commodity, commodity price or commodity index, (ii) any similar transaction, contract, instrument, undertaking or security, or (iii) any transaction, contract, instrument, undertaking or security containing any of the foregoing. Determination Date: With respect to any Payment Date, the last day of the - ------------------ immediately preceding Collection Period. Early Amortization Event: As defined in Section 7.1. - ------------------------ 8 Eligible Assignee: A Person whose short-term rating is at least A-1 from S&P - ----------------- and P-1 from Moody's, or whose obligations under this Agreement are guaranteed by a Person whose short-term rating is at least A-1 from S&P and P-1 from Moody's and is satisfactory to VFCC and the Deal Agent. Eligible Loan: On any date of determination, each Loan (a) which is a - ------------- Transferred Loan and identified on the list of Loans delivered by the Seller to the Collateral Custodian as part of a Notice of Sale, (b) which is a Commercial Loan, an AIG Loan or an SBA Loan, and (c) which satisfies each of the following requirements (unless otherwise agreed to in writing by the Deal Agent in its sole discretion): (i) the Loan is evidenced by a promissory note which has been duly authorized and which, together with the related Loan Documents, is in full force and effect and constitutes the legal, valid and binding obligation of the Obligor of such Loan to pay the stated amount of the Loan and interest thereon, and the related Loan Documents are enforceable against such Obligor in accordance with their respective terms; (ii) the Loan was originated and maintained in accordance with the terms of the Credit and Collection Policies and arose in the ordinary course of the Originator's business from the loaning of money to the Obligor thereof; (iii) the Loan is not a Defaulted Loan or a Charged-Off Loan or a Loan any payment or portion thereof is more than 30 days Delinquent; (iv) the Obligor of such Loan is an Eligible Obligor and has executed all appropriate documentation including documentation relating to its collateral required by the Originator; (v) the promissory note which evidences the Loan is an "instrument" and is not a "general intangible," an "account," or "chattel paper" as such terms are defined and used in the UCC of all jurisdictions which govern the perfection of the security interest granted therein; (vi) all material consents, licenses, approvals or authorizations of, or registrations or declarations with, any Governmental Authority required to be obtained, effected or given in connection with the making of such Loan have been duly obtained, effected or given and are in full force and effect and the Loan was otherwise originated in accordance with all federal and state governmental consumer and other applicable laws and regulations; (vii) the Loan is denominated and payable only in United States Dollars in the United States and the collateral securing such Loan is located only in the United States 9 unless otherwise agreed in writing by the Deal Agent upon its credit approval, including receipt and review of due diligence conducted by FNBNE; (viii) [Reserved] (ix) the Loan, together with the Loan Documents related thereto, does not contravene in any material respect any laws, rules or regulations applicable thereto (including, without limitation, laws, rules and regulations relating to usury, truth in lending, fair credit billing, fair credit reporting, equal credit opportunity, fair debt collection practices and privacy) and with respect to which no party to the Loan Documents related thereto is in material violation of any such law, rule or regulation in any respect; (x) the Loan, together with the related Loan Documents, is fully assignable; (xi) the Loan was documented and closed in accordance with the Originator's policies and procedures, including the relevant opinions and assignments, and only one current original promissory note with respect to such Loan, which promissory note has been delivered to the Collateral Custodian, duly endorsed for transfer under this Agreement; (xii) except for Permitted Liens, the Loan and all Related Property are free of any Liens; and all filings and other actions required to perfect the security interest of the Deal Agent as agent for the Secured Parties in the Assets related thereto have been made or taken; (xiii) the Required Loan Documents relating to such Loan are in the possession of the Collateral Custodian; (xiv) [Reserved] (xv) no right of recission, set off, counterclaim, defense or other material dispute has been asserted with respect to such Loan; (xvi) the Loan was made under the existing Loan Documents, which Loan Documents have not been modified in any respect or such Loan extended as a result of any adverse credit reason (including, without limitation on, rescheduling of installment payments); (xvii) any Related Property with respect to such Loan is insured in accordance with the Credit and Collection Policies; (xviii) the Loan Documents with respect to such Loan are complete in accordance with the Credit and Collection Policies; 10 (xix) the Obligor with respect to such Loan is an Eligible Obligor ; (xx) the Loan has an Eligible Risk Rating of 3.0 or better and was otherwise approved according to the Originator's Credit and Collection Policies; (xxi) if a Loan is a Commercial Line of Credit, (i) interest is due and payable monthly, (ii) the initial term of the Loan does not exceed 12 months, with all outstanding principal and interest due at the end of 12 months, and (iii) its respective Loan Documents provide that if it is not renewed it shall be amortized over a period not to exceed 36 additional months; (xxii) if a Loan is an SBA Loan, (i) the initial term of the Loan does not exceed 12 months and the Schedule of Payments provides for monthly interest payments with all outstanding principal and interest due at the end of 12 months, (ii) it was originated and approved under SBA policies and guidelines, and (iii) it is supported by a 90% SBA guaranty; (xxiii) if a Loan is a Commercial Term Loan, (i) the first Scheduled Payment on such Loan is due within 45 days after its Purchase Date, (ii) its term does not exceed 25 years, and (iii) its Schedule of Payments has equal payments of principal and interest except for the final payment which may be less than the other payments; and (xxiv) if a Loan is an AIG Loan, (i) its term to maturity does not exceed 360 days and such term may not be extended, (ii) the Obligor thereunder qualifies as a covered "Buyer" under the AIG Policy and is not on the "Excluded Buyer List" provided for under the AIG Policy, and a portion of such Loan is supported by AIG insurance pursuant to the AIG Policy, (iii) it qualifies as an "Insured Transaction" under the AIG Policy; and (iv) AIG's corporate unsecured debt rating is at least AA by S&P and Aa2 by Moody's. Eligible Obligor: Any Obligor which satisfies each of the following - ---------------- requirements at all times: (i) the Obligor is not in the gaming, nuclear waste, bio- tech, oil and gas or real estate industries; (ii) the Obligor is a legal operating entity, duly organized and validly existing under the laws of its jurisdiction of organization; (iii) the Obligor is not the subject of any Insolvency Event; (iv) the Obligor is not an Affiliate of any of the parties hereto; (v) the Obligor is not the Obligor of any Loan, any payment or portion thereof is more than 30 days Delinquent or any Charged-Off Loans; 11 (vi) the Obligor is not a Governmental Authority; (vii) the Obligor is in compliance with all material terms and conditions of its Loan Documents; (viii) the Obligor's principal office and any Related Property are located in the United States or any other country or territory of the United States approved by the Deal Agent upon receipt and review of satisfactory legal due diligence, Rating Agency discussions and credit approval; and (ix) the Obligor has an Eligible Risk Rating of 3.0 or better. Eligible Risk Rating: As of any date of determination, with respect to a - -------------------- designated Loan or Obligor, a risk rating of "1.0," "2.0," or "3.0" as determined by, or should have been determined by, the Servicer in accordance with the Credit and Collection Policies or as designated by the Originator. ERISA: The U.S. Employee Retirement Income Security Act of 1974, as amended - ----- from time to time, and the regulations promulgated and rulings issued thereunder. ERISA Affiliate: (a) Any corporation which is a member of the same controlled - --------------- group of corporations (within the meaning of Section 414(b) of the Code) as the Seller; (b) a trade or business (whether or not incorporated) under common control (within the meaning of Section 414(c) of the Code) with the Seller; or (c) a member of the same affiliated service group (within the meaning of Section 414(m) of the Code) as the Seller, any corporation described in clause (a) above or any trade or business described in clause (b) above. Eurodollar Disruption Event: The occurrence of any of the following: (a) a - --------------------------- determination by a Purchaser that it would be contrary to law or to the directive of any central bank or other governmental authority (whether or not having the force of law) to obtain United States dollars in the London interbank market to make, fund or maintain any Purchase, (b) the failure of one or more of the Reference Banks to furnish timely information for purposes of determining the Adjusted Eurodollar Rate, (c) a determination by a Purchaser that the rate at which deposits of United States dollars are being offered to such Purchaser in the London interbank market does not accurately reflect the cost to such Purchaser of making, funding or maintaining any Purchase or (d) the inability of a Purchaser to obtain United States dollars in the London interbank market to make, fund or maintain any Purchase. Eurodollar Reserve Percentage: For any day, that percentage (expressed as a - ----------------------------- decimal) which is in effect from time to time under Regulation D of the Board of Governors of the Federal Reserve System (or any successor), as such regulation may be amended from time to time or any successor regulation, as the reserve requirement (including, without limitation, any basic, supplemental, emergency, special, or marginal reserves) applicable with respect to Eurocurrency 12 Liabilities as that term is defined in Regulation D (or against any other category of liabilities that includes deposits by reference to which the LIBOR Rate is determined), whether or not the Purchasers have any Eurocurrency Liabilities subject to such reserve requirement at that time. All Capital whose Yield is computed by reference to the Adjusted Eurodollar Rate shall be deemed to constitute Eurocurrency Liabilities and as such shall be deemed subject to reserve requirements without benefits of credits for proration, exceptions or offsets that may be available from time to time to a Purchaser. The Adjusted Eurodollar Rate shall be adjusted automatically on and as of the effective date of any change in the Eurodollar Reserve Percentage. Facility: This Loan Purchase and Servicing Agreement, dated as of December 23, - -------- 1998, as amended, modified, supplemented or restated from time to time. Federal Funds Rate: For any period, a fluctuating interest rate per annum equal - ------------------- for each day during such period to the weighted average of the federal funds rates as quoted by First Union and confirmed in Federal Reserve Board Statistical Release H.15(519) or any successor or substitute publication selected by First Union (or, if such day is not a Business Day, for the preceding Business Day), or, if, for any reason, such rate is not available on any day, the rate determined, in the sole opinion of First Union, to be the rate at which federal funds are being offered for sale in the national federal funds market at 9:00 A.M. Charlotte, North Carolina time. Fee Letter: The letter, dated as of the Closing Date, among the Seller, the - ----------- Servicer, the Deal Agent and First Union setting forth, among other things, the Commitment Fee rate. First Union: First Union National Bank, in its individual capacity, and its - ------------ successors or assigns. Fixed Period: For any Payment Date the period beginning on, and including the - ------------ sixteenth day of the immediately preceding calendar month (or, with respect to the first Fixed Period, the Closing Date) and ending on, and including the fifteenth day of the calendar month in which such Payment Date occurs. FNBNE Existing Account: Account No. 2005 maintained at FNBNE for the purpose of - ---------------------- receiving Collections. GAAP: Generally accepted accounting principles as in effect from time to time - ---- in the United States. Governmental Authority: Any nation or government, any state or other political - ---------------------- subdivision thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government and any court or arbitrator having jurisdiction over such Person. H.15: Federal Reserve Statistical Release H.15. - ---- 13 Hedge Breakage Costs: For any Hedge Transaction, any amount payable by the - -------------------- Seller for the early termination of that Hedge Transaction or any portion thereof. Hedge Counterparty: Any entity which (a) on the date of entering into any Hedge - ------------------ Transaction (i) is an interest rate swap dealer that is either a Purchaser or an Affiliate of a Purchaser, or has been approved in writing by the Deal Agent (which approval shall not be unreasonably withheld), and (ii) has a long-term unsecured debt rating of not less than "A" by S&P and not less than "A-2" by Moody's ("Long-term Rating Requirement") and a short-term unsecured debt rating of not less than "A-1" by S&P and not less than "P-1" by Moody's ("Short-term Rating Requirement"), and (b) in a Hedging Agreement (i) consents to the assignment of the Seller's rights under the Hedging Agreement to the Deal Agent pursuant to Section 5.4(a) and (ii) agrees that in the event that Moody's or S&P reduces its long-term unsecured debt rating below the Long-term Rating Requirement, it shall transfer its rights and obligations under each Hedging Transaction to another entity that meets the requirements of clause (a) and (b) hereof and has entered onto a Hedging Agreement with the Seller on or prior to the date of such transfer. Hedge Notional Amount: For any Purchase, the aggregate notional amount in effect - --------------------- on any day under all Hedge Transactions entered into pursuant to Section 5.4(a) for that Purchase. Hedge Transaction: Each interest rate swap transaction between the Seller and a - ----------------- Hedge Counterparty which is entered into pursuant to Section 5.4(a) and is governed by a Hedging Agreement. Hedging Agreement: Each agreement between the Seller and a Hedge Counterparty - ----------------- which governs one or more Hedge Transactions entered into pursuant to Section 5.4, which agreement shall consist of a "Master Agreement" in a form published by the International Swaps and Derivatives Association, Inc., together with a "Schedule" thereto substantially in the form of Exhibit I hereto or such other ---------- form as the Deal Agent shall approve in writing, and each "Confirmation" thereunder confirming the specific terms of each such Hedge Transaction. Increased Costs: Any amounts required to be paid by the Seller to an Affected - --------------- Party pursuant to Section 2.14. Incremental Purchase: Any Purchase that increases the aggregate outstanding - -------------------- Capital hereunder. Indebtedness: With respect to any Person at any date, (a) all indebtedness of - ------------ such Person for borrowed money or for the deferred purchase price of property or services (other than current liabilities incurred in the ordinary course of business and payable in accordance with customary trade practices) or which is evidenced by a note, bond, debenture or similar instrument, (b) all obligations of such Person under capital leases, (c) all obligations of such Person in respect of acceptances issued or created for the account of such Person, (d) all liabilities secured by any Lien on any property owned by such Person even though such Person has not assumed or otherwise become liable for the payment thereof, and (e) all indebtedness, obligations or liabilities of that Person in respect of Derivatives. 14 Indemnified Amounts: As defined in Section 8.1. - ------------------- Indemnified Party: As defined in Section 8.1. - ----------------- Industry: The industry of an Obligor as determined by reference to the four - -------- digit standard industry classification codes. Insolvency Event: With respect to a specified Person, (a) the filing of a - ---------------- decree or order for relief by a court having jurisdiction in the premises in respect of such Person or any substantial part of its property in an involuntary case under any applicable Insolvency Law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official for such Person or for any substantial part of its property, or ordering the winding-up or liquidation of such Person's affairs, and such decree or order shall remain unstayed and in effect for a period of 60 consecutive days; or (b) the commencement by such Person of a voluntary case under any applicable Insolvency Law now or hereafter in effect, or the consent by such Person to the entry of an order for relief in an involuntary case under any such law, or the consent by such Person to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official for such Person or for any substantial part of its property, or the making by such Person of any general assignment for the benefit of creditors, or the failure by such Person generally to pay its debts as such debts become due, or the taking of action by such Person in furtherance of any of the foregoing. Insolvency Laws: The Bankruptcy Code of the United States and all other - --------------- applicable liquidation, conservatorship, bankruptcy, moratorium, rearrangement, receivership, insolvency, reorganization, suspension of payments, or similar debtor relief laws from time to time in effect affecting the rights of creditors generally. Insurance Policy: With respect to any Loan included in the Asset Pool, an - ---------------- insurance policy covering physical damage to or loss to any assets or Related Property of the Obligor securing such Loan. Insurance Proceeds: Any amounts payable or any payments made, to the Servicer - ------------------ under any Insurance Policy. Interest Collections: Any and all amounts received in respect of any interest, - -------------------- fees or other similar charges on a Loan from or on behalf of any Obligors that are deposited into the Collection Account, or received by the Servicer, Originator, or Seller in respect of Loans, in the form of cash, checks, wire transfers, electronic transfers or any other form of cash payment (net of any payment owed by the Seller to, and including any receipts from, any Hedge Counterparties). Investment: With respect to any Person, any direct or indirect loan, advance or - ---------- investment by such Person in any other Person, whether by means of share purchase, capital contribution, loan or otherwise, excluding the acquisition of assets pursuant to the Purchase Agreement and 15 excluding commission, travel and similar advances to officers, employees and directors made in the ordinary course of business. Issuer: VFCC and any other Investor whose principal business consists of - ------ issuing commercial paper or other securities to fund its acquisition and maintenance of receivables, accounts, instruments, chattel paper, general intangibles and other similar Assets. Jurisdiction: Delaware and Connecticut. - ------------ LIBOR Rate: For a Fixed Period, an interest rate per annum equal to the average - ---------- (rounded upward to the nearest one-sixteenth (1/16) of one percent) per annum rate of interest determined by First Union at its the principal office in Charlotte, North Carolina as its LIBOR Rate (each such determination, absent manifest error, to be conclusive and binding) as of two Business Days prior to the first day of the applicable Fixed Period, as the rate at which deposits in immediately available funds in U.S. dollars are being, have been, or would be offered or quoted by First Union to major banks in the applicable interbank market for Eurodollar deposits at or about 11:00 a.m. (Charlotte, North Carolina time) on the Business Day which is the second Business Day immediately preceding the first day of the applicable Fixed Period, for delivery on the first day of such Fixed Period, for a term comparable to such Fixed Period and in an amount approximately equal to the requested Capital. If no such offers or quotes are generally available for such amount, then the LIBOR Rate shall be the rate appearing on the Telerate Page 3750 as of 11:00 A.M. (London time) on the Business Day which is the second Business Day immediately preceding the first day of such Fixed Period for a term comparable to such Fixed Period. Lien: With respect to any Asset, (a) any mortgage, lien, pledge, charge - ---- security interest or encumbrance of any kind in respect of such Asset or (b) the interest of a vendor or lessor under any conditional sale agreement, financing lease or other title retention agreement relating to such Asset. Liquidation Expenses: With respect to any Defaulted Loan, the aggregate amount - -------------------- of all out-of-pocket expenses reasonably incurred by the Servicer (including amounts paid to any subservicer) in connection with the repossession, refurbishing and disposition of any related assets securing such Loan including the attempted collection of any amount owing pursuant to such Loan. Liquidity Bank: Each liquidity bank that is a party to the Liquidity Purchase - -------------- Agreement. Liquidity Purchase Agreement: The Liquidity Purchase Agreement, dated as of - ---------------------------- December 23, 1998, among VFCC, the Deal Agent, the Liquidity Agent, and First Union, as an investor, and each other liquidity bank a party thereto. Loan: A secured commercial loan arising from the extension of credit to an - ---- Obligor by the Originator or one of its subsidiaries in the ordinary course of the Originator's business, including, without limitation, all Commercial Loans, all SBA Loans, and all AIG Loans, which loan is secured by accounts receivable, inventory, machinery and equipment or real property; and such 16 term further includes all monies due or owing and all Interest Collections, Principal Collections and other amounts received from time to time with respect to such loan receivable and all Proceeds. Loan Document: With respect to any Loan, (i) the related original promissory - ------------- note, (ii) any related loan agreement, (iii) any security agreement, (iv) where real property serves as the primary Collateral for the Loan, the mortgage, if any, related thereto, (v) any assignment of leases, and (vi) any other documents, instruments, certificates or assignments (including amendments or modifications thereof) executed by the Obligor thereof or by another Person on the Obligor's behalf in respect of such Loan and related promissory note, including, without limitation, general or limited guaranties, and any power of attorney. Lock-Box: A post office box to which Collections are remitted for retrieval by - -------- a Lock-Box Bank and deposited by such Lock-Box Bank into a Lock-Box Account. Lock-Box Account: An account maintained for the purpose of receiving - ---------------- Collections at a bank or other financial institution which has executed a Lock- Box Notice for the purpose of receiving Collections, but specifically excluding the FNBNE Existing Account. Lock-Box Bank: Any of the banks or other financial institutions holding one or - ------------- more Lock-Box Accounts. Lock-Box Notice: A notice, in substantially the form of Exhibit B, among the - --------------- --------- Seller, the Originator (if applicable) and a Lock-Box Bank. Minimum Net Portfolio Yield: 2.0%. - --------------------------- Monthly Report: As defined in Section 6.15(a). - -------------- Moody's: Moody's Investors Service, Inc., and any successor thereto. - ------- Multiemployer Plan: A "multiemployer plan" as defined in Section 4001(a)(3) of - ------------------ ERISA which is or was at any time during the current year or the immediately preceding five years contributed to by the Seller or any ERISA Affiliate on behalf of its employees. Net Loss Ratio: For any Collection Period, the percentage equivalent of a - -------------- fraction, the numerator of which is the Outstanding Loan Balance of all Loans that became Charged-Off Loans during such Collection Period, and the denominator of which is the Aggregate Outstanding Loan Balance as of the end of such Collection Period. Net Portfolio Yield: For any Fixed Period, the difference between the Portfolio - ------------------- Yield for such Fixed Period and the Yield for such Fixed Period. 17 Notice of Sale: A notice, substantially in the form of Exhibit A hereto, - -------------- --------- delivered pursuant to Section 2.2. Obligor: With respect to any Loan, the Person or Persons obligated to make - ------- payments pursuant to the respective Loan Documents, including any guarantor thereof (but not including the SBA or AIG). For purposes of calculating any of the concentration and mix criteria set forth on Schedule II, all Loans in the Asset Pool or to be transferred to the Asset Pool, the Obligor of which is an Affiliate of another Obligor, shall be aggregated with all Loans of such other Obligor. For example, if Obligor A is an Affiliate of Obligor B, and the --- ------- aggregate Outstanding Loan Balance of all of Obligor A's Loans in the Asset Pool constitutes 5% of the Aggregate Outstanding Loan Balance, and the aggregate Outstanding Loan Balance of all of Obligor B's Loans in the Asset Pool constitutes 5% of the Aggregate Outstanding Loan Balance, then the Obligor concentration for Obligor A would be 10% and the Obligor concentration for Obligor B would also be 10%. Officer's Certificate: A certificate signed by any officer of the Seller or the - --------------------- Servicer, as the case may be, and delivered to the Deal Agent. Officer's Certificate as to Solvency: A certificate signed by any officer of - ------------------------------------ the Seller or FNBNE, as the case may be, and delivered to the Deal Agent in the form of Exhibits J-1 and J-2 attached hereto. -------- --- --- Officer's Closing Certificate: A certificate signed by any officer of the - ----------------------------- Seller or FNBNE, as the case may be, and delivered to the Deal Agent in the form of Exhibits K-1 and K-2. ------------ --- Opinion of Counsel: A written opinion of counsel, who may be counsel for the - ------------------ Seller or the Servicer and who shall be reasonably acceptable to the Deal Agent. Originator: FNBNE. - ---------- Originator Assets: Any Asset that was transferred to the Seller by the - ----------------- Originator. Outstanding Loan Balance: With respect to any Loan, the then outstanding - ------------------------- principal balance thereof. Payment Date: The twenty-first (21st) day of each calendar month or, if such - ------------ day is not a Business Day, the next succeeding Business Day, commencing with January 21, 1999. Permitted Investments: Any one or more of the following types of investments: - --------------------- (a) marketable obligations of the United States, the full and timely payment of which are backed by the full faith and credit of the United States and which have a maturity of not more than 270 days from the date of acquisition; 18 (b) marketable obligations, the full and timely payment of which are directly and fully guaranteed by the full faith and credit of the United States and which have a maturity of not more than 270 days from the date of acquisition; (c) bankers' acceptances and certificates of deposit and other interest-bearing obligations (in each case having a maturity of not more than 270 days from the date of acquisition) denominated in dollars and issued by any bank with capital, surplus and undivided profits aggregating at least $100,000,000, the short-term obligations of which are rated A-1 by S&P and P-1 by Moody's; (d) repurchase obligations with a term of not more than ten days for underlying securities of the types described in clauses (a), (b) and (c) above entered into with any bank of the type described in clause (c) above; (e) commercial paper rated at least A-1 by S&P and P-1 by Moody's; and, (f) demand deposits, time deposits or certificates of deposit (having original maturities of no more than 365 days) of depository institutions or trust companies incorporated under the laws of the United States or any state thereof (or domestic branches of any foreign bank) and subject to supervision and examination by federal or state banking or depository institution authorities; provided, however that at the time such investment, or the -------- ------- commitment to make such investment, is entered into, the short-term debt rating of such depository institution or trust company shall be at least A-1 by S&P and P-1 by Moody's. Permitted Liens: Liens in favor of the Deal Agent as agent for the Secured - --------------- Parties created pursuant to this Agreement. Person: An individual, partnership, corporation (including a business trust), - ------ limited liability company, joint stock company, trust, unincorporated association, sole proprietorship, joint venture, government (or any agency or political subdivision thereof) or other entity. Pool Assets: On any day any and all Assets in the Asset Pool. - ------------ Portfolio Yield: As of any date of determination the weighted average interest - --------------- rate of all Loans in the Asset Pool. Power of Attorney: A power of attorney signed by any officer of the Seller in - ----------------- the form of Exhibit L hereto. --------- Prepaid Loan: Other than Commercial Lines of Credit which may be prepaid but - ------------ for which the commitment to make advances thereunder is still in effect, any Loan that has terminated or been prepaid in full prior to its scheduled maturity date (including because of a Casualty Loss), other than a Defaulted Loan. 19 Prime Rate: The rate announced by First Union from time to time as its prime - ---------- rate in the United States, such rate to change as and when such designated rate changes. The Prime Rate is not intended to be the lowest rate of interest charged by First Union in connection with extensions of credit to debtors. Principal Collections: Any and all amounts received in respect of any principal - --------------------- due and payable under any Loan from or on behalf of Obligors that are deposited into the Collection Account, or received by the Servicer, Originator, or Seller in respect of Loans, in the form of cash, checks, wire transfers, electronic transfers or any other form of cash payment. Proceeds: With respect to any Pool Asset, whatever is receivable or received - -------- when such Pool Asset is sold, collected, liquidated, foreclosed, exchanged, or otherwise disposed of, whether such disposition is voluntary or involuntary, and includes all rights to payment with respect to any insurance relating to such Pool Asset. Program Fee: As defined in the Section 2.13(b). - ----------- Purchase: A purchase by a Purchaser of an undivided interest in the Assets from - -------- the Seller pursuant to Article II, including a reinvestment under Clause ELEVENTH of Section 2.7. Purchasers: Collectively, VFCC, First Union, and the Investors and any other - ---------- Person that agrees, pursuant to the pertinent Assignment and Acceptance, to purchase an Asset Interest pursuant to this Agreement. Purchase Agreement: The Purchase and Sale Agreement dated as of the date - ------------------ hereof, between the Originator and the Seller, as amended, modified, supplemented or restated from time to time. Purchase Date: The Closing Date (or, if a Purchase is not made on the Closing - ------------- Date, then the date of the initial Purchase after the Closing Date), and as to any Incremental Purchase, any Business Day that is (i) at least one (1) calendar week following the immediately preceding Purchase Date and (ii) five (5) Business Days immediately following the receipt by the Deal Agent of a written request by the Seller to sell an Asset Interest, such notice to be in the form of Exhibit A hereto. --------- Purchase Limit: At any time, $65,000,000, on or after the Termination Date, the - -------------- "Purchase Limit" shall mean the aggregate outstanding Capital. Purchase Rate: (i) With respect to Commercial Loans, 85%, (ii) with respect to - ------------- SBA Loans, 90%, and (iii) with respect to AIG Loans, a fraction expressed as a percentage the numerator of which is the portion of the Outstanding Loan Balance of such AIG Loans which is insured by an AIG Policy, and the denominator of which is the Outstanding Loan Balance of such AIG Loans. Qualified Institution: As defined in Section 6.4(d). - --------------------- 20 Rating Agency: Each of S&P, Moody's and any other rating agency that has been - ------------- requested to issue a rating with respect to the commercial paper notes issued by the Issuer. Recoveries: With respect to a Defaulted Loan, proceeds from the sale of the - ---------- Related Property, proceeds of any related Insurance Policy and any other recoveries with respect to such Defaulted Loan and the related Equipment and related property, and other amounts representing late fees and penalties net of Liquidation Expenses and amounts, if any, so received that are required to be refunded to the Obligor on such Loan. Records: With respect to any Loans, all documents, books, records and other - ------- information (including without limitation, computer programs, tapes, disks, punch cards, data processing software and related property and rights) maintained with respect to any Pool Asset and the related Obligors, other than the Loan Documents. Register: As defined in Section 10.1(c). - -------- Related Property: With respect to a Loan, any property or other assets of the - ---------------- Obligor thereunder pledged as collateral to the Originator to secure such Loan. Replaced Loan: As defined in Section 2.9. - ------------- Reporting Date: The date which is two Business Days after the end of the Fixed - -------------- Period. Required Investors: At a particular time, Investors with Commitments equal to - ------------------ or in excess of 66 2/3 % of the Purchase Limit. Required Loan Documents: The documents described in clause (i), (ii), (iii) and - ----------------------- (iv) of the definition of Loan Document. Required Reports: Collectively, the Monthly Report, the Servicer's Certificate - ---------------- and the financial statements of the Servicer required to be delivered to the Deal Agent pursuant to Section 6.12(c) hereof. Requirements of Law: For any Person shall mean the certificate of incorporation - ------------------- or articles of association and by-laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation, or order or determination of an arbitrator or Governmental Authority, in each case applicable to or binding upon such Person or to which such Person is subject, whether Federal, state or local (including, without limitation, usury laws, the Federal Truth in Lending Act, and Regulation Z and Regulation B of the Board of Governors of the Federal Reserve System). Reserve Percentage: The percentage that is 100% minus the applicable Purchase - ------------------ ----- Rate. 21 Reserves: As to any Asset Interest on any day, an amount equal to the Reserve - -------- Percentage multiplied by the Capital of such Asset Interest as of the close of business of the Collateral Custodian on such day. Responsible Officer: As to any Person, any officer of such Person with direct - ------------------- responsibility for the administration of this Agreement and also, with respect to a particular matter, any other officer to whom such matter is referred because of such officer's knowledge of and familiarity with the particular subject. Retransfer Amount: As defined in Section 5.6. - ----------------- Retransfer Date: As defined in Section 5.6. - --------------- Revolving Period: The period commencing on the Closing Date and ending on the - ---------------- day immediately preceding the Termination Date. SBA: The United States Small Business Administration. - --- SBA Loan: A Loan to an Obligor that is a revolving line of credit, originated - -------- and approved under SBA policies, ninety percent (90%) of the Outstanding Loan Balance of which is guaranteed through the SBA. S&P: Standard & Poor's Ratings Services, a division of The McGraw-Hill - --- Companies, Inc. and any successor thereto. Scheduled Payment: With respect to a date on which a payment is due under a - ----------------- Loan, the periodic payment (exclusive of any amounts in respect of insurance or taxes and reflecting any adjustment for any partial prepayment) set forth in the applicable Loan Documents as due from the Obligor. Secured Party: (i) Each Purchaser and (ii) each Hedge Counterparty that is - ------------- either a Purchaser or an Affiliate of a Purchaser if that Affiliate executes a counterpart of this Agreement agreeing to be bound by the terms of this Agreement applicable to a Secured Party. Securitization: A disposition of Loans in one or a series of structured finance - -------------- securitization transactions. Seller: FNBNE Funding Corp., or any permitted successor thereto. - ------ Servicer: FNBNE and its permitted successors and assigns. - -------- Servicer Advance: An advance of Scheduled Payments made by the Servicer - ----------------- pursuant to Section 6.5. Servicer Assignee: As defined in Section 6.19. - ----------------- 22 Servicer Termination Event: As defined in Section 6.23. - -------------------------- Servicer's Certificate: As defined in Section 6.12(b). - ---------------------- Servicing Duties: As defined in Section 6.1. - ---------------- Servicing Fee: As defined in Section 2.13(c). - ------------- Servicing Fee Rate: As defined in the Fee Letter. - ------------------ Servicing Records: All documents, books, records and other information - ----------------- (including, without limitation, computer programs, tapes, disks, data processing software and related property rights) prepared and maintained by the Servicer with respect to the Loans and the related Obligors. Solvent: As to any Person at any time, having a state of affairs such that all - ------- of the following conditions are met: (a) the fair value of the property owned by such Person is greater than the amount of such Person's liabilities (including disputed, contingent and unliquidated liabilities) as such value is established and liabilities evaluated for purposes of Section 101(31) of the Bankruptcy Code; (b) the present fair saleable value of the property owned by such Person in an orderly liquidation of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured; (c) such Person is able to realize upon its property and pay its debts and other liabilities (including disputed, contingent and unliquidated liabilities) as they mature in the normal course of business; (d) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay as such debts and liabilities mature; and (e) such Person is not engaged in business or a transaction, and is not about to engage in a business or a transaction, for which such Person's property would constitute unreasonably small capital. Structuring Fee: The structuring fee agreed to between the Seller and the Deal - --------------- Agent in the Fee Letter. Substitute Loan: As defined in Section 2.9. - --------------- Successor Servicer: As defined in Section 6.27(a). - ------------------ Taxes: Any present or future taxes, levies, imposts, duties, charges, - ----- assessments or fees of any nature (including interest, penalties, and additions thereto) that are imposed by any Government Authority. Termination Date: The earliest to occur of (a) the date of the occurrence of an - ---------------- Early Amortization Event pursuant to Section 7.1, (b) the Commitment Termination Date, (c) the termination of the Purchase Limit pursuant to Section 2.3, and (d) the occurrence of an Insolvency Event with respect to either FNBNE or the Seller. 23 Termination Notice: As defined in Section 6.26. - ------------------ Transaction: As defined in Section 3.2. - ----------- Transaction Documents: This Agreement, the Purchase Agreement, the Liquidity - --------------------- Purchase Agreement, the Hedge Agreement, dated as of the date hereof among the Seller, the Servicer and the Deal Agent, and any additional document the execution of which is necessary or incidental to carrying out the terms of the foregoing documents. Transfer Date: As defined in the Purchase Agreement. - ------------- Transferred Loans: Each Loan that is sold by the Originator to the Seller under - ----------------- the Purchase Agreement. Trigger Event: Any of the Early Amortization Events described in clauses (n), - ------------- (o), (p) and (u) of Section 7.1, without regard to any applicable cure period. UCC: The Uniform Commercial Code as from time to time in effect in the - --- specified jurisdiction. United States: The United States of America. - ------------- Unreimbursed Servicer Advances: At any time, the amount of all previous - ------------------------------ Servicer Advances (or portions thereof) as to which the Servicer has not been reimbursed as of such time pursuant to Section 2.7 and which the Servicer has determined in its sole discretion will not be recoverable from Collections with respect to the related Loan. Warranty Event: As to any Loan included as part of the Asset Pool, the - -------------- occurrence and continuance of a material breach of any representation or warranty relating to such Loan and such breach is not cured within the relevant cure period. Yield: For each Asset Interest for any Fixed Period, the products (for each day - ----- during such Fixed Period) of: YR x C x 1 ----- 360 where: C = the Capital of such Asset Interest, and YR = the Yield Rate applicable on such day; 24 provided, however, that (a) no provision of this Agreement shall require the - -------- -------- payment or permit the collection of Yield in excess of the maximum permitted by applicable law and (b) Yield shall not be considered paid by any distribution if at any time such distribution is rescinded or must otherwise be returned for any reason. Yield Rate: With respect to any Fixed Period and for each Asset Interest - ---------- purchased by a Purchaser for each day during such period, a per annum rate equal to the Adjusted Eurodollar Rate; provided, however, that if the CP Rate is -------- ------- greater than the Adjusted Eurodollar Rate on any day during such Fixed Period, then the "Yield Rate" for that day will include a Cost of Funds Adjustment; and provided, further, that if any portion of the Capital is funded under the - -------- ------- Liquidity Purchase Agreement by the Investors, then the "Yield Rate" for such portion shall be a rate equal to (i) the Adjusted Eurodollar Rate, or (ii) the Base Rate if the relevant Investor shall have notified the Deal Agent that a Eurodollar Disruption Event has occurred. SECTION 1.2 OTHER TERMS. ----------- All accounting terms not specifically defined herein shall be construed in accordance with GAAP. All terms used in Article 9 of the UCC in the States of New York and Connecticut, as applicable, and not specifically defined herein, are used herein as defined in such Article 9. SECTION 1.3 COMPUTATION OF TIME PERIODS. --------------------------- Unless otherwise stated in this Agreement, in the computation of a period of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each mean "to but excluding." ARTICLE II THE PURCHASE FACILITY SECTION 2.1 PURCHASES OF ASSET INTERESTS. ---------------------------- (a) On the terms and conditions hereinafter set forth, the Seller may on any Purchase Date during the period from the date hereof to but not including the Termination Date, at its option, sell and assign Asset Interests to the Purchasers. The Deal Agent may act on behalf of and for the benefit of the Purchasers in this regard. VFCC may, in its sole discretion, purchase, or if VFCC shall decline to purchase, the Liquidity Agent shall purchase on behalf of the Investors, Asset Interests from time to time during the period from the date hereof to but not including the Termination Date. Under no circumstances shall any Purchaser make the initial Purchase or any Incremental Purchase if, after giving effect to such Purchase or Incremental Purchase, the aggregate Capital outstanding hereunder would exceed the lesser of (i) the Purchase Limit or (ii) the Capital Limit. Each Asset Interest purchased by any Purchaser hereunder is subject to the interests of the Hedge Counterparties under Sections 2.7(a)(i) and (x) of this Agreement. 25 (b The Seller may, within 60 days, but no later than 45 days, prior to each one year anniversary of the Closing Date, by written notice to the Deal Agent, make written request for VFCC and the Investors to extend the Commitment Termination Date for an additional period of one year following the then existing Commitment Termination Date. The Deal Agent will give prompt notice to VFCC and each of the Investors of its receipt of such request for extension of the Commitment Termination Date. VFCC and each Investor shall make a determination, in their sole discretion and after a full credit review, not less than 15 days prior to such anniversary date, as to whether or not it will agree to extend the Commitment Termination Date; provided, however, that the failure -------- ------- of VFCC or any Investor to make a timely response to the Seller's request for extension of the Commitment Termination Date shall be deemed to constitute a refusal by VFCC or the Investor, as the case may be, to extend the Commitment Termination Date. The Commitment Termination Date shall only be extended upon the consent of both (i) VFCC and (ii) 100% of the Investors. (c Notwithstanding the foregoing Section 2.1(b), upon the proposed conversion of FNBNE from a regulated bank to a commercial finance company (the "Conversion"), which is otherwise subject to the provisions of this Agreement, the Commitment Termination Date shall be the date that is the earlier of (i) the date that is 364 days after the date of the Conversion, or (ii) the then Commitment Termination Date, unless the Deal Agent and 100% of the Investors, upon appropriate due diligence and credit approvals agree that the then Commitment Termination Date should not be accelerated. SECTION 2.2 THE INITIAL PURCHASE AND INCREMENTAL PURCHASES. ---------------------------------------------- (a Subject to the conditions described in Section 2.1, the initial Purchase and each Incremental Purchase shall be made in accordance with the procedures described in Section 2.2(b). After the Collection Date has occurred, each of the Purchasers and the Deal Agent, in accordance with their respective interests, shall assign and transfer to the Seller their respective remaining interest in Asset Interests without any representation or warranty, express or implied and without recourse of any kind. (b The initial Purchase and each Incremental Purchase shall be made pursuant to the terms of a Purchase Certificate in the form of Exhibit H hereto, --------- after receipt by the Purchaser of a Notice of Sale delivered by the Seller to the Deal Agent (with a copy to the Collateral Custodian) at least one (1) Business Day prior to the Closing Date in the case of the initial Purchase and at least five (5) Business Days prior to such proposed Purchase Date in the case of any Incremental Purchase. Each such notice shall specify (i) the aggregate amount of such initial Purchase or Incremental Purchase which amount must satisfy the applicable minimum requirement set forth in the following sentence and (ii) the date of such Purchase or Incremental Purchase. The Seller may deliver up to four (4) notices in a calendar month (or more frequently subject to the prior written consent of the Deal Agent), and each amount specified in any such notice must be in an amount equal to (i) at least $5,000,000 in the case of the initial Purchase, and (ii) $1,000,000 or an integral multiple of $1,000 in excess thereof in the case of any Incremental Purchase. Each 26 such notice shall be irrevocable. Following receipt of such notice, the Deal Agent will consult with VFCC in order to assist VFCC in determining whether or not to make the Purchase. If VFCC declines to make a proposed Purchase, the initial Purchase or Incremental Purchase will be made by the Investors. On the date of such Purchase or Incremental Purchase, as the case may be, VFCC or each Investor shall, upon satisfaction of the applicable conditions set forth in Article III, make available to the Seller in same day funds, at such bank or other location reasonably designated by Seller in its Notice of Sale given pursuant to this Section 2.2(b), an amount equal to (i) the Capital of the Asset Interest related to such initial Purchase or Incremental Purchase, as the case may be, in the case of a purchase by VFCC or (ii) such Investor's pro rata share of the Capital of the Asset Interest related to such initial Purchase or Incremental Purchase, in the case of a Purchase by the Investors. SECTION 2.3 REDUCTION OF THE PURCHASE LIMIT. ------------------------------- The Seller may, upon at least five Business Days' notice to the Deal Agent, terminate in whole or reduce in part the portion of the Purchase Limit that exceeds the sum of the aggregate Capital and Yield accrued and to accrue thereon, and the Commitments of the Investors shall be reduced proportionately; provided, however, that each partial reduction of the Purchase Limit shall be in - -------- ------- an aggregate amount equal to $1,000,000 or an integral multiple of $100,000 in excess thereof. Each notice of reduction or termination pursuant to this Section 2.3 shall be irrevocable. SECTION 2.4 Determination of Yield. ---------------------- The Deal Agent shall determine the Yield (including unpaid Yield, if any, due and payable on a prior Payment Date) to be paid on each Payment Date for the Fixed Period and shall advise the Servicer thereof on the first Business Day after the Fixed Period. Section 2.5 Percentage Evidenced by Asset Interest. -------------------------------------- The variable percentage represented by an Asset Interest shall be initially computed on its date of purchase. Thereafter, until the Termination Date, each Asset Interest shall be automatically recomputed (or deemed to be recomputed) on each day prior to the Termination Date. The variable percentage represented by an Asset Interest as computed (or deemed recomputed) as of the close of business on the day immediately preceding the Termination Date shall remain constant at all times after the Termination Date. The variable percentage represented by the Asset Interest shall become zero when its Capital and Yield has been paid in full. SECTION 2.6 DIVIDING OR COMBINING ASSET INTERESTS. ------------------------------------- The Deal Agent may, with the consent of a Purchaser, take any of the following actions at the end of such Fixed Period with respect to any Asset Interest: (i) divide the Asset Interest owned by such Purchaser into two or more portions of Asset Interests having aggregate Capital equal to the Capital of such divided Asset Interest, (ii) combine one portion of an Asset Interest 27 of such Purchaser with another portion of an Asset Interest of such Purchaser with a Fixed Period ending on the same day, creating a new portion of an Asset Interest having Capital equal to the Capital of the two portions of Asset Interest combined or (iii) combine the Asset Interest of such Purchaser with the Asset Interest to be purchased on such day by such Purchaser, creating a new Asset Interest having Capital equal to the Capital of the two Asset Interests combined; provided, that an Asset Interest of VFCC may not be combined with an Asset Interest of the Investors. SECTION 2.7 SETTLEMENT PROCEDURES. --------------------- (a) On each Payment Date, the Servicer shall pay to the following Persons, from (i) the Collection Account, to the extent of available funds including interest earnings on the Collection Account, (ii) a Servicer Advance if made or required pursuant to Section 6.5, and (iii) amounts received in respect of any Hedge Agreement during the applicable Collection Period (the sum of such amounts described in clauses (i), (ii) and (iii) being the "Available Collections") the following amounts in the following order of priority: (A) FIRST, pro rata to each Hedge Counterparty, any amounts, ----- including any Hedge Breakage Costs, owing that Hedge Counterparty under its respective Hedging Agreement in respect of any Hedge Transaction(s) (other than payments in respect of Termination of any Hedging Agreement), for the payment thereof; (B) SECOND, to the Servicer, but only out of proceeds on the AIG ------ Policy that were paid with respect to such AIG Loan, in an amount equal to any Unreimbursed Servicer Advances with respect to an AIG Loan, for the payment thereof; (C) THIRD, to the Servicer, but only out of Interest Collections, in ----- an amount equal to any Unreimbursed Servicer Advances, for the payment thereof; (D) FOURTH, to the Servicer, in an amount equal to its accrued and ------ unpaid Servicing Fees to the end of the preceding Collection Period; (E) FIFTH, to the extent not paid for by FNBNE, to the Backup ----- Servicer, in an amount equal to any accrued and unpaid Backup Servicer Fee, for the payment thereof; (F) SIXTH, to the extent not paid for by FNBNE, to the Collateral ----- Custodian, in an amount equal to any accrued and unpaid Collateral Custodian Fee, for the payment thereof; (G) SEVENTH, to the Deal Agent for the ratable payment to each -------- Purchaser, in an amount equal to any accrued and unpaid Yield for such Payment Date; (H) EIGHTH, to the Deal Agent for the ratable payment to each ------ Purchaser in an amount equal (I) to the extent not paid by FNBNE, to any accrued and unpaid Commitment Fees and (II) to any accrued and unpaid Program Fees; 28 (I) NINTH, to the Deal Agent, in the amount of unpaid Increased Costs ----- and/or Taxes, for payment to the Purchasers in respect thereof; (J) TENTH, so long as any AIG Loans are outstanding, to the Cash ----- Collateral Account, to the extent that the balance in such account is less than the lesser of (i) $500,000 or (ii) the Aggregate Outstanding Loan Balance of AIG Loans on such Payment Date; (K) ELEVENTH, to the extent that funds are available, any remaining -------- amounts may be reinvested in Eligible Loans; provided, however, that if the -------- ------- aggregate Capital exceeds the lesser of (i) the Capital Limit or (ii) the Purchase Limit, an amount equal to such excess shall be paid to the Deal Agent to pay down Capital outstanding; (L) TWELFTH, pro rata to each Hedge Counterparty, any amounts owing ------- that Hedge Counterparty under its respective Hedging Agreement in respect of the termination of such Hedging Agreement; (M) THIRTEENTH, to the extent funds are available to satisfy any ---------- unpaid Indemnified Amounts, amounts required to be paid by the Seller pursuant to the indemnification provisions of Section 8.1 and any other amounts due hereunder; and (N) FOURTEENTH, (A) if such Payment Date occurs during the Revolving ---------- Period, any remaining amount shall be distributed to the Seller, and (B) if such Payment Date occurs during the Amortization Period, to the Deal Agent in reduction of the outstanding Capital to zero and the payment in full of the Aggregate Unpaids. (b) On each Business Day during the Revolving Period, the Servicer may, to the extent of any Principal Collections on deposit in the Collection Account as of the last day of the related Collection Period, use such funds toward the Purchase of Eligible Loans pursuant to item ELEVENTH in subsection (a) above. (c) Notwithstanding anything to the contrary contained in this Section 2.7 or any other provision in this Agreement, if on any Business Day during the Revolving Period the aggregate outstanding amount of Capital shall exceed the lesser of (i) the Purchase Limit or (ii) the Capital Limit, then the Seller shall remit to the Deal Agent, prior to any reinvestment of funds as set forth in item ELEVENTH of Section 2.7(a) and in any event no later than the close of business of the Deal Agent on the next succeeding Business Day, a payment (to be applied by the Deal Agent to outstanding Capital) in such amount as may be necessary to reduce outstanding Capital to an amount less than or equal to the lesser of (i) the Purchase Limit or (ii) the Capital Limit. (d) On each Business Day occurring during the Amortization Period, all Principal Collections on deposit in the Collection Account as of such Business Day shall be paid to the 29 Deal Agent in reduction, to zero, of the outstanding Capital and repayment in full of the Aggregate Unpaids. Section 2.8 [Reserved.] ----------- Section 2.9 Substitution of Loans. --------------------- On any day prior to the occurrence of an Early Amortization Event, the Seller may, and upon the request of the Deal Agent shall, subject to the conditions set forth in this Section 2.9, replace any Loan subject to a Warranty Event or in respect of which the Obligor thereunder has requested the rewriting and/or restructuring of such Loan with one or more other Loans (each, a "Substitute Loan"), provided that no such replacement shall occur unless each of the following conditions is satisfied as of the date of such replacement and substitution: (a) the Loan to be replaced (i) is a Defaulted Loan, (ii) has suffered a credit rating downgrading below 3 in accordance with the Servicer's internal credit scoring system, or (iii) has experienced a decline in its fair market value at least 25% compared to its Purchase Price; (b) the Seller has previously recommended to the Deal Agent (with a copy to the Collateral Custodian) in writing that the Loan to be replaced should be replaced (each a "Replaced Loan"); (c) each Substitute Loan is an Eligible Loan on the date of substitution having an approximate Outstanding Loan Balance equal to that of the Replaced Loan (with any difference paid in cash); (d) after giving effect to any such substitution, the aggregate of all outstanding Capital does not exceed the lesser of the (i) Purchase Limit and (ii) the Capital Limit; (e) the aggregate Outstanding Loan Balance of such Substitute Loans shall be equal to or greater than the lesser of (i) the aggregate Outstanding Loan Balance of the Replaced Loans and (ii) the amount necessary to prevent the occurrence of a Trigger Event; (f) all representations and warranties of the Seller contained in Sections 4.1 and 4.2 shall be true and correct as of the date of substitution of any such Substitute Loan; (g) the substitution of any Substitute Loan does not cause an Early Amortization Event to occur; and (h) the Seller shall deliver to the Deal Agent on the date of such substitution a certificate of a Responsible Officer certifying that each of the foregoing is true and correct as of such date. 30 In connection with any such substitution, the Deal Agent as agent for the Secured Parties shall, automatically and without further action, be deemed to transfer to the Seller, free and clear of any Lien created pursuant to this Agreement, all of the right, title and interest of the Deal Agent as agent for the Secured Parties in, to and under such Replaced Loans, and the Deal Agent as agent for the Secured Parties shall be deemed to represent and warrant that it has the corporate authority and has taken all necessary corporate action to accomplish such transfer, but without any other representation and warranty, express or implied. The Deal Agent, as agent for the Purchasers, shall, at the sole expense of the Servicer execute such documents and instruments of transfer as may be prepared by the Servicer on behalf of the Seller and take other such actions as shall reasonably be requested by the Seller to effect the transfer of such Replaced Loan pursuant to this Section. Any right of the Deal Agent as agent for the Secured Parties to substitute any Loan in the Asset Pool pursuant to this Section 2.9 shall be in addition to, and without limitation of, any other rights and remedies that the Deal Agent as agent for the Secured Parties or any Secured Party may have to require the Seller or the Servicer, as applicable, to substitute for, or accept retransfer of, any Loan pursuant to the terms of this Agreement. SECTION 2.10 COLLECTIONS AND ALLOCATIONS. --------------------------- The Servicer shall promptly (but in no event later than two (2) Business Days after the receipt thereof) identify any Collections received by it as being on account of Interest Collections or Principal Collections and deposit all such Interest Collections or Principal Collections received directly by it into the Collection Account (the "Collection Account"). The Servicer shall make such deposits or payments by wire transfer, in immediately available funds. SECTION 2.11 PAYMENTS, COMPUTATIONS, ETC. --------------------------- (a) Unless otherwise expressly provided herein, all amounts to be paid or deposited by the Seller or the Servicer hereunder shall be paid or deposited in accordance with the terms hereof no later than 11:00 A.M. (Charlotte, North Carolina time) on the day when due in lawful money of the United States in immediately available funds to the Agent's Account. The Seller shall, to the extent permitted by law, pay to the Secured Parties interest on all amounts not paid or deposited when due hereunder at 1% per annum above the Base Rate, payable on demand; provided, however, that such interest rate shall not at any -------- ------- time exceed the maximum rate permitted by applicable law. Such interest shall be retained by the Deal Agent except to the extent that such failure to make a timely payment or deposit has continued beyond the date for distribution by the Deal Agent of such overdue amount to the Secured Parties, in which case such interest accruing after such date shall be for the account of, and distributed by the Deal Agent to, the Secured Parties. All computations of interest and all computations of Yield and other fees hereunder shall be made on the basis of a year of 360 days for the actual number of days (including the first but excluding the last day) elapsed. (b) Whenever any payment hereunder shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such 31 extension of time shall in such case be included in the computation of payment of Yield, interest or any fee payable hereunder, as the case may be. (c) If any Purchase or Incremental Purchase requested by the Seller and approved by a Purchaser and the Deal Agent pursuant to Section 2.2, is not, for any reason whatsoever related to a default or nonperformance by the Seller, made or effectuated, as the case may be, on the date specified therefor, the Seller shall indemnify such Purchaser against any reasonable loss, cost or expense incurred by such Purchaser, including, without limitation, any loss (including loss of anticipated profits, net of anticipated profits in the reemployment of such funds in the manner determined by such Purchaser), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Purchaser to fund or maintain such Purchase or Incremental Purchase, as the case may be, during such Fixed Period. SECTION 2.12 OPTIONAL REPURCHASE. ------------------- At any time following the Termination Date when the Aggregate Outstanding Loan Balance is less than ten percent of the Aggregate Outstanding Loan Balance as of the Termination Date, the Servicer may notify the Deal Agent in writing of its intent to purchase all remaining Assets in the Asset Pool, provided that all Hedge Transactions have been terminated. On the Payment Date next succeeding any such notice, the Servicer shall purchase all such Assets for a price equal to the sum of the Aggregate Unpaids, including for illustrative purposes but not in limitation, all Yield accrued and to accrue, as reasonably determined by the Deal Agent, and all accrued and unpaid Commitment Fees, Backup Servicer Fees, Custodial Fees, Increased Costs, Taxes, Hedge Breakage Costs, Breakage Costs and any other amounts payable by the Seller hereunder or under or with respect to any Hedging Agreement, and the proceeds of such purchase will be deposited into the Collection Account and paid in accordance with Section 2.9(b). SECTION 2.13 FEES. ---- (a) FNBNE, in its individual capacity, shall pay to the Deal Agent from its own funds on each Payment Date, monthly in arrears, a fee (the "Commitment Fee"), as set forth in the Fee Letter. (b) The Seller shall pay to the Deal Agent, on each Payment Date, monthly in arrears, a Program Fee (the "Program Fee"), as set forth in the Fee Letter. (c) The Servicer shall be entitled to receive out of Interest Collections a fee (the "Servicing Fee"), monthly in arrears in accordance with Section 2.7(a), which fee shall be equal to the product of (i) the Servicing Fee Rate and (ii) the Aggregate Outstanding Loan Balance as of the close of business on the immediately preceding Determination Date. (d) The Backup Servicer shall be entitled to receive the Backup Servicer Fee in accordance with Section 2.7(a). 32 (e) The Collateral Custodian shall be entitled to receive the Custodial Fee in accordance with Section 2.7(a). (f) The Seller shall pay to the Deal Agent, on the Closing Date, the Structuring Fee (net of any amounts previously paid) in immediately available funds. SECTION 2.14 INCREASED COSTS; CAPITAL ADEQUACY; ILLEGALITY. --------------------------------------------- (a) If either (i) the introduction of or any change (including, without limitation, any change by way of imposition or increase of reserve requirements) in or in the interpretation of any law or regulation or (ii) the compliance by a Purchaser or any Affiliate thereof (each of which, an "Affected Party") with any guideline or request from any central bank or other governmental agency or authority (whether or not having the force of law), (A) shall subject an Affected Party to any Tax (except for Taxes on the overall net income of such Affected Party), duty or other charge with respect to an Asset Interest, or any right to make Purchases hereunder, or on any payment made hereunder or (B) shall impose, modify or deem applicable any reserve requirement (including, without limitation, any reserve requirement imposed by the Board of Governors of the Federal Reserve System, but excluding any reserve requirement, if any, included in the determination of Yield), special deposit or similar requirement against assets of, deposits with or for the amount of, or credit extended by, any Affected Party or (C) shall impose any other condition affecting an Asset Interest or a Purchaser's rights hereunder, the result of which is to increase the cost to any Affected Party or to reduce the amount of any sum received or receivable by an Affected Party under this Agreement, then within ten days after demand by such Affected Party (which demand shall be accompanied by a statement setting forth the basis for such demand), the Seller shall pay directly to such Affected Party such additional amount or amounts as will compensate such Affected Party for such additional or increased cost incurred or such reduction suffered. (b) If either (i) the introduction of or any change in or in the interpretation of any law, guideline, rule, regulation, directive or request or (ii) compliance by any Affected Party with any law, guideline, rule, regulation, directive or request from any central bank or other governmental authority or agency (whether or not having the force of law), including, without limitation, compliance by an Affected Party with any request or directive regarding capital adequacy, has or would have the effect of reducing the rate of return on the capital of any Affected Party as a consequence of its obligations hereunder or arising in connection herewith to a level below that which any such Affected Party could have achieved but for such introduction, change or compliance (taking into consideration the policies of such Affected Party with respect to capital adequacy) by an amount deemed by such Affected Party to be material, then from time to time, within ten days after demand by such Affected Party (which demand shall be accompanied by a statement setting forth the basis for such demand), the Seller shall pay directly to such Affected Party such additional amount or amounts as will compensate such Affected Party for such reduction. 33 (c) If as a result of any event or circumstance similar to those described in clauses (a) or (b) of this section, and not in duplication of any payments made under those clauses, any Affected Party is required to compensate a bank or other financial institution providing liquidity support, credit enhancement or other similar support to such Affected Party in connection with this Agreement or the funding or maintenance of Purchases hereunder, then within ten days after demand by such Affected Party, the Seller shall pay to such Affected Party such additional amount or amounts as may be necessary to reimburse such Affected Party for any amounts paid by it. (d) In determining any amount provided for in this section, the Affected Party may use any reasonable averaging and attribution methods. Any Affected Party making a claim under this section shall submit to the Seller a certificate as to such additional or increased cost or reduction, which certificate shall be conclusive absent demonstrable error. (e) If a Purchaser shall notify the Deal Agent that a Eurodollar Disruption Event as described in clause (a) of the definition of "Eurodollar Disruption Event" has occurred, the Deal Agent shall in turn so notify the Seller, whereupon all Capital in respect of which Yield accrues at the Adjusted Eurodollar Rate shall immediately be converted into Capital in respect of which Yield accrues at the Base Rate. SECTION 2.15 TAXES. ----- (a) All payments made by an Obligor in respect of a Loan and all payments made by the Seller or the Servicer under this Agreement will be made free and clear of and without deduction or withholding for or on account of any Taxes, unless such withholding or deduction is required by law. If withholding or deduction is required by law, the Obligor, Seller, or Servicer (as the case may be) shall pay to the appropriate taxing authority any such Taxes required to be deducted or withheld and the amount payable to each Purchaser or the Deal Agent (as the case may be) will be increased (such increase, the "Additional Amount") such that every net payment made under this Agreement after deduction or withholding for or on account of any Taxes (including, without limitation, any Taxes on such increase) is not less than the amount that would have been paid had no such deduction or withholding been deducted or withheld. The foregoing obligation to pay Additional Amounts, however, will not apply with respect to net income or franchise taxes imposed on a Purchaser or the Deal Agent, respectively, with respect to payments required to be made by the Seller or Servicer under this Agreement, by a taxing jurisdiction in which such Purchaser or Deal Agent is organized, conducts business or is paying taxes as of the Closing Date (as the case may be). If a Purchaser or the Deal Agent pays any Taxes in respect of which the Seller is obligated to pay Additional Amounts under this Section 2.15(a), the Seller shall promptly reimburse such Purchaser or Deal Agent the amount of such Additional Amounts. (b) The Seller will indemnify each Purchaser and the Deal Agent for the full amount of Taxes in respect of which the Seller is required to pay Additional Amounts (including, without limitation, any Taxes imposed by any jurisdiction on such Additional Amounts) paid by such Purchaser or the Deal Agent (as the case may be) and any liability (including penalties, interest 34 and expenses) arising therefrom or with respect thereto; provided, however, that -------- ------- such Purchaser or the Deal Agent, as appropriate, making a demand for indemnity payment shall provide the Seller, at its address set forth under its name on the signature pages hereof, with a certificate from the relevant taxing authority or from a responsible officer of such Purchaser or the Deal Agent stating or otherwise evidencing that such Purchaser or the Deal Agent has made payment of such Taxes and will provide a copy of or extract from documentation, if available, furnished by such taxing authority evidencing assertion or payment of such Taxes. This indemnification shall be made within ten days from the date the Purchaser or the Deal Agent (as the case may be) makes written demand therefor. (c) Within 30 days after the date of any payment by the Seller of any Taxes, the Seller will furnish to the Deal Agent, at its address set forth under its name on the signature pages hereof, appropriate evidence of payment thereof. (d) If a Purchaser is not created or organized under the laws of the United States or a political subdivision thereof, such Purchaser shall, to the extent that it may then do so under applicable laws and regulations, deliver to the Seller with a copy to the Deal Agent (i) within 15 days after the date hereof, or, if later, the date on which such Purchaser becomes a Purchaser hereof two (or such other number as may from time to time be prescribed by applicable laws or regulations) duly completed copies of IRS Form 4224 or Form 1001 (or any successor forms or other certificates or statements which may be required from time to time by the relevant United States taxing authorities or applicable laws or regulations), as appropriate, to permit the Seller to make payments hereunder for the account of such Purchaser, as the case may be, without deduction or withholding of United States federal income or similar Taxes and (ii) upon the obsolescence of or after the occurrence of any event requiring a change in, any form or certificate previously delivered pursuant to this Section 2.15(d), copies (in such numbers as may from time to time be prescribed by applicable laws or regulations) of such additional, amended or successor forms, certificates or statements as may be required under applicable laws or regulations to permit the Seller to make payments hereunder for the account of such Purchaser, without deduction or withholding of United States federal income or similar Taxes. (e) For any period with respect to which a Purchaser or the Deal Agent has failed to provide the Seller with the appropriate form, certificate or statement described in clause (d) of this section (other than if such failure is due to a change in law occurring after the date of this Agreement), the Deal Agent or such Purchaser, as the case may be, shall not be entitled to indemnification under clauses (a) or (b) of this section with respect to any Taxes. (f) Within 30 days of the written request of the Seller therefor, the Deal Agent and the Purchasers, as appropriate, shall execute and deliver to the Seller such certificates, forms or other documents which can be furnished consistent with the facts and which are reasonably necessary to assist the Seller in applying for refunds of Taxes remitted hereunder; provided, however, -------- ------- that the Deal Agent and the Purchasers shall not be required to deliver such certificates forms or other documents if in their respective sole discretion it is determined that the deliverance of such certificate, form or other document would have a material adverse effect on 35 the Deal Agent or any Purchaser and provided further, however, that the Seller -------- ------- ------- shall reimburse the Deal Agent or any such Purchaser for any reasonable expenses incurred in the delivery of such certificate, form or other document. (g) If, in connection with an agreement or other document providing liquidity support, credit enhancement or other similar support to the Purchasers in connection with this Agreement or the funding or maintenance of Purchases hereunder, the Purchasers are required to compensate a bank or other financial institution in respect of Taxes under circumstances similar to those described in this section then within ten days after demand by the Purchasers, the Seller shall pay to the Purchasers such additional amount or amounts (without duplication) as may be necessary to reimburse the Purchasers for any amounts paid by them. (h) Without prejudice to the survival of any other agreement of the Seller hereunder, the agreements and obligations of the Seller contained in this section shall survive the termination of this Agreement. SECTION 2.16 ASSIGNMENT OF THE PURCHASE AGREEMENT. ------------------------------------ The Seller hereby represents, warrants and confirms to the Deal Agent that the Seller has assigned to the Deal Agent, for the ratable benefit of the Secured Parties hereunder, all of the Seller's right and title to and interest in the Purchase Agreement. The Seller confirms that following an Early Amortization Event the Deal Agent shall have the sole right to enforce the Seller's rights and remedies under the Purchase Agreement for the benefit of the Secured Parties, but without any obligation on the part of the Deal Agent, the Purchasers or any of their respective Affiliates, to perform any of the obligations of the Seller under the Purchase Agreement. The Seller further confirms and agrees that such assignment to the Deal Agent shall terminate upon the Collection Date; provided, however, that the rights of the Deal Agent and -------- ------- the Secured Parties pursuant to such assignment with respect to rights and remedies in connection with any indemnities and any breach of any representation, warranty or covenants made by the Originator pursuant to the Purchase Agreement, which rights and remedies survive the termination of the Purchase Agreement, shall be continuing and shall survive any termination of such assignment. ARTICLE III CLOSING; CONDITIONS OF CLOSING AND PURCHASES SECTION 3.1 CONDITIONS TO CLOSING AND INITIAL PURCHASE. ------------------------------------------ The initial Purchase hereunder is subject to the conditions precedent listed in Schedule I, each of which shall have been satisfied or waived, in the Deal Agent's and the Purchasers' sole discretion, on or before the Closing Date (unless otherwise indicated), in form and substance satisfactory to the Deal Agent and the Purchasers. 36 SECTION 3.2 CONDITIONS PRECEDENT TO ALL PURCHASES AND REMITTANCES OF -------------------------------------------------------- COLLECTIONS. ----------- Each Purchase (including the Initial Purchase) from the Seller by a Purchaser, the right of the Servicer to remit Collections to the Seller pursuant to Section 2.7(b) and each Incremental Purchase (each, a "Transaction") shall be subject to the further conditions precedent that (a) with respect to any Purchase (including the Initial Purchase) or Incremental Purchase, the Servicer shall have delivered to the Deal Agent, at least one (1) Business Day prior to the initial Purchase and at least five (5) Business Days prior to the date of any Incremental Purchase in form and substance satisfactory to the Deal Agent, (i) a Purchase Notice (Exhibit A), (ii) a Purchase Certificate (Exhibit H), and --------- --------- (iii) a Certificate of Assignment (Exhibit A to the Purchase Agreement) including Schedule I thereto and such additional information as may be reasonably requested by the Deal Agent; (b) on the date of such Transaction the following statements shall be true and the Seller shall be deemed to have certified that: (i) The representations and warranties contained in Sections 4.1 and 4.2 are true and correct on and as of such day as though made on and as of such date; (ii) No event has occurred and is continuing, or would result from such Transaction which constitutes an Early Amortization Event; (iii) On and as of such day, after giving effect to such Transaction, the outstanding Capital does not exceed the lesser of (x) the Purchase Limit, or (y) the Capital Limit; (iv) On and as of such day, the Seller and the Servicer each has performed all of the agreements contained in this Agreement to be performed by such person at or prior to such day; (v) No law or regulation shall prohibit, and no order, judgment or decree of any federal, state or local court or governmental body, agency or instrumentality shall prohibit or enjoin, the making of such Purchase, remittance of Collections or Incremental Purchase by the Purchaser in accordance with the provisions hereof; (vi) No Servicer Termination Date shall have occurred; (c) The Commitment Termination Date shall not have occurred; (d) There shall have been no material adverse change in the condition (financial or otherwise), business, operations, results of operations, or properties of the Originator or the Seller since the preceding Purchase; and 37 (e) The Originator and Seller shall have taken such other action, including delivery of approvals, consents, opinions, documents, and instruments to the Purchasers and the Deal Agent as each may reasonably request. ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.1 REPRESENTATIONS AND WARRANTIES OF THE SELLER. -------------------------------------------- The Seller represents and warrants as follows: (a) Organization and Good Standing. The Seller is a corporation organized, ------------------------------ validly existing, and in good standing under the laws of the jurisdiction of its formation, and has full corporate power, authority and legal right to own or loan its properties and conduct its business as such properties are presently owned or loaned and such business is presently conducted, and to execute, deliver and perform its obligations under this Agreement and the Purchase Agreement. (b) Due Qualification. The Seller is duly qualified to do business and is ----------------- in good standing as a corporation, and has obtained or will obtain all necessary licenses and approvals, in each jurisdiction in which the nature of its business requires it to be so qualified. (c) Due Authorization. The execution and delivery of this Agreement and ----------------- the Purchase Agreement and the consummation of the transactions provided for herein and therein have been duly authorized by the Seller by all necessary corporate action on the part of the Seller. (d) No Conflict. The execution and delivery of this Agreement and the ----------- Purchase Agreement, the performance by the Seller of the transactions contemplated hereby and thereby and the fulfillment of the terms hereof and thereof will not conflict with or result in any breach of any of the material terms and provisions of, and will not constitute (with or without notice or lapse of time or both) a default under, any indenture, contract, agreement, mortgage, deed of trust, or other instrument to which the Seller is a party or by which it or any of its property is bound. (e) No Violation. The execution and delivery of this Agreement and the ------------ Purchase Agreement, the performance of the transactions contemplated hereby and thereby and the fulfillment of the terms hereof and thereof will not conflict with or violate, in any material respect, any Requirements of Law applicable to the Seller. (f) No Proceedings. There are no proceedings or investigations pending or, -------------- to the best knowledge of the Seller, threatened against the Seller, before any Governmental Authority (i) asserting the invalidity of this Agreement or the Purchase Agreement, (ii) seeking to prevent the consummation of any of the transactions contemplated by this Agreement or the Purchase 38 Agreement or (iii) seeking any determination or ruling that could reasonably be expected to be adversely determined, and if adversely determined, would materially and adversely affect the performance by the Seller of its obligations under this Agreement or the Purchase Agreement. (g) All Consents Required. All approvals, authorizations, consents, --------------------- orders or other actions of any Person or of any Governmental Authority required in connection with the execution and delivery by the Seller of this Agreement and the Purchase Agreement, the performance by the Seller of the transactions contemplated by this Agreement and the Purchase Agreement, and the fulfillment of the terms hereof and thereof by the Seller, have been obtained, unless the failure to obtain such shall not materially and adversely affect the Seller's performance of its obligations under this Agreement or under the Purchase Agreement. (h) Bulk Sales. The execution, delivery and performance of this ---------- Agreement do not require compliance with any "bulk sales" law by Seller. (i) Solvency. The transactions under this Agreement and Purchase -------- Agreement do not and will not render the Seller not Solvent. (j) Selection Procedures; Credit and Collection Policies. No ---------------------------------------------------- procedures believed by the Seller to be materially adverse to the interests of VFCC or the Purchasers were utilized by the Seller in identifying and/or selecting the Loans that are in the Asset Pool. In addition, each Loan shall comply in all respects with the Credit and Collection Policies. (k) Taxes. The Seller has filed or caused to be filed all Tax returns ----- which, to its knowledge, are required to be filed. The Seller has paid or made adequate provisions for the payment of all Taxes and all assessments made against it or any of its property (other than any amount of Tax the validity of which is currently being contested in good faith by appropriate proceedings and with respect to which reserves in accordance with generally accepted accounting principles have been provided on the books of the Seller), and no Tax lien has been filed and, to the Seller's knowledge, no claim is being asserted, with respect to any such Tax, fee or other charge. (l) Agreements Enforceable. This Agreement and the Purchase Agreement ---------------------- constitute the legal, valid and binding obligation of the Seller enforceable against the Seller in accordance with their respective terms, except as such enforceability may be limited by Insolvency Laws and except as such enforceability may be limited by general principles of equity (whether considered in a suit at law or in equity). (m) Exchange Act Compliance. No proceeds of any Purchase will be used ----------------------- by the Seller to acquire any security in any transaction which is subject to Section 13 or 14 of the Securities Exchange Act of 1934, as amended. (n) No Liens. Each Asset, together with the Loan Documents related -------- thereto, shall, at all times, be owned by the Seller free and clear of any Adverse Claim except as provided herein, 39 and upon each Purchase, Incremental Purchase or remittance of Collections, the relevant Secured Party shall acquire (subject to recordation where necessary) a valid and perfected first priority undivided ownership interest in each Asset then existing or thereafter arising and Collections with respect thereto, free and clear of any Adverse Claim except as provided hereunder. No effective financing statement or other instrument similar in effect covering any Asset or Collections shall at any time be on file in any recording office except such as may be filed in favor of the Deal Agent relating to this Agreement. (o) Reports Accurate. No Monthly Report (if prepared by the Seller, ---------------- or to the extent that information contained therein is supplied by the Seller), information, exhibit, financial statement, document, book, record or report furnished or to be furnished by the Seller to the Deal Agent or a Purchaser in connection with this Agreement is or will be inaccurate in any material respect as of the date it is or shall be dated or (except as otherwise disclosed to the Deal Agent or such Purchaser, as the case may be, at such time) as of the date so furnished. (p) Location of Offices. The principal place of business and chief ------------------- executive office of the Seller and the office where the Seller keeps all the Records is located at the address of the Seller referred to in Section 11.2 hereof (or at such other locations as to which the notice and other requirements specified in Section 5.2(l) shall have been satisfied). (q) Tradenames. Except as described in Schedule III, the Seller has ---------- no trade names, fictitious names, assumed names or "doing business as" names or other names under which it has done or is doing business. (r) Purchase Agreement. The Purchase Agreement is the only agreement ------------------ pursuant to which the Seller purchases Assets. (s) Value Given. The Seller shall have given reasonably equivalent ----------- value to the Originator in consideration for the transfer to the Seller of the Assets under the Purchase Agreement, no such transfer shall have been made for or on account of an antecedent debt owed by the Originator to the Seller, and no such transfer is or may be voidable or subject to avoidance under any section of the Bankruptcy Code; no event or circumstance has occurred that would constitute an Early Amortization Event. (t) Special Purpose Entity. The Certificate of Incorporation of the ---------------------- Seller includes substantially the provisions set forth on Exhibit C hereto, and --------- the Originator has confirmed in writing to the Seller that, so long as the Seller is not "insolvent" within the meaning of the Bankruptcy Code, the Originator will not cause the Seller to file a voluntary petition under the Bankruptcy Code or any other Insolvency Laws. Each of the Seller and the Originator is aware that in light of the circumstances described in the preceding sentence and other relevant facts, the filing of a voluntary petition under the Bankruptcy Code for the purpose of making the assets of the Seller available to satisfy claims of the creditors of the Originator would not result in making such assets available to satisfy such creditors under the Bankruptcy Code. 40 (u) Accounting. The Seller accounts for the transfers to it from the ---------- Originator of interests in Assets and Collections under the Purchase Agreement as sales of such Asset Interests in its books, records and financial statements, in each case consistent with GAAP and with the requirements set forth herein. (v) Separate Entity. The Seller is operated as an entity with assets --------------- and liabilities distinct from those of the Originator and any Affiliates thereof (other than the Seller), and the Seller hereby acknowledges that the Deal Agent and the Purchasers are entering into the transactions contemplated by this Agreement in reliance upon the Seller's identity as a separate legal entity from the Originator and from each such other Affiliate of the Originator. (w) Security Interest. The Seller has granted a security interest (as ----------------- defined in the UCC) to the Deal Agent, as agent for the Secured Parties, in the Assets and Collections, which is enforceable in accordance with applicable law upon execution and delivery of this Agreement. Upon the making of each Purchase, the Deal Agent, as agent for the Secured Parties, shall have acquired a first priority perfected security interest in Assets and Collections as may be perfected under the UCC by filing a financing statement or the delivery of possession (except for any Permitted Liens). All filings (including, without limitation, such UCC filings) as are necessary in any Jurisdiction to perfect the interest of the Deal Agent as agent for the Secured Parties, in the Assets and Collections have been (or prior to the applicable Purchase will be) made. (x) Investments. The Seller does not own or hold directly or ----------- indirectly, any capital stock or equity security of, or any equity interest in, any Person. (y) Business. Since its formation, the Seller has conducted no -------- business other than the sale of Assets from the Originator under the Purchase Agreement, the sale of Assets under this Agreement and such other activities as are incidental to the foregoing. (z) Investment Company Act. ----------------------- (i) The Seller represents and warrants that the Seller has never been, is not now, and will not in the future be operated in such a manner as to cause the Seller to be an "investment company," as such term is defined in Section 3 of the Investment Company Act of 1940, as amended (the "1940 Act"); (ii) The Seller represents and warrants that the business and other activities of the Seller, including but not limited to, the sale of the Asset Interests to the Purchasers, the application and use of the proceeds thereof by the Seller and the consummation and conduct of the transactions contemplated by the Transaction Documents to which the Seller is a party (a) do now and will in the future comply in all respects with the provisions of Rule 3a-7 promulgated under the 1940 Act; and (b) do not now and will not in the future result in a violation by the Seller, the Servicer or any other person or entity of the 1940 Act or the rules and regulations promulgated thereunder. 41 (aa) Lock-Boxes. The names and addresses of all the Lock-Box Banks, ---------- together, with the account numbers of the Lock-Box Accounts of the Seller at such Lock-Box Banks and the names, addresses and account numbers of all accounts to which Collections of the Assets outstanding before the initial Purchase hereunder have been sent, are specified in Schedule VI (which shall be deemed to be amended in respect of terminating or adding any Lock-Box Account or Lock-Box Bank upon satisfaction of the notice and other requirements specified in respect thereof). (bb) FNBNE Existing Account. All Collections in the FNBNE Existing ---------------------- Account are free and clear of any Adverse Claim. As long as any Collections are held therein, no effective financing statement or other instruments similar in effect shall at any time be on file in any recording office with respect to the FNBNE Existing Account except such as may be filed in favor of the Deal Agent relating to this Agreement. (cc) Accuracy of Representations and Warranties. Each representation ------------------------------------------ or warranty by the Seller contained herein or in any certificate or other document furnished by the Seller pursuant hereto or in connection herewith is true and correct in all material respects. The representations and warranties set forth in this section shall survive the transfer of the Assets to the Deal Agent as agent for the Secured Parties. Upon discovery by the Seller, the Servicer, any Secured Party, the Liquidity Agent or the Deal Agent of a breach of any of the foregoing representations and warranties, the party discovering such breach shall give prompt written notice to the others. SECTION 4.2 REPRESENTATIONS AND WARRANTIES OF SELLER RELATING TO THE -------------------------------------------------------- AGREEMENT AND THE LOANS. ----------------------- The Seller hereby represents and warrants to the Deal Agent, each Secured Party, the Liquidity Agent and each Investor that, as of the Closing Date and as of each Purchase Date: (a) Binding Obligation, Valid Transfer and Security Interest. -------------------------------------------------------- (i) This Agreement and the Purchase Agreement each constitute legal, valid and binding obligations of the Seller, enforceable against the Seller in accordance with its respective terms, except as such enforceability may be limited by Insolvency Laws and except as such enforceability may be limited by general principles of equity (whether considered in a suit at law or in equity). (ii) This Agreement constitutes either (A) a valid transfer to the Deal Agent as agent for the Secured Parties of all right, title and interest of the Seller in, to and under all Assets in the Asset Pool to the extent of the Asset Interest, and such transfer will be free and clear of any Lien of any Person claiming through or under the Seller or its Affiliates, except for Permitted Liens, or (B) a grant of a security interest in all Assets in the Asset Pool to the Deal Agent as agent for the Secured Parties. In connection with the foregoing 42 clause (B), upon the filing of the financing statements described in Section 6.9(c) the Deal Agent as agent for the Secured Parties shall have a first priority perfected security interest in such Assets in the Asset Pool as may be perfected under the UCC by filing a financing statement or the delivery of possession, subject only to Permitted Liens. Neither the Seller nor any Person claiming through or under the Seller shall have any claim to or interest in the Collection Account, except, if this Agreement is deemed to grant a security interest in such property, for the interest of the Seller in such property as a debtor for purposes of the UCC. (b) Eligibility of Loans. As of the later of the Closing Date or the -------------------- initial Purchase Date, (i) Schedule IV to this Agreement and the information contained in the Notice of Sale and Purchase Certificate delivered pursuant to Section 2.2 is an accurate and complete listing in all material respects of all the Loans that are in the Asset Pool as of such date and the information contained therein with respect to the identity of such Loans and the amounts owing thereunder is true and correct in all material respects as of such date, (ii) each such Loan is an Eligible Loan, (iii) each such Loan and the Related Property is free and clear of any Lien of any Person (other than Permitted Liens) and in compliance with all Requirements of Law applicable to the Seller and/or the Originator and (iv) with respect to each such Loan, all consents, licenses, approvals or authorizations of or registrations or declarations with any Governmental Authority required to be obtained, effected or given by the Seller in connection with the transfer of an interest in such Loan and the Related Property to the Deal Agent, as agent for the Secured Parties, have been duly obtained, effected or given and are in full force and effect. On each Purchase Date, the Seller shall be deemed to represent and warrant that (i) Additional Loan referenced on the related Seller Notice delivered pursuant to Section 2.2 is an Eligible Loan, (ii) each such Loan and the related Property is free and clear of any Lien of any Person (other than Permitted Liens) and in compliance with all Requirements of Law applicable to Seller and/or the Originator, (iii) with respect to each such Loan, all consents, licenses, approvals, authorizations, registrations or declarations with any Governmental Authority required to be obtained, effected or given by the Seller in connection with the addition of such Loan and the Related Property to the Asset Pool have been duly obtained, effected or given and are in full force and effect and (iv) the representations and warranties set forth in Section 4.2(a) are true and correct with respect to each Loan transferred on such day as if made on such day. (c) Notice of Breach. The representations and warranties set forth in ---------------- this Section 4.2 shall survive the transfer of an interest in the respective Assets to the Deal Agent as agent for the Secured Parties. Upon discovery by the Seller, the Servicer, any Secured Party, the Deal Agent, the Liquidity Agent of any Investor of a breach of any of the foregoing representations and warranties, the party discovering such breach shall give prompt written notice to the others. 43 SECTION 4.3 REPRESENTATIONS AND WARRANTIES OF THE SELLER RELATING TO THE ------------------------------------------------------------ PURCHASE LIMIT AND CAPITAL LIMIT. -------------------------------- The Seller is hereby deemed to represent and warrant that on each day prior to the Termination Date, the amount of Capital outstanding on such day shall not exceed the lesser of (x) the Purchase Limit or (y) the Capital Limit. ARTICLE V GENERAL COVENANTS OF THE SELLER SECTION 5.1 GENERAL COVENANTS. ----------------- Until the date on which all Aggregate Unpaids have been indefeasibly paid in full, the Seller hereby covenants that it will comply in all material respects with all applicable laws, rules, regulations and orders and preserve and maintain its corporate existence, rights, franchises, qualifications and privileges the loss of which rights, franchises, qualifications and privileges would have a material adverse effect on the Seller. SECTION 5.2 COVENANTS OF SELLER. ------------------- The Seller hereby covenants that: (a) Security Interests. Except as contemplated in this Agreement, the ------------------ Seller will not sell, pledge, assign or transfer to any other Person, or grant, create, incur, assume or suffer to exist any Lien on any Loan or Related Property that is in the Asset Pool, whether now existing or hereafter transferred hereunder, or any interest therein, and the Seller will not sell, pledge, assign or suffer to exist any Lien on its interest, if any, hereunder. The Seller will promptly notify the Deal Agent of the existence of any Lien on any Loan or Related Property that is in the Asset Pool and the Seller shall defend the right, title and interest of the Deal Agent as agent for the Secured Parties in, to and under any Loan and the Related Property that is in the Asset Pool, against all claims of third parties, provided, however, that nothing in -------- ------- this Section 5.2(a) shall prevent or be deemed to prohibit the Seller from suffering to exist Permitted Liens upon any Loan or any Related Property that is in the Asset Pool. (b) Delivery of Collections. The Seller agrees to pay to the Servicer ----------------------- promptly (but in no event later than two Business Days after receipt) all Collections (including any Deemed Collections) received by Seller in respect of the Loans that are in the Asset Pool. (c) Compliance with the Law. The Seller hereby agrees to comply in all ----------------------- respects with all Requirements of Law applicable to the Seller, the Loans that are in the Asset Pool and the Related Property, if the failure to do so would have a material adverse effect on the Seller, the Loans that are in the Asset Pool or the Related Property. 44 (d) Activities of Seller. The Seller shall not engage in any business or -------------------- activity of any kind, or enter into any transaction or indenture, mortgage, instrument, agreement, contract, lease or other undertaking, which is not authorized by or related to the transactions contemplated by the Transaction Documents. (e) Indebtedness. The Seller shall not create, incur, assume or suffer to ------------ exist any Indebtedness or other liability whatsoever, except (i) obligations incurred under this Agreement or the Purchase Agreement and instruments related thereto, or under any Hedging Agreement required by Section 5.4(a), or (ii) liabilities incident to the maintenance of its corporate existence in good standing. (f) Guarantees. The Seller shall not become or remain liable, directly or ---------- indirectly, in connection with any Indebtedness or other liability of any other Person, whether by guarantee, endorsement (other than endorsements of negotiable instruments for deposit or collection in the ordinary course of business), agreement to purchase or repurchase, agreement to supply or advance funds, or otherwise. (g) Investments. The Seller shall not make or suffer to exist any loans ----------- or advances to, or extend any credit to, or make any investments (by way of transfer of property, contributions to capital, purchase of stock or securities or evidences of indebtedness, acquisition of the business or assets, or otherwise) in, any Person except for purchases of Loans and other Assets pursuant to the Purchase Agreement, or for investments in Permitted Investments in accordance with the terms of this Agreement. (h) Merger; Sales. The Seller shall not enter into any transaction of ------------- merger or consolidation, or liquidate or dissolve itself (or suffer any liquidation or dissolution), or acquire or be acquired by any Person, or convey, sell, lease or otherwise dispose of all or substantially all of its property or business, except as provided for in this Agreement. (i) Distributions. The Seller may, provided it is in compliance with any ------------- applicable State laws and no Early Amortization Event has occurred or will occur as a result thereof, declare or pay, directly or indirectly, any dividend or make any other distribution (whether in cash or other property) with respect to the profits, assets or capital of the Seller or any Person's interest therein, or purchase, redeem or otherwise acquire for value any of its capital stock now or hereafter outstanding. (j) Agreements. The Seller shall not become a party to, or permit any of ---------- its properties to be bound by, any indenture, mortgage, instrument, contract, agreement, lease or other undertaking, except this Agreement, the Purchase Agreement and any Hedging Agreement or amend or modify the provisions of its operating agreement, without the consent of the Deal Agent, or issue any power of attorney except to the Deal Agent or the Servicer. (k) Separate Corporate Existence. The Seller shall: ---------------------------- 45 (i) Maintain its own deposit account or accounts, separate from those of any Affiliate, with commercial banking institutions. The funds of the Seller will not be diverted to any other Person or for other than corporate uses of the Seller. (ii) Ensure that, to the extent that it shares the same officers or other employees as any of its stockholders or Affiliates, the salaries of and the expenses related to providing benefits to such officers and other employees shall be fairly allocated among such entities, and each such entity shall bear its fair share of the salary and benefit costs associated with all such common officers and employees. (iii) Ensure that, to the extent that it jointly contracts with any of its stockholders or Affiliates to do business with vendors or service providers or to share overhead expenses, the costs incurred in so doing shall be allocated fairly among such entities, and each such entity shall bear its fair share of such costs. To the extent that the Seller contracts or does business with vendors or service providers when the goods and services provided are partially for the benefit of any other Person, the costs incurred in so doing shall be fairly allocated to or among such entities for whose benefit the goods and services are provided, and each such entity shall bear its fair share of such costs. All material transactions between Seller and any of its Affiliates shall be only on an arm's length basis. (iv) Maintain a principal executive and administrative office through which its business is conducted separate from those of its Affiliates. To the extent that Seller and any of its stockholders or Affiliates have offices in the same location, there shall be a fair and appropriate allocation of overhead costs among them, and each such entity shall bear its fair share of such expenses. (v) Conduct its affairs strictly in accordance with its Certificate of Incorporation and observe all necessary, appropriate and customary corporate formalities, including, but not limited to, holding all regular and special stockholders, and directors' meetings appropriate to authorize all corporate action, keeping separate and accurate minutes of its meetings, passing all resolutions or consents necessary to authorize actions taken or to be taken, and maintaining accurate and separate books, records and accounts, including, but not limited to, payroll and intercompany transaction accounts. (vi) Take or refrain from taking, as applicable, each of the activities specified in the "non-consolidation" opinion of Bingham Dana LLP delivered on the Closing Date, upon which the conclusions expressed therein are based. (l) Location of Seller, Records; Instruments. The Seller (x) shall ---------------------------------------- not move the location of its principal executive office, without 30 days' prior written notice to the Deal Agent and (y) shall not move, or consent to the Servicer or Collateral Custodian moving, the Loan Documents without 30 days' prior written notice to the Deal Agent and (z) will promptly take all 46 actions required of each relevant jurisdiction in order to continue the first priority perfected security interest of the Deal Agent as agent for the Secured Parties (except for Permitted Liens) in all Assets in the Asset Pool, including delivery of an opinion of counsel acceptable to the Deal Agent. (m) ERISA Matters. The Seller will not (a) engage or permit any ERISA ------------- Affiliate to engage in any prohibited transaction for which an exemption is not available or has not previously been obtained from the United States Department of Labor; (b) permit to exist any accumulated funding deficiency, as defined in Section 302(a) of ERISA and Section 412(a) of the Code, or funding deficiency with respect to any Benefit Plan other than a Multiemployer Plan; (c) fail to make any payments to a Multiemployer Plan that the Seller or any ERISA Affiliate may be required to make under the agreement relating to such Multiemployer Plan or any law pertaining thereto; (d) terminate any Benefit Plan so as to result in any liability; or (e) permit to exist any occurrence of any reportable event described in Title IV of ERISA. (n) Originator Assets. With respect to each Asset acquired by the ----------------- Seller, the Seller will (i) acquire such Asset pursuant to and in accordance with the terms of the Purchase Agreement, (ii) take all action necessary to perfect, protect and more fully evidence the Seller's ownership of such Asset, including, without limitation, (A) filing and maintaining, effective financing statements (Form UCC-1) against the Originator in all necessary or appropriate filing offices, and filing continuation statements, amendments or assignments with respect thereto in such filing offices and (B) executing or causing to be executed such other instruments or notices as may be necessary or appropriate, (iii) perform in accordance with those terms of the Assets requiring performance thereof by the Seller, and (vi) take all additional action that the Deal Agent may reasonably request to perfect, protect and more fully evidence the respective interests of the parties to this Agreement in the Assets and interest therein represented by the Asset Interests. (o) Transactions with Affiliates. The Seller will not enter into, or ---------------------------- be a party to, any transaction with any of its Affiliates, except (i) the transactions permitted or contemplated by this Agreement, the Purchase Agreement and any Hedging Agreements and (ii) other transactions (including, without limitation, the lease of office space or computer equipment or software by the Seller to or from an Affiliate) (A) in the ordinary course of business, (B) pursuant to the reasonable requirements of the Seller's business, (C) upon fair and reasonable terms that are no less favorable to the Seller than could be obtained in a comparable arm's-length transaction with a Person not an Affiliate of the Seller, and (D) not inconsistent with the factual assumptions set forth in the "non-consolidation" legal opinion letter issued by Bingham Dana LLP and delivered to the Deal Agent as a condition to the initial Purchase, as such assumptions may be modified in any subsequent opinion letters delivered to the Deal Agent pursuant to Section 3.2 or otherwise. It is understood that any compensation arrangement for officers shall be permitted under clause (ii)(A) through (C) above if such arrangement has been expressly approved by the board of directors of the Seller. 47 (p) Change in the Purchase Agreement. The Seller will not amend, -------------------------------- modify, waive or terminate any terms or conditions of the Purchase Agreement, without the consent of Deal Agent. (q) Amendment to Certificate of Incorporation. The Seller will not ----------------------------------------- amend, modify or otherwise make any change to its Certificate of Incorporation which would delete or otherwise nullify or circumvent the provisions set forth on Exhibit C hereto. --------- (r) Credit and Collection Policies. The Seller shall take all actions ------------------------------ necessary to comply with the terms of the Credit and Collection Policies, and the Seller shall not cause or permit any changes to be made to the Credit and Collection Policies in any manner that would materially and adversely affect the collectibility of the Loans that are in the Asset Pool without the prior written consent of the Deal Agent. (s) Accounting of Purchases. Other than for federal, state and local ----------------------- income tax purposes, the Seller will not account for or treat (whether in financial statements or otherwise) the transactions contemplated hereby in any manner other than as the sale, or absolute assignment, of Assets by the Seller to a Purchaser. The Seller will not account for or treat (whether in financial statements or otherwise) the transaction contemplated by the Purchase Agreement in any manner other than as the sale, or absolute assignment, of the Originator Assets by the Originator to the Seller, as the case may be. (t) AIG Policy. If any AIG Loans are outstanding, (i) on or before ---------- the expiration of the then existing AIG Policy, the Seller will deliver to the Deal Agent a copy of a renewal or replacement AIG Policy, showing the Seller as an insured and the Deal Agent as a loss payee, and the Seller will notify the Deal Agent on or before such expiration date of any Obligor under an AIG Loan which has been excluded from policy coverage upon such renewal or replacement; (ii) the Seller will comply with all warranties, covenants and agreements of the "Insured" under the AIG Policy; and (iii) the Seller will cooperate with the Servicer and take all actions reasonably required by the Servicer to collect amounts under the AIG Policy. (u) FNBNE Existing Account/Establishment of Lock-Box Account. As long -------------------------------------------------------- as any Collections are held therein, the Seller will not grant, create, incur or suffer to exist any Adverse Claim with respect to the Collections in the FNBNE Existing Account. The Seller will promptly notify the Deal Agent of the existence of any Adverse Claim with respect to any Collections in the FNBNE Existing Account and the Seller shall defend the right, title and interest of the Deal Agent as agent for the Secured Parties in such Collections against all claims of third parties. Upon the request of the Deal Agent, the Seller shall cause a Lock-Box Account to be established within five (5) Business Days and shall promptly transfer all Collections in the FNBNE Existing Account into such Lock-Box Account. SECTION 5.3 RELEASE OF LIEN. --------------- At the same time as (i) any Loan in the Asset Pool expires by its terms and all amounts in respect thereof have been paid by the related Obligor and deposited in the Collection Account or 48 (ii) any Loan becomes a Prepaid Loan and all amounts in respect thereof have been paid by the related Obligor and deposited in the Collection Account, the Deal Agent as agent for the Purchasers will, to the extent requested by the Servicer, release its interest in such Loan and Loan Documents. SECTION 5.4 HEDGING AGREEMENT. ----------------- (a) On or prior to each Purchase Date for any Purchase, the Seller shall enter into one or more Hedge Transactions for that Purchase, provided that each such Hedge Transaction shall: (i) be entered into with a Hedge Counterparty and governed by a Hedging Agreement; (ii) have monthly payment periods the first of which commences on the Purchase Date of that Purchase and the last of which ends on the last Scheduled Payment due to occur under the Loans to which that Purchase relates; (iii) have an amortizing notional amount such that the Hedge Notional Amount in effect during any monthly payment period shall be equal to at least seventy-five percent (75%) but not more than one hundred percent (100%) of the aggregate Capital outstanding hereunder; provided, however, -------- ------- that the above percentage shall increase to one hundred percent (100%) for any period during which the difference between the Portfolio Yield and the Adjusted Eurodollar Rate is less than 2%; and (iv) provide for two series of monthly payments to be netted against each other, one such series being payments to be made by the Seller to a Hedge Counterparty (solely on a net basis) by reference to a fixed interest rate, and the other such series being payments to be made by the Hedge Counterparty to the Deal Agent (solely on a net basis) by reference to the money market yield of the rate set forth in Federal Reserve Statistical Release H.15 (519) under the caption "Commercial Paper-Nonfinancial" for a 30-day maturity as in effect on the first day of each monthly payment period, the net amount of which shall be paid into the Collection Account (if payable by the Hedge Counterparty) or from the Collection Account to the extent funds are available under Section 2.7 or 2.9 of this Agreement (if payable by the Seller). (b) As additional security hereunder, Seller hereby assigns to the Deal Agent, as agent for the Secured Parties, all right, title and interest of Seller in each Hedging Agreement, each Hedge Transaction, and all present and future amounts payable by a Hedge Counterparty to Seller under or in connection with the respective Hedging Agreement and Hedge Transaction(s) with that Hedge Counterparty ("Hedge Collateral"), and grants a security interest to the Deal Agent, as agent for the Secured Parties, in the Hedge Collateral. Seller acknowledges that, as a result of that assignment, Seller may not, without the prior written consent of the Deal Agent, exercise any rights under any Hedging Agreement or Hedge Transaction, except for Seller's right under any Hedging Agreement to enter into Hedge Transactions in order to meet the Seller's obligations 49 under Section 5.4(a) hereof. Nothing herein shall have the effect of releasing the Seller from any of its obligations under any Hedging Agreement or any Hedge Transaction, nor be construed as requiring the consent of the Deal Agent or any Secured Party for the performance by Seller of any such obligations. SECTION 5.5 RETRANSFER OF INELIGIBLE LOANS. ------------------------------ In the event of a breach of any representation or warranty set forth in Section 4.2 with respect to a Loan in the Asset Pool (each such Loan, an "Ineligible Loan") which breach results in a Trigger Event, or would result in a Trigger Event at the next Determination Date or other date of determination, no later than thirty (30) days after the earlier of (i) knowledge by the Seller of such Loan becoming an Ineligible Loan and causing a Trigger Event or prospective Trigger Event, and (ii) receipt by the Seller from the Deal Agent or Servicer of written notice thereof, the Seller shall either (a) accept the retransfer of each such Ineligible Loan, and the Deal Agent as agent for the Purchasers shall convey to the Seller, without recourse, representation or warranty, all of its right, title and interest in such Ineligible Loan; or (b) subject to the satisfaction of the conditions in Section 2.9, substitute for such Ineligible Loan a Substitute Loan; provided, however, that no such retransfer shall be -------- ------- required to be made with respect to such Ineligible Loan (and such Loan shall cease to be an Ineligible Loan) if, on or before the expiration of such 30-day period, the representations and warranties in Section 4.2 with respect to such Loan shall be made true and correct in all material respects with respect to such Loan as if such Loan had been transferred to the Purchasers on such day. Notwithstanding anything contained in this Section 5.5 to the contrary, in the event of breach of any representation and warranty set forth in Section 4.2, with respect to any interest in each Loan and the Related Property having been conveyed to the Purchasers free and clear of any Lien of any Person claiming through or under the Seller and its Affiliates (other than Permitted Liens) and in compliance in all material respects, with all Requirements of Law applicable to the Seller, immediately upon the earlier to occur of the discovery of such breach by the Seller or receipt by the Seller of written notice of such breach given by the Deal Agent, the Seller shall repurchase and the Deal Agent on behalf of the Secured Parties shall convey, free and clear of any Lien created pursuant to this Agreement, all of its right, title and interest in such Ineligible Loan, and the Deal Agent shall, in connection with such conveyance and without further action, be deemed to represent and warrant on behalf of the Secured Parties that it has the corporate authority and has taken all necessary corporate action to accomplish such conveyance, but without any other representation or warranty, express or implied. In any of the foregoing instances, the Seller shall accept the retransfer of each such Ineligible Loan, and the Aggregate Outstanding Loan Balance shall be reduced by the Outstanding Loan Balance of each such Ineligible Loan and, if applicable, increased by the Outstanding Loan Balance of each such Substitute Loan. On and after the date of retransfer, the Ineligible Loan so retransferred shall not be included in the Asset Pool and, as applicable, the Substitute Loan shall be included in the Asset Pool. In consideration of such retransfer without substitution of a Substitute Loan, the Seller shall, on the date of retransfer of such Ineligible Loan, make a deposit to the Collection Account (for allocation pursuant to Section 2.7) in immediately available funds in an amount equal to the Outstanding Loan Balance of such Ineligible Loan (to the extent that the Deemed Collections with respect to such Ineligible Loan 50 have not already been deposited in the Collection Account), plus interest thereon from the last day of the immediately preceding Fixed Period to and including the date of repurchase at a rate per annum equal to the weighted average of the Yield Rates. Upon each retransfer to the Seller of such Ineligible Loan, the Deal Agent, as agent for the Purchasers, shall automatically and without further action be deemed to transfer, assign and set- over to the Seller, without recourse, representation or warranty, all the right, title and interest of the Deal Agent, as agent for the Purchasers, in, to and under such Ineligible Loan and all monies due or to become due with respect thereto, and all proceeds of such Ineligible Loan and Recoveries and Insurance Proceeds relating thereto and all rights to Related Property and other security for any such Ineligible Loan, and all proceeds and products of the foregoing. The Deal Agent, as agent for the Purchasers, shall, at the sole expense of the Servicer execute such documents and instruments of transfer as may be prepared by the Servicer on behalf of the Seller and take other such actions as shall reasonably be requested by the Seller to effect the transfer of such Ineligible Loan pursuant to this subsection. SECTION 5.6 RETRANSFER OF ASSETS. -------------------- In the event of a breach of any representation or warranty set forth in Section 4.2 hereof which breach could reasonably be expected to have a material adverse effect on the rights of the Secured Parties or the Deal Agent, as agent of the Secured Parties, or on the ability of the Seller to perform its obligations hereunder, by notice then given in writing to the Seller, the Deal Agent may direct the Seller to accept the retransfer of all of the Assets, in which case the Seller shall be obligated to accept retransfer of such Assets on a Payment Date specified by the Seller which date shall be at least thirty (30) days after the date of such notice (such date, the "Retransfer Date") and to terminate all Hedge Transactions prior to the Retransfer Date; provided, -------- however, that no such retransfer shall be required to be made if, on or before - ------- expiration of such applicable period, the representations and warranties contained in Section 4.2 shall then be true and correct in all material respects. The Seller shall deposit on the Retransfer Date an amount equal to the deposit amount provided below for such Assets in the Collection Account for distribution to the Secured Parties in accordance with Section 2.7. The deposit amount (the "Retransfer Amount") for such retransfer will be equal to (A) the Aggregate Unpaids minus (B) the amount, if any, available in the Collection ----- Account on such Payment Date. On the Retransfer Date, provided that the full Retransfer Amount has been deposited into the Collection Account, the Assets shall be transferred to the Seller; and the Deal Agent as agent for the Secured Parties shall, at the sole expense of the Servicer, execute and deliver such instruments of transfer, in each case without recourse, representation or warranty, as shall be prepared and reasonably requested by the Servicer on behalf of the Seller to vest in the Seller, or its designee or assignee, all right, title and interest of the Deal Agent as agent for the Secured Parties in, to and under the Assets. If the Deal Agent gives a notice directing the Seller to accept such a retransfer as provided above, the obligation of Seller to accept a retransfer pursuant to this Section 5.6 shall constitute the sole remedy respecting a breach of the representations and warranties contained in Section 4.2 available to the Secured Parties and the Deal Agent on behalf of the Secured Parties. 51 SECTION 5.7 YEAR 2000 COMPATIBILITY. ----------------------- The Seller shall take all action necessary to assure that, prior to January 1, 2000, the Seller's computer system is able to operate and effectively process data including dates on and after January 1, 2000. At the request of the Deal Agent, the Seller shall provide assurance acceptable to the Deal Agent of the Seller's Year 2000 compatibility. ARTICLE VI ADMINISTRATION AND SERVICING OF LOANS SECTION 6.1 APPOINTMENT AND ACCEPTANCE; DUTIES. ---------------------------------- The Seller hereby appoints FNBNE as Servicer pursuant to this Agreement. FNBNE accepts such appointment and agrees to act as the Servicer pursuant to this Agreement to service the Transferred Loans and to serve in such capacity until the termination of its responsibilities pursuant to Section 6.26. Marine Midland is hereby appointed as Backup Servicer and Collateral Custodian pursuant to this Agreement. Marine Midland accepts the appointment and agrees to act as the Backup Servicer and Collateral Custodian pursuant to this Agreement. SECTION 6.2 DUTIES AND RESPONSIBILITIES OF THE SERVICER AND THE COLLATERAL -------------------------------------------------------------- CUSTODIAN. ---------- (a) The Servicer shall conduct the servicing, administration and collection of the Transferred Loans and shall take, or cause to be taken, all such actions as may be necessary or advisable to service, administer and collect Transferred Loans from time to time on behalf of the Purchasers. The Servicer will perform its servicing duties with reasonable care, using that degree of skill and attention that a prudent person engaging in such activities would exercise, but in any event shall not act with less care than the Servicer exercises with respect to all comparable loans that it services for itself or others. Neither the Secured Parties, the Deal Agent nor the Collateral Custodian shall have any obligation or liability with respect to any Transferred Loans, nor shall any of them be obligated to perform any of the obligations of the Servicer hereunder. (b) The duties of the Servicer, as the Purchasers' agent, shall include, without limitation: (i) preparing and submitting of claims to, and post-billing liaison with, Obligors on Transferred Loans; (ii) maintaining all necessary Servicing Records with respect to the Transferred Loans and providing such reports to the Liquidity Agent and the Deal Agent in respect of the servicing of the Transferred Loans (including information relating to its 52 performance under this Facility) as may be required hereunder or as the Liquidity Agent or the Deal Agent may reasonably request; (iii) maintaining and implementing administrative and operating procedures (including, without limitation, an ability to recreate Servicing Records evidencing the Transferred Loans in the event of the destruction of the originals thereof) and keeping and maintaining all documents, books, records and other information reasonably necessary or advisable for the collection of the Transferred Loans (including, without limitation, records adequate to permit the identification of each new Transferred Loan and all Collections of and adjustments to each existing Transferred Loan); (iv) promptly delivering to the Deal Agent, from time to time, such information and Servicing Records relating to the Transferred Loans (including information relating to its performance under this Facility) as the Deal Agent may from time to time reasonably request; (v) identifying each Transferred Loan clearly and unambiguously in its Servicing Records to reflect that such Transferred Loan is owned by the Purchasers; (vi) complying in all material respects with the Credit and Collection Policies in regard to each Transferred Loan; (vii) complying in all material respects with all applicable laws, rules, regulations and orders with respect to it, its business and properties and all Transferred Loans and Collections with respect thereto; (viii) preserving and maintaining its existence, rights, franchises and privileges as a National Banking Association and qualifying to and remaining authorized to perform obligations as Servicer (including enforcement of collection of Transferred Loans on behalf of the Secured Parties) in each jurisdiction where the failure to preserve and maintain such existence, rights, franchises, privileges and qualification would materially adversely affect (A) the rights or interests of the Secured Parties in the Transferred Loans, (B) the collectibility of any Transferred Loan, or (C) the ability of the Servicer to perform its obligations hereunder; (ix) immediately, but not later than three (3) Business Days after such occurrence, notifying the Liquidity Agent and the Deal Agent of the occurrence of an Early Amortization Event (including, without limitation, a material adverse change in the financial condition of the Originator); (x) notifying the Liquidity Agent and the Deal Agent of any material action, suit, proceeding, dispute, offset deduction, defense or counterclaim that is or may be (1) asserted by an Obligor with respect to any Transferred Loan; or (2) reasonably expected to have a material adverse effect on the Loans as a whole or on the ability of the Servicer 53 or the Originator to perform its obligations under the Transaction Documents or on the Servicer or the Seller or any of their respective property; and (xi) notifying the Deal Agent of any change in the Credit and Collections Policies. (c) Disposition Upon Defaulted Loan. Upon any Loan in the Asset Pool ------------------------------- becoming a Defaulted Loan, the Servicer will use commercially reasonable efforts in accordance with the Credit and Collection Policies to dispose of any Related Property. Without limiting the generality of the foregoing, to the extent provided by law, the Servicer may dispose of any such Related Property by purchasing such Related Property or by selling such Related Property to any of its Affiliates for a purchase price equal to the fair market value thereof, any such sale to be evidenced by a certificate of a Responsible Officer of the Servicer delivered to the Deal Agent setting forth the Loan, the Related Property, the sale price of the Related Property and certifying that such sale price is the fair market value of such Related Property. (d) Further Assurances. The Deal Agent will, at the sole expense of the ------------------ Servicer, furnish the Servicer with any powers of attorney and other documents necessary or appropriate to enable the Servicer to carry out its servicing and administrative duties under this Agreement. (e) Custodial Duties. The Collateral Custodian shall take and retain ---------------- custody of the Required Loan Documents delivered by the Seller in accordance with the terms and conditions of this Agreement, all for the benefit of the Purchasers and subject to the Lien thereon in favor of the Deal Agent as agent for the Secured Parties. Within five Business Days of its receipt of any Required Loan Document, the Collateral Custodian shall review the related Required Loan Documents to verify that such Required Loan Documents have been executed and have no missing or mutilated pages and to confirm that such Loan is referenced on the related list of Loans delivered in connection with the related Purchase Certificate. In order to facilitate the foregoing review by the Collateral Custodian, in connection with each delivery of Required Loan Documents hereunder to the Collateral Custodian, the Servicer shall provide to the Collateral Custodian an electronic file (in EXCEL or a comparable format) that contains the related list of Required Loan Documents or which otherwise contains the Loan number and the name of the Obligor with respect to each related Loan. If, at the conclusion of such review, the Collateral Custodian shall determine that such Required Loan Documents are not executed or in proper form on its face, or that the respective Loan is not referenced on such list of Required Loan Documents, the Collateral Custodian shall promptly notify the Seller and the Deal Agent of such determination by providing a written report to such Persons setting forth, with particularity, the lack of execution of such Required Loan Documents, that such Required Loan Documents have missing or mutilated pages, or the fact that such Loan was not referenced on the related list. In addition, unless instructed otherwise in writing by the Seller or the Deal Agent within 10 days of the Collateral Custodian's delivery of such report, the Collateral Custodian shall return any Required Loan Documents not referenced on such list of Loans to the Seller. Other than the foregoing, the Collateral Custodian shall not have any responsibility for reviewing any Required Loan Documents. 54 In taking and retaining custody of the Required Loan Documents, the Collateral Custodian shall be deemed to be acting as the agent of the Deal Agent as agent for the Purchasers and Secured Parties, provided, however, that the -------- ------- Collateral Custodian makes no representations as to the existence, perfection or priority of any Lien on the Required Loan Documents or the instruments therein, and provided, further, that the Collateral Custodian's duties as agent shall be -------- ------- limited to those expressly contemplated herein. All Required Loan Documents shall be kept in fireproof vaults or cabinets at the locations specified on Schedule V attached hereto, or at such other office as shall be specified to the Deal Agent by the Collateral Custodian in a written notice delivered at least 45 days prior to such change. All Required Loan Documents shall be placed together in a separate file cabinet with an appropriate identifying label and maintained in such a manner so as to permit retrieval and access. All Required Loan Documents shall be clearly segregated from any other documents or instruments maintained by the Collateral Custodian. The Collateral Custodian shall clearly indicate that such Required Loan Documents are the sole property of the Purchasers and that the Seller has granted an interest therein to the Deal Agent on behalf of the Secured Parties. In performing its duties, the Collateral Custodian shall use the same degree of care and attention as it employs with respect to similar contracts which it holds as Collateral Custodian. (f) Concerning the Collateral Custodian. ----------------------------------- (i) The Collateral Custodian may conclusively rely on and shall be fully protected in acting upon any certificate, instrument, opinion, notice, letter, telegram or other document delivered to it and which in good faith it reasonably believes to be genuine and which has been signed by the proper party or parties. The Collateral Custodian may rely conclusively on and shall be fully protected by in acting upon (A) the written instructions of any designated officer of the Deal Agent (and shall provide a copy thereof to the Seller) or (B) the verbal instructions of the Deal Agent, which the Collateral Custodian shall promptly confirm in writing (and shall provide a copy thereof to the Seller). (ii) The Collateral Custodian may consult counsel satisfactory to it and the written advice or opinion of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with the advice or opinion of such counsel. (iii) The Collateral Custodian shall not be liable for any error of judgment, or for any act done or step taken or omitted by it, in good faith, or for any mistakes of fact or law, or for anything which it may do or refrain from doing in connection herewith except in the case of its willful misconduct or grossly negligent performance or omission. (iv) The Collateral Custodian makes no warranty or representation and shall have no responsibility (except as expressly set forth in this Agreement) as to the content, enforceability, completeness, validity, sufficiency, value, genuineness, ownership or 55 transferability of the Loans, and will not be required to and will not make any representations as to the validity or value (except as expressly set forth in this Agreement) of any of the Loans. The Collateral Custodian shall not be obligated to take any legal action hereunder which might in its judgment involve any expense or liability unless it has been furnished with an indemnity reasonably satisfactory to it. (v) The Collateral Custodian shall have no duties or responsibilities except such duties and responsibilities as are specifically set forth in this Agreement and no covenants or obligations shall be implied in this Agreement against the Collateral Custodian. (vi) Except for overhead and general administrative expenses, the Collateral Custodian shall not be required to expend or risk its own funds in the performance of its duties hereunder. (vii) It is expressly agreed and acknowledged that the Collateral Custodian is not guaranteeing performance of or assuming any liability for the obligations of the other parties hereto or any parties to the Loans. SECTION 6.3 AUTHORIZATION OF THE SERVICER. ----------------------------- (a) Each of the Originator, the Seller and the Deal Agent on behalf of the Secured Parties and each Hedge Counterparty hereby authorizes the Servicer (including any successor thereto) to take any and all reasonable steps in its name and on its behalf necessary or desirable and not inconsistent with the sale of the Transferred Loans to the Purchasers, in the determination of the Servicer, to collect all amounts due under any and all Transferred Loans, including, without limitation, endorsing any of their names on checks and other instruments representing Collections, executing and delivering any and all instruments of satisfaction or cancellation, or of partial or full release or discharge, and all other comparable instruments, with respect to the Transferred Loans and, after the delinquency of any Transferred Loan and to the extent permitted under and in compliance with applicable law and regulations, to commence proceedings with respect to enforcing payment thereof, to the same extent as the Originator could have done if it had continued to own such Loan. The Originator, the Seller and the Deal Agent on behalf of the Secured Parties and each Hedge Counterparty shall furnish the Servicer (and any successors thereto) with any powers of attorney and other documents necessary or appropriate to enable the Servicer to carry out its servicing and administrative duties hereunder, and shall cooperate with the Servicer to the fullest extent in order to ensure the collectibility of the Transferred Loans. In no event shall the Servicer be entitled to make any Secured Party, any Hedge Counterparty, the Collateral Custodian or the Deal Agent a party to any litigation without such party's express prior written consent, or to make the Seller a party to any litigation (other than any routine foreclosure or similar collection procedure) without the Deal Agent's consent. (b) After an Early Amortization Event has occurred and is continuing, at the Agent's direction the Servicer shall take such action as the Deal Agent may deem necessary or advisable 56 to enforce collection of the Transferred Loans; provided, however, that the Deal -------- Agent may, at any time that an Early Amortization Event has occurred and is continuing, notify any Obligor with respect to any Transferred Loans of the assignment of such Transferred Loans, to the Deal Agent and direct that payments of all amounts due or to become due to any other party thereunder be made directly to the Deal Agent or any servicer, collection agent or lockbox or other account designated by the Deal Agent and, upon such notification and at the expense of the Seller, the Deal Agent may enforce collection of any such Transferred Loans and adjust, settle or compromise the amount or payment thereof. SECTION 6.4 COLLECTION OF PAYMENTS. ---------------------- (a) Collection Efforts, Modification of Loans. The Servicer will make ----------------------------------------- reasonable efforts to collect all payments called for under the terms and provisions of the Loans included in the Asset Pool as and when the same become due, and will follow those collection procedures which it follows with respect to all comparable Loans that it services for itself or others; provided, -------- however, that so long as FNBNE or the Servicer Assignee is the Servicer the - ------- Servicer shall collect all payments in accordance with the Credit and Collection Policies. The Servicer may not waive, modify or otherwise vary any provision of a Loan that is included in the Asset Pool other than as permitted in the Credit and Collection Policies or as permitted by the Deal Agent. The Servicer may in its discretion waive any late payment charge or any other fees that may be collected in the ordinary course of servicing any Loan included in the Asset Pool. (b) Prepaid Loan. The Servicer may not permit a Loan in the Asset Pool to ------------ become a Prepaid Loan (which shall not include a Loan that becomes a Prepaid Loan due to a Casualty Loss), unless (x) the Servicer provides an Additional ------ Loan or (y) such prepayment will not result in the Collection Account receiving an amount (the "Prepayment Amount") less than the sum of (A) the Outstanding Loan Balance on the date of such prepayment, (B) any outstanding Servicer Advances thereon, (C) all Hedge Breakage Costs owing to the relevant Hedge Counterparty for any termination of one or more Hedge Transactions, in whole or in part, as required by the terms of any Hedging Agreement as the result of any such Loan becoming a Prepaid Loan, and (D) any accrued and unpaid Yield thereon and all Breakage Costs arising as a result of such prepayment. After an Early Amortization Event has occurred, the Servicer may not permit a Loan in the Asset Pool to become a Prepaid Loan (which shall not include a Loan that becomes a Prepaid Loan due to a Casualty Loss), unless the Servicer collects an amount ------ equal to the sum of (A) the Outstanding Loan Balance on the date of such prepayment, (B) any outstanding Servicer Advances thereon, (C) all Hedge Breakage Costs owing to the relevant Hedge Counterparty for any termination of one or more Hedge Transactions, in whole or in part, as required by the terms of any Hedging Agreement as the result of any such Loan becoming a Prepaid Loan, and (D) any accrued and unpaid Yield thereon and all Breakage Costs arising as a result of such prepayment. (c) Acceleration. The Servicer shall accelerate the maturity of all or ------------ any Scheduled Payments under any Loan included in the Asset Pool under which a default under the terms thereof has occurred and is continuing (after the lapse of any applicable grace period) promptly after such Loan becomes a Defaulted Loan; provided, however, that so long as FNBNE or the 57 Servicer Assignee is the Servicer the Servicer shall collect all Defaulted Loans in accordance with the Credit and Collections Policies. (d) Taxes and other Amounts. To the extent provided for in any Loan ----------------------- included in the Asset Pool, the Servicer will use its best efforts to collect all payments with respect to amounts due for taxes, assessments and insurance premiums relating to such Loans or the Related Property and remit such amounts to the appropriate Governmental Authority or insurer on or prior to the date such payments are due. (e) Payments to FNBNE Existing Account and Lock-Box Account. On or before ------------------------------------------------------- each applicable Purchase Date, the Servicer shall have instructed all Obligors to make all payments in respect of the Loans in the Asset Pool to the FNBNE Existing Account; provided, however, notwithstanding the foregoing, upon -------- ------- the establishment of a Lock-Box Account pursuant to Section 5.2 hereof, the Servicer shall promptly instruct all Obligors to make all payments in respect of the Loans in the Asset Pool to a Lock-Box or directly to a Lock-Box Account. (f) Establishment of the Collection Account. The Servicer shall cause to --------------------------------------- be established, on or before the Closing Date, and maintained in the name of the Deal Agent, with a "Qualified Institution" (as hereinafter defined) the Collection Account. A "Qualified Institution" shall be a depository institution or trust company that at all times shall be organized under the laws of the United States or any one of the States thereof or the District of Columbia (or any domestic branch of a foreign bank), (i) (A) which has either (1) a long-term unsecured debt rating of A- or better by S&P and A 3 or better by Moody's or (2) a short-term unsecured debt rating or certificate of deposit rating of A-1 or better by S&P or P-1 or better by Moody's, (B) the parent corporation of which has either (1) a long-term unsecured debt rating of A- or better by S&P and A 3 or better by Moody's or (2) a short-term unsecured debt rating or certificate of deposit rating of A-1 or better by S&P and P-1 or better by Moody's or (C) is otherwise acceptable to the Deal Agent and (ii) whose deposits are insured by the Federal Deposit Insurance Corporation. (g) Establishment of the Cash Collateral Account. On or prior to the date -------------------------------------------- any AIG Loans are outstanding, the Servicer shall cause to be established, on or before the Closing Date, and maintained in the name of the Deal Agent, with a "Qualified Institution" (as defined in subsection (f) above) the Cash Collateral Account. SECTION 6.5 SERVICER ADVANCES. ----------------- For each Collection Period, if the Servicer determines that any Scheduled Payment (or portion thereof) which was due and payable pursuant to a Loan in the Asset Pool during such Collection Period was not received prior to the end of such Collection Period, the Servicer may make an advance in an amount up to the amount of such delinquent Scheduled Payment (or portion thereof); in addition, if on any day there are not sufficient funds on deposit in the Collection Account to pay accrued Yield on any Asset Interest the Fixed Period of which ends on such day, the Servicer shall make an advance in the amount necessary to pay such Yield (in either 58 case, any such advance, a "Servicer Advance"). Notwithstanding the preceding sentence, (i) the Servicer shall be required to make a Servicer Advance with respect to any Loan if, and only if, the Servicer determines (such determination to be conclusive and binding) in good faith that such Servicer Advance will ultimately be recoverable from future collections on, or the liquidation of, the Asset Pool and payments by one or more Hedge Counterparties under one or more Hedging Agreements, (ii) the Servicer's obligation to make a Servicer Advance for any Loan shall cease on the day such Loan becomes a Defaulted Loan or a Charged-Off Loan and (iii) any successor Servicer, including the Backup Servicer, will not be obligated to make any Servicer Advances. The Servicer will deposit any Servicer Advances into the Collection Account on or prior to 11:00 a.m. (Charlotte, North Carolina time) on the related Payment Date, in immediately available funds. SECTION 6.6 REALIZATION UPON DEFAULTED LOANS. -------------------------------- The Servicer will use reasonable efforts to repossess or otherwise comparably convert the ownership of any Related Property with respect to a Defaulted Loan and will act as sales and processing agent for Related Property which it repossesses. The Servicer will follow such other practices and procedures as it deems necessary or advisable and as are customary and usual in its servicing of loans and other actions by the Servicer in order to realize upon such Related Property, which practices and procedures may include reasonable efforts to enforce all obligations of Obligors and repossessing and selling such Related Property at public or private sale in circumstances other than those described in the preceding sentence, provided, however, that so long -------- ------- as FNBNE or the Servicer Assignee is Servicer the Servicer shall follow the practices and procedures with respect to the servicing of loans and the realization upon any Related Property as are set forth in the Credit and Collection Policies. Without limiting the generality of the foregoing, the Servicer may sell any such Related Property with respect to the Servicer or its Affiliates for a purchase price equal to the then fair market value thereof, any such sale to be evidenced by a certificate of a Responsible Officer of the Servicer delivered to the Deal Agent setting forth the Loan, the Related Property, the sale price of the Related Property and certifying that such sale price is the fair market value of such Related Property. In any case in which any such Related Property has suffered damage, the Servicer will not expend funds in connection with any repair or toward the repossession of such Related Property unless it reasonably determines that such repair and/or repossession will increase the Recoveries by an amount greater than the amount of such expenses. The Servicer will remit to the Collection Account the Recoveries received in connection with the sale or disposition of Related Property with respect to a Defaulted Loan. SECTION 6.7 REPRESENTATIONS AND WARRANTIES OF BACKUP SERVICER AND ----------------------------------------------------- COLLATERAL CUSTODIAN. -------------------- Each of the Backup Servicer and the Collateral Custodian represents and warrants to the Deal Agent, as agent for the Secured Parties, and the Secured Parties that, as of the Closing Date and on each Purchase Date, insofar as any of the following affects the Backup Servicer's or the 59 Collateral Custodian's, as the case may be, ability to perform its obligations pursuant to this Agreement in any material respect: (a) Organization and Good Standing. Marine Midland is a New York banking ------------------------------ corporation duly organized, validly existing and in good standing under the laws of the State of New York with all requisite corporate power and authority to own its properties and to conduct its business as presently conducted and to enter into and perform its obligations pursuant to this Agreement. (b) Power and Authority. Each of the Backup Servicer and the Collateral ------------------- Custodian has the corporate power and authority to execute and deliver this Agreement and to carry out its terms. Each of the Backup Servicer and the Collateral Custodian has duly authorized the execution, delivery and performance of this Agreement by all requisite corporate action. (c) No Violation. The consummation of the transactions contemplated by, ------------ and the fulfillment of the terms of, this Agreement by the Backup Servicer and the Collateral Custodian will not (i) conflict with, result in any breach of any of the terms or provisions of, or constitute a default under, the charter or bylaws of the Backup Servicer or the Collateral Custodian, or any term of any material agreement, indenture, mortgage, deed of trust or other instrument to which the Backup Servicer or the Collateral Custodian is a party or by which it or any of its property is bound, (ii) result in the creation or imposition of any Lien upon any of its properties pursuant to the terms of any such indenture, agreement, mortgage, deed of trust or other instrument, or (iii) violate any law, regulation, order, writ, judgment, injunction, decree, determination or award of any Governmental Authority applicable to Marine Midland or any of its properties that might (in the reasonable judgment of the Backup Servicer or the Collateral Custodian, as the case may be) materially and adversely affect the performance by the Backup Servicer or the Collateral Custodian of its obligations under, or the validity or enforceability of, this Agreement. (d) No Consent. No consent, approval, authorization, order, registration, ---------- filing, qualification, license or permit (collectively, the "Consents") of or with any Governmental Authority having jurisdiction over the Backup Servicer or the Collateral Custodian or any of its respective properties is required to be obtained by or with respect to the Backup Servicer or the Collateral Custodian in order for the Backup Servicer or the Collateral Custodian, as the case may be, to enter into this Agreement or perform its obligations hereunder (except with respect to performance only, such Consents as the Backup Servicer or the Collateral Custodian, as the case may be, may need to obtain prior to the commencement of its performance of its duties hereunder in the certain jurisdictions outside of New York, provided that in lieu of obtaining for itself the requisite Consents, the Backup Servicer or the Collateral Custodian, as the case may be, may and shall be permitted to delegate the performance of its duties to parties having the requisite Consents in such jurisdictions; provided, -------- however, in the case of such delegation of performance the Backup Servicer or the Collateral Custodian, as the case may be, shall not be relieved of their responsibility under this Agreement with respect to such duties). 60 (e) Binding Obligation. This Agreement constitutes a legal, valid and ------------------ binding obligation of Marine Midland, enforceable against the Backup Servicer and the Collateral Custodian in accordance with its terms, except as such enforceability may be limited by (i) applicable Insolvency Laws and (ii) general principles of equity (whether considered in a suit at law or in equity). (f) No Proceeding. There are no proceedings or investigations pending or, ------------- to the best of its knowledge, threatened, against the Backup Servicer or the Collateral Custodian, before any Governmental Authority (i) asserting the invalidity of this Agreement, (ii) seeking to prevent the consummation of any of the transactions contemplated by this Agreement or (iii) seeking any determination or ruling that might (in the reasonable judgment of the Backup Servicer or the Collateral Custodian, as the case may be) materially and adversely affect the performance by the Backup Servicer or the Collateral Custodian of its obligations under, or the validity or enforceability of, this Agreement. SECTION 6.8 MAINTENANCE OF INSURANCE POLICIES. --------------------------------- The Servicer will require that each Obligor with respect to a Loan included in the Asset Pool maintains an Insurance Policy with respect to each Loan and the Related Property, in accordance with the Credit and Collection Policies. In connection with its activities as Servicer, the Servicer agrees to present, or to require the Obligor to present, on behalf of the Deal Agent as agent for the Secured Parties, claims to the insurer under each Insurance Policy and any such liability policy, and to settle, adjust and compromise such claims, in each case, consistent with the terms of each related Loan. SECTION 6.9 REPRESENTATIONS AND WARRANTIES OF SERVICER. ------------------------------------------ The Servicer represents and warrants to the Deal Agent, as agent for the Secured Parties, each Secured Party, the Liquidity Agent and each Investor that, as of the Closing Date and on each Purchase Date: (a) Organization and Good Standing. The Servicer is a National Banking ------------------------------ Association duly organized and validly existing with all requisite corporate power and authority to own its properties and to conduct its business as presently conducted and to enter into and perform its obligations pursuant to this Agreement. (b) Due Qualification. The Servicer is qualified to do business, is in ----------------- good standing, and has obtained all licenses and approvals as required under the laws of all jurisdictions in which the ownership or lease of its property and or the conduct of its business (other than the performance of its obligations hereunder) requires such qualification, standing, license or approval, except to the extent that the failure to so qualify, maintain such standing or be so licensed or approved would not have a material adverse effect on the interests of the Seller or of the Purchasers. The Servicer is qualified to do business, is in good standing, and has obtained all 61 licenses and approvals as required under the laws of all states in which the performance of its obligations pursuant to this Agreement requires such qualification, standing, license or approval and where the failure to qualify or obtain such license or approval would have material adverse effect on its ability to perform hereunder. (c) Power and Authority. The Servicer has the corporate power and ------------------- authority to execute and deliver this Agreement and to carry out its terms. The Servicer has duly authorized the execution, delivery and performance of this Agreement by all requisite corporate action. The execution, delivery and performance of this Agreement does not contravene the Servicer's Certificate of Incorporation or by-laws. (d) No Violation. The consummation of the transactions contemplated by, ------------ and the fulfillment of the terms of, this Agreement by the Servicer (with or without notice or lapse of time) will not (i) conflict with, result in any breach of any of the terms or provisions of, or constitute a default under, the [articles of incorporation] or by-laws of the Servicer, or any term of any agreement, indenture, mortgage, deed of trust or other instrument to which the Servicer is a party or by which it or any of its property is bound, (ii) result in the creation or imposition of any Lien upon any of its properties pursuant to the terms of any such indenture, agreement, mortgage, deed of trust or other instrument, or (iii) violate any law, regulation, order, writ, judgment, injunction, decree, determination or award of any Governmental Authority applicable to the Servicer or any of its properties. (e) No Consent. No consent, approval, authorization, order, registration, ---------- filing, qualification, license or permit of or with any Governmental Authority having jurisdiction over the Servicer or any of its properties is required to be obtained by or with respect to the Servicer in order for the Servicer to enter into this Agreement or perform its obligations hereunder. (f) Binding Obligation. This Agreement constitutes a legal, valid and ------------------ binding obligation of the Servicer, enforceable against the Servicer in accordance with its terms, except as such enforceability may be limited by (i) applicable Insolvency Laws and (ii) general principles of equity (whether considered in a suit at law or in equity). (g) No Proceeding. There are no proceedings or investigations pending or ------------- threatened against the Servicer, before any Governmental Authority (i) asserting the invalidity of this Agreement, (ii) seeking to prevent the consummation of any of the transactions contemplated by this Agreement or (iii) seeking any determination or ruling that might (in the reasonable judgment of the Servicer) materially and adversely affect the performance by the Servicer of its obligations under, or the validity or enforceability of, this Agreement. (h) Reports Accurate. No Servicer Certificate, information, exhibit, ---------------- financial statement, document, book, Servicer Record or report furnished or to be furnished by the Servicer to the Deal Agent or a Secured Party in connection with this Agreement is or will be inaccurate in any material respect as of the date it is or shall be dated or (except as otherwise 62 disclosed to the Deal Agent or such Secured Party, as the case may be, at such time) as of the date so furnished. (i) Investment Company Act. ---------------------- (i) The Servicer represents and warrants that the Servicer has never been, is not now, and will not in the future be operated in such a manner as to cause the Servicer to be an "investment company," as such term is defined in Section 3 of the 1940 Act; and (ii) The Servicer represents and warrants that the business and other activities of the Servicer, including but not limited to, the consummation and conduct of the transactions contemplated by the Transaction Documents to which the Servicer is a party do not now and will not in the future result in a violation by the Servicer, the Borrower, or any other person or entity of the 1940 Act or the rules and regulations promulgated thereunder. SECTION 6.10 COVENANTS OF SERVICER. --------------------- The Servicer hereby covenants that: (a) Compliance with Law. The Servicer will comply with all laws and ------------------- regulations of any Governmental Authority applicable to the Servicer or the Loans included in the Asset Pool and Related Property and Loan Documents or any part thereof. (b) Obligations with Respect to Loans; Modifications. The Servicer will ------------------------------------------------ duly fulfill and comply with all obligations on the part of the Seller to be fulfilled or complied with under or in connection with each Loan included in the Asset Pool and will do nothing to impair the rights of the Deal Agent as agent for the Secured Parties or of the Secured Parties in, to and under the Assets. The Servicer will perform its obligations under the Loans included in the Asset Pool and will not change or modify such Loans other than as permitted in the Credit and Collection Policies or as approved by the Deal Agent. (c) Preservation of Security Interest. The Servicer will execute and --------------------------------- file such financing and continuation statements and any other documents which may be required by any law or regulation of any Governmental Authority to preserve and protect fully the interest of the Deal Agent as agent for the Secured Parties in, to and under the Assets. (d) No Bankruptcy Petition. Prior to the date that is one year and one ---------------------- day after the payment in full of all amounts owing in respect of all outstanding commercial paper issued by VFCC, the Servicer will not institute against the Seller or VFCC, or join any other Person in instituting against the Seller or VFCC, any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings or other similar proceedings under the laws of the United States or any state of the United States. This Section 6.10(d) will survive the termination of this Agreement. 63 (e) Amendments to Credit and Collection Policies. The Servicer, without -------------------------------------------- the prior written consent of the Deal Agent, will not agree or consent to or otherwise permit to occur any amendment, modification, change, supplement, or recission of the Credit and Collection Policies in whole or in part or in any manner that could have a material adverse effect upon the Loans or the interests of the Deal Agent or the Secured Parties. (f) Year 2000 Compatibility. The Servicer shall take all action necessary ----------------------- to assure that, prior to January 1, 2000, the Servicer's computer system is able to operate and effectively process data including dates on and after January 1, 2000. At the request of the Deal Agent, the Servicer shall provide assurance acceptable to the Deal Agent of the Servicer's Year 2000 compatibility. (g) Backup Servicer and Collateral Custodian Fee Letter. The Servicer --------------------------------------------------- will not amend, modify, waive or terminate any terms or provisions of the Backup Servicer and Collateral Custodian Fee Letter without the prior written consent of the Deal Agent. SECTION 6.11 COVENANTS OF BACKUP SERVICER AND COLLATERAL CUSTODIAN. ----------------------------------------------------- Each of the Backup Servicer and the Collateral Custodian hereby covenants that: (a) Loan Files. The Collateral Custodian will not dispose of any ---------- documents constituting the Loan Files in any manner which is inconsistent with the performance of its obligations as the Collateral Custodian pursuant to this Agreement and will not dispose of any Loan Files except as contemplated by this Agreement. (b) Compliance with Law. Each of the Backup Servicer and the Collateral ------------------- Custodian will comply with all laws and regulations of any Governmental Authority applicable to the Backup Servicer and the Collateral Custodian. (c) No Bankruptcy Petition. Prior to the date that is one year and one ---------------------- day after the payment in full of all amounts owing in respect of all outstanding commercial paper issued by VFCC, neither the Backup Servicer nor the Collateral Custodian will institute against the Seller or VFCC, or join any other Person in instituting against the Seller or VFCC, any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings or other similar proceedings under the laws of the United States or any state of the United States. This Section 6.11(c) will survive the termination of this Agreement. (d) Location of Loan Files. The Loan Files shall remain at all times in ---------------------- the possession of the Collateral Custodian at the address set forth herein unless notice of a different address is given in accordance with the terms hereof. (e) No Changes in Backup Servicer and Collateral Custodian Fee. The ---------------------------------------------------------- Backup Servicer and Collateral Custodian will not make any changes to the fees set forth in the Backup 64 Servicer and Collateral Custodian Fee Letter without the prior written approval of the Deal Agent. (f) Year 2000 Compatibility. The Backup Servicer and Collateral Custodian ----------------------- shall take all action necessary to assure that, prior to January 1, 2000, the Backup Servicer and Collateral Custodian's computer system is able to operate and effectively process data including dates on and after January 1, 2000. At the request of the Deal Agent, the Backup Servicer and Collateral Custodian shall provide assurance acceptable to the Deal Agent of the Backup Servicer and Collateral Custodian's Year 2000 Compatibility. SECTION 6.12 SERVICING COMPENSATION. ---------------------- As compensation for its servicing activities hereunder and reimbursement for its expenses, the Servicer shall be entitled to receive a servicing fee (the "Servicing Fee") in respect of each Collection Period (or portion thereof) equal to one-twelfth of the product of (A) the Servicing Fee Rate and (B) the Aggregate Outstanding Loan Balance as on the most recent Determination Date, such Servicing Fee to be payable monthly in arrears on each Payment Date to the extent of funds available therefor pursuant to the provisions of Section 2.7. SECTION 6.13 CUSTODIAL COMPENSATION. ---------------------- As compensation for its custodial activities hereunder and reimbursement for its expenses, the Collateral Custodian shall be entitled to receive a custodial fee (the "Custodial Fee") as provided in the Backup Servicer and Collateral Custodian Fee Letter. SECTION 6.14 PAYMENT OF CERTAIN EXPENSES BY SERVICER. --------------------------------------- The Servicer will be required to pay all expenses incurred by it in connection with its activities under this Agreement, including fees and disbursements of legal counsel and independent accountants, Taxes imposed on the Servicer, expenses incurred in connection with payments and reports pursuant to this Agreement, and all other fees and expenses not expressly stated under this Agreement for the account of the Seller, but excluding Liquidation Expenses. The Servicer will be required to pay all reasonable fees and expenses owing to any bank or trust company in connection with the maintenance of the FNBNE Existing Account, the Collection Account and the Lock-Box Account. The Servicer shall be required to pay such expenses for its own account and shall not be entitled to any payment therefor other than the Servicing Fee. SECTION 6.15 REPORTS. ------- (a) Monthly Report. With respect to each Determination Date and the -------------- related Collection Period, the Servicer will provide to the Seller and the Deal Agent and the Backup Servicer, on the related Reporting Date, a monthly statement (a "Monthly Report"), signed by a Responsible Officer of the Servicer and substantially in the form of Exhibit E. --------- 65 (b) Servicer's Certificate. Together with each Monthly Report, the ---------------------- Servicer shall submit to the Seller, the Deal Agent and the Backup Servicer a certificate (a "Servicer's Certificate"), signed by a Responsible Officer of the Servicer and substantially in the form of Exhibit F. --------- (c) Financial Statements. The Servicer will submit to the Deal Agent, -------------------- within 45 days of the end of each of the Servicer's fiscal quarters, commencing March 31, 1999 unaudited consolidated financial statements of the Servicer (or, so long as FNBNE or the Servicer Assignee is the Servicer, First International Bancorp, Inc.) (including an analysis of delinquencies and losses for each fiscal quarter) as of the end of each such fiscal quarter. The Servicer shall submit to the Deal Agent, within 90 days of the end of the Servicer's fiscal year, commencing December 31, 1999, annual consolidated audited financial statements of the Servicer (or, so long as the Originator is the Servicer, First International Bancorp, Inc.) as of the end of such fiscal year. SECTION 6.16 ANNUAL STATEMENT AS TO COMPLIANCE. --------------------------------- The Servicer will provide to the Deal Agent, on or prior to March 31 of each year, commencing March 31, 1999, an annual report signed by a Responsible Officer of the Servicer certifying that (a) a review of the activities of the Servicer, and the Servicer's performance pursuant to this Agreement, for the period ending on the last day of the preceding fiscal year has been made under such Person's supervision and (b) the Servicer has performed or has caused to be performed in all material respects all of its obligations under this Agreement throughout such year and no Servicer Termination Event has occurred and is continuing (or if a Servicer Termination Event has so occurred and is continuing, specifying each such event, the nature and status thereof and the steps necessary to remedy such event, and, if a Servicer Termination Event occurred during such year and no notice thereof has been given to the Deal Agent, specifying such Servicer Termination Event and the steps taken to remedy such event). SECTION 6.17 ANNUAL INDEPENDENT PUBLIC ACCOUNTANT'S SERVICING REPORTS. -------------------------------------------------------- The Servicer will cause a firm of nationally recognized independent public accountants (who may also render other services to the Servicer) to furnish to the Deal Agent, on or prior to March 31 of each year, commencing March 31, 1999, (i) a report relating to the previous fiscal year to the effect that (A) such firm has reviewed certain documents and records relating to the servicing of the Loans included in the Asset Pool, and (B) based on such examination, such firm is of the opinion that the Monthly Reports for such year were prepared in compliance with this Agreement, except for such exceptions as it believes to be immaterial and such other exceptions as will be set forth in such firm's report and (ii) a report covering the preceding fiscal year to the effect that such accountants have applied certain agreed-upon procedures to certain documents and records relating to the servicing of Loans under this Agreement, compared the information contained in the Servicer's Certificates delivered during the period covered by such report with such documents and records and that no matters came to the attention of such accountants that caused them to believe that such servicing was not conducted in compliance with this Article VI 66 of this Agreement, except for such exceptions as such accountants shall believe to be immaterial and such other exceptions as shall be set forth in such statement. SECTION 6.18 ADJUSTMENTS. ----------- If (i) the Servicer makes a deposit into the Collection Account in respect of a Collection of a Loan included in the Asset Pool and such Collection was received by the Servicer in the form of a check which is not honored for any reason or (ii) the Servicer makes a mistake with respect to the amount of any Collection and deposits an amount that is less than or more than the actual amount of such Collection, the Servicer shall appropriately adjust the amount subsequently deposited into the Collection Account to reflect such dishonored check or mistake. Any Scheduled Payment in respect of which a dishonored check is received shall be deemed not to have been paid. SECTION 6.19 MERGER OR CONSOLIDATION OF THE SERVICER. --------------------------------------- The Servicer shall not consolidate with or merge into any other Person or convey or transfer its properties and assets substantially as an entirety to any Person, unless the Servicer is the surviving entity and unless: (i) the Servicer has delivered to the Deal Agent and the Backup Servicer an Officer's Certificate and an Opinion of Counsel each stating that any consolidation, merger, conveyance or transfer and such supplemental agreement comply with this Section 6.19 and that all conditions precedent herein provided for relating to such transaction have been complied with and, in the case of the Opinion of Counsel, that such supplemental agreement is legal, valid and binding with respect to the Servicer and such other matters as the Deal Agent may reasonably request; (ii) the Servicer shall have delivered notice of such consolidation, merger, conveyance or transfer to the Deal Agent; and (iii) after giving effect thereto, no Early Amortization Event or event which with notice or lapse of time would constitute an Early Amortization Event shall have occurred. Notwithstanding anything to the contrary contained herein, so long as the Servicer and the Originator are the same Person, the Servicer is permitted as part of a Conversion to assign its rights hereunder to, and the Servicer's obligations hereunder can be assumed by, another wholly-owned subsidiary of First International Bancorp, Inc. (the "Servicer Assignee") (in which case all of the provisions of this Agreement shall, to the same extent as they apply to the Servicer hereunder, apply to the Servicer Assignee rather than to the Servicer) on the condition that (a) the Servicer Assignee acquires substantially all of the Servicer's assets relating to its commercial lending business, (b) the Servicer Assignee assumes substantially all of the Servicer's liabilities relating to its commercial lending business, but expressly excluding the Servicer's deposits, (c) 67 Deal Agent receives such documents evidencing (a) and (b) above as Deal Agent shall reasonably request, and (d) the Servicer Assignee executes and deliver to Deal Agent such amendments to this Agreement and such opinions of counsel as Deal Agent may deem necessary including, but not limited to opinions to evidence that the Servicer Assignee has assumed all of the Servicer's rights and obligations, and is bound by all of the Servicer's agreements, set forth herein. Upon such conversion, the Commitment Termination Date may be accelerated pursuant to the provisions of Section 2.1(c). SECTION 6.20 LIMITATION ON LIABILITY OF THE SERVICER AND OTHERS. -------------------------------------------------- Except as provided herein, neither the Servicer nor any of the directors or officers or employees or agents of the Servicer shall be under any liability to the Deal Agent, the Secured Parties or any other Person for any action taken or for refraining from the taking of any action pursuant to this Agreement whether arising from express or implied duties under this Agreement; provided, however, -------- ------- that this provision shall not protect the Servicer or any such Person against any liability which would otherwise be imposed by reason of its willful misfeasance, bad faith or gross negligence in the performance of duties or by reason of its willful misconduct hereunder. SECTION 6.21 INDEMNIFICATION OF THE SELLER, THE DEAL AGENT, THE LIQUIDITY ------------------------------------------------------------ AGENT AND THE SECURED PARTIES. ----------------------------- The Servicer shall indemnify and hold harmless the Seller, the Deal Agent, the Liquidity Agent and each Secured Party and their respective officers, directors, employees and agents (collectively, the "Indemnified Persons") from and against any loss, liability, expense, damage or injury suffered or sustained by any Indemnified Person by reason of any acts, omissions or alleged acts or omissions of the Servicer, including, but not limited to any judgment, award, settlement, reasonable attorneys' fees and other costs or expenses incurred in connection with the defense of any actual or threatened action, proceeding or claim, but excluding allocations of overhead expenses of any such Indemnified Party or other non-monetary damages of any such Indemnified Party. Notwithstanding the foregoing, the Servicer shall not indemnify an Indemnified Person if such loss, liability, expense, damage or injury results or arises (i) as a result of fraud, gross negligence or willful misconduct by any Indemnified Person; and (ii) under any federal, state or local income or franchise taxes or any other Tax imposed on or measured by income (or any interest or penalties with respect thereto or arising from a failure to comply therewith) required to be paid by the Seller, the Deal Agent, the Liquidity Agent or the Secured Parties in connection herewith to any taxing authority. The provisions of this indemnity shall run directly to and be enforceable by an injured party subject to the limitations hereof. If the Servicer has made any indemnity payment pursuant to this Section 6.21 and such payment fully indemnified the recipient thereof and the recipient thereafter collects any payments from others in respect of such Indemnified Amounts, the recipient shall repay to the Servicer an amount equal to the amount it has collected from others in respect of such indemnified amounts. If for any reason the indemnification provided above in this Section 6.21 is unavailable to the Indemnified Person or is insufficient to hold an Indemnified Person harmless, then Servicer 68 shall contribute to the amount paid or payable by such Indemnified Person as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect not only the relative benefits received by such Indemnified Person on the one hand and Servicer on the other hand but also the relative fault of such Indemnified Person as well as any other relevant equitable considerations. The parties hereto agree that the provisions of this Section 6.21 shall not be interpreted to provide recourse to the Seller against loss by reason of the bankruptcy or insolvency (or other credit condition) of, or default by, related Obligor on, any Loan. Any indemnification pursuant to this Section shall not be payable from the Assets. Any indemnification pursuant to this Section shall not be in duplication of any other indemnification for the same loss under Section 8.1. The obligations of the Servicer under this Section 6.21 shall survive the resignation or removal of the Deal Agent and the Liquidity Agent, and the termination of this Agreement. SECTION 6.22 THE SERVICER AND BACKUP SERVICER NOT TO RESIGN. ---------------------------------------------- Neither the Servicer nor the Backup Servicer shall resign from the obligations and duties hereby imposed on it except upon such Person's determination that (i) the performance of its duties hereunder is or becomes impermissible under applicable law and (ii) there is no reasonable action which such Person could take to make the performance of its duties hereunder permissible under applicable law. Any such determination permitting the resignation of the Servicer or Backup Servicer shall be evidenced as to clause (i) above by an Opinion of Counsel to such effect delivered to the Deal Agent. No such resignation shall become effective until a Successor Servicer shall have assumed the responsibilities and obligations of the Servicer in accordance with Section 6.27, or a successor Backup Servicer shall have assumed the responsibilities and obligations of the Backup Servicer, respectively. SECTION 6.23 ACCESS TO CERTAIN DOCUMENTATION AND INFORMATION REGARDING --------------------------------------------------------- THE LOANS. --------- The Servicer shall provide to the Deal Agent access to the Loan Documents and all other documentation regarding the Loans included in the Asset Pool and the Related Property in such cases where the Deal Agent is required in connection with the enforcement of the rights or interests of the Secured Parties, or by applicable statutes or regulations, to review such documentation, such access being afforded without charge but only (i) upon two Business Days' prior written request, (ii) during normal business hours and (iii) subject to the Servicer's normal security and confidentiality procedures. Prior to the Closing Date and periodically thereafter at the discretion of the Deal Agent, the Deal Agent may review the Servicer's collection and administration of the Loans in order to assess compliance by the Servicer with the Servicer's written policies and procedures, as well as with this Agreement and may conduct an audit of the 69 Loans, Loan Documents and Records in conjunction with such a review. Such review shall be reasonable in scope and shall be completed in a reasonable period of time. The Seller shall bear the cost of up to four of such audits per calendar year in an amount not to exceed $5,000 per audit. SECTION 6.24 BACKUP SERVICER. --------------- (a) On or before the date on which the initial Purchase occurs, until the receipt by the Servicer of a Termination Notice, the Backup Servicer shall perform, on behalf of the Deal Agent and the Secured Parties, the following duties and obligations: (i) On or before the Closing Date, the Backup Servicer shall accept from the Servicer delivery of the information required to be set forth in the Monthly Reports in hard copy and on computer tape; provided, -------- however, the computer tape is in an MS-DOS, PC readable ASCII format or ------- format to be agreed upon by the Backup Servicer and the Servicer on or prior to closing. (ii) Not later than 12:00 noon New York time two Business Days prior to each Reporting Date, the Backup Servicer shall accept delivery of tape from the Servicer, which shall include but not be limited to the following information: the name, number and name of the related Obligor for each Loan, the collection status, the contract status, the principal balance and the Aggregate Outstanding Loan Balance (the "Tape"). The Servicer shall provide the Tape on each Reporting Date as described above. (b) On or before the date on which the initial Purchase occurs, and until the receipt by the Servicer of a Termination Notice, the Backup Servicer shall perform, on behalf of the Secured Parties and the Deal Agent, the following duties and obligations: (i) Prior to the related Payment Date, the Backup Servicer shall review the Monthly Report to ensure that it is complete on its face and that the following items in such Monthly Report have been accurately calculated, if applicable, and reported: (A) the Aggregate Outstanding Loan Balance, (B) the Backup Servicing Fee, (C) the Loans that are 30-60 days past due, (D) the Loans that are 61-90 days past due, (E) the Loans that are 90+ days past due, (F) the Loans that are Defaulted Loans, (G) the Average Default Rate, and (H) the Average Net Loss Ratio. The Backup Servicer shall notify the Deal Agent and the Servicer of any disagreements with the Monthly Report based on such review not later than the Business Day preceding such Payment Date to such Persons. (ii) If the Servicer disagrees with the report provided under paragraph (i) above by the Backup Servicer or if the Servicer or any subservicer has not reconciled such discrepancy, the Backup Servicer agrees to confer with the Servicer to resolve such disagreement on or prior to the next succeeding Determination Date and shall settle such discrepancy with the Servicer if possible, and notify the Deal Agent of the resolution 70 thereof. The Servicer hereby agrees to cooperate at its own expense, with the Backup Servicer in reconciling any discrepancies herein. If within 20 days after the delivery of the report provided under paragraph (i) above by the Backup Servicer, such discrepancy is not resolved, the Backup Servicer shall promptly notify the Deal Agent of the continued existence of such discrepancy. Following receipt of such notice by the Deal Agent, the Servicer shall deliver to the Deal Agent, the Secured Parties, and the Backup Servicer no later than the related Payment Date a certificate describing the nature and amount of such discrepancies and the actions the Servicer proposes to take with respect thereto. With respect to the foregoing, the Backup Servicer, in the performance of its duties and obligations hereunder, is entitled to rely conclusively, and shall be fully protected in so relying, on the contents of each Tape, including, but not limited to, the completeness and accuracy thereof, provided by the Servicer. (c) After the receipt of an effective Termination Notice by the Servicer in accordance with this Agreement, all authority, power, rights and responsibilities of the Servicer, under this Agreement, whether with respect to the Loans or otherwise shall pass to and be vested in the Backup Servicer, subject to and in accordance with the provisions of Section 6.27, as long as the Backup Servicer is not prohibited by an applicable provision of law from fulfilling the same, as evidenced by an Opinion of Counsel. (d) Any Person (i) into which the Backup Servicer may be merged or consolidated, (ii) which may result from any merger or consolidation to which the Backup Servicer shall be a party, or (iii) which may succeed to the properties and assets of the Backup Servicer substantially as a whole, which Person in any of the foregoing cases executes an agreement of assumption to perform every obligation of the Backup Servicer hereunder, shall be the successor to the Backup Servicer under this Agreement without further act on the part of any of the parties to this Agreement. (e) As compensation for its back-up servicing obligations hereunder, the Backup Servicer shall be entitled to receive the Backup Servicing Fee in respect of each Monthly Period (or portion thereof) until the first to occur of the date on which the Backup Servicer becomes a Successor Servicer, resigns or is removed as Backup Servicer or termination of this Agreement. (f) The Backup Servicer may be removed without cause by the Deal Agent by notice then given in writing to the Servicer, the Seller and the Backup Servicer. In the event of any such removal, the Backup Servicer may be replaced by (i) the Servicer, acting with the consent of the Deal Agent or (ii) if no such replacement is appointed within 30 days following such removal or resignation, by the Deal Agent. (g) The Backup Servicer undertakes to perform only such duties and obligations as are specifically set forth in this Agreement, it being expressly understood by all parties hereto that there are no implied duties or obligations of the Backup Servicer hereunder. Without limiting the generality of the foregoing, the Backup Servicer, except as expressly set forth herein, 71 shall have no obligation to supervise, verify, monitor or administer the performance of the Servicer. The Backup Servicer may act through its agents, attorneys and custodians in performing any of its duties and obligations under this Agreement, it being understood by the parties hereto that the Backup Servicer will be responsible for any misconduct or negligence on the part of such agents, attorneys or custodians acting on the routine and ordinary day-to- day operations for and on behalf of the Backup Servicer. Neither the Backup Servicer nor any of its officers, directors, employees or agents shall be liable, directly or indirectly, for any damages or expenses arising out of the services performed under this Agreement other than damages or expenses which result from the gross negligence or willful misconduct of it or them or the failure to perform materially in accordance with this Agreement. (h) The Backup Servicer shall not be liable for any obligation of the Servicer contained in this Agreement or for any errors of the Servicer contained in any computer tape, certificate or other data or document delivered to the Backup Servicer hereunder or on which the Backup Servicer must rely in order to perform its obligations hereunder, and the Seller, Secured Parties, Deal Agent, Liquidity Agent, Collateral Custodian and Backup Servicer, shall look only to the Servicer to perform such obligations. The Backup Servicer and the Collateral Custodian shall have no responsibility and shall not be in default hereunder or incur any liability for any failure, error, malfunction or any delay in carrying out any of their respective duties under this Agreement if such failure or delay results from the Backup Servicer acting in accordance with information prepared or supplied by a Person other than the Backup Servicer or the failure of any such other Person to prepare or provide such information. SECTION 6.25 IDENTIFICATION OF RECORDS. ------------------------- The Servicer shall clearly and unambiguously identify each Loan that is in the Asset Pool and the Related Property in its computer or other records to reflect that the Asset Interests in such Loans and Related Property have been transferred to and are owned by the Purchasers and that the Deal Agent has the interest therein granted by the Seller pursuant to this Agreement. SECTION 6.26 SERVICER TERMINATION EVENTS. --------------------------- (a) If any one of the following events (a "Servicer Termination Event") shall occur and be continuing on any day: (i) any failure by the Servicer to make any payment, transfer or deposit on or before the date occurring two (2) Business Days after the date such payment, transfer or deposit is required to be made, or any failure by the Servicer to give instructions or notice to the Deal Agent as required by this Agreement or to deliver any Required Reports hereunder and such failure continues unremedied more than two (2) Business Days after notice thereof to the Servicer. (ii) any failure on the part of the Servicer duly to observe or perform in any material respect any other covenants or agreements of the Servicer set forth in this 72 Agreement or any other Transaction Document which continues unremedied for a period of 30 days after the first to occur of (i) the date on which written notice of such failure requiring the same to be remedied shall have been given to the Servicer by the Deal Agent and (ii) the date on which the Servicer becomes aware thereof; (iii) any representation, warranty or certification made by the Servicer in this Agreement or in any certificate delivered pursuant to this Agreement shall prove to have been incorrect when made, and which continues to be unremedied for a period of 30 days after the first to occur of (i) the date on which written notice of such incorrectness requiring the same to be remedied shall have been given to the Servicer by the Deal Agent and (ii) the date on which the Servicer becomes aware thereof; (iv) the Servicer shall fail in any material respect to service the Loans in accordance with the Credit and Collection Policies; (v) an Insolvency Event shall occur with respect to the Servicer; or (vi) (x) the Servicer ceases to be a wholly-owned subsidiary of First International Bancorp., Inc., or (y) the Servicer's principal place of business and chief executive office ceases to be located in the United States, without the prior written consent of the Deal Agent, VFCC and the Required Investors. Notwithstanding anything herein to the contrary, so long as any such Servicer Termination Events shall not have been remedied at the expiration of any applicable cure period, the Deal Agent, by written notice to the Servicer (a "Termination Notice"), may, subject to the provisions of Section 6.27, terminate all of the rights and obligations of the Servicer as Servicer under this Agreement. The Seller shall pay all reasonable set-up and conversion costs associated with the transfer of servicing rights to the Successor Servicer. SECTION 6.27 APPOINTMENT OF SUCCESSOR SERVICER. --------------------------------- (a) On and after the receipt by the Servicer of a Termination Notice pursuant to Section 6.26, the Servicer shall continue to perform all servicing functions under this Agreement until the date specified in the Termination Notice or otherwise specified by the Deal Agent in writing or, if no such date is specified in such Termination Notice or otherwise specified by the Deal Agent, until a date mutually agreed upon by the Servicer and the Deal Agent. The Deal Agent may at the time described in the immediately preceding sentence in its sole discretion, appoint the Backup Servicer as the Servicer hereunder, and the Backup Servicer shall on such date assume all obligations of the Servicer hereunder, and all authority and power of the Servicer under this Agreement shall pass to and be vested in the Backup Servicer (the Backup Servicer or such other successor, the "Successor Servicer"); provided, however, -------- ------- that the Successor Servicer shall not be responsible or liable for any past actions or omissions of the outgoing Servicer. In the event that a Successor Servicer has not been appointed and has not accepted its appointment at the time when the Servicer ceases to act as Servicer, the Deal Agent shall petition a court of 73 competent Jurisdiction to appoint any established financial institution having a net worth of not less than U.S. $25,000,000 and whose regular business includes the servicing of Loans as the Successor Servicer hereunder. (b) Upon its appointment, the Backup Servicer (subject to 6.27(a)) or the Successor Servicer, as applicable, shall be the successor in all respects to the Servicer with respect to servicing functions under this Agreement and shall be subject to all the responsibilities, duties and liabilities relating thereto placed on the Servicer by the terms and provisions hereof, and all references in this Agreement to the Servicer shall be deemed to refer to the Backup Servicer or the Successor Servicer, as applicable. (c) All authority and power granted to the Servicer under this Agreement shall automatically cease and terminate upon termination of this Agreement and shall pass to and be vested in the Seller and, without limitation, the Seller is hereby authorized and empowered to execute and deliver, on behalf of the Servicer, as attorney-in-fact or otherwise, all documents and other instruments, and to do and accomplish all other acts or things necessary or appropriate to effect the purposes of such transfer of servicing rights. The Servicer agrees to cooperate with the Seller in effecting the termination of the responsibilities and rights of the Servicer to conduct servicing with respect to the Loans included in the Asset Pool. (d) Upon the Backup Servicer receiving notice that it is required to serve as Servicer hereunder pursuant to the foregoing provisions of this Section 6.27, the Backup Servicer will promptly begin the transition to its role as Servicer. SECTION 6.28 NOTIFICATION. ------------ Upon the Servicer becoming aware of the occurrence of any Servicer Termination Event, the Servicer shall promptly give written notice thereof to the Deal Agent. SECTION 6.29 PROTECTION OF RIGHT, TITLE AND INTEREST IN ASSETS. ------------------------------------------------- The Servicer shall cause this Agreement, all amendments hereto and/or all financing statements and continuation statements and any other necessary documents covering the right, title and interest of the Deal Agent as agent for the Secured Parties and of the Secured Parties to the Assets to be promptly recorded, registered and filed, and at all times to be kept recorded, registered and filed, all in such manner and in such places as may be required by law fully to preserve and protect the right, title and interest of the Deal Agent as agent for the Secured Parties hereunder to all property comprising the Asset Pool. The Servicer shall deliver to the Deal Agent file-stamped copies of, or filing receipts for, any document recorded, registered or filed as provided above, as soon as available following such recording, registration or filing. The Seller shall cooperate fully with the Servicer in connection with the obligations set forth above and will execute any and all documents reasonably required to fulfill the intent of this Section. 74 SECTION 6.30 RELEASE OF LOAN FILES. --------------------- The Seller may, with the prior written consent of the Deal Agent (such consent not to be unreasonably withheld), require that the Collateral Custodian release each Loan File (a) delivered to the Collateral Custodian in error, (b) for which a Substitute Loan has been substituted in accordance with Section 2.9, (c) as to which the lien on the Related Property has been so released pursuant to Section 5.3, (d) which has been retransferred to the Seller pursuant to Section 5.5 or 5.6, or (e) which is required to be redelivered to the Seller in connection with the termination of this Agreement, in each case by submitting to the Collateral Custodian and the Deal Agent a written request (signed by both the Seller and the Deal Agent) specifying the Loans to be so released and reciting that the conditions to such release have been met (and specifying the section or sections of this Agreement being relied upon for such release). The Collateral Custodian shall upon its receipt of each such request for release executed by the Seller and the Deal Agent promptly, but in any event within 5 Business Days, release the Loan Files so requested to the Seller. ARTICLE VII EARLY AMORTIZATION EVENTS SECTION 7.1 EARLY AMORTIZATION EVENTS. ------------------------- If any of the following events (each, an "Early Amortization Event") shall occur and be continuing: (a) the Seller or the Servicer shall default in the payment of any amount required to be made under the terms of this Facility and such failure continues unremedied for a period of three (3) Business Days after written notice thereof shall have been given by the Deal Agent or the Collateral Custodian to the Seller or Servicer; or (b) the amount of outstanding Capital shall exceed the Capital Limit for more than three (3) Business Days; or (c) termination of the then existing AIG Policy without simultaneous renewal or replacement thereof, unless at such time no AIG Loans are Outstanding; or (d) (i) the Seller or the Originator shall fail to perform or observe in any material respect any other covenant or other agreement of the Seller or the Originator set forth in this Facility, or (ii) the Originator shall fail to perform or observe in any material respect any term, covenant or agreement of such Originator set forth in the Purchase Agreement, in each case when such failure continues unremedied for more than thirty (30) days after the earlier of (x) the date written notice thereof shall have been given by the Deal Agent or the Collateral Custodian to such Person or (y) the date of actual knowledge thereof by the Seller; or 75 (e) any representation or warranty made or deemed made hereunder shall prove to be incorrect in any material respect as of the time when the same shall have been made, and such incorrect representation or warranty shall not have been eliminated or otherwise cured within a period of thirty (30) days after written notice thereof shall have been given by the Deal Agent or the Collateral Custodian to the Seller; or (f) an Insolvency Event shall occur with respect to the Seller or the Originator; or (g) a Servicer Termination Event occurs; or (h) any Change in Control of the Seller or Originator occurs; or (i) the Seller or the Originator defaults in making any payment required to be made under any material agreement for borrowed money to which either is a party and such default gives the relevant lender a right to accelerate the Seller's or Originator's obligations thereunder and is not cured within the relevant cure period; or (j) the Deal Agent, as agent for the Secured Parties, shall fail for any reason to have a valid and perfected first priority security interest in any of the Assets; or (k) (i) a final judgment for the payment of money in excess of $5,000,000 shall have been rendered against the Originator or $1,000,000 against the Seller by a court of competent jurisdiction and, if such judgment relates to the Originator, the Originator shall not have either: (1) discharged or provided for the discharge of such judgment in accordance with its terms, or (2) perfected a timely appeal of such judgment and caused the execution thereof to be stayed (by supersedes or otherwise during the pendency of such appeal or (ii) the Seller, shall have made payments of amounts in excess of $100,000 in settlement of any litigation; or (l) the Seller or Originator agrees or consents to, or otherwise permits to occur, any amendment, modification, change, supplement or recission of or to the Credit and Collection Policies in whole or in part that could have a material adverse effect upon the Loans or interest of any Purchaser, without the prior consent of the Deal Agent or the Purchaser; or (m) any failure to comply with Section 5.4 and such failure continues for a period of fifteen (15) days; or (n) on any Determination Date, the Net Portfolio Yield does not equal or exceed the Minimum Net Portfolio Yield and such failure continues for a period of fifteen (15) consecutive days; or (o) As of any Determination Date, the Average Default Ratio is greater than four percent (4.0%); or 76 (p) As of any Determination Date, the Average Net Loss Ratio is greater than one and one-half percent (1.5%); or (q) [Reserved] (r) the Originator ceases to be a wholly-owned subsidiary of First International Bancorp., Inc.; or (s) the Seller ceases to be a "bankruptcy-remote entity" under customary criteria; or (t) the Seller shall become an "investment company" within the meaning of the 1940 Act; or (u) the noncompliance at any time of the composition of the Asset Pool with the concentration and mix requirements set forth on Schedule II hereof and such noncompliance is not cured within five (5) Business Days; or (v) the business and other activities of the Seller or the Servicer (if the Originator is the Servicer), including but not limited to, the Purchases made by the Purchasers, the application and use of the proceeds thereof by the Seller and the consummation and conduct of the transactions contemplated by the Transaction Documents to which the Seller or Servicer is a party do not now and will not in the future result in a violation by the Servicer, the Seller, or any other person or entity of the 1940 Act or the rules and regulations promulgated thereunder, then, and in any such event, the Deal Agent shall, at the request, or may with the consent, of the Required Investors, by notice to the Seller declare the Termination Date to have occurred, without demand, protest or future notice of any kind, all of which are hereby expressly waived by the Seller, and all Aggregate Unpaids and all other amounts owing by the Seller under this Facility shall be accelerated and become immediately due and payable, provided, that in -------- the event that the Termination Event described in subsection (f) herein has occurred, the Termination Date shall automatically occur, without demand, protest or any notice of any kind, all of which are hereby expressly waived by the Seller. ARTICLE VIII INDEMNIFICATION SECTION 8.1 INDEMNITIES BY THE SELLER. ------------------------- Without limiting any other rights which the Deal Agent, the Liquidity Agent, any Secured Party or its assignee, or any of their respective Affiliates may have hereunder or under applicable law, the Seller hereby agrees to indemnify the Deal Agent, the Liquidity Agent, any Secured Party or its assignee and each of their respective Affiliates and officers, directors, employees and agents thereof (collectively, the "Indemnified Parties") from and against any and all damages, 77 losses, claims, liabilities and related costs and expenses, including reasonable attorneys' fees and disbursements (all of the foregoing being collectively referred to as "Indemnified Amounts") awarded against or incurred by, any such Indemnified Party or other non-monetary damages of any such Indemnified Party any of them arising out of or as a result of this Agreement, excluding, however, Indemnified Amounts to the extent resulting from gross negligence or willful misconduct on the part of any Indemnified Party. Without limiting the foregoing, the Seller shall indemnify the Indemnified Parties for Indemnified Amounts relating to or resulting from: (i) any Loan treated as or represented by the Seller to be an Eligible Loan which is not at the applicable time an Eligible Loan; (ii) reliance on any representation or warranty made or deemed made by the Seller, the Servicer (or one of its Affiliates) or any of their respective officers under or in connection with this Agreement, which shall have been false or incorrect in any material respect when made or deemed made or delivered; (iii) the failure by the Seller or the Servicer (or one of its Affiliates) to comply with any term, provision or covenant contained in this Agreement or any agreement executed in connection with this Agreement, or with any applicable law, rule or regulation with respect to any Loan comprising a portion of the Assets Pool, the Related Property, or the nonconformity of any Loan, the Related Property with any such applicable law, rule or regulation or any failure by the Originator, the Seller or any Affiliate thereof to perform its respective duties under the Loans included as a part of the Assets; (iv) the failure to vest and maintain vested in the relevant Purchaser or to transfer to such Purchaser, an undivided ownership interest in the Assets, together with all Collections, free and clear of any Adverse Claim whether existing at the time of any Purchase or at any time thereafter; (v) the failure to file, or any delay in filing, financing statements or other similar instruments or documents under the UCC of any applicable jurisdiction or other applicable laws with respect to any Asset whether at the time of any Purchase or at any subsequent time and as required by the Transaction Documents; (vi) any dispute, claim, offset or defense (other than the discharge in bankruptcy of the Obligor) of the Obligor to the payment of any Loan included in the Asset Pool which is, or is purported to be, an Eligible Loan (including, without limitation, a defense based on the Loan not being a legal, valid and binding obligation of such Obligor enforceable against it in accordance with its terms); (vii) any failure of the Seller or the Servicer (if the Originator or one of its Affiliates) to perform its duties or obligations in accordance with the provisions of this 78 Agreement or any failure by the Originator, the Seller or any Affiliate thereof to perform its respective duties under the Loans; (viii) any products liability claim or personal injury or property damage suit or other similar or related claim or action of whatever sort arising out of or in connection with merchandise or services which are the subject of any Loan included in the Asset Pool or the Related Property included in the Asset Pool; (ix) the failure by Seller to pay when due any Taxes for which the Seller is liable, including without limitation, sales, excise or personal property taxes payable in connection with the Assets Pool; (x) any repayment by the Deal Agent, the Liquidity Agent or a Secured Party of any amount previously distributed in reduction of Capital or payment of Yield or any other amount due hereunder or under any Hedging Agreement, in each case which amount the Deal Agent, the Liquidity Agent or a Secured Party believes in good faith is required to be repaid; (xi) any investigation, litigation or proceeding related to this Agreement or the use of proceeds of Purchases or in respect of any Loan included in the Asset Pool or the Related Property included in the Asset Pool; (xii) any failure by the Seller to give reasonably equivalent value to the Originator in consideration for the transfer by the Originator to the Seller of any Loan or the Related Property or any attempt by any Person to void or otherwise avoid any such transfer under any statutory provision or common law or equitable action, including, without limitation, any provision of the Bankruptcy Code; (xiii) the failure of the Seller, the Originator or any of their respective agents or representatives to remit to the Servicer or the Deal Agent, Collections on the Pool Assets remitted to the Seller or any such agent or representative; or (xiv) the failure to maintain, as of the close of business on each Business Day prior to the Termination Date, an amount of Capital outstanding which is less than or equal to the lesser of (x) the Purchase Limit on such Business Day, or (y) the Capital Limit on such Business Day. Any amounts subject to the indemnification provisions of this Section 8.1 shall be paid by the Seller solely pursuant to the provisions of Sections 2.7 and 2.9 hereof as the case may be to the Deal Agent within two Business Days following the Deal Agent's demand therefor. Any indemnification pursuant to this Section 8.1 shall not be in duplication of any other indemnification for the same loss under Section 6.21. 79 ARTICLE IX THE DEAL AGENT AND THE LIQUIDITY AGENT SECTION 9.1 AUTHORIZATION AND ACTION. ------------------------ (a) Each Secured Party hereby designates and appoints the Deal Agent as Deal Agent hereunder, and authorizes the Deal Agent to take such actions as agent on its behalf and to exercise such powers as are delegated to the Deal Agent by the terms of this Agreement together with such powers as are reasonably incidental thereto. The Deal Agent shall not have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with any Purchaser, and no implied covenants, functions, responsibilities, duties, obligations or liabilities on the part of the Deal Agent shall be read into this Agreement or otherwise exist for the Deal Agent. In performing its functions and duties hereunder, the Deal Agent shall act solely as agent for the Secured Parties and does not assume nor shall be deemed to have assumed any obligation or relationship of trust or agency with or for the Seller or any of its successors or assigns. The Deal Agent shall not be required to take any action which exposes the Deal Agent to personal liability or which is contrary to this Agreement or applicable law. The appointment and authority of the Deal Agent hereunder shall terminate at the indefeasible payment in full of the Aggregate Unpaids. (b) Each Investor hereby designates and appoints First Union as Liquidity Agent hereunder, and authorizes the Liquidity Agent to take such actions as agent on its behalf and to exercise such powers as are delegated to the Liquidity Agent by the terms of this Agreement together with such powers as are reasonably incidental thereto. The Liquidity Agent shall not have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with any Investor, and no implied covenants, functions, responsibilities, duties, obligations or liabilities on the part of the Liquidity Agent shall be read into this Agreement or otherwise exist for the Liquidity Agent. In performing its functions and duties hereunder, the Liquidity Agent shall act solely as agent for the Investors and does not assume nor shall be deemed to have assumed any obligation or relationship of trust or agency with or for the Seller or any of its successors or assigns. The Liquidity Agent shall not be required to take any action which exposes the Liquidity Agent to personal liability or which is contrary to this Agreement or applicable law. The appointment and authority of the Liquidity Agent hereunder shall terminate at the indefeasible payment in full of the Aggregate Unpaids. SECTION 9.2 DELEGATION OF DUTIES. -------------------- (a) The Deal Agent may execute any of its duties under this Agreement by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Deal Agent shall not be responsible for the negligence or misconduct of any agents or attorneys- in-fact selected by it with reasonable care. 80 (b) The Liquidity Agent may execute any of its duties under this Agreement by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Liquidity Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. SECTION 9.3 EXCULPATORY PROVISIONS. ---------------------- (a) Neither the Deal Agent nor any of its directors, officers, agents or employees shall be (i) liable for any action lawfully taken or omitted to be taken by it or them under or in connection with this Agreement (except for its, their or such Person's own gross negligence or willful misconduct or, in the case of the Deal Agent, the breach of its obligations expressly set forth in this Agreement), or (ii) responsible in any manner to any of the Secured Parties for any recitals, statements, representations or warranties made by the Seller contained in this Agreement or in any certificate, report, statement or other document referred to or provided for in, or received under or in connection with, this Agreement for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other document furnished in connection herewith, or for any failure of the Seller to perform its obligations hereunder, or for the satisfaction of any condition specified in Article III. The Deal Agent shall not be under any obligation to any Secured Party to ascertain or to inquire as to the observance or performance of any of the agreements or covenants contained in, or conditions of, this Agreement, or to inspect the properties, books or records of the Seller. The Deal Agent shall not be deemed to have knowledge of any Early Amortization Event unless the Deal Agent has received notice from the Seller or a Secured Party. (b) Neither the Liquidity Agent nor any of its directors, officers, agents or employees shall be (i) liable for any action lawfully taken or omitted to be taken by it or them under or in connection with this Agreement (except for its, their or such Person's own gross negligence or willful misconduct or, in the case of the Liquidity Agent, the breach of its obligations expressly set forth in this Agreement), or (ii) responsible in any manner to the Deal Agent or any of the Secured Parties for any recitals, statements, representations or warranties made by the Seller contained in this Agreement or in any certificate, report, statement or other document referred to or provided for in, or received under or in connection with, this Agreement or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other document furnished in connection herewith, or for any failure of the Seller to perform its obligations hereunder, or for the satisfaction of any condition specified in Article III. The Liquidity Agent shall not be under any obligation to the Deal Agent or any Secured Party to ascertain or to inquire as to the observance or performance of any of the agreements or covenants contained in, or conditions of, this Agreement, or to inspect the properties, books or records of the Seller. The Liquidity Agent shall not be deemed to have knowledge of any Early Amortization Event unless the Liquidity Agent has received notice from the Seller, the Deal Agent or a Secured Party. 81 SECTION 9.4 RELIANCE. -------- (a) The Deal Agent shall in all cases be entitled to rely, and shall be fully protected in relying, upon any document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Seller), independent accountants and other experts selected by the Deal Agent. The Deal Agent shall in all cases be fully justified in failing or refusing to take any action under this Agreement or any other document furnished in connection herewith unless it shall first receive such advice or concurrence of VFCC or the Required Investors or all of the Secured Parties, as applicable, as it deems appropriate or it shall first be indemnified to its satisfaction by the Secured Parties; provided, that, unless -------- ---- and until the Deal Agent shall have received such advice, the Deal Agent may take or refrain from taking any action, as the Deal Agent shall deem advisable and in the best interests of the Secured Parties. The Deal Agent shall in all cases be fully protected in acting, or in refraining from acting, in accordance with a request of VFCC or the Required Investors or all of the Secured Parties, as applicable, and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Secured Parties. (b) The Liquidity Agent shall in all cases be entitled to rely, and shall be fully protected in relying, upon any document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Seller), independent accountants and other experts selected by the Liquidity Agent. The Liquidity Agent shall in all cases be fully justified in failing or refusing to take any action under this Agreement or any other document furnished in connection herewith unless it shall first receive such advice or concurrence of Required Investors as it deems appropriate or it shall first be indemnified to its satisfaction by the Investors, provided that unless and until the Liquidity Agent shall have -------- received such advice, the Liquidity Agent may take or refrain from taking any action, as the Liquidity Agent shall deem advisable and in the best interests of the Investors. The Liquidity Agent shall in all cases be fully protected in acting, or in refraining from acting, in accordance with a request of the Required Investors and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Investors. SECTION 9.5 NON-RELIANCE ON DEAL AGENT, LIQUIDITY AGENT AND OTHERS. ------------------------------------------------------ Each Secured Party expressly acknowledges that neither the Deal Agent, the Liquidity Agent nor any of their respective officers, directors, employees, agents, attorneys-in-fact or affiliates has made any representations or warranties to it and that no act by the Deal Agent or the Liquidity Agent hereafter taken, including, without limitation, any review of the affairs of the Seller, shall be deemed to constitute any representation or warranty by the Deal Agent or the Liquidity Agent. Each Secured Party represents and warrants to the Deal Agent and to the Liquidity Agent that it has and will, independently and without reliance upon the Deal Agent, the Liquidity Agent or any other Secured Party and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, 82 operations, property, prospects, financial and other conditions and creditworthiness of the Seller and made its own decision to enter into this Agreement. SECTION 9.6 REIMBURSEMENT AND INDEMNIFICATION. --------------------------------- The Investors agree to reimburse and indemnify VFCC, the Deal Agent, the Liquidity Agent and each of their respective officers, directors, employees, representatives and agents ratably according to their pro rata shares, to the extent not paid or reimbursed by the Seller (i) for any amounts for which VFCC, the Liquidity Agent, acting in its capacity as Liquidity Agent, or the Deal Agent, acting in its capacity as Deal Agent, is entitled to reimbursement by the Seller hereunder and (ii) for any other expenses incurred by VFCC, the Liquidity Agent, acting in its capacity as Liquidity Agent, or the Deal Agent, in its capacity as Deal Agent and acting on behalf of the Secured Parties, in connection with the administration and enforcement of this Agreement. SECTION 9.7 DEAL AGENT AND LIQUIDITY AGENT IN THEIR INDIVIDUAL CAPACITIES. ------------------------------------------------------------- The Deal Agent, the Liquidity Agent and each of their respective Affiliates may make loans to, accept deposits from and generally engage in any kind of business with the Seller or any Affiliate of the Seller as though the Deal Agent or the Liquidity Agent, as the case may be, were not the Deal Agent or the Liquidity Agent, as the case may be, hereunder. With respect to the making of Purchases pursuant to this Agreement, the Deal Agent, the Liquidity Agent and each of their respective Affiliates shall have the same rights and powers under this Agreement as any Purchaser and may exercise the same as though it were not the Deal Agent or the Liquidity Agent, as the case may be, and the terms "Investor," "Purchaser," "Investors" and "Purchasers" shall include the Deal Agent or the Liquidity Agent, as the case may be, in its individual capacity. SECTION 9.8 SUCCESSOR DEAL AGENT OR LIQUIDITY AGENT. --------------------------------------- (a) The Deal Agent may, upon 5 days' notice to the Seller and the Secured Parties, and the Deal Agent will, upon the direction of all of the Secured Parties (other than the Deal Agent, in its individual capacity) resign as Deal Agent. If the Deal Agent shall resign, then the Required Investors during such 5-day period shall appoint from among the Secured Parties a successor agent. If for any reason no successor Deal Agent is appointed by the Required Investors during such 5-day period, then effective upon the expiration of such 5-day period, the Secured Parties shall perform all of the duties of the Deal Agent hereunder and the Seller shall make all payments in respect of the Aggregate Unpaids or under any fee letter delivered by the Originator to the Deal Agent and the Secured Parties directly to the applicable Purchaser and for all purposes shall deal directly with the Secured Parties. After any retiring Deal Agent's resignation hereunder as Deal Agent, the provisions of Article VIII and Article IX shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Deal Agent under this Agreement. (b) The Liquidity Agent may, upon 5 days' notice to the Seller, the Deal Agent and the Investors, and the Liquidity Agent will, upon the direction of all of the Investors (other than 83 the Liquidity Agent, in its individual capacity) resign as Liquidity Agent. If the Liquidity Agent shall resign, then the Required Investors during such 5-day period shall appoint from among the Investors a successor Liquidity Agent. If for any reason no successor Liquidity Agent is appointed by the Required Investors during such 5-day period, then effective upon the expiration of such 5-day period, the Investors shall perform all of the duties of the Liquidity Agent hereunder and all payments in respect of the outstanding Capital. After any retiring Liquidity Agent's resignation hereunder as Liquidity Agent, the provisions of Article VIII and Article IX shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Liquidity Agent under this Agreement. ARTICLE X ASSIGNMENTS; PARTICIPATIONS SECTION 10.1 ASSIGNMENTS AND PARTICIPATIONS. ------------------------------ (a) Each Investor may upon at least 30 days' notice to VFCC, the Deal Agent and the Liquidity Agent, and prior to the Termination Date with the consent of the Seller (which consent shall not be unreasonably withheld), assign to one or more banks or other entities all or a portion of its rights and obligations under this Agreement; provided, however, that (i) each such -------- ------- assignment shall be of a constant, and not a varying percentage of all of the assigning Investor's rights and obligations under this Agreement, (ii) the amount of the Commitment of the assigning Investor being assigned pursuant to each such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than the lesser of (A) $10,000,000 or an integral multiple of $1,000,000 in excess of that amount and (B) the full amount of the assigning Investor's Commitment, (iii) each such assignment shall be to an Eligible Assignee, (iv) the parties to each such assignment shall execute and deliver to the Deal Agent, for its acceptance and recording in the Register, an Assignment and Acceptance, together with a processing and recordation fee of $3,000 or such lesser amount as shall be approved by the Deal Agent, (v) the parties to each such assignment shall have agreed to reimburse the Deal Agent, the Liquidity Agent and VFCC for all reasonable fees, costs and expenses (including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for each of the Deal Agent, the Liquidity Agent and VFCC) incurred by the Deal Agent, the Liquidity Agent and VFCC, respectively, in connection with such assignment and (vi) there shall be no increased costs, expenses or taxes incurred by the Deal Agent, the Liquidity Agent or VFCC upon such assignment or participation; and provided, --------- further, that upon the effective date of such assignment the provisions of - -------- Section 3.03(f) of the Administration Agreement shall be satisfied. Upon such execution, delivery and acceptance by the Deal Agent and the Liquidity Agent and the recording by the Deal Agent, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be the date of acceptance thereof by the Deal Agent and the Liquidity Agent, unless a later date is specified therein, (i) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of an Investor hereunder and (ii) the Investor assignor thereunder shall, to the extent that rights 84 and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Investor's rights and obligations under this Agreement, such Investor shall cease to be a party hereto). (b) By executing and delivering an Assignment and Acceptance, the Investor assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, such assigning Investor makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; (ii) such assigning Investor makes no representation or warranty and assumes no responsibility with respect to the financial condition of VFCC or the performance or observance by VFCC of any of its obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of such financial statements and other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the Deal Agent or the Liquidity Agent, such assigning Investor or any other Investor and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assigning Investor and such assignee confirm that such assignee is an Eligible Assignee; (vi) such assignee appoints and authorizes each of the Deal Agent and the Liquidity Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to such agent by the terms hereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of this Agreement are required to be performed by it as an Investor. (c) The Deal Agent shall maintain at its address referred to herein a copy of each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of the Investors and the Commitment of, and principal amount of, each Asset Interest owned by each investor from time to time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and VFCC, the Seller and the Investors may treat each Person whose name is recorded in the Register as an Investor hereunder for all purposes of this Agreement. The Register shall be available for inspection by VFCC, the Liquidity Agent or any Investor at any reasonable time and from time to time upon reasonable prior notice. (d) Subject to the provisions of Section 10.1(a), upon its receipt of an Assignment and Acceptance executed by an assigning Investor and an assignee, the Deal Agent and the Liquidity Agent shall each, if such Assignment and Acceptance has been completed and is in substantially the form of Exhibit D --------- hereto, accept such Assignment and Acceptance, and the Deal Agent shall 85 then (i) record the information contained therein in the Register and (ii) give prompt notice thereof to VFCC. (e) Each Investor may sell participations to one or more banks or other entities in or to all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment and each Asset Interest owned by it); provided, however, that (i) -------- ------- such Investor's obligations under this Agreement (including, without limitation, its Commitment hereunder) shall remain unchanged, (ii) such Investor shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) the Deal Agent and the other Investors shall continue to deal solely and directly with such Investor in connection with such Investor's rights and obligations under this Agreement; and provided, further, --------- -------- that the Deal Agent shall have confirmed that upon the effective date of such participation the provisions of Section 3.03(f) of the Administration Agreement shall be satisfied. Notwithstanding anything herein to the contrary, each participant shall have the rights of an Investor (including any right to receive payment) under Sections 2.14 and 2.15; provided, however, that no participant -------- ------- shall be entitled to receive payment under either such Section in excess of the amount that would have been payable under such Section by the Seller to the Investor granting its participation had such participation not been granted, and no Investor granting a participation shall be entitled to receive payment under either such Section in an amount which exceeds the sum of (i) the amount to which such Investor is entitled under such Section with respect to any portion of any Asset Interest owned by such Investor which is not subject to any participation plus (ii) the aggregate amount to which its participants are ---- entitled under such Sections with respect to the amounts of their respective participations. With respect to any participation described in this Section 10.1, the participant's rights as set forth in the agreement between such participant and the applicable Investor to agree to or to restrict such Investor's ability to agree to any modification, waiver or release of any of the terms of this Agreement or to exercise or refrain from exercising any powers or rights which such Investor may have under or in respect of this Agreement shall be limited to the right to consent to any of the matters set forth in Section 11.1 of this Agreement. (f) Each Investor may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 10.1, disclose to the assignee or participant or proposed assignee or participant any information relating to the Seller or VFCC furnished to such Investor by or on behalf of the Seller or VFCC, but such Investor shall require such assignee or participant or proposed assignee or participant to keep all such information confidential. (g) In the event (i) an Investor ceases to qualify as an Eligible Assignee, or (ii) an Investor makes demand for compensation pursuant to Section 2.15 or Section 2.16, VFCC may, and, upon the direction of the Seller and prior to the occurrence of the Termination Date, shall, in any such case, notwithstanding any provision to the contrary herein, replace such Investor with an Eligible Assignee by giving three Business Days' prior written notice to such Investor. In the event of the replacement of an Investor, such Investor agrees (i) to assign all of its rights and obligations hereunder to an Eligible Assignee selected by VFCC upon payment to such Investor 86 of the amount of such Investor's Asset Interests together with any accrued and unpaid Yield thereon, all accrued and unpaid commitment fees owing to such Investor and all other amounts owing to such Investor hereunder and (ii) to execute and deliver an Assignment and Acceptance and such other documents evidencing such assignment as shall be necessary or reasonably requested by VFCC or the Deal Agent. In the event that any Investor ceases to qualify as an Eligible Assignee, such affected Investor agrees (1) to give the Deal Agent, the Seller and VFCC prompt written notice thereof and (2) subject to the following proviso, to reimburse the Deal Agent, the Liquidity Agent, the Seller, VFCC and the relevant assignee for all fees, costs and expenses (including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for each of the Deal Agent, the Liquidity Agent, the Seller and VFCC and such assignee) incurred by the Deal Agent, the Liquidity Agent, the Seller, VFCC and such assignee, respectively, in connection with any assignment made pursuant to this Section 10.1(g) by such affected Investor; provided, however, that such affected -------- ------- Investor's liability for such costs, fees and expenses shall be limited to the amount of any up-front fees paid to such affected Investor at the time that it became a party to this Agreement. (h) Nothing herein shall prohibit any Investor from pledging or assigning as collateral any of its rights under this Agreement to any Federal Reserve Bank in accordance with applicable law and any such pledge or collateral assignment may be made without compliance with Section 10.1(a) or Section 10.1(b). (i) In the event any Investor causes increased costs, expenses or taxes to be incurred by the Deal Agent, Liquidity Agreement or VFCC in connection with the assignment or participation of such Investor's rights and obligations under this Agreement to an Eligible Assignee then such Investor agrees that it will make reasonable efforts to assign such increased costs, expenses or taxes to such Eligible Assignee in accordance with the provisions of this Agreement. ARTICLE XI MISCELLANEOUS SECTION 11.1 AMENDMENTS AND WAIVERS. ---------------------- (a) Except as provided in this Section 11.1, no amendment, waiver or other modification of any provision of this Agreement shall be effective without the written agreement of the Seller, the Deal Agent, VFCC and the Required Investors; provided, however, that any amendment of this Agreement which is -------- ------- solely for the purpose of adding a Purchaser or increasing the Commitment of all Purchasers may be effected with the written consent of the Deal Agent. Any waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 87 (b) No amendment, waiver or other modification affecting the rights or obligations of any Hedge Counterparty shall be effective against such Hedge Counterparty without the written agreement of such Hedge Counterparty. (c) No amendment, waiver or other modification adversely affecting the rights or obligations of the Backup Servicer or Collateral Custodian shall be effective against such Backup Servicer or Collateral Custodian without their written agreement. (d) The Seller shall not agree to any amendment, waiver or other modification if the effect thereof is to jeopardize the Seller's status as a qualifying special purpose entity under FASB statement 125, as amended and interpreted. SECTION 11.2 NOTICES, ETC. ------------ All notices and other communications provided for hereunder shall, unless otherwise stated herein, be in writing (including telex communication and communication by facsimile copy) and mailed, telexed, transmitted or delivered, as to each party hereto, at its address set forth under its name on the signature pages hereof or specified in such party's Assignment and Acceptance or at such other address as shall be designated by such party in a written notice to the other parties hereto. All such notices and communications shall be effective, upon receipt, or in the case of (a) notice by mail, five days after being deposited in the United States mail, first class postage prepaid, (b) notice by telex, when telexed against receipt of answer back, or (c) notice by facsimile copy, when verbal communication of receipt is obtained, except that notices and communications pursuant to Article 11 shall not be effective until received with respect to any notice sent by mail or telex. SECTION 11.3 [RESERVED.] --------- SECTION 11.4 NO WAIVER, RIGHTS AND REMEDIES. ------------------------------ No failure on the part of the Deal Agent, the Liquidity Agent or any Secured Party or any assignee of any Secured Party to exercise, and no delay in exercising, any right or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right. The rights and remedies herein provided are cumulative and not exclusive of any rights and remedies provided by law. SECTION 11.5 BINDING EFFECT. -------------- This Agreement shall be binding upon and inure to the benefit of the Seller, the Deal Agent, the Liquidity Agent, the Secured Parties and their respective successors and permitted assigns and, in addition, the provisions of Section 2.7 and 2.9 applicable to the Hedge Counterparty shall inure to the benefit of each Hedge Counterparty, whether or not that Hedge Counterparty is a Secured Party. 88 SECTION 11.6 TERM OF THIS AGREEMENT. ---------------------- This Agreement, including, without limitation, the Seller's obligation to observe its covenants set forth in Article V, and the Servicer's obligation to observe its covenants set forth in Article VI, shall remain in full force and effect until the Collection Date; provided, however, that the rights and -------- ------- remedies with respect to any breach of any representation and warranty made or deemed made by the Seller pursuant to Articles III and IV and the indemnification and payment provisions of Article VIII and Article IX and the provisions of Section 11.10 and Section 11.11 shall be continuing and shall survive any termination of this Agreement. SECTION 11.7 GOVERNING LAW; CONSENT TO JURISDICTION; WAIVER OF OBJECTION ----------------------------------------------------------- TO VENUE. -------- THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. EACH OF THE SECURED PARTIES, THE SELLER, THE LIQUIDITY AGENT AND THE DEAL AGENT HEREBY AGREES TO THE NON-EXCLUSIVE JURISDICTION OF ANY FEDERAL COURT LOCATED WITHIN THE STATE OF NEW YORK. EACH OF THE PARTIES HERETO AND EACH SECURED PARTY HEREBY WAIVES ANY OBJECTION BASED ON FORUM NON CONVENIENS, AND ANY OBJECTION TO VENUE OF ANY ACTION INSTITUTED HEREUNDER IN ANY OF THE AFOREMENTIONED COURTS AND CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT. SECTION 11.8 WAIVER OF JURY TRIAL. -------------------- TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH OF THE SECURED PARTIES, THE SELLER AND THE DEAL AGENT WAIVES ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE BETWEEN THE PARTIES HERETO ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP BETWEEN ANY OF THEM IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. INSTEAD, ANY SUCH DISPUTE RESOLVED IN COURT WILL BE RESOLVED IN A BENCH TRIAL WITHOUT A JURY. SECTION 11.9 COSTS, EXPENSES AND TAXES. ------------------------- (a) In addition to (but without duplication of) the rights of indemnification granted to the Deal Agent, the Liquidity Agent, the Secured Parties and its or their Affiliates and officers, directors, employees and agents thereof under Article VIII hereof, the Seller agrees to pay on demand all reasonable costs and expenses of the Deal Agent, the Liquidity Agent, and the Secured Parties incurred in connection with the preparation, execution, delivery, administration (including periodic auditing), amendment or modification of, or any waiver or consent issued in 89 connection with, this Agreement and the other documents to be delivered hereunder or in connection herewith, including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Deal Agent, the Liquidity Agent, and the Secured Parties with respect thereto and with respect to advising the Deal Agent, the Liquidity Agent, and the Secured Parties as to their respective rights and remedies under this Agreement and the other documents to be delivered hereunder or in connection herewith in an amount not to exceed $85,000 (excluding any Hedge Agreement) provided that the transaction contemplated herein closes on or before December 29, 1998, and the structure described in the summary of terms does not materially change, and all costs and expenses, if any (including reasonable counsel fees and expenses), incurred by the Deal Agent, the Liquidity Agent, or the Secured Parties in connection with the enforcement of this Agreement and the other documents to be delivered hereunder or in connection herewith (including any Hedge Agreement); provided, -------- that the fees above other than legal fees may not exceed $5,000 per occurrence and per service provider without FNBNE's consent which shall not unreasonably be withheld. (b) The Seller shall pay on demand any and all stamp, sales, excise and other taxes (excluding taxes based on income) and fees payable or determined to be payable in connection with the execution, delivery, filing and recording of this Agreement, the other documents to be delivered hereunder or any agreement or other document providing liquidity support, credit enhancement or other similar support to the Purchasers in connection with this Agreement or the funding or maintenance of Capital hereunder. (c) The Seller shall pay on demand all other costs, expenses and taxes (excluding income taxes) ("Other Costs"), including, without limitation, all reasonable costs and expenses incurred by the Deal Agent in connection with periodic audits of the Seller's or the Servicer's books and records and the cost of rating VFCC's commercial paper by independent financial rating agencies, which are incurred as a result of the execution of this Agreement. SECTION 11.10 NO PROCEEDINGS. -------------- Each of the Seller, the Deal Agent, the Liquidity Agent and the Secured Parties hereby agrees that it will not institute against, or join any other Person in instituting against VFCC any proceedings of the type referred to in Section 4.1(f) so long as any commercial paper issued by VFCC shall be outstanding and there shall not have elapsed one year and one day since the last day on which any such commercial paper shall have been outstanding. SECTION 11.11 RECOURSE AGAINST CERTAIN PARTIES. -------------------------------- (a) No recourse under or with respect to any obligation, covenant or agreement (including, without limitation, the payment of any fees or any other obligations) of any Secured Party as contained in this Agreement or any other agreement, instrument or document entered into by it pursuant hereto or in connection herewith shall be had against any manager or administrator of such Secured Party or any incorporator, affiliate, stockholder, officer, employee 90 or director of such Secured Party or of any such manager or administrator, as such, by the enforcement of any assessment or by any legal or equitable proceeding, by virtue of any statute or otherwise; it being expressly agreed and -- ----- --------- ------ --- understood that the agreements of such Secured Party contained in this Agreement - ---------- and all of the other agreements, instruments and documents entered into by it pursuant hereto or in connection herewith are, in each case, solely the corporate obligations of such Secured Party, and that no personal liability whatsoever shall attach to or be incurred by any manager or administrator of such Secured Party or any incorporator, stockholder, affiliate, officer, employee or director of such Secured Party or of any such manager or administrator, as such, or any other of them, under or by reason of any of the obligations, covenants or agreements of such Secured Party contained in this Agreement or in any other such instruments, documents or agreements, or which are implied therefrom, and that any and all personal liability of every such manager or administrator of such Secured Party and each incorporator, stockholder, affiliate, officer, employee or director of such Secured Party or of any such administrator, or any of them, for breaches by such Secured Party of any such obligations, covenants or agreements, which liability may arise either at common law or at equity, by statute or constitution, or otherwise, is hereby expressly waived as a condition of and in consideration for the execution of this Agreement. (b) Notwithstanding anything in this Agreement or any other Transaction Document to the contrary, VFCC shall have no obligation to pay any amount required to be paid by it hereunder or thereunder in excess of any amount available to VFCC after paying or making provision for the payment of its Commercial Paper Notes. All payment obligations of VFCC hereunder are contingent upon the availability of funds in excess of the amounts necessary to pay Commercial Paper Notes; and each of the Seller, the Servicer, the Backup Servicer, the Deal Agent, the Liquidity Agent and the Secured Parties agrees that they shall not have a claim under Section 101(5) of the Bankruptcy Code if and to the extent that any such payment obligation exceeds the amount available to VFCC to pay such amounts after paying or making provision for the payment of its Commercial Paper Notes. (c) The provisions of this Section 11.11 shall survive the termination of this Agreement. SECTION 11.12 PROTECTION OF OWNERSHIP INTEREST; APPOINTMENT OF DEAL AGENT ----------------------------------------------------------- AS ATTORNEY-IN-FACT. ------------------- (a) The Seller agrees that from time to time, at its expense, it will promptly execute and deliver all instruments and documents, and take all actions, that may reasonably be necessary or desirable, or that the Deal Agent may reasonably request, to perfect, protect or more fully evidence the Asset Interests and the undivided ownership interest in the Assets in the Asset Pool represented by such Asset Interests, or to enable the Deal Agent or the Secured Parties to exercise and enforce their rights and remedies hereunder. (b) If the Seller or the Servicer fails to perform any of its obligations hereunder after five Business Days' notice from the Deal Agent, the Deal Agent or any Secured Party may (but 91 shall not be required to) perform, or cause performance of, such obligation; and the Deal Agent's or such Secured Party's reasonable costs and expenses incurred in connection therewith shall be payable by the Seller (if the Servicer that fails to so perform is the Seller or an Affiliate thereof) as provided in Article VIII, as applicable. The Seller irrevocably authorizes the Deal Agent and appoints the Deal Agent as its attorney-in-fact to act on behalf of the Seller (i) to execute on behalf of the Seller as debtor and to file financing statements necessary or desirable in the Deal Agent's sole discretion to perfect and to maintain the perfection and priority of the interest of the Secured Parties in the Asset Pool and (ii) to file a carbon, photographic or other reproduction of this Agreement or any financing statement with respect to the Asset Pool as a financing statement in such offices as the Deal Agent in its sole discretion deems necessary or desirable to perfect and to maintain the perfection and priority of the interests of the Secured Parties in the Asset Pool. This appointment is coupled with an interest and is irrevocable. (c) The parties hereto intend that the conveyance of Asset Interests by the Seller to the Purchasers shall be treated as sales for all purposes. If, despite such intention, a determination is made that such transactions shall not be treated as sales, then the parties hereto intend that this Agreement constitutes a security agreement and the transactions effected hereby constitute secured loans by the Purchasers to the Seller under applicable law. For such purpose, the Seller hereby transfers, conveys, assigns and grants to the Deal Agent, for the benefit of the Secured Parties, a continuing security interest in all Assets, all Collections, all Hedging Agreements and the proceeds of the foregoing to secure the repayment of all Capital, all payments at any time due or accrued in respect of the Yield on any Asset Interest and all other payments at any time due (whether accrued or due) by the Seller hereunder (including without limit any amount owing under Article VIII hereof), under any Hedging Agreement (including, without limitation, payments in respect of the termination of any such Hedging Agreement) or under any fee letter to the Deal Agent and each Purchaser. SECTION 11.13 CONFIDENTIALITY --------------- (a) Each of the Deal Agent, the Secured Parties, the Liquidity Agent and the Seller shall maintain and shall cause each of its employees and officers to maintain the confidentiality of the Agreement and the other confidential proprietary information with respect to the other parties hereto and their respective businesses obtained by it or them in connection with the structuring, negotiating and execution of the transactions contemplated herein, except that each such party and its officers and employees may (i) disclose such information to its external accountants and attorneys and as required by an applicable law or order of any judicial or administrative proceeding, (ii) disclose the existence of this Agreement, but not the financial terms thereof and (iii) disclose the Agreement and such information in any suit, action, proceeding or investigation (whether in law or in equity or pursuant to arbitration) involving and of the Transaction Documents or any Hedging Agreement for the purpose of defending itself, reducing itself, reducing its liability, or protecting or exercising any of its claims, rights, remedies, or interests under or in connection with any of the Transaction Documents or any Hedging Agreement. 92 (b) Anything herein to the contrary notwithstanding, the Seller hereby consents to the disclosure of any nonpublic information with respect to it (i) to the Deal Agent, the Liquidity Agent, or the Secured Parties by each other, (ii) by the Liquidity Agent, the Deal Agent or the Secured Parties to any prospective or actual Eligible Assignee or participant of any of them or (iii) by the Deal Agent, the Liquidity Agent or the Secured Parties to any Rating Agency, commercial paper dealer or provider of a surety, guaranty or credit or liquidity enhancement to a Secured Party and to any officers, directors, employees, outside accountants and attorneys of any of the foregoing, provided each such Person is informed of the confidential nature of such information and agree to be bound hereby. In addition, the Secured Parties, the Liquidity Agent and the Deal Agent may disclose any such nonpublic information pursuant to any law, rule, regulation, direction, request or order of any judicial, administrative or regulatory authority or proceedings. SECTION 11.14 EXECUTION IN COUNTERPARTS; SEVERABILITY; INTEGRATION. ---------------------------------------------------- This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. This Agreement contains the final and complete integration of all prior expressions by the parties hereto with respect to the subject matter hereof and shall constitute the entire agreement among the parties hereto with respect to the subject matter hereof, superseding all prior oral or written understandings other than any fee letter delivered by the Originator to the Deal Agent and the Purchasers. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 63 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. THE SELLER: FNBNE FUNDING CORP. By___________________________________ Title: FNBNE Funding Corp. c/o First National Bank of New England 280 Trumbull Street Hartford, CT 06103 Attention: Capital Markets Facsimile No.: (860) 241-2583 Confirmation No.: (860) 241-2595 THE SERVICER: FIRST NATIONAL BANK OF NEW ENGLAND By___________________________________ Title: First National Bank of New England 280 Trumbull Street Hartford, CT 06103 Attention: Capital Markets Facsimile No.: (860) 241-2583 Confirmation No.: (860) 241-2595 THE BACKUP SERVICER: MARINE MIDLAND BANK By______________________________________ Title: Assistant Vice President Marine Midland Bank 140 Broadway Corporate Trust Department, 12th Floor New York, NY 10005 Attention: Susan Barstock Facsimile No.: (212) 658-6425 Confirmation No.: (212) 658-2079 THE COLLATERAL CUSTODIAN: MARINE MIDLAND BANK By______________________________________ Title: Assistant Vice President Marine Midland Bank 140 Broadway Corporate Trust Department, 12th Floor New York, New York 10005 Attention: Susan Barstock Facsimile No.: (212) 658-6425 Confirmation No.: (212) 658-2079 THE INVESTORS: FIRST UNION NATIONAL BANK By_______________________________ Title: Commitment: $65,000,000 First Union National Bank One First Union Center, TW-9 Charlotte, North Carolina 28288 Attention: Mr. Bill A. Shirley Facsimile No.: (704) 374-3254 Confirmation No: (704) 374-4001 VFCC: VARIABLE FUNDING CAPITAL CORPORATION By First Union Capital Markets, a division of Wheat First Securities, Inc., as attorney-in- fact By_______________________________ Title: Variable Funding Capital Corporation c/o First Union Capital Markets One First Union Center, TW-9 Charlotte, North Carolina 28288 Attention: Conduit Administration Facsimile No.: (704) 383-6036 Confirmation No.: (704) 383-9343 With a copy to: Lord Securities Corp. Attention: Facsimile No.: (____) __________ Confirmation No.: (____) __________ THE DEAL AGENT: FIRST UNION CAPITAL MARKETS, a division of WHEAT FIRST SECURITIES, INC. By_____________________________________ Title: First Union Capital Markets One First Union Center, TW-9 Charlotte, North Carolina 28288 Attention: Conduit Administration Facsimile No.: (704) 383-6036 Telephone No.: (704) 383-9343 THE LIQUIDITY AGENT: FIRST UNION NATIONAL BANK By_____________________________________ Title: First Union National Bank One First Union Center, TW-9 Charlotte, North Carolina 28288 Attention: Mr. Bill A. Shirley Facsimile No.: (704) 374-3254 Telephone No.: (704) 374-4001 EX-10.14 7 POOLING AND SERVICING AGREEMENT EXHIBIT 10.14 POOLING AND SERVICING AGREEMENT Dated as of May 31, 1998 Marine Midland Bank (Trustee) and FIRST NATIONAL BANK OF NEW ENGLAND (Seller and Servicer) First National Bank of New England SBA Loan-Backed Adjustable Rate Certificates, Series 1998-1, Class A and Class B TABLE OF CONTENTS -----------------
Section Page - ------- ---- ARTICLE I DEFINITIONS Definitions......................................................................................... I-1 ARTICLE II SALE AND CONVEYANCE OF THE TRUST FUND 2.01 Sale and Conveyance of Trust Fund............................................................ II-1 2.02 Possession of SBA Files...................................................................... II-1 2.03 Books and Records............................................................................ II-1 2.04 Delivery of SBA Loan Documents............................................................... II-2 2.05 Acceptance by Trustee of the Trust Fund; Certain Substitutions; Certification by Trustee;.... II-5 2.06 [Intentionally Omitted]...................................................................... II-7 2.07 Authentication of Certificates............................................................... II-7 2.08 Fees and Expenses of the Trustee............................................................. II-7 2.09 Sale and Conveyance of the Subsequent SBA Loans.............................................. II-7 2.10 Optional Repurchase of Defaulted SBA Loans................................................... II-10 ARTICLE III REPRESENTATIONS AND WARRANTIES 3.01 Representations of the Bank.................................................................. III-1 3.02 Individual SBA Loans......................................................................... III-4 3.03 Purchase and Substitution of Defective SBA Loans............................................. III-10 ARTICLE IV THE CERTIFICATES 4.01 The Certificates............................................................................. IV-1 4.02 Registration of Transfer and Exchange of Certificates........................................ IV-1 4.03 Mutilated, Destroyed, Lost or Stolen Certificates............................................ IV-9 4.04 Persons Deemed Owners........................................................................ IV-9
(i) ARTICLE V ADMINISTRATION AND SERVICING OF SBA LOANS 5.01 Duties of the Servicer...................................................................... V-1 5.02 Liquidation of SBA Loans.................................................................... V-5 5.03 Establishment of Principal and Interest Accounts; Deposits in Principal and Interest Accounts................................................................................ V-6 5.04 Permitted Withdrawals From the Principal and Interest Account............................... V-7 5.05 [Intentionally Omitted]..................................................................... V-9 5.06 Transfer of Accounts........................................................................ V-9 5.07 Maintenance of Hazard Insurance............................................................. V-9 5.08 [Intentionally Omitted]..................................................................... V-10 5.09 Fidelity Bond............................................................................... V-10 5.10 Title, Management and Disposition of Foreclosed Property.................................... V-11 5.11 [Omitted.].................................................................................. V-12 5.12 Collection of Certain SBA Loan Payments..................................................... V-12 5.13 Access to Certain Documentation and Information Regarding the SBA Loans..................... V-12 ARTICLE VI PAYMENTS TO THE CERTIFICATEHOLDERS 6.01 Establishment of Certificate Account; Deposits in Certificate Account; Permitted Withdrawals from Certificate Account.................................................... VI-1 6.02 Establishment of Spread Account; Deposits in Spread Account; Permitted Withdrawals from Spread Account.......................................................................... VI-2 6.03 Establishment of Expense Account; Deposits in Expense Account; Permitted Withdrawals from Expense Account......................................................................... VI-4 6.04 Pre-Funding Account and Capitalized Interest Account........................................ VI-5 6.05 [Intentionally Omitted]..................................................................... VI-7 6.06 Investment of Accounts...................................................................... VI-7 6.07 Distributions............................................................................... VI-8 6.08 [Omitted]................................................................................... VI-10 6.09 Statements.................................................................................. VI-10 6.10 Advances by the Servicer.................................................................... VI-13 6.11 Compensating Interest....................................................................... VI-14 6.12 Reports of Foreclosure and Abandonment of Mortgaged Property................................ VI-14
(ii) ARTICLE VII GENERAL SERVICING PROCEDURE 7.01 [Omitted]................................................................................... VII-1 7.02 Satisfaction of Mortgages and Collateral and Release of SBA Files........................... VII-1 7.03 Servicing Compensation...................................................................... VII-2 7.04 Annual Statement as to Compliance........................................................... VII-3 7.05 Annual Independent Public Accountants' Servicing Report..................................... VII-3 7.06 SBA's and Trustee's Right to Examine Servicer Records and Audit Operations.................. VII-3 7.07 Reports to the Trustee; Principal and Interest Account Statements........................... VII-4 7.08 Premium Protection Fee and Servicing Fee.................................................... VII-4 ARTICLE VIII REPORTS TO BE PROVIDED BY SERVICER 8.01 Financial Statements........................................................................ VIII-1 ARTICLE IX THE SERVICER 9.01 Indemnification; Third Party Claims......................................................... IX-1 9.02 Merger or Consolidation of the Servicer..................................................... IX-2 9.03 Limitation on Liability of the Servicer and Others.......................................... IX-3 9.04 Servicer Not to Resign...................................................................... IX-3 ARTICLE X DEFAULT 10.01 Events of Default........................................................................... X-1 10.02 Trustee to Act; Appointment of Successor.................................................... X-3 10.03 Waiver of Defaults.......................................................................... X-5 10.04 Control by Majority Certificateholders and Others........................................... X-5 ARTICLE XI TERMINATION 11.01 Termination................................................................................. XI-1 11.02 Accounting Upon Termination of Servicer..................................................... XI-2
(iii) ARTICLE XII THE TRUSTEE 12.01 Duties of Trustee........................................................................... XII-1 12.02 Certain Matters Affecting the Trustee....................................................... XII-2 12.03 Trustee Not Liable for Certificates or SBA Loans............................................ XII-4 12.04 Trustee May Own Certificates................................................................ XII-4 12.05 Servicer To Pay Trustee's Fees and Expenses................................................. XII-5 12.06 Eligibility Requirements for Trustee........................................................ XII-5 12.07 Resignation and Removal of the Trustee...................................................... XII-6 12.08 Successor Trustee........................................................................... XII-7 12.09 Merger or Consolidation of Trustee.......................................................... XII-8 12.10 Appointment of Co-Trustee or Separate Trustee............................................... XII-8 12.11 Authenticating Agent........................................................................ XII-10 12.12 Tax Returns and Reports..................................................................... XII-10 12.13 Protection of Trust Fund.................................................................... XII-11 12.14 Representations, Warranties and Covenants of Trustee........................................ XII-12 ARTICLE XIII MISCELLANEOUS PROVISIONS 13.01 Acts of Certificateholders.................................................................. XIII-1 13.02 Amendment................................................................................... XIII-1 13.03 Recordation of Agreement.................................................................... XIII-2 13.04 Duration of Agreement....................................................................... XIII-2 13.05 Governing Law............................................................................... XIII-2 13.06 Notices..................................................................................... XIII-2 13.07 Severability of Provisions.................................................................. XIII-3 13.08 No Partnership.............................................................................. XIII-3 13.09 Counterparts................................................................................ XIII-3 13.10 Successors and Assigns...................................................................... XIII-3 13.11 Headings.................................................................................... XIII-3 13.12 Paying Agent................................................................................ XIII-4 13.13 Notification to Rating Agency............................................................... XIII-4 13.14 Third Party Rights.......................................................................... XIII-5
(iv) EXHIBIT INDEX ------------- EXHIBIT A Contents of SBA File EXHIBIT B-1 Form of Class A Certificate EXHIBIT B-2 Form of Class B Certificate EXHIBIT C Principal and Interest Account Letter Agreement EXHIBIT D [Omitted] EXHIBIT E Wiring Instructions Form EXHIBIT F-1 Initial Certification EXHIBIT F-2 Final Certification EXHIBIT G [Omitted] EXHIBIT H SBA Loan Schedule EXHIBIT I Request for Release of Documents EXHIBIT J Form of Liquidation Report EXHIBIT K Form of Delinquency Report EXHIBIT L Servicer's Monthly Computer Diskette Format EXHIBIT M Multi-Party Agreement EXHIBIT N Spread Account Agreement EXHIBIT O-1 Form of Transferee Letter EXHIBIT O-2 Form of Rule 144A Certification EXHIBIT P List of SBA Loans with lost SBA Notes (v) Agreement dated as of May 31, 1998, between Marine Midland Bank, as trustee (the "Trustee"), First National Bank of New England, as Seller (in such capacity, the "Seller") and as Servicer (in such capacity, the "Servicer", and collectively or in another capacity, the "Bank"): PRELIMINARY STATEMENT The Seller, in the ordinary course of its business, originates and acquires SBA (S) 7(a) Loans (the "SBA (S) 7(a) Loans") to small businesses in compliance with the provisions of the Small Business Act and the rules and regulations thereunder and certain loans originated in connection with such loans, which SBA (S) 7(a) Loans are evidenced by the SBA Notes in favor of the Seller. Pursuant to and in accordance with the provisions of the Small Business Act and the Loan Guaranty Agreement, a portion of each SBA (S) 7(a) Loan has been guaranteed by the Small Business Administration (the "SBA"). The Seller has previously sold the Guaranteed Interest (as defined herein) in the SBA (S) 7(a) Loans to certain Registered Holders pursuant to SBA Form 1086 Agreements between such Registered Holders, the SBA and the Seller. The parties hereto acknowledge that the SBA is the party in interest with respect to the Guaranteed Interest. Pursuant to and in accordance with policies of the SBA, the Servicer is required to retain a portion of the interest received on the Guaranteed Interest of each SBA (S) 7(a) Loan sold to the Trust Fund (such portion, the "Premium Protection Fee"). To facilitate the sale of the Unguaranteed Interest (as defined herein) in the SBA (S) 7(a) Loans, net of the Servicing Fee, and the servicing of the SBA Loans by the Servicer, the Bank is entering into this Agreement with the Trustee. The Seller is transferring the SBA Loans to the Trustee for the benefit of the SBA and the Certificateholders under this Agreement, pursuant to which Certificates are being issued, denominated on the face thereof as First National Bank of New England SBA Loan-Backed Adjustable Rate Certificates, Series 1998-1, Class A and Class B, representing in the aggregate a 100% undivided beneficial ownership interest in the right to receive the principal portion of the Unguaranteed Interests of the SBA Loans together with interest thereon at the then applicable Class A or Class B Remittance Rate, as the case may be. The Unguaranteed Interest of the Initial SBA Loans have an aggregate outstanding principal balance of $19,901,728.97 as of May 31, 1998 (the "Cut-Off Date"), after application of payments received by the Seller on or before such date. The parties hereto agree as follows: -2- ARTICLE I DEFINITIONS ----------- Whenever used herein, the following words and phrases, unless the context otherwise requires, shall have the following meanings. This Agreement relates to a Trust Fund evidenced by First National Bank of New England SBA Loan-Backed Adjustable Rate Certificates, Series 1998-1, Class A and Class B. Unless otherwise provided, all calculations of interest pursuant to this Agreement including, but not limited to, the Class A and Class B Interest Distribution Amounts, are based on a 360-day year and twelve 30-day months. ACCOUNT: The Certificate Account, the Pre-Funding Account and the ------- Capitalized Interest Account established by the Trustee for the benefit of the Certificateholders; the Expense Account established by the Trustee for the benefit of the Trustee; and the Spread Account held by the Spread Account Custodian pursuant to the Spread Account Agreement. The Trustee's obligation to establish and maintain the Certificate Account is not delegable. ACCOUNT NUMBER: The number assigned to each SBA Loan by the Seller, -------------- as set forth in Exhibit H hereto. ACCOUNT PROPERTY: has the meaning set forth in Section 3 of the Spread ---------------- Account Agreement. ADDITION NOTICE: With respect to the transfer of Subsequent SBA Loans --------------- to the Trust Fund pursuant to Section 2.09 herein, notice, which shall be given not later than three Business Days prior to the related Subsequent Transfer Date, of the Seller's designation of Subsequent SBA Loans to be sold to the Trust Fund and the aggregate Principal Balance of such Subsequent SBA Loans. ADDITIONAL FEE: With respect to each Additional Fee SBA Loan, the fee -------------- payable to the SBA by the Seller equal to 40 basis points or 50 basis points per annum, as the case may be, on the outstanding balance of the Guaranteed Interest of such Additional Fee SBA Loan. ADDITIONAL FEE SBA LOAN: An SBA (S) 7(a) Loan sold in the secondary ----------------------- market on or after September 1, 1993 (unless the related SBA (S) 7(a) Loan was approved by the SBA on or after October 12, 1995), for which the related Additional Fee is 40 basis points per annum, or an SBA (S) 7(a) Loan approved by the SBA on or after October 12, 1995 (regardless of whether it was sold I-1 in the secondary market), for which the related Additional Fee is 50 basis points per annum. ADJUSTED CLASS A INTEREST DISTRIBUTION AMOUNT: With respect to each --------------------------------------------- Remittance Date, the product of (A) the aggregate amount of interest payable with respect to the Unguaranteed Interest of each SBA Loan in accordance with its terms, net of the Servicing Fee allocable to such SBA Loan, the Extra Interest and the Annual Expense Escrow Amount allocable to such interest (plus, for the Remittance Dates occurring in August and September 1998, any amounts transferred from the Pre-Funding Account and the Capitalized Interest Account for such Remittance Date to be applied as a payment of interest on the Certificates) and (B) a fraction, the numerator of which is the amounts set forth in clauses (i) and (ii) of the definition of Class A Interest Distribution Amount with respect to such Remittance Date, and the denominator of which is the sum of the amounts set forth in clauses (i) and (ii) of the definition of Class A Interest Distribution Amount and the amounts set forth in clauses (i) and (ii) of the definition of Class B Interest Distribution Amount, each with respect to such Remittance Date. ADJUSTED CLASS B INTEREST DISTRIBUTION AMOUNT: With respect to each --------------------------------------------- Remittance Date, the product of (A) the aggregate amount of interest payable with respect to the Unguaranteed Interest of each SBA Loan in accordance with its terms, net of the Servicing Fee allocable to such SBA Loan, the Extra Interest and the Annual Expense Escrow Amount allocable to such interest (plus, for the Remittance Dates occurring in August and September 1998, any amounts transferred from the Pre-Funding Account and the Capitalized Interest Account for such Remittance Date to be applied as a payment of interest on the Certificates) and (B) a fraction, the numerator of which is the amounts set forth in clauses (i) and (ii) of the definition of Class B Interest Distribution Amount with respect to such Remittance Date, and the denominator of which is the sum of the amounts set forth in clauses (i) and (ii) of the definition of Class A Interest Distribution Amount and the amounts set forth in clauses (i) and (ii) of the definition of Class B Interest Distribution Amount, each with respect to such Remittance Date. ADJUSTED SBA LOAN REMITTANCE RATE: With respect to any SBA Loan, a --------------------------------- percentage per annum equal to the sum of (i) the then applicable weighted average Class A and Class B Remittance Rates and (ii) .06% per annum, relating to the Annual Expense Escrow Amount. ADJUSTMENT DATE: The first Business Day of each Interest Accrual --------------- Period, commencing August 15, 1998. I-2 AGGREGATE CLASS A CERTIFICATE PRINCIPAL BALANCE: As of any date of ----------------------------------------------- determination, the Original Class A Certificate Principal Balance less the sum of all amounts previously distributed to the Class A Certificateholders in respect of principal. AGGREGATE CLASS B CERTIFICATE PRINCIPAL BALANCE: As of any date of ----------------------------------------------- determination, the Original Class B Certificate Principal Balance less the sum of all amounts previously distributed to the Class B Certificateholders in respect of principal. AGREEMENT: This Pooling and Servicing Agreement and all amendments --------- hereof and supplements hereto. ANNUAL EXPENSE ESCROW AMOUNT: The product of .06% per annum and the ---------------------------- Pool Principal Balance, which is computed and payable on a monthly basis and represents the estimated annual Trustee's fees and Trust Fund expenses. ASSIGNMENT OF MORTGAGE: With respect to those SBA Loans secured by a ---------------------- Mortgaged Property, an assignment of the Mortgage, notice of transfer or equivalent instrument sufficient under the laws of the jurisdiction wherein the related Mortgaged Property is located to reflect of record the transfer of the related SBA Loan to the Trustee subject to the Multi-Party Agreement. AUTHENTICATING AGENT: Initially, Marine Midland Bank and thereafter, -------------------- any successor appointed pursuant to Section 12.11. AVAILABLE FUNDS: With respect to each Remittance Date, the sum of (i) --------------- the Unguaranteed Percentage of all amounts received from any source by the Servicer or any Subservicer during the preceding calendar month (or with respect to the "Remittance Date" in August 1998, the two preceding calendar months) with respect to principal and interest on the SBA Loans (net of the Servicing Fee allocable to such SBA Loan), (ii) advances by the Servicer, (iii) amounts to be transferred from the Pre-Funding Account and the Capitalized Interest Account with respect to the Remittance Dates in August and September 1998, and (iv) amounts in the Spread Account. BANK: First National Bank of New England, in its individual capacity ---- or in its capacities as Seller and Servicer hereunder. BIF: The Bank Insurance Fund, or any successor thereto. --- I-3 BUSINESS DAY: Any day other than (i) a Saturday or Sunday, or (ii) a ------------ day on which banking institutions in the States of New York or Connecticut are authorized or obligated by law or executive order to be closed. CAPITALIZED INTEREST ACCOUNT: As described in Section 6.04. ---------------------------- CAPITALIZED INTEREST REQUIREMENT: With respect to the Remittance -------------------------------- Dates in August and September 1998, the excess, if any, of (i) 30 days' interest (or, with respect to the Remittance Date in August 1998, the actual number of days from the Closing Date to but not including such Remittance Date) calculated at the weighted average Class A and Class B Remittance Rates on the excess of (a) the Aggregate Class A and Class B Certificate Principal Balances for such Remittance Date over (b) the aggregate Principal Balances of the SBA Loans for such Remittance Date over (ii) any Pre-Funding Earnings to be transferred to the Certificate Account on such Remittance Date pursuant to Section 6.04(d). With respect to the Special Remittance Date, accrued interest calculated at the weighted average Class A and Class B Remittance Rates on the amount to be transferred on the Special Remittance Date from the Pre-Funding Account to the Certificate Account pursuant to Section 6.04(c). CERTIFICATE: Any Class A or Class B Certificate executed by the ----------- Servicer and authenticated by the Trustee or the Authenticating Agent substantially in the form annexed hereto as Exhibits B-1 and B-2. CERTIFICATE ACCOUNT: As described in Section 6.01. ------------------- CERTIFICATEHOLDER or HOLDER: Each Person in whose name a Class A or ----------------- ------ Class B Certificate is registered in the Certificate Register, except that, solely for the purposes of giving any consent, waiver, request or demand pursuant to this Agreement, any Certificate registered in the name of the Seller, the Servicer, any Subservicer or any affiliate of any of them, shall be deemed not to be outstanding and the undivided Percentage Interest evidenced thereby shall not be taken into account in determining whether the requisite percentage of Certificates necessary to effect any such consent, waiver, request or demand has been obtained. CERTIFICATE REGISTER: As described in Section 4.02. -------------------- CERTIFICATE REGISTRAR: Initially, Marine Midland Bank, and --------------------- thereafter, any successor appointed pursuant to Section 4.02. I-4 CLASS A CARRY-FORWARD AMOUNT: The amount, if any, by which (i) the ---------------------------- Class A Principal Distribution Amount with respect to any preceding Remittance Date exceeded (ii) the amount of the actual principal distribution to the Class A Certificates on such Remittance Date. CLASS A CERTIFICATE: A Certificate denominated as a Class A ------------------- Certificate. CLASS A CERTIFICATEHOLDER: A holder of a Class A Certificate. ------------------------- CLASS A INTEREST DISTRIBUTION AMOUNT: With respect to each Remittance ------------------------------------ Date, the sum of (i) the interest accrued for the related Interest Accrual Period at the then applicable Class A Remittance Rate on the Aggregate Class A Certificate Principal Balance outstanding immediately prior to such Remittance Date and (ii) the amount of the shortfall, if any, of any interest that the Class A Certificates were entitled to receive on a preceding Remittance Date but did not receive plus interest thereon at the then applicable Class A Remittance Rate compounded monthly; provided, however, that on each Remittance Date the Class A Interest Distribution Amount will be increased or decreased, as the case may be, to equal the Adjusted Class A Interest Distribution Amount for such Remittance Date. CLASS A PERCENTAGE: With respect to each Remittance Date, 89.9979%, ------------------ representing the beneficial ownership interest of the Class A Certificates in the Trust Fund. CLASS A PRINCIPAL DISTRIBUTION AMOUNT: With respect to each ------------------------------------- Remittance Date, the Class A Percentage multiplied by the sum of, without duplication, (i) the Unguaranteed Percentage of all payments and other recoveries of principal of an SBA Loan (net of amounts reimbursable to the Servicer pursuant to this Agreement) received by the Servicer or any Subservicer in the related Due Period, excluding amounts received relating to SBA Loans which have been delinquent 24 months or have been determined to be uncollectible, in whole or in part, by the Servicer to the extent that the Class A Certificateholders have previously received the Class A Percentage of the Principal Balance of such SBA Loans; (ii) the principal portion of any Unguaranteed Interest actually purchased by the Servicer or the Seller and actually received by the Trustee as of the related Determination Date; (iii) any Substitution Adjustments deposited in the Principal and Interest Account and transferred to the Certificate Account as of the related Determination Date; (iv) the Unguaranteed Percentage of all losses on SBA Loans which were finally liquidated during the applicable Due Period; (v) the Unguaranteed Percentage of the then outstanding principal balance I-5 of any SBA Loan which, as of the first day of the related Due Period, has been delinquent 24 months or has been determined to be uncollectible, in whole or in part, by the Servicer; and (vi) the amount, if any, released from the Pre- Funding Account on the August and September 1998 Remittance Dates. CLASS A REMITTANCE RATE: During the initial Interest Accrual Period ----------------------- 6.50% per annum. During each subsequent Interest Accrual Period, the Prime Rate in effect on the preceding Adjustment Date minus 2.00% per annum. CLASS B CARRY-FORWARD AMOUNT: The amount, if any, by which (i) the ---------------------------- Class B Principal Distribution Amount with respect to any preceding Remittance Date exceeded (ii) the amount of the actual principal distribution to the Class B Certificates on such Remittance Date. CLASS B CERTIFICATE: A Certificate denominated as a Class B ------------------- Certificate. CLASS B CERTIFICATEHOLDER: A holder of a Class B Certificate. ------------------------- CLASS B INTEREST DISTRIBUTION AMOUNT: With respect to each Remittance ------------------------------------ Date, the sum of (i) the interest accrued for the related Interest Accrual Period at the then applicable Class B Remittance Rate on the Aggregate Class B Certificate Principal Balance outstanding immediately prior to such Remittance Date and (ii) the amount of the shortfall, if any, of any interest that the Class B Certificates were entitled to receive on a preceding Remittance Date but did not receive plus interest thereon at the then applicable Class B Remittance Rate compounded monthly; provided, however, that on each Remittance Date the Class B Interest Distribution Amount will be increased or decreased, as the case may be, to equal the Adjusted Class B Interest Distribution Amount for such Remittance Date. CLASS B PERCENTAGE: With respect to each Remittance Date, 10.0021%, ------------------ representing the beneficial ownership interest of the Class B Certificates in the Trust Fund. CLASS B PRINCIPAL DISTRIBUTION AMOUNT: With respect to each ------------------------------------- Remittance Date, the Class B Percentage multiplied by the sum of, without duplication, (i) the Unguaranteed Percentage of all payments and other recoveries of principal of an SBA Loan (net of amounts reimbursable to the Servicer pursuant to this Agreement) received by the Servicer or any Subservicer in the related Due Period, excluding amounts received relating to SBA Loans which have been delinquent 24 months or have been determined to be uncollectible, in whole or in part, by the I-6 Servicer to the extent that the Class B Certificateholders have previously received the Class B Percentage of the Principal Balance of such SBA Loans; (ii) the principal portion of any Unguaranteed Interest actually purchased by the Seller for breach of a representation and warranty or other defect and actually received by the Trustee as of the related Determination Date; (iii) any Substitution Adjustments deposited in the Principal and Interest Account and transferred to the Certificate Account as of the related Determination Date; (iv) the Unguaranteed Percentage of all losses on SBA Loans which were finally liquidated during the applicable Due Period; (v) the Unguaranteed Percentage of the then outstanding principal balance of any SBA Loan which, as of the first day of the related Due Period, has been delinquent 24 months or has been determined to be uncollectible, in whole or in part, by the Servicer; and (vi) the amount, if any, released from the Pre-Funding Account on the August and September 1998 Remittance Dates. CLASS B REMITTANCE RATE: During the initial Interest Accrual Period ----------------------- 7.50% per annum. During each subsequent Interest Accrual Period, the Prime Rate in effect on the preceding Adjustment Date minus 1.00% per annum. CLOSING DATE: June 30, 1998 ------------ CODE: The Internal Revenue Code of 1986, as amended, or any successor ---- legislation thereto. COLLATERAL: All items of property (including a Mortgaged Property), ---------- whether real or personal, tangible or intangible, or otherwise, pledged by an Obligor or others to the Seller (including guarantees on behalf of the Obligor) to secure payment under an SBA Loan. COMMERCIAL PROPERTY: Real property (other than agricultural property ------------------- or Residential Property) that generally is used by the Obligor in the conduct of its business. COMPENSATING INTEREST: As defined in Section 6.11. --------------------- CONFIDENTIAL PLACEMENT MEMORANDUM: The Confidential Private Placement --------------------------------- Memorandum dated June 29, 1998 prepared by the Seller in connection with the offer and sale of the Class A Certificates. CORPORATE TRUST OFFICE: The principal office of the Trustee at which ----------------------- at any particular time its corporate trust business shall be administered which office at the date of the execution of this Agreement is located at Marine Midland Bank, 140 Broadway, New York, New York 10005, 12/th/ Floor, Attention I-7 Corporate Trust Department or at any other time at such other address as the Trustee may designate from time to time by notice to the parties hereto. CURTAILMENT: With respect to an SBA Loan, any payment of principal ----------- received during a Due Period as part of a payment that is in excess of five times the amount of the Monthly Payment due for such Due Period and which is not intended to satisfy the SBA Loan in full, nor is intended to cure a delinquency. CUT-OFF DATE: May 31, 1998. ------------ DEFAULTED SBA LOAN: Any SBA Loan as to which the Obligor has failed ------------------ to make payment in full of three or more consecutive Monthly Payments. DELETED SBA LOAN: An SBA Loan replaced by a Qualified Substitute SBA ---------------- Loan. DEPOSITORY: The Depository Trust Company and any successor Depository ---------- hereafter named. DESIGNATED DEPOSITORY INSTITUTION: With respect to the Principal and --------------------------------- Interest Account or items of Account Property held in deposit accounts, an entity which is an institution whose deposits are insured by either the BIF or SAIF administered by the FDIC, the unsecured and uncollateralized long-term debt obligations of which shall be rated A2 or better by Moody's, and which is either (i) a federal savings association duly organized, validly existing and in good standing under the federal banking laws, (ii) an institution duly organized, validly existing and in good standing under the applicable banking laws of any state, (iii) a national banking association duly organized, validly existing and in good standing under the federal banking laws, or (iv) a principal subsidiary of a bank holding company, in each case acting or designated by the Servicer as the depository institution for the Principal and Interest Account or the Spread Account Depositor with respect to items of Account Property, as the case may be. DETERMINATION DATE: That day of each month which is the third ------------------ Business Day prior to the Remittance Date. DIRECT PARTICIPANT: Any broker-dealer, bank or other financial ------------------ institution for which the Depository holds Certificates from time to time as a securities depository. DUE DATE: The day of the month on which the Monthly Payment is due -------- from the Obligor on an SBA Loan. I-8 DUE PERIOD: With respect to each Remittance Date, the calendar month ---------- preceding the month in which such Remittance Date occurs. ERISA: The Employee Retirement Income Security Act of 1974, as ----- amended, or any successor legislation thereto. EVENT OF DEFAULT: As described in Section 10.01. ---------------- EXCESS PAYMENTS: With respect to a Due Period, any amounts received --------------- on an SBA Loan in excess of the Monthly Payment due on the Due Date relating to such Due Period which does not constitute either a Curtailment or a Principal Prepayment or payment with respect to an overdue amount. Excess Payments are payments of principal for purposes of this Agreement. EXCESS PROCEEDS: As of any Remittance Date, with respect to any --------------- Liquidated SBA Loan, the excess, if any, of (a) the Unguaranteed Percentage of the total Net Liquidation Proceeds, over (b) the Principal Balance of such SBA Loan as of the date such SBA Loan became a Liquidated SBA Loan plus 30 days interest thereon at the then applicable Adjusted SBA Loan Remittance Rate; provided, however, that such excess shall be reduced by the amount by which interest accrued on the advance, if any, made by the Servicer at the related SBA Loan Interest Rate(s) exceeds interest accrued on such advance at the then applicable weighted average Class A and Class B Remittance Rates. EXPENSE ACCOUNT: The expense account established and maintained by --------------- the Trustee in accordance with Section 6.03 hereof. EXTRA INTEREST: With respect to each SBA Loan, for each Remittance -------------- Date the product of (i) the principal portion of the Unguaranteed Interest of such SBA Loan for such Remittance Date and (ii) one-twelfth of the Extra Interest Percentage. EXTRA INTEREST PERCENTAGE: With respect to each SBA Loan, the excess ------------------------- of (i) the SBA Loan Interest Rate that would be in effect for such SBA Loan as of the Cut-Off Date without giving effect to any applicable lifetime floors or caps over (ii) the sum of the rates used in determining the Servicing Fee and the Annual Expense Escrow Amount and 6.6% per annum (i.e., the initial weighted ---- average Class A and Class B Remittance Rates without giving effect to any applicable lifetime floors or caps on the SBA Loans). FDIC: The Federal Deposit Insurance Corporation and any successor ---- thereto. I-9 FHLMC: The Federal Home Loan Mortgage Corporation and any successor ----- thereto. FIDELITY BOND: As described in Section 5.09. ------------- FNMA: The Federal National Mortgage Association and any successor ---- thereto. FORECLOSED PROPERTY: As described in Section 5.10. ------------------- FORECLOSED PROPERTY DISPOSITION: The final sale of a Foreclosed ------------------------------- Property acquired in foreclosure or by deed in lieu of foreclosure or of Repossessed Collateral acquired by legal process. The proceeds of any Foreclosed Property Disposition constitute part of the definition of Liquidation Proceeds. FTA: Colson Services Corp., in its capacity as the Fiscal and --- Transfer Agent of the SBA under the Multi-Party Agreement, or any successor thereto appointed by the SBA. FUNDING PERIOD: The period commencing on the Closing Date and ending -------------- on the earliest to occur of (i) the date on which the amount on deposit in the Pre-Funding Account is less than $100,000, (ii) the date on which an Event of Default occurs or (iii) at the close of business on September 10, 1998. GLOBAL CERTIFICATE: Any Certificate registered in the name of the ------------------ Depository or its nominee, beneficial interests of which are reflected on the books of the Depository or on the books of a Person maintaining any account with such Depository (directly or as an indirect participant in accordance with the rules of such Depository). GUARANTEED INTEREST: As to any SBA (S) 7(a) Loan, the right to ------------------- receive the guaranteed portion of the principal balance thereof together with interest thereon at the then applicable SBA Loan Interest Rate. Certificateholders have no right or interest in the Guaranteed Interest. INDIRECT PARTICIPANT: Any financial institution for whom any Direct -------------------- Participant holds an interest in any Certificate. INDIVIDUAL CERTIFICATE: Any Certificate registered in the name of a ---------------------- holder other than the Depository or its nominee. INITIAL SPREAD ACCOUNT DEPOSIT: A deposit of $807,051.87 required to ------------------------------ be made by the Spread Account Depositor into the Spread Account on the Closing Date, such deposit being equal to 3.0% of the sum of (i) the Original Pool Principal Balance and (ii) the Original Pre-Funded Amount. I-10 INITIAL SBA LOANS: THE SBA Loans listed on Exhibit H hereto and ----------------- delivered to the Trustee on the Closing Date. INSTITUTIONAL ACCREDITED INVESTOR: Any Person satisfying the --------------------------------- definition of "Accredited Investor" within the meaning of Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act. INSURANCE PROCEEDS: Proceeds paid by any insurer pursuant to any ------------------ insurance policy covering an SBA Loan, Collateral, Repossessed Collateral or Foreclosed Property, including but not limited to title, hazard, life, health and/or accident insurance policies. INTEREST ACCRUAL PERIOD: With respect to each Remittance Date, the ----------------------- period commencing on the 15th day of the month preceding such Remittance Date and ending on the 14th day of the month of such Remittance Date. However, for the Remittance Date occurring in August 1998, the period commencing on the Closing Date and ending on August 14, 1998. LIQUIDATED SBA LOAN: Any defaulted SBA Loan, Repossessed Collateral ------------------- or Foreclosed Property as to which the Servicer has determined that all amounts which it reasonably and in good faith expects to recover have been recovered from or on account of such SBA Loan. LIQUIDATION PROCEEDS: Cash, including Insurance Proceeds, proceeds of -------------------- any Foreclosed Property Disposition, revenues received with respect to the conservation and disposition of a Foreclosed Property or Repossessed Collateral, and any other amounts received in connection with the liquidation of defaulted SBA Loans, whether through trustee's sale, foreclosure sale or otherwise. LOAN GUARANTY AGREEMENT: Collectively, one or more Loan Guaranty ----------------------- Agreements (Deferred Participation) (SBA Form 750), between the SBA and the Servicer, as such agreements may be amended from time to time, or such Loan Guaranty Agreement as applicable to a successor to the Servicer, as the case may be. LOAN-TO-VALUE RATIO OR LTV: With respect to any SBA Loan, (a) the sum -------------------------- of (i) the original principal amount of such SBA Loan as of origination and (ii) the principal balance of any Prior Lien as of the date of origination of the related SBA Loan, divided by (b) the total discounted net collateral value (as determined by the Seller in accordance with its underwriting criteria) of the primary and secondary Collateral securing such SBA Loan at the time of origination. I-11 MAJORITY CERTIFICATEHOLDERS: The Holder or Holders of Class A and --------------------------- Class B Certificates evidencing an Aggregate Class A Certificate Principal Balance and Aggregate Class B Certificate Principal Balance in excess of 50% of the Aggregate Class A Certificate Principal Balance and Aggregate Class B Certificate Principal Balance. MONTHLY ADVANCE: An advance made by the Servicer pursuant to Section --------------- 6.10 hereof. MONTHLY PAYMENT: The monthly payment of principal and/or interest --------------- required to be made by an Obligor on the related SBA Loan, as adjusted pursuant to the terms of the related SBA Note. MOODY'S: Moody's Investors Service, Inc. or any successor thereto. ------- MORTGAGE: The mortgage, deed of trust or other instrument creating a -------- lien on a Mortgaged Property. MORTGAGED PROPERTY: The underlying real property, if any, securing an ------------------ SBA Loan, consisting of a Commercial Property or Residential Property and any improvements thereon. MULTI-PARTY AGREEMENT: That certain Multi-Party Agreement dated as of --------------------- May 31, 1998 among the Seller, the Trustee, the SBA and the FTA, substantially in the form of Exhibit M hereto, as amended from time to time by the parties thereto. NET LIQUIDATION PROCEEDS: Liquidation Proceeds net of (i) any ------------------------ reimbursements to the Servicer made therefrom pursuant to Section 5.04(b) and (ii) amounts required to be released to the related Obligor pursuant to applicable law. OBLIGOR: The obligor on an SBA Note. ------- OCC: The Office of the Comptroller of the Currency. --- OFFICER'S CERTIFICATE: A certificate delivered to the Trustee signed --------------------- by the Chairman of the Board, the President, an Executive Vice President, a Vice President, an Assistant Vice President, the Treasurer, the Secretary, or one of the Assistant Secretaries of the Bank as required by this Agreement. OPINION OF COUNSEL: A written opinion of counsel, who may, without ------------------ limitation, be counsel for the Bank, reasonably acceptable to the Trustee and experienced in matters relating thereto. I-12 ORIGINAL CLASS A CERTIFICATE PRINCIPAL BALANCE: $24,211,000.00. ---------------------------------------------- ORIGINAL CLASS B CERTIFICATE PRINCIPAL BALANCE:$2,690,728.97. ---------------------------------------------- ORIGINAL POOL PRINCIPAL BALANCE: $19,901,728.97. ------------------------------- ORIGINAL PRE-FUNDED AMOUNT: $7,000,000.00, representing the amount -------------------------- deposited in the Pre-Funding Account on the Closing Date. OVERFUNDED INTEREST AMOUNT: -------------------------- With respect to each Subsequent Transfer Date occurring in August 1998, the difference between (i) two-months' interest on the aggregate Principal Balances of the Subsequent SBA Loans acquired by the Trust Fund on such Subsequent Transfer Date, calculated at the weighted average Class A and Class B Remittance Rates, and (ii) two-months' interest on the aggregate Principal Balances of the Subsequent SBA Loans acquired by the Trust Fund on such Subsequent Transfer Date, calculated at the rate at which Pre-Funding Account moneys are invested as of such Subsequent Transfer Date. With respect to each Subsequent Transfer Date occurring in September 1998, the difference between (i) one-month's interest on the aggregate Principal Balances of the Subsequent SBA Loans acquired by the Trust Fund on such Subsequent Transfer Date, calculated at the weighted average Class A and Class B Remittance Rates, and (ii) one-month's interest on the aggregate Principal Balances of the Subsequent SBA Loans acquired by the Trust Fund on such Subsequent Transfer Date, calculated at the rate at which Pre-Funding Account moneys are invested as of such Subsequent Transfer Date. PAYING AGENT: Initially, Marine Midland Bank, and thereafter, any ------------ other Person that meets the eligibility standards for the Paying Agent specified in Section 13.12 hereof and is authorized by the Trustee to make payments on the Certificates on behalf of the Trustee. PERCENTAGE INTEREST: With respect to a Class A or Class B ------------------- Certificate, the portion of the Trust Fund evidenced by such Class A or Class B Certificate, expressed as a percentage, the numerator of which is the denomination represented by such Class A or Class B Certificate and the denominator of which is the Original Class A Certificate Principal Balance or Original Class B Certificate Principal Balance, as the case may be. The I-13 Certificates are issuable only in the minimum Percentage Interest corresponding to a minimum denomination of $100,000 and integral multiples of $1,000 in excess thereof, except for one Certificate of each Class which may be issued in a different denomination to equal the remainder of the Original Class A Certificate Principal Balance or Original Class B Certificate Principal Balance, as the case may be. PERMITTED INSTRUMENTS: As used herein, Permitted Instruments shall --------------------- include the following: (i) direct general obligations of, or obligations fully and unconditionally guaranteed as to the timely payment of principal and interest by, the United States or any agency or instrumentality thereof, provided such obligations are backed by the full faith and credit of the United States, FHA debentures, Federal Home Loan Bank consolidated senior debt obligations, and FNMA senior debt obligations, but excluding any of such securities whose terms do not provide for payment of a fixed dollar amount upon maturity or call for redemption; (ii) federal funds, certificates of deposit, time deposits and banker's acceptances (having original maturities of not more than 365 days) of any bank or trust company incorporated under the laws of the United States or any state thereof, provided that the short-term debt obligations of such bank or trust company at the date of acquisition thereof have been rated Prime-1 or better by Moody's; (iii) deposits of any bank or savings and loan association which has combined capital, surplus and undivided profits of at least $3,000,000 which deposits are held only up to the limits insured by the BIF or SAIF administered by the FDIC, provided that the unsecured long-term debt obligations of such bank or savings and loan association have been rated A3 or better by Moody's; (iv) commercial paper (having original maturities of not more than 365 days) rated Prime-1 or better by Moody's; (v) debt obligations rated Aaa by Moody's (other than any such obligations that do not have a fixed par value and/or whose terms do not promise a fixed dollar amount at maturity or call date); (vi) investments in money market funds rated Aaa or better by Moody's, the assets of which are invested solely in instruments described in clauses (i)-(v) above I-14 (including, without limitation, any fund which the Trustee or an affiliate of the Trustee serves as an investment advisor, administrator, shareholder, servicing agent and/or custodian or sub-custodian, notwithstanding that (a) the Trustee or an affiliate of the Trustee charges and collects fees and expenses from such funds for services rendered, (b) the Trustee charges and collects fees and expenses for services rendered pursuant to this Agreement, and (c) services performed for such funds and pursuant to this Agreement may converge at any time (the parties hereto specifically authorizes the Trustee or an affiliate of the Trustee to charge and collect all fees and expenses from such funds for services rendered to such funds, in addition to any fees and expenses the Trustee may charge and collect for services rendered pursuant to this Agreement)); (vii) guaranteed investment contracts or surety bonds providing for the investment of funds in an account or insuring a minimum rate of return on investments of such funds, which contract or surety bond shall: (a) be an obligation of an insurance company or other corporation whose debt obligations or insurance financial strength or claims paying ability are rated "Aaa" by Moody's; and (b) provide that the Trustee may exercise all of the rights of the Seller under such contract or surety bond without the necessity of the taking of any action by the Seller; (viii) A repurchase agreement that satisfies the following criteria: (a) Must be between the Trustee and a dealer bank or securities firm described in 1. or 2. below: 1. Primary dealers on the Federal Reserve reporting dealer list which are rated "Aa" or better by Moody's, or 2. Banks rated "Aa" or better by Moody's. (b) The written repurchase agreement must include the following: 1. Securities which are acceptable for the transfer are: I-15 A. Direct U.S. government securities, or B. Securities of Federal Agencies backed by the full faith and credit of the U.S. government (and FNMA & FHLMC), 2. the term of the repurchase agreement may be up to 60 days, 3. the collateral must be delivered to the Trustee or third party custodian acting as agent for the Trustee by appropriate book entries and confirmation statements must have been delivered before or simultaneous with payment (perfection by possession of certificated securities), 4. Valuation of collateral: The securities must be valued weekly, marked-to- market at current market price plus accrued interest. The value of the collateral must be equal to at least 104% of the amount of cash transferred by the Trustee or custodian for the Trustee to the dealer bank or security firm under the repurchase agreement plus accrued interest. If the value of securities held as collateral slips below 104% of the value of the cash transferred by the Trustee plus accrued interest, then additional cash and/or acceptable securities must be transferred. If, however, the securities used as collateral are FNMA or FHLMC, then the value of collateral must equal at least 105%; and (ix) any other investment acceptable to the Rating Agency, written confirmation of which shall be furnished to the Trustee prior to any such investment. PERSON: Any individual, corporation, partnership, limited liability ------ company, joint venture, association, joint-stock company, trust, national banking association, unincorporated organization or government or any agency or political subdivision thereof. I-16 POOL PRINCIPAL BALANCE: The aggregate Principal Balances as of any ---------------------- date of determination. PRE-FUNDED AMOUNT: With respect to any date of determination, the ----------------- amount on deposit in the Pre-Funding Account. PRE-FUNDING ACCOUNT: The Pre-Funding Account established in accordance ------------------- with Section 6.04 hereof and maintained by the Trustee. PRE-FUNDING EARNINGS: With respect to the Remittance Date in August -------------------- 1998, the actual investment earnings earned during the period from the Closing Date through the Business Day immediately preceding the Determination Date in August 1998 (inclusive) on the Pre-Funded Amount. With respect to the Remittance Date in September 1998, the actual investment earnings earned during the period from the Determination Date in August 1998 through the Business Day immediately preceding the Determination Date in September 1998 (inclusive), on the Pre-Funded Amount. PREMIUM PROTECTION FEE: As to any SBA Loan and any date of ---------------------- determination, an amount equal to 0.60% per annum of the then outstanding principal balance of the related Guaranteed Interest. PRIME RATE: With respect to any date of determination, the lowest ---------- prime lending rate published in the Money Rate Section of The Wall Street --------------- Journal, on the next succeeding Business Day. - ------- PRINCIPAL AND INTEREST ACCOUNT: The principal and interest account ------------------------------ established by the Servicer pursuant to Section 5.03 hereof. PRINCIPAL BALANCE: With respect to any SBA Loan or related Foreclosed ----------------- Property or Repossessed Collateral, at any date of determination, (i) the Unguaranteed Percentage of the principal balance of the SBA Loan outstanding as of the Cut-Off Date (or applicable Subsequent Cut-Off Date with respect to Subsequent SBA Loans), after application of principal payments received on or before such date, minus (ii) the sum of (a) the Unguaranteed Percentage of the principal portion of the Monthly Payments received during each Due Period ending prior to the most recent Remittance Date, which were distributed pursuant to Section 6.07 on any previous Remittance Date, and (b) the Unguaranteed Percentage of all Principal Prepayments, Curtailments, Excess Payments, Insurance Proceeds, Released Mortgaged Property Proceeds, Net Liquidation Proceeds and net income from a Foreclosed Property or Repossessed Collateral to the extent applied by the Servicer as recoveries of principal in I-17 accordance with the provisions hereof, which were distributed pursuant to Section 6.07 on any previous Remittance Date. The Principal Balance of any Liquidated SBA Loan or any SBA Loan that has been paid off will equal $0. PRINCIPAL PREPAYMENT: Any payment or other recovery of principal on -------------------- an SBA Loan equal to the outstanding principal balance thereof, received in advance of the final scheduled Due Date which is intended to satisfy an SBA Loan in full. PRIOR LIEN: With respect to any SBA Loan secured by a lien on a ---------- Mortgaged Property or on other Collateral which is not a first priority lien, each lien relating to the corresponding Mortgaged Property or other Collateral having a prior priority lien. QUALIFIED INSTITUTIONAL BUYER: As used herein, has the meaning ----------------------------- ascribed to such term in Rule 144A under the Securities Act. QUALIFIED SUBSTITUTE SBA LOAN: An SBA loan or SBA loans substituted ----------------------------- for a Deleted SBA Loan pursuant to Section 2.05 or 3.03 hereof, which (i) has or have an SBA Loan interest rate or rates of not less than (and not more than two percentage points more than) the SBA Loan Interest Rate for the Deleted SBA Loan, (ii) substantially relates or relate to the same type of Collateral as the Deleted SBA Loan, (iii) matures or mature no later than (and not more than one year earlier than) the Deleted SBA Loan, (iv) has or have a Loan-to-Value Ratio or Loan-to-Value Ratios at the time of such substitution no higher than the Loan-to Value Ratio of the Deleted SBA Loan at such time, (v) has or have a principal balance or principal balances relating to an unguaranteed interest or unguaranteed interests (after application of all payments received on or prior to the date of substitution) equal to or less than the Principal Balance of the Unguaranteed Interest or Unguaranteed Interests as of such date of the Deleted SBA Loan, (vi) has or have the same Unguaranteed Percentage at the time of substitution as the Deleted SBA Loan; (vii) was or were originated under the same program type as the Deleted SBA Loan; and (viii) complies or comply as the date of substitution with each representation and warranty set forth in Section 3.02. RATING AGENCY: Moody's. ------------- RATING AGENCY CONDITION: With respect to any specified action, that ----------------------- the Rating Agency shall have notified the Servicer and the Trustee, orally or in writing, that such action will not result in a reduction or withdrawal of the rating assigned by the respective Rating Agency to either Class of Certificates. I-18 RECORD DATE: With respect to any Remittance Date, the close of ----------- business on the last day of the month immediately preceding the month of the related Remittance Date. With respect to the Special Remittance Date, August 31, 1998. REGISTERED HOLDER: With respect to any SBA (S) 7(a) Loan, the Person ----------------- identified as such in the applicable SBA Form 1086, and any permitted assignees thereof. REIMBURSABLE AMOUNTS: As of any date of determination, an amount -------------------- payable to the Bank, in its capacity as either Seller or Servicer, with respect to (i) the Monthly Advances and Servicing Advances reimbursable pursuant to Section 5.04(b), (ii) any advances reimbursable pursuant to Section 9.01 and not previously reimbursed pursuant to Section 6.03(c)(i), and (iii) any other amounts reimbursable to the Seller or Servicer pursuant to this Agreement. RELEASED MORTGAGED PROPERTY PROCEEDS: As to any SBA Loan secured by a ------------------------------------ Mortgaged Property, proceeds received by the Servicer in connection with (a) a taking of an entire Mortgaged Property by exercise of the power of eminent domain or condemnation or (b) any release of part of the Mortgaged Property from the lien of the related Mortgage, whether by partial condemnation, sale or otherwise, which are not released to the Obligor in accordance with applicable law, the SBA or the Registered Holder in accordance with the SBA Rules and Regulations, the Servicer's customary SBA loan servicing procedures and this Agreement. REMITTANCE DATE: The 15th day of any month or if such 15th day is not --------------- a Business Day, the first Business Day immediately following, commencing in August 1998. REO PROPERTY: Real Estate property owned by the Trust Fund as a ------------ result of foreclosure on an Obligor's SBA Loan. REPOSSESSED COLLATERAL: Items of Collateral owned by the Trust as a ---------------------- result of legal action enforcing the lien on the Collateral resulting from a default on the related Obligor's SBA Loan. RESIDENTIAL PROPERTY: Any one or more of the following, (i) single -------------------- family dwelling unit not attached in any way to another unit, (ii) row house, (iii) two-family house, (iv) low-rise condominium, (v) planned unit development, (vi) three- or four-family house, (vii) high-rise condominium, (viii) mixed use building or (ix) manufactured home (as defined in the I-19 FNMA/FHLMC Seller-Servicers' Guide) to the extent that it constitutes real property in the state in which it is located. RESPONSIBLE OFFICER: When used with respect to the Trustee, any ------------------- officer assigned to the Corporate Trust Office, including any Vice President, Assistant Vice President, any Assistant Secretary, any trust officer or any other officer of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also, with respect to a particular matter, any other officer to whom such matter is referred because of such officer's knowledge of and familiarity with the particular subject. When used with respect to the Bank, the President, any Vice President, Assistant Vice President, or any Secretary or Assistant Secretary. RULE 144A CERTIFICATION: A letter substantially in the form attached ----------------------- hereto as Exhibit O-2. SAIF: The Savings Association Insurance Fund, or any successor ---- thereto. SBA: The United States Small Business Administration, an agency of --- the United States Government. SBA FILE: As described in Exhibit A. -------- SBA Form 1086: The Secondary Participation Guaranty and Certification ------------- Agreement on SBA Form 1086, pursuant to which investors purchase the Guaranteed Interest. SBA LOAN: An individual loan, the Unguaranteed Interest of which is -------- transferred to the Trust Fund pursuant to this Agreement, together with the rights and obligations of a holder thereof and payments thereon and proceeds therefrom, the SBA Loans originally subject to this Agreement being identified on the SBA Loan Schedule as set forth on Exhibit H. Any loan which, although intended by the parties hereto to have been, and which purportedly was, transferred and assigned to the Trust Fund by the Seller (as indicated by the SBA Loan Schedule), in fact was not transferred and assigned to the Trust Fund for any reason whatsoever, including, without limitation, the incorrectness of the statement set forth in Section 3.02(h) hereof with respect to the loan, shall nevertheless be considered an "SBA Loan" for all purposes of this Agreement. For the purposes of this Agreement, references to SBA Loans are equivalent to references to SBA (S) 7(a) Loans. SBA LOAN INTEREST RATE: With respect to any date of determination, ---------------------- the then applicable annual rate of interest borne I-20 by an SBA Loan, pursuant to its terms, which, as of the Cut-Off Date, is shown on the SBA Loan Schedule. SBA LOAN SCHEDULE: The schedule of SBA Loans listed on Exhibit H ----------------- attached hereto and delivered to the Trustee on the Closing Date or Subsequent Transfer Date, as the case may be, such schedule identifying each SBA Loan by address of the related premises, and the name of the Obligor and setting forth as to each SBA Loan the following information: (i) the Principal Balance as of the close of business on the Cut-Off Date, (ii) the Account Number, (iii) the original principal amount of the SBA Loan, (iv) the SBA Loan date and original number of months to maturity, in months, (v) the SBA Loan Interest Rate as of the Cut-Off Date or Subsequent Cut-Off Date, as the case may be, and guaranteed rate payable to the Registered Holder and the FTA, (vi) when the first Monthly Payment was due, (vii) the Monthly Payment as of the Cut-Off Date or Subsequent Cut-Off Date, as the case may be, (viii) the remaining number of months to maturity as of the Cut-Off Date or Subsequent Cut-Off Date, as the case may be, (ix) the Unguaranteed Percentage, (x) the SBA loan number, (xi) the margin which is added to the Prime Rate to determine the SBA Loan Interest Rate or, in the case of fixed rate SBA Loans, the rate of interest specified in the related SBA Note, and (xii) the lifetime minimum and maximum SBA Loan Interest Rates, if applicable. SBA NOTE: The note or other evidence of indebtedness evidencing the -------- indebtedness of an Obligor under an SBA Loan. SBA RULES AND REGULATIONS: The Small Business Act, as amended, ------------------------- codified at 15 U.S.C. 631 et. seq., all rules and regulations promulgated from -------- time to time thereunder, the Loan Guaranty Agreement and SBA Standard Operating Procedures and official notices as from time to time are in effect. SBA (S) 7(a) LOAN: An SBA Loan originated pursuant to Section 7(a) of ----------------- the SBA Rules and Regulations. For purposes of this Agreement, references to SBA (S) 7(a) Loans are equivalent to references to SBA Loans. SECURITIES ACT: The Securities Act of 1933, as amended. -------------- SECURITIES LEGEND: "THIS CERTIFICATE HAS NOT BEEN AND WILL NOT BE ----------------- REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR UNDER ANY STATE SECURITIES OR BLUE SKY LAW OF ANY STATE. THE HOLDER HEREOF, BY PURCHASING THIS CERTIFICATE, AGREES THAT THIS CERTIFICATE MAY BE REOFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY IN COMPLIANCE WITH THE SECURITIES ACT AND OTHER APPLICABLE LAWS AND ONLY (1) (A) I-21 PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A") TO A PERSON THAT THE HOLDER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A (A "QIB"), PURCHASING FOR ITS OWN ACCOUNT OR A QIB PURCHASING FOR THE ACCOUNT OF A QIB, WHOM THE HOLDER HAS INFORMED THAT THE REOFFER, RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, OR (B) IN CERTIFICATED FORM TO AN INSTITUTIONAL "ACCREDITED INVESTOR" (WITHIN THE MEANING OF RULE 501(a)(1)-(3) OR (7) UNDER THE SECURITIES ACT) PURCHASING FOR INVESTMENT AND NOT FOR DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, IN EACH CASE, SUBJECT TO (X) THE RECEIPT BY THE TRUSTEE OF A LETTER SUBSTANTIALLY IN THE FORM PROVIDED IN THE AGREEMENT AND (Y) THE RECEIPT BY THE TRUSTEE OF SUCH OTHER EVIDENCE ACCEPTABLE TO THE TRUSTEE THAT SUCH REOFFER, RESALE, PLEDGE OR TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT AND OTHER APPLICABLE LAWS OR IN EACH CASE IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE UNITED STATES AND SECURITIES AND BLUE SKY LAWS OF ANY STATE OF THE UNITED STATES AND ANY OTHER APPLICABLE JURISDICTION, (2) PURSUANT TO ANOTHER EXEMPTION AVAILABLE UNDER THE SECURITIES ACT AND IN ACCORDANCE WITH ANY APPLICABLE STATE SECURITIES LAWS, OR (3) PURSUANT TO A VALID REGISTRATION STATEMENT. " SELLER: First National Bank of New England, and its successors and ------ assigns as Seller hereunder. SERIES: 1998-1. ------ SERVICER: First National Bank of New England, and its successors and -------- assigns as Servicer hereunder. SERVICER'S CERTIFICATE: The certificate as defined in Section 6.09. ---------------------- SERVICING ADVANCES: All reasonable and customary "out-of-pocket" ------------------ costs and expenses incurred in the performance by the Servicer of its servicing obligations, including, but not limited to, the cost of (i) the preservation, restoration and protection of the Mortgaged Property or other Collateral, (ii) any enforcement or judicial proceedings, including foreclosures, (iii) the management and liquidation of the Foreclosed Property or Repossessed Collateral, (iv) compliance with the obligations under clause (iv) of Section 5.01(a) and Sections 5.02 and 5.07, which Servicing Advances are reimbursable to the Servicer to the extent provided in Section 5.04(b) and (v) in connection with the liquidation of an SBA Loan, expenditures relating to the purchase or maintenance of any Prior Lien, for all of which costs and expenses the Servicer is entitled to reimbursement thereon up to a maximum rate per annum equal to the related SBA Loan Interest Rate, except that any amount of such interest accrued at a rate in excess of the weighted average Class A and Class B Remittance I-22 Rates with respect to the Remittance Date on or prior to which the Unguaranteed Percentage of the Net Liquidation Proceeds will be distributed shall be reimbursable only from Excess Proceeds. SERVICING FEE: As to each SBA Loan, the annual fee payable to the ------------- Servicer. Such fee shall be calculated and payable monthly from the amounts received in respect of interest on the Guaranteed Interest and the Unguaranteed Interest of such SBA Loan, shall accrue at the rate of 0.40% per annum of the entire principal balance of such SBA Loan and shall be computed on the basis of the same principal amount and for the period respecting which any related interest payment on an SBA Loan is computed. The Servicing Fee is payable solely from the interest portion of related (i) Monthly Payments, (ii) Liquidation Proceeds or (iii) Released Mortgaged Property Proceeds collected by the Servicer, or as otherwise provided in Section 5.04. The Servicing Fee includes any servicing fees owed or payable to any Subservicer. SERVICING OFFICER: Any officer of the Servicer involved in, or ----------------- responsible for, the administration and servicing of the SBA Loans whose name appears on a list of servicing officers furnished to the Trustee by the Servicer on the Closing Date hereof and as such list may from time to time be amended. SPECIAL REMITTANCE DATE: September 15, 1998. ----------------------- SPECIFIED SPREAD ACCOUNT REQUIREMENT: The maximum amount of Spread ------------------------------------ Account Balance required to be on deposit at any time in the Spread Account which, with respect to any Remittance Date, shall be equal to the sum of (i) the then outstanding Principal Balance with respect to all SBA Loans 180 days or more delinquent and (ii) the greater of (a) 7.0% of the then outstanding Pool Principal Balance or (b) 2.0% of the Original Pool Principal Balance; provided, however, that for purposes of clauses (i) and (ii)(a), there shall be excluded the Principal Balance of SBA Loans which have been delinquent 24 months or have been determined to be uncollectible, in whole or in part, by the Servicer, to the extent that the Certificateholders have previously received the Principal Balance of such SBA Loans; provided, however, that in no event shall the Spread Account Balance exceed the then outstanding Pool Principal Balance. SPREAD ACCOUNT: The Spread Account established in accordance with the -------------- terms of the Spread Account Agreement and maintained by the Spread Account Custodian for distribution in accordance with the provisions of Section 6.02 hereof. SPREAD ACCOUNT AGREEMENT: The Agreement dated as of June 30, 1998 by ------------------------ and among the Spread Account Depositor and the I-23 Spread Account Custodian, substantially in the form attached hereto as Exhibit N, as amended from time to time by the parties thereto. SPREAD ACCOUNT CUSTODIAN: Marine Midland Bank, in its capacity as ------------------------ Spread Account Custodian under the Spread Account Agreement, or any successor thereto. SPREAD ACCOUNT DEPOSITOR: FNBNE SBA Holdings, Inc., a wholly-owned ------------------------ subsidiary of the Bank. SPREAD ACCOUNT BALANCE: As of any date of determination, the sum of ---------------------- the aggregate amount then on deposit in the Spread Account. SPREAD ACCOUNT EXCESS: As defined in Section 6.02(b)(iii). --------------------- SUBSEQUENT CUT-OFF DATE: The beginning of business on each date ----------------------- specified in a Subsequent Transfer Agreement with respect to those Subsequent SBA Loans which are transferred and assigned to the Trust Fund pursuant to the related Subsequent Transfer Agreement. SUBSEQUENT SBA LOANS: The SBA Loans sold to the Trust Fund pursuant -------------------- to Section 2.09, which shall be listed on the Schedule of SBA Loans attached to the related Subsequent Transfer Agreement. SUBSEQUENT TRANSFER AGREEMENT: Each Subsequent Transfer Agreement ----------------------------- dated as of a Subsequent Transfer Date executed by the Trustee and the Seller, by which Subsequent SBA Loans are sold and assigned to the Trust Fund. SUBSEQUENT TRANSFER DATE: The date specified as such in each ------------------------ Subsequent Transfer Agreement. SUBSERVICER: Any person with whom the Servicer has entered into a ----------- Subservicing Agreement and who satisfies any requirements set forth in Section 5.01(b) hereof in respect of the qualification of a Subservicer. SUBSERVICING AGREEMENT: Any agreement between the Servicer and any ---------------------- Subservicer relating to subservicing and/or administration of certain SBA Loans as provided in Section 5.01(b), a copy of which shall be delivered, along with any modifications thereto, to the Trustee and the SBA. SUBSTITUTION ADJUSTMENT: As to any date on which a substitution ----------------------- occurs pursuant to Sections 2.05 or 3.03, the amount I-24 (if any) by which the aggregate unguaranteed portions of the principal balances (after application of principal payments received on or before the date of substitution) of any Qualified Substitute SBA Loans as of the date of substitution are less than the aggregate of the Principal Balance of the related Deleted SBA Loans. TAX RETURN: The federal income tax return to be filed on behalf of ---------- the Trust Fund together with any and all other information reports or returns that may be required to be furnished to the Certificateholders or filed with the Internal Revenue Service or any other governmental taxing authority under any applicable provision of federal, state or local tax laws. TERMINATION PRICE: The price defined in Section 11.01 ----------------- hereof. TRANSFEREE LETTER: A letter substantially in the form attached hereto ----------------- as Exhibit O-1. TRUST FUND: The segregated pool of assets subject hereto, ---------- constituting the trust created hereby and to be administered hereunder, consisting of: (i) the Unguaranteed Interest of such SBA Loans as from time to time are subject to this Agreement, together with, subject to the Multi-Party Agreement, the SBA Files relating thereto and all proceeds thereof, (ii) the Unguaranteed Interest of such assets (including any Permitted Instruments) as from time to time are identified as Foreclosed Property, Repossessed Collateral or are deposited in or constitute the Certificate Account, (iii) the Unguaranteed Interests of any Insurance Proceeds under all insurance policies with respect to the SBA Loans required to be maintained pursuant to this Agreement, (iv) the Unguaranteed Interest of any Liquidation Proceeds and (v) the Unguaranteed Interest of any Released Mortgaged Property Proceeds, including all earnings thereon and proceeds thereof. Amounts deposited in the Principal and Interest Account, Spread Account, Pre-Funding Account and Capitalized Interest Account shall be held by the Trustee or the Spread Account Custodian, as the case may be, but shall not constitute part of the Trust Fund. Also, neither the Servicing Fee nor the Premium Protection Fee shall constitute part of the Trust Fund. TRUSTEE: Marine Midland Bank, or its successor in interest, or any ------- successor trustee appointed as herein provided. TRUSTEE'S DOCUMENT FILE: The documents delivered pursuant to Section ----------------------- 2.04. I-25 UNGUARANTEED INTEREST: That portion of an SBA Loan not guaranteed by --------------------- the SBA pursuant to the SBA Rules and Regulations. UNGUARANTEED PERCENTAGE: With respect to any SBA (S) 7(a) Loan, the ----------------------- quotient, expressed as a percentage, the numerator of which shall be the principal portion of the Unguaranteed Interest of such SBA (S) 7(a) Loan as of the Cut-Off Date (or, in the case of a Subsequent SBA Loan, as of the Subsequent Cut-Off Date) and the denominator of which shall be the sum of the principal portion of the Unguaranteed Interest and the principal portion of the Guaranteed Interest of such SBA (S) 7(a) Loan as of the Cut-Off Date (or, in the case of a Subsequent SBA Loan, as of the Subsequent Cut-Off Date). I-26 ARTICLE II SALE AND CONVEYANCE OF THE TRUST FUND ------------------------------------- Section 2.01 Sale and Conveyance of Trust Fund. --------------------------------- (a) The Seller hereby sells, transfers, assigns, sets over and conveys to the Trustee without recourse and for the benefit of the SBA and the Certificateholders, as their interests may appear, subject to the terms of this Agreement and the Multi-Party Agreement, all of the right, title and interest of the Seller in and to the Unguaranteed Interests of the Initial SBA Loans and the Subsequent SBA Loans and all other assets included or to be included in the Trust Fund. (b) The rights of the Certificateholders to receive payments with respect to the SBA Loans in respect of the Certificates, and all ownership interests of the Certificateholders in such payments, shall be as set forth in this Agreement. The Servicing Fee shall not constitute part of the Trust Fund and Certificateholders shall have no interest in, and are not entitled to receive any portion of, the Servicing Fee. Section 2.02 Possession of SBA Files. ----------------------- (a) Upon the issuance of the Certificates, the ownership of each SBA Note, the Mortgage and the contents of the related SBA File relating to the Initial SBA Loans is, and upon each Subsequent Transfer Date the ownership of each Mortgage Note, the Mortgage and the contents of the related Mortgage File relating to the applicable Subsequent SBA Loans will be, vested in the Trustee for the benefit of the SBA and the Certificateholders, as their interests may appear. (b) Pursuant to Section 2.04, with respect to the Initial SBA Loans, the Seller has delivered or caused to be delivered, and, on each Subsequent Transfer Date, the Seller will deliver or cause to be delivered, each SBA Note relating to an SBA (S) 7(a) Loan to the FTA. Section 2.03 Books and Records. ----------------- The sale of the Unguaranteed Interest of each SBA Loan shall be reflected on the Seller's balance sheets and other financial statements as a sale of assets by the Seller and Seller shall respond to any third-party inquiry that such transfer is so reflected as a sale. The Seller shall be responsible for maintaining, and shall maintain, a complete set of books and records for each SBA Loan which shall be clearly marked to II-1 reflect the ownership of the Unguaranteed Interest in each SBA Loan by the Trustee for the benefit of the Certificateholders. Section 2.04 Delivery of SBA Loan Documents. ------------------------------ The Seller, (i) contemporaneously with the delivery of this Agreement, has delivered or caused to be delivered to the Trustee or, with respect to the SBA Notes relating to the SBA (S) 7(a) Loans being delivered pursuant to (a) below, to the FTA, each of the following documents for each Initial SBA Loan and (ii) on each Subsequent Transfer Date, will deliver or cause to be delivered to the Trustee, or with respect to the SBA Notes relating to the SBA (S) 7(a) Loans being delivered pursuant to paragraph (a) below, to the FTA, each of the following documents for each Subsequent SBA Loan: (a) The original SBA Note, endorsed by means of an allonge as follows: "Pay to the order of Marine Midland Bank, and its successors and assigns, as trustee under that certain Pooling and Servicing Agreement dated as of May 31, 1998, for the benefit of the United States Small Business Administration and holders of First National Bank of New England SBA Loan-Backed Certificates, Series 1998-1, Class A and Class B, as their respective interests may appear, without recourse" and signed, by facsimile or manual signature, in the name of the Seller by a Responsible Officer, with all prior and intervening endorsements showing a complete chain of endorsement from the originator to the Seller, if the Seller was not the originator; provided, however, that in lieu of -------- ------- the original SBA Note relating to one SBA Loan, with an aggregate Principal Balance as of the Cut-Off Date of approximately $136,997.25, as identified in the list delivered to the Trustee by the Seller on the Closing Date and set forth on Exhibit P hereto, the Seller may deliver a lost note affidavit and, if a copy exists, a copy of the original SBA Note. (b) With respect to those SBA Loans secured by Mortgaged Properties, either: (i) the original Mortgage, with evidence of recording thereon, (ii) a copy of the Mortgage certified as a true copy by a Responsible Officer of the Seller where the original has been transmitted for recording until such time as the original is returned by the public recording office or duly licensed title or escrow officer or (iii) a copy of the Mortgage certified by the public recording office in those instances where the original recorded Mortgage has been lost. (c) With respect to those SBA Loans secured by Mortgaged Properties, either: (i) the original Assignment of Mortgage from the Seller endorsed as follows: "Marine Midland Bank, ("Assignee") its successors and assigns, as trustee under the Pooling and Servicing Agreement dated as of May 31, 1998 II-2 subject to the Multi-Party Agreement dated as of May 31, 1998" with evidence of recording thereon (provided, however, that where permitted under the laws of the jurisdiction wherein the Mortgaged Property is located, the Assignment of Mortgage may be effected by one or more blanket assignments for SBA Loans secured by Mortgaged Properties located in the same county), or (ii) a copy of such Assignment of Mortgage certified as a true copy by a Responsible Officer of the Seller where the original has been transmitted for recording (provided, -------- however, that where the original Assignment of Mortgage is not being delivered - ------- to the Trustee, such Responsible Officer may complete one or more blanket certificates attaching copies of one or more Assignments of Mortgage relating to the Mortgages originated by the Seller); (d) With respect to those SBA Loans secured by Mortgaged Properties, either: (i) originals of all intervening assignments, if any, showing a complete chain of title from the originator to the Seller, including warehousing assignments, with evidence of recording thereon if such assignments were recorded, (ii) copies of any assignments certified as true copies by a Responsible Officer of the Seller where the originals have been submitted for recording until such time as the originals are returned by the public recording officer, or (iii) copies of any assignments certified by the public recording office in any instances where the original recorded assignments have been lost; (e) With respect to those SBA Loans secured by Mortgaged Properties, either: (i) originals of all title insurance policies relating to the Mortgaged Properties to the extent the Seller obtained such policies or (ii) copies of any title insurance policies or other evidence of lien position, including but not limited to Policy Insurance Record of Title ("PIRT") policies, limited liability reports and lot book reports, to the extent the Seller obtains such policies or other evidence of lien position, certified as true by the Seller; (f) With respect to those SBA Loans secured by other items of Collateral, the original or a certified copy of all filed UCC financing statements securing such Collateral naming the Seller as "Secured Party;" (g) For all SBA Loans, blanket assignment of all Collateral securing the SBA Loan, including without limitation, all rights under applicable guarantees and insurance policies; (h) For all SBA Loans, irrevocable power of attorney of the Seller to the Trustee to execute, deliver, file or record and otherwise deal with the Collateral for the SBA Loans in accordance with the Agreement. The power of attorney will be delegable by the Trustee to the Servicer and any successor II-3 Servicer and will permit the Trustee or its delegate to prepare, execute and file or record UCC financing statements and notices to insurers; and (i) For all SBA Loans, blanket UCC-1 financing statements identifying by type all Collateral for the SBA Loans in the SBA Loan Pool and naming the Trustee as "Secured Party" and the Seller as the "Debtor". The UCC-1 financing statements will be filed promptly following the Closing Date in Connecticut and will be in the nature of protective notice filings rather than true financing statements. The Seller shall, within ten Business Days after the receipt thereof, and in any event, within one year of the Closing Date (or with respect to the Subsequent SBA Loans, within one year of the related Subsequent Transfer Date), unless such documents have been lost, deliver or cause to be delivered to the Trustee: (i) the original recorded Mortgage in those instances where a copy thereof certified by the Seller was delivered to the Trustee; (ii) the original recorded Assignment of Mortgage from the Seller to the Trustee, which, together with any intervening assignments of Mortgage, evidences a complete chain of title from the originator to the Trustee in those instances where copies thereof certified by the Seller were delivered to the Trustee; and (iii) any intervening assignments of Mortgage in those instances where copies thereof certified by the Seller were delivered to the Trustee. Notwithstanding anything to the contrary contained in this Section 2.04, in those instances where the public recording office retains the original Mortgage, Assignment of Mortgage or the intervening assignments of the Mortgage after it has been recorded, or if such document has been lost, the Seller shall be deemed to have satisfied its obligations hereunder upon delivery to the Trustee of a copy of such Mortgage, Assignment of Mortgage or assignments of Mortgage certified by the public recording office to be a true copy of the recorded original thereof. All SBA Loan documents held by the Trustee or the FTA, as the case may be, as to each SBA Loan are referred to herein as the "Trustee's Document File." Although it is the intent of the parties to this Agreement that the conveyance of the Seller's right, title and interest in and to the Unguaranteed Interests of the SBA Loans and other assets in the Trust Fund pursuant to this Agreement shall constitute a purchase and sale and not a loan, in the event that such conveyance is deemed to be a loan, it is the intent of the parties to this Agreement that the Seller shall be deemed to have granted, and hereby does grant, to the Trustee a first priority perfected security interest in all of the Seller's right, title and interest in, to and under the Unguaranteed Interests of the SBA Loans and other assets in the Trust Fund, II-4 and that this Agreement shall constitute a security agreement under applicable law. All recording required pursuant to this Section 2.04 shall be accomplished by and at the expense of the Servicer. Section 2.05 Acceptance by Trustee of the Trust Fund; Certain ------------------------------------------------ Substitutions; Certification by Trustee. --------------------------------------- (a) The SBA shall cause the FTA to execute and deliver on the Closing Date (or, with respect to the Subsequent SBA Loans, on the related Subsequent Closing Date), for each SBA (S) 7(a) Loan, an acknowledgment of receipt of the SBA Note by the FTA in the form attached as Exhibit 1 to the Multi-Party Agreement, and declares that the FTA will hold such documents and any amendments, replacements or supplements thereto, as agent for the benefit of the SBA and the Certificateholders. The Trustee agrees, for the benefit of the SBA and the Certificateholders, to review each Trustee's Document File within 90 days after the Closing Date or Subsequent Closing Date, as the case may be (or, with respect to any Qualified Substitute SBA Loan, within 45 days after the assignment thereof), and to deliver to the Certificateholders, the Seller, the Servicer and the SBA a certification in the form attached hereto as Exhibit F-1. Within 360 days after the Closing Date (or, with respect to any Qualified Substitute SBA Loan, within 360 days after the assignment thereof), the Trustee shall deliver to the Seller, the Servicer, the SBA, the Rating Agency and any Certificateholder who requests a copy from the Trustee a final certification in the form attached hereto as Exhibit F-2 evidencing the completeness of the Trustee's Document Files. (b) If the Trustee or the SBA, as the case may be, during the process of reviewing the Trustee's Document Files finds any document constituting a part of a Trustee's Document File which is not properly executed, has not been received, is unrelated to an SBA Loan identified in the SBA Loan Schedule, or does not conform in a material respect to the requirements of Section 2.04 or the description thereof as set forth in the SBA Loan Schedule, the Trustee or the SBA, as the case may be, shall promptly so notify the Seller and the Servicer. In performing any such review, the Trustee or the SBA, as the case may be, may conclusively rely on the Seller as to the purported genuineness of any such document and any signature thereon. It is understood that the scope of the Trustee's and the SBA's review of the SBA Files is limited solely to confirming that the documents listed in Section 2.04 have been executed and received and relate to the SBA Loans identified in the SBA Loan Schedule. The Seller agrees to use reasonable efforts to remedy a material defect in a II-5 document constituting part of an SBA File of which it is so notified by the Trustee or the SBA, as the case may be. If, however, within 60 days after the Trustee's or the SBA's notice to it respecting such material defect the Seller has not remedied the defect and such defect materially and adversely affects the value of the related SBA Loan, the Seller will (i) substitute in lieu of such SBA Loan a Qualified Substitute SBA Loan in the manner and subject to the conditions set forth in Section 3.03 or (ii) purchase the Unguaranteed Interest of such SBA Loan at a purchase price equal to the Principal Balance of such Unguaranteed Interest as of the date of purchase, plus 30 days' interest on such Principal Balance, computed at the Adjusted SBA Loan Remittance Rate as of the next succeeding Determination Date, plus any accrued unpaid Servicing Fees, Monthly Advances and Servicing Advances reimbursable to the Servicer, which purchase price shall be deposited in the Principal and Interest Account on the next succeeding Determination Date. (c) Upon receipt by the Trustee and the SBA of a certification of a Servicing Officer of the Servicer of such purchase and the deposit of the amounts described above in the Principal and Interest Account (which certification shall be in the form of Exhibit I hereto), the Trustee and the SBA shall release to the Servicer for release to the Seller the related Trustee's Document File and the Trustee and the SBA shall execute, without recourse, and deliver such instruments of transfer necessary to transfer such SBA Loan to the Seller. All costs of any such transfer shall be borne by the Servicer. (d) If in connection with taking any action the Servicer requires any item constituting part of the Trustee's Document File, or the release from the lien of the related SBA Loan of all or part of any Mortgaged Property or other Collateral, the Servicer shall deliver to the Trustee and the SBA a certificate to such effect in the form attached as Exhibit I hereto. Upon receipt of such certification, the Trustee or the SBA, as the case may be, shall deliver to the Servicer the requested documentation and the Trustee shall execute, without recourse, and deliver such instruments of transfer necessary to release all or the requested part of the Mortgaged Property or other Collateral from the lien of the related SBA Loan. On the Remittance Date in March of each year, the Trustee shall deliver to the Seller, the SBA and the Servicer a certification detailing all transactions with respect to the SBA Loans for which the Trustee holds a Trustee's Document File pursuant to this Agreement during the prior calendar year. Such certification shall list all Trustee's Document Files which were released by or returned to the Trustee or the FTA during the II-6 prior calendar year, the date of such release or return and the reason for such release or return. Section 2.06 [Intentionally Omitted] Section 2.07 Authentication of Certificates. ------------------------------ The Trustee acknowledges the assignment to it on behalf of the Trust Fund of the Unguaranteed Interests in the SBA Loans and the delivery to the Trustee and the FTA of the Trustee's Document Files and, concurrently with such delivery, has authenticated or caused to be authenticated and delivered to or upon the order of the Seller, in exchange for the Unguaranteed Interests in the SBA Loans, the Trustee's Document Files and the other assets included in the definition of Trust Fund, Certificates duly authenticated by the Trustee in authorized denominations. Section 2.08 Fees and Expenses of the Trustee. -------------------------------- The fees and expenses of the Trustee including (i) the annual fees of the Trustee, payable quarterly in advance, and subject to rebate to the Servicer as additional servicing compensation hereunder for any fraction of a calendar quarter in which this Agreement terminates, (ii) any other fees and expenses to which the Trustee is entitled pursuant to this Agreement or its written agreement with the Seller, and (iii) reimbursements to the Servicer for any advances made by the Servicer to the Expense Account pursuant to Section 6.03 hereof, shall be paid from the Expense Account in the manner set forth in Section 6.03 hereof; provided, however, that the Seller shall be liable for any -------- ------- expenses of the Trust Fund incurred prior to the Closing Date. The Servicer and the Trustee hereby covenant with the Certificateholders that every material contract or other material agreement entered into by the Trustee, or the Servicer, acting as attorney-in-fact for the Trustee, on behalf of the Trust Fund shall expressly state therein that no Certificateholder shall be personally liable in connection with such contract or agreement. Section 2.09 Sale and Conveyance of the Subsequent SBA Loans. ----------------------------------------------- (a) Subject to the conditions set forth in paragraph (b) below, in consideration of the Trustee's delivery on the related Subsequent Transfer Dates to or upon the order of the Seller of all or a portion of the balance of funds in the Pre-Funding Account, the Seller shall on any Subsequent Transfer Date sell, transfer, assign, set over and otherwise convey without recourse, to the Trustee all right, title and interest of the Seller in and to the Unguaranteed Interest of each Subsequent SBA II-7 Loan listed on the SBA Loan Schedule delivered by the Seller on such Subsequent Transfer Date, all their right, title and interest in and to principal collected and interest accruing on the Unguaranteed Interest of each such Subsequent SBA Loan on and after the related Subsequent Cut-Off Date and all their right, title and interest in the Unguaranteed Interest in all insurance policies; provided, -------- however, that the Seller reserve and retain all their right, title and interest - ------- in and to principal (including Principal Prepayments) collected and interest accruing on each such Subsequent SBA Loan prior to the related Subsequent Cut- Off Date. The transfer by the Seller of the Unguaranteed Interest of the Subsequent SBA Loans set forth on the SBA Loan Schedule to the Trustee shall be absolute and shall be intended by all parties hereto to be treated as a sale by the Seller. Although it is the intent of the parties to this Agreement that the conveyance of the Seller's right, title and interest in and to the Unguaranteed Interests of the SBA Loans and other assets in the Trust Fund pursuant to this Agreement shall constitute a purchase and sale and not a loan, in the event that such conveyance is deemed to be a loan, it is the intent of the parties to this Agreement that the Seller shall be deemed to have granted, and hereby does grant, to the Trustee a first priority perfected security interest in all of the Seller's right, title and interest in, to and under the Unguaranteed Interests of the SBA Loans and other assets in the Trust Fund, and that this Agreement shall constitute a security agreement under applicable law. The amount released from the Pre-Funding Account shall be one-hundred percent (100%) of the aggregate Principal Balances as of the related Subsequent Transfer Date of the Subsequent SBA Loans so transferred. (b) The Seller shall transfer to the Trustee the Unguaranteed Interest of the Subsequent SBA Loans and the other property and rights related thereto described in paragraph (a) above only upon the satisfaction of each of the following conditions on or prior to the related Subsequent Transfer Date: (i) the Seller shall have provided the Trustee with a timely Addition Notice and shall have provided any information reasonably requested by it with respect to the Subsequent SBA Loans; (ii) the Seller shall have delivered to the Trustee a duly executed written assignment (including an acceptance by the Trustee) that shall include SBA Loan Schedules, listing the Subsequent SBA Loans and any other exhibits listed thereon; II-8 (iii) the Seller shall have deposited in the Principal and Interest Account all collections in respect of the Subsequent SBA Loans received on or after the related Subsequent Cut-Off Date; (iv) as of each Subsequent Transfer Date, the Bank was not insolvent nor will it have been made insolvent by such transfer nor is it aware of any pending insolvency; (v) such addition will not result in a material adverse tax consequence to the Trust Fund or the Holders of the Certificates; (vi) the Pre-Funding Period shall not have terminated; (vii) the Seller shall have delivered to the Trustee an Officer's Certificate confirming the satisfaction of each condition precedent specified in this paragraph (b) and in the related Subsequent Transfer Agreement; (viii) the Seller shall have delivered to the Rating Agency and the Trustee, Opinions of Counsel with respect to the transfer of the Subsequent SBA Loans substantially in the form of the Opinions of Counsel delivered to the Trustee on the Closing Date (bankruptcy, corporate and tax opinions); and (ix) the FTA shall have delivered, pursuant to Section 2.05(a) hereof, an acknowledgment of receipt of the SBA Note relating to such SBA (S) 7(a) Loan in the form attached as Exhibit 1 to the Multi-Party Agreement. (c) The obligation of the Trust Fund to purchase the Unguaranteed Interest of a Subsequent SBA Loan on any Subsequent Transfer Date is subject to the requirement, as evidenced by a certificate from a Responsible Officer of the Seller, that such Subsequent SBA Loan conforms in all material respects to the representations and warranties concerning the individual Initial SBA Loans set forth in Sections 3.01 and 3.02 (except that any reference therein to the Cut- Off Date shall be deemed a reference to the applicable Subsequent Cut-Off Date) and that the inclusion of all Subsequent SBA Loans being transferred to the Trust Fund on such Subsequent Transfer Date will not change, in any material respect, the characteristics of the Initial SBA Loans, in the aggregate, set forth in Sections 3.01 and 3.02 or in the II-9 Confidential Placement Memorandum under the headings "Summary of Terms -- The SBA Loan Pool" and "The SBA Loan Pool." Further, each Subsequent SBA Loan must be an SBA (S) 7(a) Loan. (d) In connection with the transfer and assignment of the Subsequent SBA Loans, the Seller agrees to satisfy the conditions set forth in Sections 2.01, 2.02, 2.03, 2.04 and 2.05. (e) In connection with each Subsequent Transfer Date, on the Remittance Dates in August and September 1998 and the Special Remittance Date, the Seller shall determine, and the Trustee shall cooperate with the Seller in determining (i) the amount and correct dispositions of the Capitalized Interest Requirements, Overfunded Interest Amounts, and Pre-Funding Earnings and (ii) any other necessary matters in connection with the administration of the Pre-Funding Account and of the Capitalized Interest Account. If any amounts are incorrectly released to the Seller from the Capitalized Interest Account, the Seller shall immediately repay such amounts to the Trustee. Section 2.10 Optional Repurchase of Defaulted SBA Loans. ------------------------------------------ The Servicer shall have the right, but not the obligation, to repurchase the Unguaranteed Interest of any Defaulted SBA Loan for a purchase price equal to the Principal Balance of such Unguaranteed Interest as of the date of repurchase, plus 30 days' interest on such Principal Balance, computed at the Adjusted SBA Loan Remittance Rate as of the next succeeding Determination Date, plus any accrued unpaid Servicing Fees, Monthly Advances and Servicing Advances reimbursable to the Servicer, which purchase price shall be deposited in the Principal and Interest Account on the next succeeding Determination Date. Any such repurchase shall be accomplished in the manner specified in Section 2.05(b). In no event shall the aggregate Principal Balance of the Unguaranteed Interests of all Defaulted SBA Loans purchased pursuant to this Section 2.10 exceed 5% of the sum of (i) the Original Pool Principal Balance and (ii) the Original Pre-Funded Amount. II-10 ARTICLE III REPRESENTATIONS AND WARRANTIES ------------------------------ Section 3.01 Representations of the Bank. ---------------------------- The Bank hereby represents and warrants to the Trustee and the Certificateholders as of the Closing Date: (a) The Bank is a nationally chartered bank duly organized and validly existing under the laws of the United States and has all licenses necessary to carry on its business as now being conducted and is licensed and qualified in each state where the laws of such state require licensing or qualification in order to conduct business of the type conducted by the Bank and perform its obligations hereunder; the Bank has all requisite power and authority to execute and deliver this Agreement and to perform in accordance herewith and therewith; the execution, delivery and performance of this Agreement (including all instruments of transfer to be delivered pursuant to this Agreement) by the Bank and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action; this Agreement evidences the valid, binding and enforceable obligation of the Bank; and all requisite corporate action has been taken by the Bank to make this Agreement valid, binding and enforceable upon the Bank in accordance with its terms, subject to the effect of bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally or the application of equitable principles in any proceeding, whether at law or in equity, none of which will affect the ownership of the SBA Loans by the Trustee, as trustee. (b) All actions, approvals, consents, waivers, exemptions, variances, franchises, orders, permits, authorizations, rights and licenses required to be taken, given or obtained, as the case may be, by or from any federal, state or other governmental authority or agency (other than any such actions, approvals, etc., under any state securities laws, real estate syndication or "Blue Sky" statutes, as to which the Bank makes no such representation or warranty), that are necessary or advisable in connection with the purchase and sale of the Certificates and the execution and delivery by the Bank of the documents to which it is a party, have been duly taken, given or obtained, as the case may be, are in full force and effect on the date hereof, are not subject to any pending proceedings or appeals (administrative, judicial or otherwise) and either the time within which any appeal therefrom may be taken or review thereof may be obtained has expired or no review thereof may be obtained or appeal therefrom taken, and are adequate to authorize III-1 the consummation of the transactions contemplated by this Agreement and the other documents on the part of the Bank and the performance by the Bank of its obligations under this Agreement and such of the other documents to which it is a party; (c) The consummation of the transactions contemplated by this Agreement will not result in the breach of any terms or provisions of the articles of association or by-laws of the Bank or result in the breach of any term or provision of, or conflict with or constitute a default under or result in the acceleration of any obligation under, any material agreement, indenture or loan or credit agreement or other material instrument to which the Bank or its property is subject, or result in the violation of any law, rule, regulation, order, judgment or decree to which the Bank or its property is subject; (d) Neither this Agreement nor any statement, report or other document furnished or to be furnished pursuant to this Agreement or in connection with the transactions contemplated hereby and thereby contains any untrue statement of material fact or omits to state a material fact necessary to make the statements contained herein or therein not misleading in light of the circumstances under which they were made; (e) The Bank does not believe, nor does it have any reason or cause to believe, that it cannot perform each and every covenant contained in this Agreement; (f) There is no action, suit, proceeding or investigation pending or, to the best of the Bank's knowledge, threatened against the Bank which, either in any one instance or in the aggregate, may (i) result in any material adverse change in the business, operations, financial condition, properties or assets of the Bank or in any material impairment of the right or ability of the Bank to carry on its business substantially as now conducted, or in any material liability on the part of the Bank or of any action taken or to be taken in connection with the obligations of the Bank contemplated herein, or which would be likely to impair materially the ability of the Bank to perform under the terms of this Agreement or (ii) which would draw into question the validity of this Agreement or the SBA Loans; (g) The Trust Fund will not constitute an "investment company" within the meaning of the Investment Company Act of 1940, as amended; (h) The Bank is not in default with respect to any order or decree of any court or any order, regulation or demand of any federal, state, municipal or governmental agency, which default might have consequences that would materially and III-2 adversely affect the condition (financial or other) or operations of the Bank or its properties or might have consequences that would materially and adversely affect its performance hereunder; (i) The statements contained in the Confidential Placement Memorandum which describe the Bank or the SBA Loans or matters or activities for which the Bank is responsible in accordance with the Confidential Placement Memorandum, this Agreement and all documents referred to therein or herein or delivered in connection therewith or herewith, or which are attributable to the Bank therein or herein are true and correct in all material respects, and the Confidential Placement Memorandum does not contain any untrue statement of a material fact with respect to the Bank or the SBA Loans and does not omit to state a material fact necessary to make the statements contained therein with respect to the Bank or the SBA Loans not misleading in light of the circumstances under which they were made. The Bank is not aware that the Confidential Placement Memorandum contains any untrue statement of a material fact or omits to state any material fact necessary to make the statements contained therein not misleading in light of the circumstances under which they were made. There is no fact peculiar to the Bank or the SBA Loans and known to the Bank that materially adversely affects or in the future may (so far as the Bank can now reasonably foresee) materially adversely affect the Bank or the SBA Loans or the ownership interests therein represented by the Certificates that has not been set forth in the Confidential Placement Memorandum; (j) No Certificateholder is subject to Connecticut state licensing requirements solely by virtue of holding the Certificates; (k) The transfer, assignment and conveyance of the SBA Notes and the Mortgages by the Bank pursuant to this Agreement are not or, with respect to the Subsequent SBA Loans, will not be, subject to the bulk transfer laws or any similar statutory provisions in effect in any applicable jurisdiction and do not violate the SBA Rules and Regulations; (l) The origination and collection practices used by the Bank with respect to each SBA Note and Mortgage relating to the Initial SBA Loans have been, and the origination and collection practices to be used by the Bank with respect to each SBA Note and Mortgage relating to the Subsequent SBA Loans will have been, in all material respects legal, proper, prudent and customary in the SBA loan origination and servicing business; (m) Each Initial SBA Loan was, and each Subsequent SBA Loan will be, selected from among the existing SBA loans in the III-3 Bank's portfolio at the date hereof or, in the case of the Subsequent SBA Loans, at the related Subsequent Cut-Off Date, in a manner not designed to adversely affect the Certificateholders; (n) The Bank received fair consideration and reasonably equivalent value or, in the case of the Subsequent SBA Loans, will have received fair consideration and reasonably equivalent value, in exchange for the sale of the Unguaranteed Interest of the SBA Loans evidenced by the Certificates; (o) Neither the Bank nor any of its affiliates sold or, in the case of the Subsequent SBA Loans, will have sold any interest in any SBA Loan evidenced by the Certificates with any intent to hinder, delay or defraud any of their respective creditors; (p) The Bank is solvent, and the Bank will not be rendered insolvent as a result of the transfer of the SBA Loans to the Trust Fund or the sale of the Certificates; and (q) The chief executive office and legal name of the Bank is as set forth on the respective UCC-1 financing statement filed on behalf of the Bank pursuant to Section 2.04(h), such office is the place where the Bank is "located" for the purposes of Section 9-103(3)(d) of the Uniform Commercial Code as in effect in the State of New York, and neither the location of such office nor the legal name of the Bank has changed in the past four months. Section 3.02 Individual SBA Loans . -------------------- The Bank hereby represents and warrants to the Trustee, and the Certificateholders, with respect to each Initial SBA Loan originated or acquired by the Bank, as of the Closing Date, and with respect to each Subsequent SBA Loan originated by the Bank, as of the related Subsequent Transfer Date: (a) The information with respect to each SBA Loan set forth in the SBA Loan Schedule is true and correct; (b) All of the original or certified documentation set forth in Section 2.04 (including all material documents related thereto) has been or will be delivered to the Trustee or the FTA, on behalf of the Trustee, on the Closing Date or as otherwise provided in Section 2.04; (c) Each Mortgaged Property serving as the primary Collateral for an SBA Loan is improved by a Commercial Property or a Residential Property and does not constitute other than real property under state law; III-4 (d) Except for Initial SBA Loans (and up to 10 Subsequent SBA Loans) that were purchased and reunderwritten by the Bank, each SBA Loan has been originated by the Bank, in its capacity as Seller and each SBA Loan is being serviced by the Bank, in its capacity as Servicer; (e) Each SBA Loan is an SBA (S) 7(a) Loan; (f) Except for 3 Initial SBA Loans that bear fixed rates of interest, the SBA Loan Interest Rates adjust monthly to equal the then applicable Prime Rate plus the margin set forth in the related SBA Note. Each adjustable rate SBA Note will, with respect to principal payments, adjust monthly to provide for a schedule of Monthly Payments which are, if timely paid, sufficient to fully amortize the principal balance of such SBA Loan on its respective maturity date; (g) With respect to those SBA Loans secured by a Mortgaged Property, each Mortgage is a valid and subsisting lien of record on the Mortgaged Property subject only to any applicable Prior Liens on such Mortgaged Property and subject in all cases to such exceptions that are generally acceptable to banking institutions in connection with their regular commercial lending activities, and such other exceptions to which similar properties are commonly subject and which do not individually, or in the aggregate, materially and adversely affect the benefits of the security intended to be provided by such Mortgage; (h) Immediately prior to the transfer and assignment herein contemplated, the Bank held good and indefeasible title to, and was the sole owner of, the Unguaranteed Interest of each SBA Loan conveyed by the Bank subject to no liens, charges, mortgages, encumbrances or rights of others except as set forth in Sections 3.02(g) or 3.02(kk) or other liens which will be released simultaneously with such transfer and assignment; and immediately upon the transfer and assignment herein contemplated, the Trustee will hold good and indefeasible title, to, and be the sole owner of, each SBA Loan subject to no liens, charges, mortgages, encumbrances or rights of others except (i) as set forth in Sections 3.02(g) or 3.02(kk), (ii) the interests of the SBA or (iii) other liens which will be released simultaneously with such transfer and assignment; (i) As of the Cut-Off Date (or, with respect to any Subsequent SBA Loan, as of the related Subsequent Cut-Off Date), no SBA Loan is more than 30 days delinquent in payment; (j) To the best of the Bank's knowledge, there is no delinquent tax or assessment lien on any Mortgaged Property, and III-5 each Mortgaged Property is free of material damage and is in good repair; (k) No SBA Loan is subject to any right of rescission, set-off, counterclaim or defense, including the defense of usury, nor will the operation of any of the terms of the SBA Note or any related Mortgage, or the exercise of any right thereunder, render either the SBA Note or any related Mortgage unenforceable in whole or in part, or subject to any right of rescission, set- off, counterclaim or defense, including the defense of usury, and no such right of rescission, set-off, counterclaim or defense has been asserted with respect thereto; (l) Each SBA Loan at the time it was made complied and, as of the Closing Date complies, in all material respects with applicable state and federal laws and regulations, including, without limitation, usury, equal credit opportunity, disclosure and recording laws and the SBA Rules and Regulations; (m) Each Initial SBA Loan was (and each Subsequent SBA Loan will be) originated and underwritten or purchased and reunderwritten by the Bank in accordance with the underwriting criteria set forth in the Confidential Placement Memorandum; provided, however, that without the prior written consent of the SBA, no more than 10 Subsequent SBA Loans may have been purchased by the Bank from a third party; (n) Pursuant to the SBA Rules and Regulations, the Bank requires that the improvements upon each Mortgaged Property are covered by a valid and existing hazard insurance policy with a generally acceptable carrier that provides for fire and extended coverage representing coverage described in Section 5.07; (o) Pursuant to the SBA Rules and Regulations, the Bank requires that if a Mortgaged Property is in an area identified in the Federal Register by the Federal Emergency Management Agency as having special flood hazards, a flood insurance policy is in effect with respect to such Mortgaged Property with a generally acceptable carrier in an amount representing coverage described in Section 5.07; (p) Each SBA Note, any related Mortgage and any other agreement pursuant to which Collateral is pledged to the Bank is the legal, valid and binding obligation of the maker thereof and is enforceable in accordance with its terms, except only as such enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by general principles of equity (whether considered in a proceeding or III-6 action in equity or at law), none of which will prevent the ultimate realization of the security provided by the Collateral or other agreement, and all parties to each SBA Loan had full legal capacity to execute all SBA Loan documents and convey the estate therein purported to be conveyed; (q) The Bank has caused and will cause to be performed any and all acts reasonably required to be performed to preserve the rights and remedies of the Trustee in any insurance policies applicable to the SBA Loans including, without limitation, in each case, any necessary notifications of insurers, assignments of policies or interests therein, and establishments of co-insured, joint loss payee and mortgagee rights in favor of the Trustee or the Bank, respectively; (r) Each original Mortgage was recorded, and all subsequent assignments of the original Mortgage have been recorded in the appropriate jurisdictions wherein such recordation is necessary to perfect the lien thereof as against creditors of the Bank (or, subject to Section 2.04 hereof, are in the process of being recorded); (s) Each SBA Loan conforms, and all such SBA Loans in the aggregate conform, to the description thereof set forth in the Confidential Placement Memorandum; (t) The terms of the SBA Note and the related Mortgage or other security agreement pursuant to which Collateral was pledged have not been impaired, altered or modified in any respect, except by a written instrument which has been recorded, if necessary, to protect the interest of the SBA and the Certificateholders and which has been delivered to the Trustee; (u) There are no material defaults in complying with the terms of any applicable Mortgage, and all taxes, governmental assessments, insurance premiums, water, sewer and municipal charges, leasehold payments or ground rents which previously became due and owing have been paid, or an escrow of funds has been established in an amount sufficient to pay for every such item which remains unpaid and which has been assessed but is not yet due and payable; (v) There is no proceeding pending or threatened for the total or partial condemnation of any Mortgaged Property, nor is such a proceeding currently occurring, and such property is undamaged by waste, fire, earthquake or earth movement, windstorm, flood, tornado or other casualty, so as to affect adversely the value of the Mortgaged Property as security for the SBA Loan or the use for which the premises were intended; III-7 (w) At the time of origination for an SBA Loan, in all instances where commercial real property serves as the primary collateral for such SBA Loan, the related Mortgaged Property was free of contamination from toxic substances or hazardous wastes requiring action under applicable laws or is subject to ongoing environmental rehabilitation approved by the SBA, and as of the Cut-Off Date, the Seller has no knowledge of any such contamination from toxic substances or hazardous waste material on any Mortgaged Property unless such items are below action levels or such Mortgaged Property is subject to ongoing environmental rehabilitation approved by the SBA;; (x) The proceeds of the SBA Loan have been fully disbursed, and there is no obligation on the part of the Bank to make future advances thereunder. Any and all requirements as to disbursements of any escrow funds therefor have been complied with. All costs, fees and expenses incurred in making or closing or recording the SBA Loans were paid; (y) There is no obligation on the part of the Bank or any other party (except for any guarantor of an SBA Loan) to make Monthly Payments (except for Monthly Advances) in addition to those made by the Obligor; (z) No statement, report or other document signed by the Bank constituting a part of the SBA File contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained therein not misleading in light of the circumstances under which they were made; (aa) With respect to each Mortgage constituting a deed of trust, a trustee, duly qualified under applicable law to serve as such, has been properly designated and currently so serves and is named in such Mortgage, and no fees or expenses are or will become payable by the Certificateholders to the trustee under the deed of trust, except in connection with a trustee's sale after default by the Obligor; (bb) No SBA Loan has a shared appreciation feature, or other contingent interest feature; (cc) With respect to each SBA Loan secured by a Mortgaged Property or other Collateral and that is not a first priority lien, either (i) no consent for the SBA Loan is required by the holder of any related Prior Lien or (ii) such consent has been obtained; (dd) Each SBA Loan was originated to a business located in the State identified in the SBA Loan Schedule; III-8 (ee) All parties which have had any interest in the SBA Loan, whether as mortgagee, assignee, pledgee or otherwise, are (or, during the period in which they held and disposed of such interest, were) (1) in compliance with any and all applicable licensing requirements of the laws of the state wherein any Mortgaged Property is located, and (2)(A) organized under the laws of such state, or (B) qualified to do business in such state, or (C) federal savings and loan associations or national banks having principal offices in such state, or (D) not doing business in such state; (ff) Any related Mortgage contains customary and enforceable provisions in accordance with the SBA Rules and Regulations which render the rights and remedies of the holder thereof adequate for the realization against the Mortgaged Property of the benefits of the security, including, (i) in the case of a Mortgage designated as a deed of trust, by trustee's sale, and (ii) otherwise by judicial foreclosure. There is no homestead or other exemption available to the Mortgagor which would materially interfere with the right to sell the Mortgaged Property at a trustee's sale or the right to foreclose the Mortgage; (gg) There is no default, breach, violation or event of acceleration existing under the SBA Note and no event which, with the passage of time or with notice and the expiration of any grace or cure period, would constitute a default, breach, violation or event of acceleration; and the Bank, in its capacity as either Servicer or Seller, has not waived any default, breach, violation or event of acceleration; (hh) All parties to the SBA Note and any related Mortgage or other document pursuant to which Collateral was pledged had legal capacity to execute the SBA Note and any such Mortgage or other document and each SBA Note and Mortgage or other document have been duly and properly executed by such parties; (ii) The SBA Loan was not selected for inclusion under this Agreement from the Bank's portfolio of comparable SBA loans on any basis which would have a material adverse affect on a Certificateholder; (jj) All amounts received after the Cut-Off Date (or, with respect to the Subsequent SBA Loans, after the related Subsequent Cut-Off Date) with respect to the SBA Loans have been, to the extent required by this Agreement, deposited into the Principal and Interest Account and are, as of the Closing Date (or with respect to the Subsequent SBA Loans, as of the related III-9 Subsequent Closing Date), in the Principal and Interest Account; and (kk) With respect to those SBA Loans secured by Collateral other than a Mortgaged Property, the related SBA Note, security agreements, if any, and UCC-1 filed with respect to such Collateral creates a valid and subsisting lien of record on such Collateral subject only to any Prior Liens, if any, on such Collateral and subject in all cases to such exceptions that are generally acceptable to lending institutions in connection with their regular commercial lending activities, and such other exceptions to which similar Collateral is commonly subject and which do not individually, or in the aggregate, materially and adversely affect the benefits of the security intended to be provided by such SBA Note, security agreement and UCC-1. Section 3.03 Purchase and Substitution of Defective SBA Loans. ------------------------------------------------ It is understood and agreed that the representations and warranties set forth in Sections 3.01 and 3.02 shall survive delivery of the Certificates to the Certificateholders. Upon discovery by the Servicer, any Subservicer or the Trustee of a breach of any of such representations and warranties which materially and adversely affects the value of the SBA Loans or the interest of the Certificateholders or the SBA therein or which materially and adversely affects the interests of the Certificateholders and the SBA in the related SBA Loan in the case of a representation and warranty relating to a particular SBA Loan (notwithstanding that such representation and warranty was made to the Bank's best knowledge), the party discovering such breach shall give prompt written notice to the others. Within 60 days of the earlier of its discovery or its receipt of notice of any breach of a representation or warranty, the Bank, in its capacity as Seller shall (a) promptly cure such breach in all material respects, (b) purchase the Unguaranteed Interest of such SBA Loan by depositing in the Principal and Interest Account, on the next succeeding Determination Date, an amount and in the manner specified in Section 2.05(b), or (c) if within two years of the Closing Date, remove such SBA Loan from the Trust Fund (in which case it shall become a Deleted SBA Loan) and substitute one or more Qualified Substitute SBA Loans. Any such substitution shall be accompanied by payment by the Seller of the Substitution Adjustment, if any. As to any Deleted SBA Loan for which the Seller substitutes a Qualified Substitute SBA Loan or Loans, the Servicer shall effect such substitution by delivering to the Trustee and the FTA a certification in the form attached hereto III-10 as Exhibit I, executed by a Servicing Officer, and shall also deliver to the Trustee and the FTA, as applicable, the documents constituting the Trustee's Document File for such Qualified Substitute SBA Loan or Loans. The Servicer shall deposit in the Principal and Interest Account the Unguaranteed Percentage of all payments of principal received in connection with such Qualified Substitute SBA Loan or Loans after the date of such substitution together with all interest (net of the Servicing Fee allocable to such Qualified Substitute SBA Loan or Loans). Monthly Payments received with respect to Qualified Substitute SBA Loans on or before the date of substitution will be retained by the Seller. The Trust Fund will own all payments received with respect to the Unguaranteed Interest on the Deleted SBA Loan on or before the date of substitution, and the Seller shall thereafter be entitled to retain all amounts subsequently received in respect of such Deleted SBA Loan. The Servicer shall give written notice to the Trustee that such substitution has taken place and shall amend the SBA Loan Schedule to reflect the removal of such Deleted SBA Loan from the terms of this Agreement and the substitution of the Qualified Substitute SBA Loan or Loans. Upon such substitution, such Qualified Substitute SBA Loan or Loans shall be subject to the terms of this Agreement in all respects, including Sections 2.04 and 2.05, and the Seller shall be deemed to have made with respect to such Qualified Substitute SBA Loan or Loans, as of the date of substitution, the covenants, representations and warranties set forth in Sections 3.01 and 3.02. On the date of such substitution, the Seller will remit to the Servicer, and the Servicer will deposit into the Principal and Interest Account an amount equal to the Substitution Adjustment. In addition to the cure, purchase and substitution obligation in Sections 2.04, 2.05 and 3.03, the Bank shall indemnify and hold harmless the Trust Fund, the Trustee and the Certificateholders against any loss, damages, penalties, fines, forfeitures, reasonable legal fees and related costs, judgments and other costs and expenses resulting from any claim, demand, defense or assertion based on or grounded upon, or resulting from, a breach of the Bank's representations and warranties contained in this Agreement. It is understood and agreed that the obligations of the Bank, in its capacity as Seller set forth in Sections 2.04, 2.05 and 3.03 to cure, purchase or substitute for a defective SBA Loan and to indemnify the Certificateholders and the Trustee as provided in Sections 2.04, 2.05 and 3.03 constitute the sole remedies of the Trustee and the Certificateholders respecting a breach of the foregoing representations and warranties. III-11 Any cause of action against the Bank, in its capacity as either Servicer or the Seller, relating to or arising out of the breach of any representations and warranties made in Sections 2.05, 3.01 or 3.02 shall accrue as to any SBA Loan upon (i) discovery of such breach by any party and notice thereof to the Seller and or notice thereof by the Seller to the Trustee, (ii) failure by the Seller to cure such breach or purchase or substitute such SBA Loan as specified above, and (iii) demand upon the Seller by the Trustee for all amounts payable hereunder in respect of such SBA Loan. III-12 ARTICLE IV THE CERTIFICATES ---------------- Section 4.01 The Certificates. ---------------- The Class A and Class B Certificates shall be substantially in the forms annexed hereto as Exhibits B-1 and B-2 and shall, upon original issue, be executed and delivered by the Servicer to the Trustee for authentication and redelivery to or upon the order of the Seller, upon receipt by the Trustee and the FTA of the documents specified in Section 2.04. All Certificates shall be executed on behalf of the Servicer by a Responsible Officer, in the denominations specified in the definition of Percentage Interest, and shall be authenticated on behalf of the Trustee by one of its Responsible Officers. Certificates bearing the signatures of individuals who were at the time of the execution or authentication of the Certificates a Responsible Officer of the Servicer or a Responsible Officer of the Trustee, as the case may be, shall bind the Servicer or the Trustee, as the case may be, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the delivery of such Certificates or did not hold such offices at the date of such Certificates. All Certificates issued hereunder shall be dated the date of their authentication. Section 4.02 Registration of Transfer and Exchange of Certificates. ----------------------------------------------------- (a) The Trustee shall cause to be kept at the office of the Certificate Registrar, in New York, New York, a Certificate Register in which, subject to such reasonable regulations as it may prescribe, it shall provide for the registration of Certificates and of transfers and exchanges of Certificates as herein provided. The Certificate Register shall contain the name, remittance instructions, Class and Percentage Interest of each Certificateholder, as well as the Series and the number in the Series. Marine Midland Bank is initially appointed Certificate Registrar for the purpose of registering Certificates and transfers and exchanges of Certificates as herein provided. (b) Each Class of Certificates shall be issued in minimum denominations of $100,000 original principal amount and integral multiples of $1,000 in excess thereof, except that one Certificate of each Class may be in a different denomination so that the sum of the denominations of all outstanding Class A and Class B Certificates shall equal the Original Class A and Class B Certificate Principal Balance, respectively. On the Closing Date, the Trustee will execute and authenticate (i) one or more Global Certificates and/or (ii) Individual Certificates all in an IV-1 aggregate principal amount that shall equal the Original Class A and Original Class B Certificate Principal Balances. The Global Certificates (i) shall be delivered by the Seller to the Depository or, pursuant to the Depository's instructions, shall be delivered by the Seller on behalf of the Depository to and deposited with the Depository's custodian, and in each case shall be registered in the name of Cede & Co. and (ii) shall bear a legend substantially to the following effect: "Unless this certificate is presented by an authorized representative of The Depository Trust Company, a New York corporation ("DTC"), to the Certificate Registrar or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of Cede & Co. or in such other name as is requested by an authorized representative of DTC (and any payment is made to Cede & Co. or to such other entity as is requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein." The Global Certificates may be deposited with such other Depository as the Seller may from time to time designate, and shall bear such legend as may be appropriate; provided that such successor Depository maintains a book-entry -------- system that qualifies to be treated as "registered form" under Section 163(f)(3) of the Code. The Seller and the Trustee are hereby authorized to and shall execute and deliver a Letter of Representations, in the form provided by the Depository, with the Depository relating to the Certificates. (c) With respect to Certificates registered in the Register in the name of Cede & Co., as nominee of the Depository, the Seller, the Servicer and the Trustee shall have no responsibility or obligation to Direct or Indirect Participants or beneficial owners for which the Depository holds Certificates from time to time as a Depository and the Trustee and its agents, employees, officers and directors may treat the Depository as the absolute owner of the Certificates for all purposes whatsoever. Without limiting the immediately preceding sentence, the Seller, the Servicer and the Trustee shall have no responsibility or obligation with respect to (a) the accuracy of the records of the Depository, Cede & Co., or any Direct or Indirect Participant with respect to the ownership interest in the Certificates, (b) the delivery to any Direct or Indirect Participant or any other IV-2 Person, other than a registered Holder of a Certificate, (c) the payment to any Direct or Indirect Participant or any other Person, other than a registered Holder of a Certificate as shown in the Register, of any amount with respect to any distribution of principal or interest on the Certificates or (d) the making of book-entry transfers among Direct and Indirect Participants of the Depository with respect to Certificates registered in the Register in the name of the nominee of the Depository. No Person other than a registered Holder of a Certificate as shown in the Register shall receive a certificate evidencing such Certificate. (d) Upon delivery by the Depository to the Trustee of written notice to the effect that the Depository has determined to substitute a new nominee in place of Cede & Co., and subject to the provisions hereof with respect to the payment of distributions by the mailing of checks or drafts to the registered Holders of Certificates appearing as registered Owners in the Certificate Register on a Record Date, the name "Cede & Co." in this Agreement shall refer to such new nominee of the Depository. (e) In the event that (i) the Depository or the Servicer advises the Trustee in writing that the Depository is no longer willing or able to discharge properly its responsibilities as nominee and depository with respect to the Certificates and the Servicer is unable to locate a qualified successor or (ii) the Servicer at its sole option elects to terminate the book-entry system through the Depository, the Certificates shall no longer be restricted to being registered in the Register in the name of Cede & Co. (or a successor nominee) as nominee of the Depository. At that time, the Servicer may determine that the Certificates shall be registered in the name of and deposited with a successor depository operating a global book-entry system, as may be acceptable to the Servicer, or such depository's agent or designee but, if the Servicer does not select such alternative global book-entry system, then upon surrender to the Certificate Registrar of the Global Certificates by the Depository, accompanied by the registration instructions from the Depository for registration, the Trustee shall at the Servicer's expense authenticate Individual Certificates. Neither the Servicer nor the Trustee shall be liable for any delay in delivery of such instructions and may conclusively rely on, and shall be fully protected in relying on, such instructions. Upon the issuance of Individual Certificates, the Trustee, the Certificate Registrar, the Servicer, any Paying Agent and the Seller shall recognize the Holders of the Individual Certificates as Certificateholders hereunder. (f) Notwithstanding any other provision of this Agreement to the contrary, so long as any Certificates are IV-3 registered in the name of Cede & Co., as nominee of the Depository, all distributions of principal and interest on such Certificates and all notices with respect to such Certificates shall be made and given, respectively, in the manner provided in the Letter of Representations. (g) Subject to the preceding paragraphs, upon surrender for registration of transfer of any Certificate at the office of the Certificate Registrar and, upon satisfaction of the conditions set forth below, the Servicer shall execute in the name of the designated transferee or transferees, a new Certificate of the same Percentage Interest and dated the date of authentication by the Trustee. The Certificate Registrar shall notify the Servicer and the Trustee of any such transfer. At the option of the Certificateholders, Certificates may be exchanged for other Certificates in authorized denominations of a like Class and aggregate Percentage Interest, upon surrender of the Certificates to be exchanged at such office. Whenever any Certificates are so surrendered for exchange, the Servicer shall execute the Certificates which the Certificateholder making the exchange is entitled to receive. Every Certificate presented or surrendered for transfer or exchange shall be accompanied by wiring instructions, if applicable, in the form of Exhibit E. (h) No service charge shall be made for any transfer or exchange of Certificates, but prior to transfer the Certificate Registrar may require payment by the transferor of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer or exchange of Certificates. All Certificates surrendered for transfer and exchange shall be marked canceled by the Authenticating Agent and retained for one year and destroyed thereafter. (i) By acceptance of an Individual Certificate, whether upon original issuance or subsequent transfer, each holder of such a Certificate acknowledges the restrictions on the transfer of such Certificate set forth in the Securities Legend and agrees that it will transfer such Certificate only as provided herein. In addition to the provisions of Section 4.02(n), the following restrictions shall apply with respect to the transfer and registration of transfer of an Individual Certificate to a transferee that takes delivery in the form of an Individual Certificate: (i) The Certificate Registrar shall register the transfer of an Individual Certificate if the requested IV-4 transfer is being made to transferee who has provided the Certificate Registrar with a Rule 144A Certification. (ii) The Certificate Registrar shall register the transfer of any Individual Certificate (other than the initial delivery of the Class B Certificates to the Spread Account Depositor) if (x) the transferor has advised the Certificate Registrar in writing that the Certificate is being transferred to an Institutional Accredited Investor; and (y) prior to the transfer the transferee furnishes to the Certificate Registrar a Transferee Letter, provided that, if based upon an Opinion of Counsel to the effect that the delivery of (x) and (y) above are not sufficient to confirm that the proposed transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and other applicable laws, the Certificate Registrar may as a condition of the registration of any such transfer require the transferor to furnish other certifications, legal opinions or other information prior to registering the transfer of an Individual Certificate. (j) Subject to Section 4.02(n), so long as the Global Certificate remains outstanding and is held by or on behalf of the Depository, transfers of beneficial interests in the Global Certificate, or transfers by holders of Individual Certificates to transferees that take delivery in the form of beneficial interests in the Global Certificate, may be made only in accordance with this Section 4.02(j) and in accordance with the rules of the Depository. (i) In the case of a beneficial interest in the Global Certificate being transferred to an Institutional Accredited Investor, such transferee shall be required to take delivery in the form of an Individual Certificate or Certificates and the Certificate Registrar shall register such transfer only upon compliance with the provisions of Section 4.02(i)(ii). (ii) In the case of a beneficial interest in the Global Certificate being transferred to a transferee that takes delivery in the form of an Individual Certificate or Certificates, except as set forth in clause (i) above, the Certificate Registrar shall register such transfer only upon compliance with the provisions of Section 4.02(i)(i). IV-5 (iii) In the case of an Individual Certificate being transferred to a transferee that takes delivery in the form of a beneficial interest in a Global Certificate, the Certificate Registrar shall register such transfer if the transferee has provided the Certificate Registrar with a Rule 144A Certification. (iv) No restrictions shall apply with respect to the transfer or registration of transfer of a beneficial interest in the Global Certificate to a transferee that takes delivery in the form of a beneficial interest in the Global Certificate. (k) Subject to Section 4.02(n), an exchange of a beneficial interest in the Global Certificate for an Individual Certificate or Certificates, an exchange of an Individual Certificate or Certificates for a beneficial interest in the Global Certificate and an exchange of an Individual Certificate or Certificates for another Individual Certificate or Certificates (in each case, whether or not such exchange is made in anticipation of subsequent transfer, and, in the case of the Global Certificate, so long as such Certificate remains outstanding and is held by or on behalf of the Depository) may be made only in accordance with this Section 4.02(k) and in accordance with the rules of the Depository. (i) A holder of a beneficial interest in the Global Certificate may at any time exchange such beneficial interest for an Individual Certificate or Certificates. (ii) A holder of an Individual Certificate may exchange such Certificate for a beneficial interest in the Global Certificate if such holder furnishes to the Registrar a Rule 144A Certification. (iii) A holder of an Individual Certificate may exchange such Certificate for an equal aggregate principal amount of Individual Certificates in different authorized denominations without any certification. (l) (i) Upon acceptance for exchange or transfer of an Individual Certificate for a beneficial interest in the Global Certificate as provided herein, the Certificate Registrar shall cancel such Individual Certificate and shall (or shall request the Depository to) endorse on the schedule affixed to the applicable Global Certificate (or on a continuation of such schedule affixed to the Global Certificate and made a part thereof) an appropriate notation evidencing the date of such IV-6 exchange or transfer and an increase in the certificate balance of the Global Certificate equal to the certificate balance of such Individual Certificate exchanged or transferred therefor. (ii) Upon acceptance for exchange or transfer of a beneficial interest in the Global Certificate for an Individual Certificate as provided herein, the Certificate Registrar shall (or shall request the Depository to) endorse on the schedule affixed to the Global Certificate (or on a continuation of such schedule affixed to the Global Certificate and made a part thereof) an appropriate notation evidencing the date of such exchange or transfer and a decrease in the certificate balance of the Global Certificate equal to the certificate balance of such Individual Certificate issued in exchange therefor or upon transfer thereof. (m) The Securities Legend shall be placed on any Individual Certificate issued in exchange for or upon transfer of another Individual Certificate or of a beneficial interest in the Global Certificate. (n) Subject to the restrictions on transfer and exchange set forth in this Section 4.02, the holder of any Individual Certificate may transfer or exchange the same in whole or in part (in an initial certificate balance equal to the minimum authorized denomination or any integral multiple of $1,000 in excess thereof) by surrendering such Certificate at the Corporate Trust Office, or at the office of any transfer agent, together with an executed instrument of assignment and transfer satisfactory in form and substance to the Certificate Registrar in the case of transfer and a written request for exchange in the case of exchange. The holder of a beneficial interest in a Global Certificate may, subject to the rules and procedures of the Depository, cause the Depository (or its nominee) to notify the Certificate Registrar in writing of a request for transfer or exchange of such beneficial interest for an Individual Certificate or Certificates. Following a proper request for transfer or exchange, the Certificate Registrar shall, within five Business Days of such request made at such Corporate Trust Office, cause the Trustee to authenticate and the Certificate Registrar to deliver at such Corporate Trust Office, to the transferee (in the case of transfer) or holder (in the case of exchange) or send by first class mail at the risk of the transferee (in the case of transfer) or holder (in the case of exchange) to such address as the transferee or holder, as applicable, may request, an Individual Certificate or Certificates, as the case may require, for a like aggregate Percentage Interest and in such authorized denomination or denominations as may be requested. The presentation for transfer IV-7 or exchange of any Individual Certificate shall not be valid unless made at the Corporate Trust Office by the registered holder in person, or by a duly authorized attorney-in-fact. (o) No transfer of any Certificate shall be made unless such transfer is exempt from the registration requirements of the Securities Act and any applicable state securities laws or is made in accordance with said Act and laws. In the event of any such transfer, unless such transfer is made in reliance upon Rule 144A under the Securities Act and except for the initial issuance of the Class B Certificates to the Spread Account Depositor, (i) the Trustee may require a written Opinion of Counsel (which may be in-house counsel) acceptable to and in form and substance reasonably satisfactory to the Trustee that such transfer may be made pursuant to an exemption, describing the applicable exemption and the basis therefor, from said Act and laws or is being made pursuant to said Act and laws, which Opinion of Counsel shall not be an expense of the Trustee, the Seller, the Servicer or the Trust Fund and (ii) the Trustee shall require the transferee to execute a Transferee Letter certifying to the Seller and the Trustee the facts surrounding such transfer, which Transferee Letter shall not be an expense of the Trustee, the Seller, the Servicer or the Trust Fund. The holder of a Certificate desiring to effect such transfer shall, and does hereby agree to, indemnify the Trustee, the Seller and the Servicer against any liability that may result if the transfer is not so exempt or is not made in accordance with such federal and state laws. None of the Seller, the Servicer, the Trustee or the Trust Fund intends or is obligated to register or qualify any Certificate under the Securities Act or any state securities laws. (p) No Certificate may be acquired directly or indirectly, for or on behalf of an employee benefit plan or other retirement arrangement subject to ERISA, and/or Section 4975 of the Code, (collectively, a "Plan"). No transfer of a Certificate representing an Individual Certificate shall be made unless the Trustee shall have received a certification from the transferee of such Individual Certificate, acceptable to and in form and substance satisfactory to the Trustee and the Servicer, to the effect that such transferee is not acquiring a Certificate, directly or indirectly, for or on behalf of a Plan. Notwithstanding anything else to the contrary herein, in the event any purported transfer of any certificate representing an Individual Certificate is made without delivery of the certification referred to above, such certification shall be deemed to have been made by the Transferee by its acceptance of such Individual Certificate. In addition, any purported transfer of a Certificate representing an Individual Certificate directly or indirectly to or on behalf of a Plan shall be void and of no IV-8 effect. The acquisition of a Certificate representing an interest in a Global Certificate shall be deemed a representation by the acquirer that it is not acquiring a Certificate, directly or indirectly, for or on behalf of a Plan. (q) Notwithstanding any other provision of this Agreement to the contrary, on the Closing Date, the Trustee shall authenticate in the name of, and deliver to, the Spread Account Depositor, the Class B Certificate in the form of a single Individual Certificate in an aggregate principal amount equal to the Original Class B Principal Balance. The Class B Certificate may not be sold, pledged, transferred, assigned or otherwise conveyed, in whole or in part, without the prior written approval of the SBA and a copy of such approval shall be furnished to the Trustee. A legend to such effect shall be placed on the Class B Certificate. Section 4.03 Mutilated, Destroyed, Lost or Stolen Certificates. ------------------------------------------------- If (i) any mutilated Certificate is surrendered to the Certificate Registrar, or the Trustee and the Certificate Registrar receives evidence to its satisfaction of the destruction, loss or theft of any Certificate, and (ii) there is delivered to the Servicer, the Trustee and the Certificate Registrar such security or indemnity as may be required by each of them to save each of them harmless, then, in the absence of notice to the Servicer, the Trustee and the Certificate Registrar that such Certificate has been acquired by a bona fide purchaser, the Servicer shall execute and deliver, and the Trustee shall authenticate, in exchange for or in lieu of any such mutilated, destroyed, lost or stolen Certificate, a new Certificate of like Class, tenor and Percentage Interest, but bearing a number not contemporaneously outstanding. Upon the issuance of any new Certificate under this Section 4.03, the Servicer and the Trustee may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses connected therewith. Any duplicate Certificate issued pursuant to this Section 4.03 shall constitute complete and indefeasible evidence of ownership in the Trust Fund, as if originally issued, whether or not the mutilated, destroyed, lost or stolen Certificate shall be found at any time. Section 4.04 Persons Deemed Owners. --------------------- Prior to due presentation of a Certificate for registration of transfer, the Servicer, the Seller, the Trustee, the Paying Agent and the Certificate Registrar may treat the Person in whose name any Certificate is registered as the owner of such Certificate for the purpose of receiving remittances IV-9 pursuant to Section 6.07 and for all other purposes whatsoever, and the Seller, the Servicer, the Trustee and the Certificate Registrar shall not be affected by notice to the contrary. IV-10 ARTICLE V ADMINISTRATION AND SERVICING OF SBA LOANS ----------------------------------------- Section 5.01 Duties of the Servicer. ---------------------- (a) The Servicer covenants and agrees that it shall act as agent (and the Servicer is hereby appointed to act as agent) on behalf of the Trust Fund and that, in such capacity, it shall: (i) prepare and file, or cause to be prepared and filed, in a timely manner, any Tax Return required to be filed by the Trust Fund; (ii) prepare and forward, or cause to be prepared and forwarded, to the Trustee, the Certificateholders and to the Internal Revenue Service and any other relevant governmental taxing authority all information returns or reports as and when required to be provided to them in accordance with any provision of federal, state or local income tax laws; (iii) to the extent that the affairs of the Trust Fund are within its control, conduct such affairs at all times that any Certificates are outstanding so as to maintain the status of the Trust Fund as a grantor trust under any applicable federal, state and local laws; (iv) pay the amount of any and all federal, state, and local taxes, imposed on the Trust Fund when and as the same shall be due and payable (but such obligation shall not prevent the Servicer or any other appropriate Person from contesting any such tax in appropriate proceedings and shall not prevent the Servicer from withholding payment of such tax, if permitted by law, pending the outcome of such proceedings); (v) ensure that any such returns or reports filed on behalf of the Trust Fund are properly executed by the appropriate person; and (vi) represent the Trust Fund in any administrative or judicial proceedings relating to an examination or audit by any governmental taxing authority, request an administrative adjustment as to any taxable year of the Trust Fund, enter into settlement agreements with any governmental taxing agency, extend any statute of limitations relating to any item of the Trust Fund and otherwise act on behalf of the Trust Fund in relation to any tax matter involving the Trust Fund. The Servicer shall indemnify the Trustee and the Trust Fund for any liability it may incur in connection with this Section 5.01(a), which indemnification shall survive the termination of the Trust Fund; provided, however, that the Servicer shall not indemnify the Trustee for the - -------- ------- Trustee's negligence, willful misconduct or bad faith. (b) The Servicer, as independent contract servicer, shall service and administer the SBA Loans and shall have full power and authority, acting alone, to do any and all things in connection with such servicing and administration which the Servicer may deem necessary or desirable and consistent with the terms of this Agreement and the Multi-Party Agreement and the SBA V-1 Rules and Regulations. The Servicer may enter into Subservicing Agreements for anyservicing and administration of SBA (S) 7(a) Loans with any entity approved with prior written consent by the SBA. Any such Subservicing Agreement shall be consistent with and not violate the provisions of this Agreement and the Multi- Party Agreement. The Servicer shall be entitled to terminate any Subservicing Agreement in accordance with the terms and conditions of such Subservicing Agreement and to either itself directly service the related SBA (S) 7(a) Loans or enter into a Subservicing Agreement with a successor Subservicer which qualifies hereunder. (c) Notwithstanding any Subservicing Agreement, any of the provisions of this Agreement relating to agreements or arrangements between the Servicer and a Subservicer or reference to actions taken through a Subservicer or otherwise, the Servicer shall remain obligated and primarily liable to the Trustee, for itself and on behalf of the Certificateholders, the SBA and the Certificateholders for the servicing and administering of the SBA Loans in accordance with the provisions of this Agreement and the Multi-Party Agreement and the SBA Rules and Regulations, without diminution of such obligation or liability by virtue of such Subservicing Agreements or arrangements or by virtue of indemnification from the Subservicer and to the same extent and under the same terms and conditions as if the Servicer alone were servicing and administering the SBA Loans. For purposes of this Agreement, the Servicer shall be deemed to have received payments on SBA Loans when any Subservicer has received such payments. The Servicer shall be entitled to enter into any agreement with a Subservicer for indemnification of the Servicer by such Subservicer, and nothing contained in this Agreement shall be deemed to limit or modify such indemnification. (d) Any Subservicing Agreement that may be entered into and any transactions or services relating to the SBA Loans involving a Subservicer in its capacity as such and not as an originator shall be deemed to be between the Subservicer and the Servicer alone, and the Trustee, the SBA and Certificateholders shall not be deemed parties thereto and shall have no claims, rights, obligations, duties or liabilities with respect to the Subservicer except as set forth in Section 5.01(e). (e) In the event the Servicer shall for any reason no longer be the Servicer (including by reason of an Event of Default), the Trustee or its designee shall, subject to Section 10.02 hereof and the Multi-Party Agreement, thereupon assume all of the rights and obligations of the Servicer under each Subservicing Agreement that the Servicer may have entered into, unless the Trustee is then permitted and elects to terminate any Subservicing Agreement in accordance with its terms. The V-2 Trustee, its designee or the successor servicer for the Trustee shall be deemed to have assumed all of the Servicer's interest therein and to have replaced the Servicer as a party to each Subservicing Agreement to the same extent as if the Subservicing Agreements had been assigned to the assuming party, except that the Servicer shall not thereby be relieved of any liability or obligations under the Subservicing Agreements. The Servicer at its expense and without right of reimbursement therefor, shall, upon request of the Trustee, deliver to the assuming party all documents and records relating to each Subservicing Agreement and the SBA Loans then being serviced and an accounting of amounts collected and held by it and otherwise use its best efforts to effect the orderly and efficient transfer of the Subservicing Agreements to the assuming party. (f) So long as it is consistent with the terms of this Agreement and the Multi-Party Agreement, the SBA Agreement (as defined in the Multi-Party Agreement) and the SBA Rules and Regulations, the Servicer may waive, modify or vary any term of any SBA Loan or consent to the postponement of strict compliance with any such term or in any manner grant indulgence to any Obligor if in the Servicer's determination such waiver, modification, postponement or indulgence is not materially adverse to the interests of the SBA and the Certificateholders, provided, however, that (unless (x) the Obligor is in -------- ------- default with respect to the SBA Loan, or such default is, in the judgment of the Servicer, imminent and (y) the Servicer determines that any modification would not be considered a new loan for federal income tax purposes) the Servicer may not permit any modification with respect to any SBA Loan that would change the SBA Loan Interest Rate, defer (subject to Section 5.12), or forgive the payment of any principal or interest (unless in connection with the liquidation of the related SBA Loan), or extend the final maturity date on such SBA Loan without the consent of the SBA, if such consent is then required by the SBA Rules and Regulations. The Servicer may exercise all unilateral servicing actions permitted by participating lenders in accordance with the SBA Rules and Regulations. No costs incurred by the Servicer or any Subservicer in respect of Servicing Advances shall for the purposes of distributions to Certificateholders be added to the amount owing under the related SBA Loan. Without limiting the generality of the foregoing, so long as it is consistent with the SBA Rules and Regulations, the Servicer shall continue, and is hereby authorized and empowered to execute and deliver on behalf of the Trustee, the SBA and each Certificateholder, all instruments of satisfaction or cancellation, or of partial or full release, discharge and all other comparable instruments, with respect to the SBA Loans and with respect to any Mortgaged Properties or other Collateral. If reasonably required by the Servicer, each Certificateholder and/or the Trustee shall furnish V-3 the Servicer, within 5 Business Days of receipt of the Servicer's request, with any powers of attorney and other documents necessary or appropriate to enable the Servicer to carry out its servicing and administrative duties under this Agreement. Any such request to the Trustee shall be accompanied by a certification in the form of Exhibit I attached hereto signed by a Servicing Officer. The Servicer, in servicing and administering the SBA Loans, shall employ or cause to be employed procedures (including collection, foreclosure and Foreclosed Property and Repossessed Collateral management procedures) and exercise the same care that it customarily employs and exercises in servicing and administering SBA Loans for its own account, in accordance with the SBA Rules and Regulations and giving due consideration to the Certificateholders' and the SBA's reliance on the Servicer. (g) On and after such time as the Trustee receives the resignation of, or notice of the removal of, the Servicer from its rights and obligations under this Agreement, and with respect to resignation pursuant to Section 9.04, after receipt of the Opinion of Counsel required pursuant to Section 9.04 addressed to the SBA and the Trustee, the Trustee or its designee shall assume all of the rights and obligations of the Servicer, subject to Section 10.02 hereof and the Multi-Party Agreement. The Servicer shall, upon request of the Trustee but at the expense of the Servicer, deliver to the Trustee all documents and records (including computer tapes and diskettes) relating to the SBA Loans and an accounting of amounts collected and held by the Servicer and otherwise use its best efforts to effect the orderly and efficient transfer of servicing rights and obligations to the assuming party. (h) For so long as any of the Certificates are outstanding and are "restricted securities" within the meaning of Rule 144(a)(3) of the Securities Act, (1) the Servicer will provide or cause to be provided to any holder of such Certificates and any prospective purchaser thereof designated by such a holder, upon the request of such holder or prospective purchaser, the information required to be provided to such holder or prospective purchaser by Rule 144A(d)(4) under the Securities Act; and (2) the Servicer shall update such information from time to time in order to prevent such information from becoming false and misleading and will take such other actions as are necessary to ensure that the safe harbor exemption from the registration requirements of the Securities Act under Rule 144A is and will be available for resales of such Certificates conducted in accordance with Rule 144A. V-4 Section 5.02 Liquidation of SBA Loans. ------------------------ In the event that any payment due under any SBA Loan and not postponed pursuant to Section 5.01 is not paid when the same becomes due and payable, or in the event the Obligor fails to perform any other covenant or obligation under the SBA Loan, the Servicer shall take such action in accordance with the applicable SBA Rules and Regulations as it shall deem to be in the best interests of the Certificateholders and the SBA. With respect to any such SBA (S) 7(a) Loan for which the SBA has expressed to the Servicer the SBA's desire to assume servicing of such SBA Loan consistent with the SBA Rules and Regulations, the Trustee shall, upon written direction of the Servicer, deliver to the SBA or its designee all or any portion of the Trustee's Document File relating to such SBA (S) 7(a) Loan and the Trustee shall execute such documents, including but not limited to an endorsement of the related SBA Note and an assignment of the related Mortgage, as the Servicer or the SBA shall request. Expenses incurred in connection with any such action shall be the responsibility of the Servicer and shall not be chargeable to the Principal and Interest Account or the Certificate Account. Subject to the SBA Rules and Regulations and with the prior written consent of the SBA (if required by the SBA Rules and Regulations), the Servicer shall foreclose upon or otherwise comparably effect the ownership of Mortgaged Properties or other Collateral relating to defaulted SBA (S) 7(a) Loans for which the related SBA (S) 7(a) Loan is still outstanding, as to which no satisfactory arrangements can be made for collection of delinquent payments in accordance with the provisions of Section 5.10. In connection with such foreclosure or other conversion, the Servicer shall exercise collection and foreclosure procedures with the same degree of care and skill in its exercise or use as it would exercise or use under the circumstances in the conduct of its own affairs. The Unguaranteed Percentage of any amounts advanced in connection with such foreclosure or other action shall constitute "Servicing Advances." The Servicer shall take into account the existence of any hazardous substances, hazardous wastes or solid wastes on Mortgaged Properties in determining whether to foreclose upon or otherwise comparably convert the ownership of such Mortgaged Property, and will not foreclose on a Mortgaged Property where it has cause to believe such substances exist unless it has received an environmental report and such report reveals no environmental problems, or such Mortgaged Property is subject to an environmental rehabilitation for which the Seller is not responsible. After an SBA Loan has become a Liquidated SBA Loan, the Servicer shall promptly prepare and forward to the Trustee and the SBA and upon request, any Certificateholder, a Liquidation V-5 Report, in the form attached hereto as Exhibit J, detailing the Liquidation Proceeds received from the Liquidated SBA Loan, expenses incurred with respect thereto, and any loss incurred in connection therewith. Section 5.03 Establishment of Principal and ------------------------------ Interest Accounts; Deposits in ------------------------------ Principal and Interest Accounts. --------------------------------- (a) The Servicer shall cause to be established and maintained one or more Principal and Interest Accounts, in one or more Designated Depository Institutions, in the form of time deposit or demand accounts, which may be interest-bearing or such accounts may be trust accounts wherein the moneys therein are invested in Permitted Instruments, titled "First National Bank of New England, in trust for the registered holders of First National Bank of New England SBA Loan-Backed Adjustable Rate Certificates, Series 1998-1, Class A and Class B." Such Principal and Interest Accounts shall be insured by the BIF or SAIF administered by the FDIC to the maximum extent provided by law. The creation of any Principal and Interest Account shall be evidenced by a letter agreement in the form of Exhibit C hereto. A copy of such letter agreement shall be furnished to the Trustee, the SBA and, upon request, any Certificateholder. (b) The Servicer and each Subservicer shall deposit without duplication (within two Business Days of receipt thereof) in the Principal and Interest Account and retain therein: (i) the Unguaranteed Percentage of all payments received after the Cut-Off Date on account of principal on the SBA Loans, including the Unguaranteed Percentage of all Excess Payments, Principal Prepayments and Curtailments collected after the Cut-Off Date, the Unguaranteed Percentage of all Insurance Proceeds (other than amounts to be applied to restoration or repair of any related Mortgaged Property, or to be released to the Obligor in accordance with customary servicing procedures) and the Unguaranteed Percentage of all Released Mortgaged Property Proceeds; (ii) all payments received after the Cut-Off Date on account of interest on the Unguaranteed Interest of the SBA Loans (net of the Servicing Fee allocable to such SBA Loans and other servicing compensation payable to the Servicer as permitted herein); V-6 (iii) the Unguaranteed Percentage of all Net Liquidation Proceeds; (iv) the Unguaranteed Percentage of all Insurance Proceeds (other than amounts to be applied to restoration or repair of any related Mortgaged Property, or to be released to the Obligor in accordance with customary servicing procedures); (v) the Unguaranteed Percentage of all Released Mortgaged Property Proceeds; (vi) any amounts paid in connection with the repurchase of the Unguaranteed Interest of any SBA Loan and the amount of any Substitution Adjustment received pursuant to Sections 2.05 and 3.03; (vii) any amount required to be deposited in the Principal and Interest Account pursuant to Section 5.04 or 5.10; and (viii) the amount of any losses incurred in connection with investments in Permitted Instruments. (c) The foregoing requirements for deposit in the Principal and Interest Account shall be exclusive, it being understood and agreed that, without limiting the generality of the foregoing, payments with respect to the Guaranteed Interest, and the Servicing Fee (to the extent received and permitted by Section 7.03), with respect to each SBA Loan and the Additional Fee with respect to each Additional Fee SBA Loan, together with the difference between any Liquidation Proceeds and the related Net Liquidation Proceeds, need not be deposited by the Servicer in the Principal and Interest Account. (d) Any interest earnings on funds held in the Principal and Interest Account paid by a Designated Depository Institution shall be for the account of the Servicer and may only be withdrawn from the Principal and Interest Account by the Servicer immediately following its monthly remittance to the Trustee pursuant to Section 5.04(a). Any reference herein to amounts on deposit in the Principal and Interest Account shall refer to amounts net of such investment earnings. Section 5.04 Permitted Withdrawals From the ------------------------------ Principal and Interest Account ------------------------------ The Servicer shall withdraw funds from the Principal and Interest Account for the following purposes: V-7 (a) to effect the remittance to the Trustee on each Determination Date for deposit in the Certificate Account, the portion of the Available Funds for the related Remittance Date that is separate from Compensating Interest, Monthly Advances and amounts then on deposit in the Spread Account; (b) to reimburse itself for any accrued unpaid Servicing Fees allocable to the SBA Loans, unreimbursed Monthly Advances and for unreimbursed Servicing Advances to the extent deposited in the Principal and Interest Account (and not netted from Monthly Payments received). The Servicer's right to reimbursement for unpaid Servicing Fees and, except as provided in the following sentence, Servicing Advances and Monthly Advances shall be limited to Liquidation Proceeds, Released Mortgaged Property Proceeds, Insurance Proceeds and such other amounts as may be collected by the Servicer from the Obligor or otherwise relating to the SBA Loan in respect of which such unreimbursed amounts are owed. The Servicer's right to reimbursement for Servicing Advances and Monthly Advances in excess of such amounts shall be limited to any late collections of interest received on the SBA Loans generally, including Liquidation Proceeds, Released Mortgaged Property Proceeds, Insurance Proceeds and any other amounts; (c) to withdraw any amount received from an Obligor that is recoverable and sought to be recovered as a voidable preference by a trustee in bankruptcy pursuant to the United States Bankruptcy Code in accordance with a final, nonappealable order of a court having competent jurisdiction; (d) (i) to make investments in Permitted Instruments and (ii) to pay to itself, as permitted by Section 5.03(d), interest paid in respect of Permitted Instruments or by a Designated Depository Institution on funds deposited in the Principal and Interest Account; (e) to withdraw any funds deposited in the Principal and Interest Account that were not required to be deposited therein or were deposited therein in error; (f) to pay itself servicing compensation pursuant to Section 7.03 hereof or interest as permitted under the definition of Excess Proceeds; and (g) to clear and terminate the Principal and Interest Account upon the termination of this Agreement. So long as no default or Event of Default shall have occurred and be continuing, and consistent with any requirements of the Code, the Principal and Interest Account shall either be V-8 maintained with a Designated Depository Institution as an interest-bearing account meeting the requirements set forth in Section 5.03(a), or the funds held therein may be invested by the Servicer (to the extent practicable) in Permitted Instruments, as directed in writing by the Servicer. In either case, funds in the Principal and Interest Account must be available for withdrawal without penalty, and any Permitted Instruments must mature not later than the Business Day immediately preceding the Determination Date next following the date of such investment (except that if such Permitted Instrument is an obligation of the institution that maintains such account, then such Permitted Instrument shall mature not later than such Determination Date) and shall not be sold or disposed of prior to its maturity. All Permitted Instruments must be held by or registered in the name of "First National Bank of New England, in trust for the registered holders of First National Bank of New England SBA Loan-Backed Adjustable Rate Certificates, Series 1998-1." All interest or other earnings from funds on deposit in the Principal and Interest Account (or any Permitted Instruments thereof) shall be the exclusive property of the Servicer, and may be withdrawn from the Principal and Interest Account pursuant to clause (d) above. The amount of any losses incurred in connection with the investment of funds in the Principal and Interest Account in Permitted Instruments shall be deposited in the Principal and Interest Account by the Servicer from its own funds immediately as realized without reimbursement therefor. Section 5.05 [Intentionally Omitted] Section 5.06 Transfer of Accounts. -------------------- The Servicer may, upon written notice to the Trustee and the SBA, transfer any Principal and Interest Account to a different Designated Depository Institution. Section 5.07 Maintenance of Hazard Insurance. ------------------------------- The Servicer shall comply with the SBA Rules and Regulations concerning the issuance and maintenance of fire and hazard insurance with extended coverage customary in the area where the Mortgaged Property is located. If at origination of an SBA Loan, to the best of the Servicer's knowledge after reasonable investigation, the related Mortgaged Property is in an area identified in the Federal Register by the Flood Emergency Management Agency as having special flood hazards (and such flood insurance has been made available) consistent with the SBA Rules and Regulations, the Servicer will require the related Obligor to purchase a flood insurance policy with a generally acceptable insurance carrier, in an amount representing coverage not less than the least of (i) the full insurable value of the Mortgaged V-9 Property, or (ii) the maximum amount of insurance available under the National Flood Insurance Act of 1968, as amended. The Servicer shall also maintain, to the extent such insurance is available, and required by the SBA Rules and Regulations and the Servicer's policies, on Foreclosed Property constituting real property, fire and hazard insurance in the amounts described above and liability insurance. Any amounts collected by the Servicer under any such policies (other than amounts to be applied to the restoration or repair of the Mortgaged Property, or to be released to the Obligor in accordance with the SBA Rules and Regulations) shall be deposited in the Principal and Interest Account, subject to withdrawal pursuant to Section 5.04. It is understood and agreed that no earthquake or other additional insurance need be required by the Servicer of any Obligor or maintained on Foreclosed Property, other than pursuant to such applicable laws and regulations as shall at any time be in force and as shall require such additional insurance. All policies required hereunder shall be endorsed with standard mortgagee clauses with losses payable to the Servicer or its affiliates. Section 5.08 [Intentionally Omitted] Section 5.09 Fidelity Bond. ------------- The Servicer shall maintain with a responsible company, and at its own expense, a blanket fidelity bond and an errors and omissions insurance policy, in a minimum amount equal to $1,500,000, and a maximum deductible of $100,000, if commercially available, with coverage on all employees acting in any capacity requiring such persons to handle funds, money, documents or papers relating to the SBA Loans ("Servicer Employees"). The fidelity bond shall insure the Trustee, its officers and employees against losses resulting from forgery, theft, embezzlement or fraud by such Servicer Employees. The errors and omissions policy shall insure against losses resulting from the errors, omissions and negligent acts of such Servicer employees. No provision of this Section 5.09 requiring such fidelity bond and errors and omissions insurance shall relieve the Servicer from its duties as set forth in this Agreement. Upon the request of the Trustee, the SBA or any Certificateholder, the Servicer shall cause to be delivered to the Trustee, the SBA or such Certificateholder a certified true copy of such fidelity bond and insurance policy. The current issuer of such fidelity bond and insurance policy is the ITT Hartford Group, located in Hartford, Connecticut. V-10 Section 5.10 Title, Management and Disposition --------------------------------- of Foreclosed Property ---------------------- In the event that title to a Mortgaged Property or other Collateral is acquired in foreclosure, by deed in lieu of foreclosure or by other legal process(a "Foreclosed Property"), the deed or certificate of sale or the Repossessed Collateral may be taken in the name of the Trustee on behalf of the Trust for the benefit of the Certificateholders and the SBA, as their interests may appear. Unless the servicing of a Foreclosed Property or item of Repossessed Collateral relating to an SBA (S) 7(a) Loan is assumed by the SBA pursuant to the SBA Rules and Regulations, the Servicer, subject to Sections 5.01 and 5.02 hereof, shall manage, conserve, protect and operate each Foreclosed Property or other Repossessed Collateral for the SBA and the Certificateholders solely for the purpose of its prudent and prompt disposition and sale. The Servicer shall, either itself or through an agent selected by the Servicer, manage, conserve, protect and operate the Foreclosed Property or other Repossessed Collateral in the same manner that it manages, conserves, protects and operates other foreclosed or repossessed property for its own account, and in the same manner that similar property in the same locality as the Foreclosed Property or other Repossessed Collateral is managed. The Servicer shall attempt to sell the same (and may temporarily rent the same) on such terms and conditions as the Servicer deems to be in the best interest of the SBA and the Certificateholders. The Servicer shall cause to be deposited in the Principal and Interest Account, no later than five Business Days after the receipt thereof, the Unguaranteed Percentage of all revenues received with respect to the conservation and disposition of the related Foreclosed Property or other Repossessed Collateral net of Servicing Advances. The disposition of Foreclosed Property or other Repossessed Collateral shall be carried out by the Servicer at such price, and upon such terms and conditions, as the Servicer, with SBA concurrence (if required by the SBA Rules and Regulations), deems to be in the best interest of the SBA and the Certificateholders. The Unguaranteed Percentage of the proceeds of sale of the Foreclosed Property or other Repossessed Collateral shall promptly, but in no event later than two Business Days after receipt, be deposited in the Principal and Interest Account as received from time to time and, as soon as practicable thereafter, the expenses of such sale shall be paid. The Servicer shall, subject to Section 5.04, reimburse itself for any related unreimbursed Servicing Advances, unpaid Servicing V-11 Fees and unreimbursed Monthly Advances, and the Servicer shall deposit in the Principal and Interest Account the Unguaranteed Percentage of the net cash proceeds of such sale to be distributed to the Certificateholders in accordance with Section 6.07 hereof. In the event any Mortgaged Property or other Repossessed Collateral is acquired as aforesaid or otherwise in connection with a default or imminent default on an SBA Loan, the Servicer shall dispose of such Mortgaged Property or other Repossessed Collateral within two years after its acquisition unless the Servicer and the Trustee shall have received an Opinion of Counsel also addressed to the SBA to the effect that such longer retention will not cause the Trust Fund to be subject to Federal income tax. Section 5.11 [Intentionally Omitted.] Section 5.12 Collection of Certain SBA ------------------------- Loan Payments. ------------- The Servicer shall make reasonable efforts to collect all payments called for under the terms and provisions of the SBA Loans, and shall cause the Obligor under the SBA Loan, to the extent such procedures shall be consistent with this Agreement, to comply with the terms and provisions of any applicable hazard insurance policy. Consistent with the foregoing and the SBA Rules and Regulations, the Servicer may in its discretion waive or permit to be waived any fee or charge (other than the Servicing Fee, without the written consent of the SBA) which the Servicer would be entitled to retain hereunder as servicing compensation and extend the due date for payments due on an SBA Note for a period (with respect to each payment as to which the due date is extended) not greater than 180 days after the initially scheduled due date for such payment provided that the Servicer determines such extension would not be considered a new mortgage loan for federal income tax purposes. In the event the Servicer shall consent to the deferment of the due dates for payments due on an SBA Note, the Servicer shall nonetheless make payment of any required Monthly Advance with respect to the payments so extended to the same extent as if such installment were due, owing and delinquent and had not been deferred, and shall be entitled to reimbursement therefor in accordance with Section 5.04(b) hereof. Section 5.13 Access to Certain Documentation and ----------------------------------- Information Regarding the SBA Loans. ----------------------------------- The Servicer shall provide to the Trustee, the SBA, the FDIC, and the OCC, and the supervisory agents and examiners of V-12 each of the foregoing access to the documentation regarding the SBA Loans required by applicable local, state and federal regulations, such access being afforded without charge but only upon reasonable request and during normal business hours at the offices of the Servicer designated by it. V-13 ARTICLE VI PAYMENTS TO THE CERTIFICATEHOLDERS ---------------------------------- Section 6.01 Establishment of Certificate Account; Deposits in ------------------------------------------------- Certificate Account; Permitted Withdrawals from ----------------------------------------------- Certificate Account. ------------------- (a) No later than the Closing Date, the Trustee will establish and maintain with itself in its trust department a trust account, which shall not be interest-bearing, titled "Certificate Account, Marine Midland Bank, as trustee for the registered holders of First National Bank of New England SBA Loan-Backed Adjustable Rate Certificates, Series 1998-1, Class A and Class B" (the "Certificate Account"). The Trustee shall, promptly upon receipt, deposit in the Certificate Account and retain therein: (i) the Available Funds (net of the amount of Monthly Advances and Compensating Interest deposited pursuant to subclause (ii) below and amounts then on deposit in the Spread Account) remitted by the Servicer; (ii) the Compensating Interest and the portion of the Monthly Advance remitted to the Trustee by the Servicer; (iii) amounts transferred from the Spread Account pursuant to Section 6.02(b)(i); (iv) amounts required to be paid by the Servicer pursuant to Section 6.06(e) in connection with losses on investments of amounts in the Certificate Account; and (v) amounts transferred from the Pre-Funding Account and the Capitalized Interest Account on the Special Remittance Date pursuant to Sections 6.04(c) and (h), respectively. (b) Amounts on deposit in the Certificate Account shall be withdrawn on each Remittance Date by the Trustee, or the Paying Agent, on its behalf, to effect the distribution described in Section 6.07(b) and thereafter by the following parties in no particular order of priority: VI-1 (i) by the Trustee, to invest amounts on deposit in the Certificate Account in Permitted Instruments pursuant to Section 6.06; (ii) by the Trustee, to pay on a monthly basis to the Servicer as additional servicing compensation interest paid and earnings realized on Permitted Instruments; (iii) by the Trustee, to withdraw any amount not required to be deposited in the Certificate Account or deposited therein in error; and (iv) by the Trustee, to clear and terminate the Certificate Account upon the termination of this Agreement in accordance with the terms of Section 11.01 hereof. Section 6.02 Establishment of Spread Account; Deposits in Spread --------------------------------------------------- Account; Permitted Withdrawals from Spread Account. -------------------------------------------------- (a) No later than the Closing Date, the Trustee will establish with the Spread Account Custodian an Account in accordance with the terms of the Spread Account Agreement (the "Spread Account"). The Spread Account shall be the property of the Spread Account Depositor, subject to the terms hereof and of the Spread Account Agreement, and the funds held therein may be invested in Permitted Instruments. The Spread Account shall not constitute part of the Trust Fund. The Trustee or the Spread Account Custodian, as the case may be, shall, promptly upon receipt, deposit into the Spread Account or, in the case of the Trustee, transfer to the Spread Account Custodian for deposit in the Spread Account: (i) on the Closing Date, the Initial Spread Account Deposit made by the Spread Account Depositor; (ii) on each Remittance Date, that portion of the Available Funds, if any, required to be deposited into the Spread Account pursuant to Section 6.07(b)(vi) until the Spread Account Balance equals the then applicable Specified Spread Account Requirement; and (iii) amounts required to be paid by the Servicer pursuant to Section 6.06(e) in connection with losses on investments of amounts in the Spread Account. VI-2 (b) Amounts on deposit in the Spread Account shall be withdrawn by the Spread Account Custodian and transferred to the Trustee for distribution in the manner set forth in subclause (c) below on each Remittance Date in the following order of priority: (i) to deposit in the Certificate Account an amount by which (a) the sum of the Class A and Class B Interest Distribution Amounts, the Class A and Class B Principal Distribution Amounts and the Class A and Class B Carry Forward Amounts exceeds (b) the Available Funds for such Remittance Date (but excluding from such definition of Available Funds, amounts in the Spread Account); (ii) to deposit in the Certificate Account the amount, if any, required to make the full distribution to the Expense Account pursuant to Section 6.07(b)(v); and (iii) to the extent that the amount then on deposit in the Spread Account after giving effect to all required transfers from the Spread Account to the Certificate Account on such Remittance Date then exceeds the Specified Spread Account Requirement as of such Remittance Date (such excess, a "Spread Account Excess"), an amount equal to such Spread Account Excess shall be distributed by the Spread Account Custodian to the Spread Account Depositor; and also, in no particular order of priority: (iv) to invest amounts on deposit in the Spread Account in Permitted Instruments pursuant to Section 6.06; (v) to withdraw any amount not required to be deposited in the Spread Account or deposited therein in error; and (vi) to clear and terminate the Spread Account upon the termination of this Agreement in accordance with the terms of Section 11.01. (c) Any amounts which are required to be withdrawn from the Spread Account pursuant to paragraph (b) above shall be withdrawn from the Spread Account in the following order of priority: (i) first, from any uninvested ----- funds therein, and (ii) second, from the proceeds of the liquidation of any ------ investments therein pursuant to Section 6.06(b). VI-3 (d) Any amounts which are distributed by the Spread Account Custodian to the Spread Account Depositor pursuant to paragraph (b) above will not be required to be refunded, regardless of whether there are sufficient funds on a subsequent Remittance Date to make a full distribution to holders of the Certificates on such Remittance Date. Section 6.03 Establishment of Expense Account; Deposits in Expense ----------------------------------------------------- Account; Permitted Withdrawals from Expense Account --------------------------------------------------- (a) No later than the Closing Date, the Trustee will establish with itself an account for the benefit of the Trustee to pay its fees and expenses related to the Trust Fund (the "Expense Account"). The Expense Account shall not constitute part of the Trust Fund and is for the benefit of the Trustee and, on a subordinate basis, for the benefit of the Servicer as described in (b)(ii) and (c) below. The Trustee shall deposit into the Expense Account: (i) on each Remittance Date from the amounts on deposit in the Certificate Account an amount equal to one-twelfth of the Annual Expense Escrow Amount; and (ii) upon receipt, amounts required to be paid by the Servicer pursuant to Section 6.06(e) in connection with losses on investments of amounts in the Expense Account. If, at any time the amount then on deposit in the Expense Account shall be insufficient to pay in full the fees and expenses of the Trustee then due, the Trustee shall make demand on the Servicer to advance the amount of such insufficiency, and the Servicer shall promptly advance such amount to the Trustee. Thereafter, the Servicer shall be entitled to reimbursement from the Expense Account for the amount of any such advance from any excess funds available pursuant to subclause (c)(ii) below. Without limiting the obligation of the Servicer to advance such insufficiency, in the event the Servicer does not advance the full amount of such insufficiency by the Business Day immediately preceding the Determination Date, the amount of such insufficiency shall be deposited into the Expense Account for payment to the Trustee pursuant to Section 6.07(b)(v), to the extent of available funds in the Certificate Account. (b) The Trustee, at the direction of the Servicer, may invest amounts on deposit in the Expense Account in Permitted Instruments pursuant to Section 6.06 hereof, and the Trustee shall withdraw amounts on deposit in the Expense Account to: VI-4 (i) pay the Trustee's fees and expenses as described in Section 2.08 hereof; (ii) pay on a monthly basis to the Servicer as additional servicing compensation interest paid and earnings realized on Permitted Instruments; (iii) withdraw any amounts not required to be deposited in the Expense Account or deposited therein in error; and (iv) clear and terminate the Expense Account upon the termination of this Agreement in accordance with the terms of Section 11.01. (c) On the twelfth Remittance Date following the Closing Date, an on each twelfth Remittance Date thereafter, the Trustee shall determine that all payments required to be made during the prior twelve month period pursuant to subclauses (b)(i), (b)(ii) and (b)(iii) above, have been made, and, if all such payments have been made, from the amounts remaining in the Expense Account, the Trustee shall (in the following order of priority): (i) reimburse the Servicer and/or the Seller, for reimbursable advances made pursuant to Section 9.01; (ii) reimburse the Servicer for advances made by it pursuant to the last paragraph of subclause (a) above; and (iii) remit to the Servicer as additional servicing compensation any amounts remaining in the Expense Account after payments made pursuant to subclauses (b)(i), (b)(ii), (b)(iii), (c)(i) and (c)(ii), above. Section 6.04 Pre-Funding Account and Capitalized Interest Account. ---------------------------------------------------- (a) No later than the Closing Date, the Seller shall establish and maintain with the Trustee in its trust department a trust account, which shall not be interest-bearing, titled "First National Bank of New England SBA Pre- Funding Account 1998-1" (the "Pre-Funding Account"). The Pre-Funding Account shall not constitute part of the Trust Fund. The Seller shall be deemed the owner of the Pre-Funding Account for Federal income tax purposes. The Trustee shall, promptly upon receipt, deposit into VI-5 the Pre-Funding Account and retain therein the Original Pre-Funded Amount from the proceeds of the sale of the Certificates. (b) On each Subsequent Transfer Date, the Seller shall instruct the Trustee to withdraw from the Pre-Funding Account an amount equal to 100% of the aggregate Principal Balances of the Subsequent SBA Loans as of the related Subsequent Cut-Off Date sold to the Trust Fund on such Subsequent Transfer Date and pay such amount to or upon the order of the Seller with respect to such transfer. (c) If at the end of the Funding Period amounts still remain in the Pre-Funding Account, the Servicer shall instruct the Trustee to withdraw from the Pre-Funding Account on the immediately following Remittance Date and deposit such amounts in the Certificate Account. However, if at the close of business on September 10, 1998, amounts still remain in the Pre-Funding Account, the Servicer shall instruct the Trustee to withdraw from the Pre-Funding Account on the Special Remittance Date and deposit in the Certificate Account any Pre- Funded Amount then remaining in the Pre-Funding Account, and then the Pre- Funding Account shall be closed. (d) On the Remittance Dates occurring in August and September 1998, the Trustee shall transfer from the Pre-Funding Account to the Certificate Account, the Pre-Funding Earnings, if any, applicable to each such Remittance Date. (e) No later than the Closing Date, the Seller shall establish and maintain with the Trustee in its trust department a trust account, which shall not be interest-bearing, titled "First National Bank of New England SBA Capitalized Interest Account 1998-1" (the "Capitalized Interest Account"). The Capitalized Interest Account shall not constitute part of the Trust Fund. The Seller shall be deemed the owner of the Capitalized Interest Account for Federal income tax purposes. The Trustee shall, promptly upon receipt, deposit into the Capitalized Interest Account $71,750.36. If prior to the end of the Funding Period the funds on deposit in the Pre-Funding Account are invested in a guaranteed investment contract, repurchase agreement or other arrangement acceptable to the Rating Agency, that constitutes a Permitted Instrument, the Trustee shall, within one Business Day of its receipt of notification of satisfaction of the Rating Agency Condition, withdraw from the Capitalized Interest Account and pay to the Seller the amount set forth in such notification. (f) On each Subsequent Transfer Date the Seller may instruct the Trustee to withdraw from the Capitalized Interest Account and pay on such Subsequent Transfer Date to the Seller VI-6 the Overfunded Interest Amount for such Subsequent Transfer Date, as calculated by the pursuant to Section 2.09(e) hereof. (g) On the Remittance Dates occurring in August and September 1998 the Trustee shall transfer from the Capitalized Interest Account to the Certificate Account, the Capitalized Interest Requirement, if any, for such Remittance Dates. (h) On the Special Remittance Date, the Trustee shall transfer from the Capitalized Interest Account to the Certificate Account the Capitalized Interest Requirement, if any, for such Special Remittance Date. Any amounts remaining in the Capitalized Interest Account after taking into account such transfer shall be paid on such Special Remittance Date to the Seller, and the Capitalized Interest Account shall be closed. Section 6.05 [Intentionally Omitted] Section 6.06 Investment of Accounts. ---------------------- (a) So long as no default or Event of Default shall have occurred and be continuing, and consistent with any requirements of the Code, all or a portion of any Account which is not by the terms of this Agreement to be held uninvested by the Trustee or the Spread Account Custodian shall be invested and reinvested by the Trustee or the Spread Account Custodian, as directed in writing by the Servicer, in one or more Permitted Instruments in the name of the Trustee or the Spread Account Custodian, as the case may be, bearing interest or sold at a discount. No such investment in the Certificate Account, the Pre- Funding Account, the Capitalized Interest Account and the Spread Account shall mature later than the Business Day immediately preceding the next Remittance Date and no such investment in the Expense Account shall mature later than the Business Day immediately preceding the date such funds will be needed to pay fees or premiums; provided, however, the Trustee or any affiliate thereof, may -------- ------- be the obligor on any investment which otherwise qualifies as a Permitted Instrument and any investment on which the Trustee is the obligor may mature on such Remittance Date or date when needed, as the case may be. (b) If any amounts are needed for disbursement from any Account held by the Trustee or the Spread Account Custodian and sufficient uninvested funds are not available to make such disbursement, the Trustee or the Spread Account Custodian, as the case may be, shall cause to be sold or otherwise converted to cash a sufficient amount of the investments in such Account. Neither the Trustee nor the Spread Account Custodian shall be liable for any investment loss or other charge resulting therefrom. VI-7 (c) Subject to Section 12.01 hereof, neither the Trustee nor the Spread Account Custodian shall in any way be held liable by reason of any insufficiency in any Account held by the Trustee or the Spread Account Custodian resulting from any investment loss on any Permitted Instrument included therein (except to the extent that the Trustee is the obligor thereon). (d) The Trustee and the Spread Account Custodian shall invest and reinvest funds in the Accounts held by the Trustee or the Spread Account Custodian, to the fullest extent practicable, in such manner as the Servicer shall from time to time direct in writing, but only in one or more Permitted Instruments. (e) All income or other gain from investments in any Account held by the Trustee or the Spread Account Custodian shall be deposited in such Account, as the case may be, immediately on receipt, and the Trustee or the Spread Account Custodian shall notify the Servicer of any loss resulting from such investments. The Servicer shall remit the amount of any such loss, to the extent that such investment was made at the direction of the Servicer, from its own funds, without reimbursement therefor, to the Trustee or the Spread Account Custodian, as the case may be, for deposit in the Account from which the related funds were withdrawn for investment by the next Determination Date following receipt by the Servicer of such notice. Section 6.07 Distributions. ------------- (a) The rights of the Certificateholders to receive distributions from the proceeds of the Trust Fund, and all ownership interests of the Certificateholders in such distributions, shall be as set forth in this Agreement. (b) On each Remittance Date the Trustee shall withdraw from the Certificate Account the sum of (A) that portion of the Available Funds received from the Servicer pursuant to Section 6.01(a)(i), (ii) and (iv),and (B) the amounts deposited therein pursuant to Section 6.02(b)(i) and make distributions thereof in the following order of priority: (i) First, to the Class A Certificates in an amount up to the Class A Interest Distribution Amount; (ii) Second, to the Class B Certificates in an amount up to the Class B Interest Distribution Amount; (iii) Third, to the Class A Certificates in an amount up to the sum of (a) the Class A Principal VI-8 Distribution Amount and (b) the Class A Carry Forward Amount; (iv) Fourth, to the Class B Certificates, in an amount up to the sum of (a) the Class B Principal Distribution Amount and (b) the Class B Carry Forward Amount; (v) Fifth, to the Expense Account in an amount up to one- twelfth of the Annual Expense Escrow Amount plus any amount required to be paid to the Trustee pursuant to Section 6.03(a) resulting from insufficiencies in the Expense Account; (vi) Sixth, to the Spread Account, any remaining Available Funds unless and until the amount therein equals the Specified Spread Account Requirement; (vii) Seventh, to the Servicer in an amount up to the Reimbursable Amounts; and (viii) Eighth, to the Spread Account Depositor, any amounts in excess of the Specified Spread Account Requirement. Notwithstanding the foregoing, the Servicer shall not be entitled to receive Reimbursable Amounts pursuant to clause (vi) above until the first Remittance Date on which the Spread Account Balance equals the then applicable Specified Account Requirement. Additionally, on the Special Remittance Date, the Trustee shall withdraw from the Certificate Account the amount, if any, deposited therein pursuant to Section 6.01(a)(v) and make distributions thereof as follows: (i) from amounts transferred from the Pre-Funding Account, distributions of principal to the Class A and Class B Certificates pro rata based upon the Class A and Class B Percentages and (ii) from amounts transferred from the Capitalized Interest Account, distributions of interest to such Class A and Class B Certificates equal to the applicable Capitalized Interest Requirement. (c) All distributions made to the Certificateholders of a particular Class will be made on a pro rata basis among the Certificateholders of record of the applicable Class on the next preceding Record Date based on the Percentage Interest represented by their respective Certificates on such date, and shall be made by check or, upon request by a Certificateholder, by wire transfer of immediately available funds to the account of VI-9 such Certificateholder at a bank or other entity having appropriate facilities therefor, and, in the case of wire transfers, at the expense of such Certificateholder unless such Certificateholder shall own of record Certificates which have initial Certificate Principal Balances aggregating at least $5,000,000. Section 6.08 [Intentionally Omitted] Section 6.09 Statements. ---------- Each month, not later than 12:00 noon New York time on the Determination Date, the Servicer shall deliver to the Trustee, by telecopy, for distribution to the Certificateholders, the receipt and legibility of which shall be confirmed telephonically, with hard copy thereof and the Servicer's Monthly Computer Diskette in the form attached hereto as Exhibit L (both in hard copy and in computer diskette form) to be delivered on the Business Day following the Determination Date, a certificate signed by a Servicing Officer (a "Servicer's Certificate") stating the date (day, month and year), the Series number of the Certificates, the date of this Agreement, and, as of the close of business on the Record Date for such month: (i) Available Funds for the related Remittance Date; (ii) The Aggregate Class A Certificate Principal Balance, the Aggregate Class B Certificate Principal Balance and the Pool Principal Balance as reported in the prior Servicer's Certificate pursuant to subclause (xii) below, or, in the case of the first Determination Date, the Original Class A and Class B Certificate Principal Balance and the Original Pool Principal Balance; (iii) The number and Principal Balances of all SBA Loans which were the subject of Principal Prepayments during the Due Period and the number and Principal Balances of all Defaulted SBA Loans purchased by the Servicer during the Due Period; (iv) The product of the Unguaranteed Percentage multiplied by all Curtailments which were received during the Due Period; (v) The product of the Unguaranteed Percentage multiplied by all Excess Payments and the product of the Unguaranteed Percentage multiplied by VI-10 all Monthly Payments in respect of principal received during the Due Period; (vi) The aggregate amount of interest received on the Unguaranteed Interest of each SBA Loan; (vii) The amount of the Monthly Advances to be made on the Determination Date and the Compensating Interest payment to be made on the Determination Date; (viii) The delinquency and foreclosure information set forth in the form attached hereto as Exhibit K; (ix) The product of the Unguaranteed Percentage multiplied by the amount of any losses realized on a Liquidated SBA Loan; (x) The Class A and Class B Interest Distribution Amounts and Principal Distribution Amounts for the Remittance Date with the components thereof stated separately; (xi) The amount stated in dollars and as a percentage of the current aggregate Principal Balance of the Class A and Class B Certificates of the funds available in the Spread Account as of the related Record Date in cash and from liquidation of Permitted Instruments and the amount, if any, to be transferred from the Spread Account to the Certificate Account pursuant to Section 6.02(b)(i); (xii) The Aggregate Class A Certificate Principal Balance, Aggregate Class B Certificate Principal Balance and the Pool Principal Balance after giving effect to the distribution to be made on the Remittance Date; (xiii) The Spread Account Balance and the Specified Spread Account Requirement with respect to such Remittance Date; (xiv) The weighted average maturity and weighted average SBA Loan Interest Rate; (xv) The Servicing Fees and the Annual Expense Escrow Amount and other amounts to be deposited to the Expense Account; VI-11 (xvi) The amount of all payments and reimbursements to the Servicer pursuant to Section 5.04 (b), (c), (d)(ii), (e) and (f); (xvii) The Class A and Class B Remittance Rates with respect to such Remittance Date; (xviii) During the Funding Period, the aggregate Principal Balance of the Subsequent SBA Loans purchased during the prior Due Period and the amount on deposit in the Pre-Funding Account as of the end of such Due Period; and (xix) Such other information as the Trustee, the Certificateholders or the Rating Agency may reasonably require; provided, however, that the Servicer shall have no obligation to distribute such information directly to any Certificateholder. The Trustee shall forward such report to the Certificateholders and the Rating Agency on the Remittance Date, together with a separate report indicating the amount of funds deposited in the Certificate Account pursuant to Section 6.01(a)(iv); and the amounts which are reimbursable to the Servicer or the Seller pursuant to Sections 6.03(c)(i), 6.03(c)(ii) and 6.07(b)(vii) (all reports prepared by the Trustee of such withdrawals and deposits will be based in whole or in part upon the information provided to the Trustee by the Servicer). To the extent that there are inconsistencies between the telecopy of the Servicer's Certificate and the hard copy thereof, the Trustee shall be entitled to rely upon the telecopy. In the case of information furnished pursuant to subclauses (ii), (iii), (iv), (v), (x) and (xii), above, the amounts shall be expressed in a separate section of the report as a dollar amount for each Class per $1,000 original dollar amount as of the Cut-Off Date. Additionally, on the Special Remittance Date the Trustee shall, based upon information received from the Servicer, forward to the Certificateholders and the Rating Agency a report setting forth the amount of principal and interest, if any, being paid to each Class of Certificates on the Special Remittance Date. (a) Within a reasonable period of time after the end of each calendar year, the Servicer shall furnish to the Trustee for distribution to each Person who at any time during the calendar year was a Certificateholder such information as is VI-12 reasonably necessary to provide to such Person a statement containing the information set forth in subclauses (vi), (x), and (xiv), above, aggregated for such calendar year or applicable portion thereof during which such Person was a Certificateholder. Such obligation of the Servicer shall be deemed to have been satisfied to the extent that substantially comparable information shall be provided by the Servicer pursuant to any requirements of the Code as from time to time are in force. (b) Upon reasonable advance notice in writing, the Servicer will provide to each Certificateholder which is a savings and loan association, bank or insurance company certain reports and access to information and documentation regarding the SBA Loans sufficient to permit such Certificateholder to comply with applicable regulations of its regulatory authorities with respect to investment in the Certificates. (c) The Servicer shall furnish to each Certificateholder, during the term of this Agreement, such periodic, special, or other reports or information, whether or not provided for herein, as shall be necessary, reasonable, or appropriate with respect to the Certificateholder or otherwise with respect to the purposes of this Agreement, all such reports or information to be provided by and in accordance with such applicable instructions and directions as the Certificateholder may reasonably require; provided, that the Servicer shall be entitled to be reimbursed by such Certificateholder for the Servicer's actual expenses incurred in providing such reports if such reports are not producible in the ordinary course of the Servicer's business. The Rating Agency shall receive copies of any such reports or information furnished to the Certificateholders. Section 6.10 Advances by the Servicer. ------------------------ Not later than the close of business on each Determination Date, the Servicer, may in its sole discretion, if it determines such amount is recoverable, remit to the Trustee for deposit in the Certificate Account an amount (as indicated in the Servicer's Certificate prepared pursuant to Section 6.09), to be distributed on the related Remittance Date pursuant to Section 6.07, equal to the amount by which (i) 30 days' interest (or with respect to the first Remittance Date, 45 days' interest) at a rate equal to the then applicable Adjusted SBA Loan Remittance Rate on the aggregate Class A and Class B Principal Balances immediately prior to the related Remittance Date (plus or minus the difference, if any, between (A) the sum of the Class A and Class B Interest Distribution Amounts and (B) the sum of the Adjusted Class A and Adjusted Class B Interest Distribution Amounts for the related Remittance Date) exceeds (ii) the amount VI-13 received by the Servicer as of the related Record Date in respect of interest on the Unguaranteed Interest of the SBA Loans minus the Servicing Fee allocable to the Unguaranteed Interest (plus, for the Remittance Dates in August and September 1998, the sum of (i) all funds to be transferred to the Certificate Account from the Capitalized Interest Account for such Remittance Date pursuant to Section 6.04(g) and (ii) the Pre-Funding Earnings for the applicable Remittance Date), such excess being defined herein as the "Monthly Advance." The Servicer may reimburse itself for Monthly Advances made pursuant to Section 5.04. Notwithstanding the foregoing, the Servicer shall not be required to make a Monthly Advance with respect to an SBA Loan if it determines, in good faith, that such advance would be nonrecoverable from amounts received in respect of the SBA Loans. Section 6.11 Compensating Interest. --------------------- The Certificateholders shall be entitled to a full month's interest on the principal portion of the Unguaranteed Interest of each SBA Loan at the then applicable Class A or Class B Remittance Rate, as the case may be. Not later than the close of business on each Determination Date, with respect to each SBA Loan for which a Principal Prepayment or Curtailment was received during the related Due Period, the Servicer shall remit to the Trustee for deposit in the Certificate Account from amounts otherwise payable to it as servicing compensation, an amount (such amount required to be delivered to the Trustee is referred to herein as "Compensating Interest") (as indicated in the Servicer's Certificate prepared pursuant to Section 6.09) equal to the difference between (a) 30 days' interest (or with respect to the first Remittance Date 45 days' interest) at the Adjusted SBA Loan Remittance Rate on the Principal Balance of each such SBA Loan as of the beginning of the Due Period applicable to the Remittance Date on which such amount will be distributed, and (b) the amount of interest actually received on the Unguaranteed Interest of each such SBA Loan for such Due Period net of the Servicing Fee allocable to the Unguaranteed Interest and the fees and expenses of the Trustee allocable to such interest and, with respect to each Additional Fee SBA Loan, the Additional Fee. Section 6.12 Reports of Foreclosure and Abandonment of Mortgaged --------------------------------------------------- Property -------- Each year the Servicer shall make the reports of foreclosures and abandonments of any Mortgaged Property required by Section 6050J of the Code. Promptly after filing each such report with the Internal Revenue Service, the Servicer shall provide the Trustee with an Officer's Certificate certifying that such report has been filed. VI-14 ARTICLE VII GENERAL SERVICING PROCEDURE --------------------------- Section 7.01 [Intentionally Omitted] Section 7.02 Satisfaction of Mortgages and Collateral and Release of ------------------------------------------------------- SBA Files --------- The Servicer shall maintain the Fidelity Bond as provided for in Section 5.09 insuring the Servicer against any loss it may sustain with respect to any SBA Loan not satisfied in accordance with the procedures set forth herein. Upon the payment in full of any SBA Loan, or the receipt by the Servicer of a notification that payment in full will be escrowed in a manner customary for such purposes, the Servicer will immediately notify the FTA and the Trustee by a certification in the form of Exhibit I attached hereto (which certification shall include a statement to the effect that all amounts received or to be received in connection with such payment which are required to be deposited in the Principal and Interest Account pursuant to Section 5.03 have been or will be so deposited) of a Servicing Officer and shall request delivery to it of the Trustee's Document File. Upon receipt of such certification and request, the FTA and the Trustee shall release, within 3 Business Days, the related Trustee's Document File to the Servicer. Expenses incurred in connection with any instrument of satisfaction or deed of reconveyance shall be payable only from and to the extent of servicing compensation and shall not be chargeable to the Principal and Interest Account or the Certificate Account. Subject to the Multi-Party Agreement, from time to time and as appropriate for the servicing or foreclosure of any SBA Loan, the FTA and the Trustee shall, upon request of the Servicer and delivery to the FTA and the Trustee of a certification in the form of Exhibit I attached hereto signed by a Servicing Officer, release the related Trustee's Document File to the Servicer within 3 Business Days, and the Trustee shall execute such documents as shall be necessary to the prosecution of any such proceedings. The Servicer shall return the Trustee's Document File to the FTA and the Trustee when the need therefor by the Servicer no longer exists, unless the SBA Loan has been liquidated and the Unguaranteed Percentage of the Liquidation Proceeds relating to the SBA Loan has been deposited in the Principal and Interest Account and remitted to the Trustee for deposit in the Certificate Account or the SBA File or such document has been delivered to an attorney, or to a public trustee or other public official as required by law, for purposes VII-1 of initiating or pursuing legal action or other proceedings for the foreclosure of the Mortgaged Property or repossession of other Collateral either judicially or non-judicially, and the Servicer has delivered to the FTA and the Trustee a certificate of a Servicing Officer certifying as to the name and address of the Person to whom such SBA File or such document was delivered and the purpose or purposes of such delivery. Upon receipt of a certificate of a Servicing Officer stating that such SBA Loan was liquidated, the servicing receipt shall be released by the Trustee to the Servicer. The Trustee shall execute and deliver to the Servicer any court pleadings, requests for trustee's sale or other documents provided to it necessary to the foreclosure or trustee's sale in respect of a Mortgaged Property or other Collateral or to any legal action brought to obtain judgment against any Obligor on the SBA Note or Mortgage or other agreement securing Collateral or to obtain a deficiency judgment, or to enforce any other remedies or rights provided by the SBA Note or Mortgage or other agreement securing Collateral or otherwise available at law or in equity. Together with such documents or pleadings, the Servicer shall deliver to the Trustee a certificate of a Servicing Officer requesting that such pleadings or documents be executed by the Trustee and certifying as to the reason such documents or pleadings are required and that the execution and delivery thereof by the Trustee will not invalidate or otherwise affect the lien of the Mortgage or other agreement securing Collateral, except for the termination of such a lien upon completion of the foreclosure or trustee's sale. The Trustee shall, upon receipt of a written request from a Servicing Officer, execute any document provided to the Trustee by the Servicer or take any other action requested in such request, that is, in the opinion of the Servicer as evidenced by such request, required by any state or other jurisdiction to discharge the lien of a Mortgage or other agreement securing Collateral upon the satisfaction thereof and the Trustee will sign and post, but will not guarantee receipt of, any such documents to the Servicer, or such other party as the Servicer may direct, within five Business Days of the Trustee's receipt of such certificate or documents. Such certificate or documents shall establish to the Trustee's satisfaction that the related SBA Loan has been paid in full by or on behalf of the Obligor and that such payment has been deposited in the Principal and Interest Account. Section 7.03 Servicing Compensation. ---------------------- As compensation for its services hereunder, the Servicer shall be entitled to withdraw from the Principal and Interest Account or to retain from interest payments on the SBA Loans the Servicer's Servicing Fee in accordance with Section VII-2 5.04(b). Additional servicing compensation in the form of assumption and other administrative fees, interest paid on funds on deposit in the Principal and Interest Account, interest paid and earnings realized on Permitted Instruments, amounts remitted pursuant to Section 6.03(c)(iii) and late payment charges shall be retained by or remitted to the Servicer to the extent not required to be remitted to the Trustee for deposit in the Certificate Account. The Servicer shall be required to pay all expenses incurred by it in connection with its servicing activities hereunder and shall not be entitled to reimbursement therefor except as specifically provided for herein. Section 7.04 Annual Statement as to Compliance. --------------------------------- The Servicer will deliver to the Trustee, the SBA and the Rating Agency on or before March 31 of each year beginning March 31, 1999, an Officer's Certificate stating that (i) the Servicer has fully complied with the provisions of Articles V and VII, (ii) a review of the activities of the Servicer during the preceding calendar year and of performance under this Agreement has been made under such officer's supervision, and (iii) to the best of such officer's knowledge, based on such review, the Servicer has fulfilled all its obligations under this Agreement throughout such year, or, if there has been a default in the fulfillment of any such obligation, specifying each such default known to such officers and the nature and status thereof and the action being taken by the Servicer to cure such default. Section 7.05 Annual Independent Public Accountants' Servicing Report ------------------------------------------------------- On or before March 31 of each year beginning March 31, 1999, the Servicer, at its expense, shall cause one of the "big six" accounting firms to furnish a letter or letters to the Trustee and the Rating Agency to the effect that such firm has with respect to the Servicer's overall servicing operations examined such operations in accordance with the requirements of the Uniform Single Audit Program for Mortgage Bankers, and stating such firm's conclusions relating thereto. Section 7.06 SBA's and Trustee's Right to Examine Servicer Records ----------------------------------------------------- and Audit Operations -------------------- The SBA and the Trustee shall have the right upon reasonable prior notice, during normal business hours and as often as reasonably required, to examine and audit any and all of the books, records or other information of the Servicer, whether held by the Servicer or by another on behalf of the Servicer, which may be relevant to the performance or observance by the Servicer of the terms, covenants or conditions of this Agreement. VII-3 No amounts payable in respect of the foregoing shall be paid from the Trust Fund. Section 7.07 Reports to the Trustee; Principal and Interest Account ------------------------------------------------------ Statements. ---------- Not later than 20 days after each Record Date, the Servicer shall forward to the Trustee and the SBA a statement, certified by a Servicing Officer, setting forth the status of the Principal and Interest Account as of the close of business on the preceding Record Date and showing, for the period covered by such statement, the aggregate of deposits into the Principal and Interest Account for each category of deposit specified in Section 5.03, the aggregate of withdrawals from the Principal and Interest Account for each category of withdrawal specified in Section 5.04, the aggregate amount of permitted withdrawals not made in the related Due Period, and the amount of any Monthly Advances or payments of Compensating Interest, in each case, for the related Due Period. Section 7.08 Premium Protection Fee and Servicing Fee. ---------------------------------------- Pursuant to and in accordance with the policies of the SBA and SBA Form 1086, the Servicer shall retain the Premium Protection Fee where the Guaranteed Interest has been sold and the Servicing Fee for each SBA (S) 7(a) Loan. The Premium Protection Fee and the Servicing Fee shall not constitute part of the Trust Fund and Certificateholders shall have no interest in, and are not entitled to receive any portion of, the Premium Protection Fee and the Servicing Fee. If the Servicer is replaced as servicer pursuant to any provision of this Agreement, it shall no longer be entitled to the Premium Protection Fee and the Servicing Fee but, instead, the successor servicer shall be entitled thereto. VII-4 ARTICLE VIII REPORTS TO BE PROVIDED BY SERVICER ---------------------------------- Section 8.01 Financial Statements. -------------------- The Servicer understands that, in connection with a transfer of the Certificates, Certificateholders may request that the Servicer make available to prospective Certificateholders the annual audited financial statements of the Servicer's parent (First International Bancorp, Inc., and any successor thereto) for one or more of the most recently completed five fiscal years for which such statements are publicly available, which request shall not be unreasonably denied. The Servicer also agrees to make available on a reasonable basis to any prospective Certificateholder a knowledgeable financial or accounting officer for the purpose of answering reasonable questions respecting recent developments affecting the Servicer or the financial statements of the Servicer and its parent (First International Bancorp, Inc. and any successor thereto) and to permit any prospective Certificateholder to inspect the Servicer's servicing facilities during normal business hours for the purpose of satisfying such prospective Certificateholder that the Servicer has the ability to service the SBA Loans in accordance with this Agreement. VIII-1 ARTICLE IX THE SERVICER ------------ Section 9.01 Indemnification; Third Party Claims. ----------------------------------- (a) The Servicer agrees to indemnify and hold the Trustee, the SBA, and each Certificateholder harmless against any and all claims, losses, penalties, fines, forfeitures, legal fees and related costs, judgments, and any other costs, fees and expenses that the Trustee, the SBA, and any Certificateholder may sustain in any way related to the failure of the Servicer to perform its duties and service the SBA Loans in compliance with the terms of this Agreement. The Servicer shall immediately notify the Trustee, the SBA and each Certificateholder if a claim is made by any party with respect to this Agreement, and the Servicer shall assume (with the consent of the Trustee) the defense of any such claim and pay all expenses in connection therewith, including reasonable counsel fees, and promptly pay, discharge and satisfy any judgment or decree which may be entered against the Servicer, the Trustee, the SBA, and/or a Certificateholder in respect of such claim. The Trustee may reimburse the Servicer from the Expense Account pursuant to Section 6.03(c)(i) for all amounts advanced by it pursuant to the preceding sentence except when the claim relates directly to the failure of the Servicer to service and administer the SBA Loans in compliance with the terms of this Agreement. (b) The Seller agrees to indemnify and hold the Trustee, the SBA and each Certificateholder harmless against any and all claims, losses, penalties, fines, forfeitures, legal fees and related costs, judgments, and any other costs, fees and expenses that the Trustee, the SBA, and any Certificateholder may sustain in any way related to the failure of the Servicer, if it is an affiliate thereof, or the failure of the Seller to perform its respective duties in compliance with the terms of this Agreement and in the best interests of the SBA and the Certificateholders. The Seller shall immediately notify the Trustee, the SBA, and each Certificateholder if a claim is made by a third party with respect to this Agreement, and the Seller shall assume (with the consent of the Trustee) the defense of any such claim and pay all expenses in connection therewith, including reasonable counsel fees, and promptly pay, discharge and satisfy any judgment or decree which may be entered against the Servicer, the Seller, the Trustee, the SBA and/or a Certificateholder in respect of such claim. The Trustee may reimburse the Seller from the Expense Account pursuant to Section 6.03(c)(i) for all amounts advanced by them pursuant to the preceding sentence except when the claim relates directly to the Seller's indemnification pursuant to Section 2.05 and IX-1 Section 3.03 or to the failure of the Servicer, if it is an affiliate of the Seller, to perform its obligations to service and administer the Mortgages in compliance with the terms of this Agreement, or the failure of the Seller to perform its duties in compliance with the terms of this Agreement and in the best interests of the SBA and the Certificateholders. Section 9.02 Merger or Consolidation of the Servicer; Assignment of ------------------------------------------------------ the Servicer's Duties. - --------------------- The Servicer will keep in full effect its existence, rights and franchises as a corporation, bank or association and will obtain and preserve its qualification to do business as a foreign entity in each jurisdiction necessary to protect the validity and enforceability of this Agreement or any of the SBA Loans and to perform its duties under this Agreement. Any Person into which the Servicer may be merged or consolidated, or any Person resulting from any merger, conversion or consolidation to which the Servicer shall be a party, or any Person succeeding to all or substantially all of the business of the Servicer, shall be an established mortgage loan servicing institution that has a net worth of at least $15,000,000 and shall be an approved SBA guaranteed lender in good standing, operating pursuant to an effective Loan Guaranty Agreement, and shall be the successor of the Servicer, hereunder, without the execution or filing of any paper or any further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding. The Servicer shall send notice of any such merger or consolidation to the Trustee, the Rating Agency and the SBA. Subject to the receipt of approval from the SBA, the Servicer is permitted to assign its rights and duties hereunder to, and such rights and duties can be assumed by, an affiliate of the Servicer having a net worth of at least $15,000,000 and which is an approved SBA guaranteed lender in good standing, operating pursuant to an effective Loan Guaranty Agreement (the "Assignee") (in which case all of the provisions of this Agreement shall, to the same extent as they apply to the Servicer hereunder, apply to the Assignee rather than the Servicer), without the execution or filing of any paper or any further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding. The Servicer shall send notice of any such assignment to the Trustee, the Rating Agency and the SBA. IX-2 Section 9.03 Limitation on Liability of the Servicer and Others. -------------------------------------------------- The Servicer and any director, officer, employee or agent of the Servicer may rely on any document of any kind which it in good faith reasonably believes to be genuine and to have been adopted or signed by the proper authorities or persons respecting any matters arising hereunder. Subject to the terms of Section 9.01 herein, the Servicer shall have no obligation to appear with respect to, prosecute or defend any legal action which is not incidental to the Servicer's duty to service the SBA Loans in accordance with this Agreement. Section 9.04 Servicer Not to Resign. ---------------------- The Servicer shall not resign from the obligations and duties hereby imposed on it except (i) by mutual consent of the Servicer, the SBA, the Trustee and the Majority Certificateholders, or (ii) in connection with a merger, conversion or consolidation permitted pursuant to Section 9.02 and with the consent of the SBA (in which case the Person resulting from the merger, conversion or consolidation shall be the successor of the Servicer), or (iii) in connection with an assignment permitted pursuant to Section 9.02 and with the consent of the SBA (in which case the Assignee shall be the successor of the Servicer), or (iv) upon the determination that the Servicer's duties hereunder are no longer permissible under applicable law or administrative determination and such incapacity cannot be cured by the Servicer. Any such determination permitting the resignation of the Servicer shall be evidenced by a written Opinion of Counsel (who may be counsel for the Servicer) to such effect delivered to the Trustee, the SBA and to each Certificateholder, which Opinion of Counsel shall be in form and substance acceptable to the Trustee. No such resignation shall become effective until a successor has assumed the Servicer's responsibilities and obligations hereunder in accordance with Section 10.02. IX-3 ARTICLE X DEFAULT ------- Section 10.01 Events of Default. ----------------- (a) In case one or more of the following Events of Default by the Servicer shall occur and be continuing, that is to say: (i) (A) the failure by the Servicer to make any required Servicing Advance, to the extent such failure materially and adversely affects the interests of the Certificateholders; (B) the failure by the Servicer to make any required Monthly Advance to the extent such failure materially and adversely affects the interests of the Certificateholders; (C) the failure by the Servicer to remit any Compensating Interest to the extent such failure materially and adversely affects the interests of the Certificateholders; or (D) any failure by the Servicer to remit to Certificateholders, or to the Trustee for the benefit of the Certificateholders, any payment required to be made under the terms of this Agreement which continues unremedied after the date upon which written notice of such failure, requiring the same to be remedied, shall have been given to the Servicer by the Trustee or to the Servicer and the Trustee by any Certificateholder; or (ii) failure by the Servicer or the Seller duly to observe or perform, in any material respect, any other covenants, obligations or agreements of the Servicer or the Seller as set forth in this Agreement, which failure continues unremedied for a period of 60 days after the date on which written notice of such failure, requiring the same to be remedied, shall have been given to the Servicer or the Seller, as the case may be, by the Trustee or to the Servicer, or the Seller, as the case may be, and the Trustee by any Certificateholder; or (iii) a decree or order of a court or agency or supervisory authority having jurisdiction for the appointment of a conservator or receiver or liquidator in any insolvency, readjustment of debt, marshaling of assets and liabilities or similar proceedings, or for the winding-up or liquidation of its affairs, shall have been entered against the Servicer and such decree X-1 or order shall have remained in force, undischarged or unstayed for a period of 60 days; or (iv) the Servicer shall consent to the appointment of a conservator or receiver or liquidator in any insolvency, readjustment of debt, marshaling of assets and liabilities or similar proceedings of or relating to the Servicer or of or relating to all or substantially all of the Servicer's property; or (v) the Servicer shall admit in writing its inability to pay its debts as they become due, file a petition to take advantage of any applicable insolvency or reorganization statute, make an assignment for the benefit of its creditors, or voluntarily suspend payment of its obligations; (b) then, and in each and every such case, so long as an Event of Default shall not have been remedied, and in the case of clause (i) above (except for clause (i)(B)), if such Event of Default shall not have been remedied within 30 days after the Servicer has received notice of such Event of Default, (x) with respect solely to clause (i)(B) above, if such Monthly Advance is not made earlier than 4:00 p.m. New York time on the Determination Date, the Trustee shall give immediate telephonic notice of such failure to a Servicing Officer of the Servicer and, unless such failure is cured, either by receipt of payment or receipt of evidence (e.g., a wire reference number communicated by ---- the sending bank) that such funds have been sent, by 12:00 Noon New York time on the following Business Day, the Trustee shall immediately assume, pursuant to Section 10.02 hereof, the duties of a successor servicer; and (y) in the case of clauses (i)(A), (i)(C), (i)(D), (iii), (iv) and (v), the Majority Certificateholders, by notice in writing to the Servicer (except with respect to (iii), (iv) and (v) for which no notice is required) may, in addition to whatever rights such Certificateholders may have at law or equity including damages, injunctive relief and specific performance, in each case immediately terminate all the rights and obligations of the Servicer under this Agreement and in and to the SBA Loans and the proceeds thereof, as Servicer. Upon such receipt by the Servicer of a second written notice from the Majority Certificateholders stating that they or it intend to terminate the Servicer as a result of such Event of Default, all authority and power of the Servicer under this Agreement, whether with respect to the SBA Loans or otherwise, shall, subject to Section 10.02 and the Multi-Party Agreement, pass to and be vested in the Trustee and the Trustee is hereby authorized and empowered to execute and deliver, on behalf of the Servicer, as attorney-in-fact or otherwise, any and all documents and other instruments and do or X-2 cause to be done all other acts or things necessary or appropriate to effect the purposes of such notice of termination, including, but not limited to, the transfer and endorsement or assignment of the SBA Loans and related documents. The Servicer agrees to cooperate with the Trustee in effecting the termination of the Servicer's responsibilities and rights hereunder, including, without limitation, the transfer to the Trustee for administration by it of all amounts which shall at the time be credited by the Servicer to each Principal and Interest Account or thereafter received with respect to the SBA Loans. The Trustee shall provide notice to the SBA of any Event of Default hereunder. Section 10.02 Trustee to Act; Appointment of Successor ---------------------------------------- On and after the time of the Servicer's immediate termination, or the Servicer's receipt of notice if required by Section 10.01, or at any time if the Trustee receives the resignation of the Servicer evidenced by an Opinion of Counsel pursuant to Section 9.04 or the Servicer is removed as Servicer pursuant to this Article X, the Trustee shall be the successor in all respects to the Servicer in its capacity as Servicer under this Agreement and the transactions set forth or provided for herein and shall be subject to all the responsibilities, duties and liabilities relating thereto placed on the Servicer by the terms and provisions hereof; provided, however, that the Trustee shall not be liable for any actions of any Servicer prior to it, and that the Trustee shall not be obligated to make advances or payments pursuant to Sections 6.03, 6.10, 6.11, 5.10 or 5.14 but only to the extent the Trustee determines reasonably and in good faith that such advances would not be recoverable, such determination to be evidenced with respect to each such advance by a certification of a Responsible Officer of the Trustee. As compensation therefor, the Trustee shall be entitled to all funds relating to the SBA Loans which the Servicer would have been entitled to receive from the Principal and Interest Account pursuant to Section 5.04 if the Servicer had continued to act as Servicer hereunder and shall be entitled to the Servicing Fee and the Premium Protection Fee, together with other servicing compensation in the form of assumption fees, late payment charges or otherwise as provided in Sections 7.01 and 7.03. Notwithstanding the above, the Trustee shall, if it is unable to so act or if the SBA so requests in writing to the Trustee, appoint, or petition a court of competent jurisdiction to appoint, any established servicing institution acceptable to the SBA and satisfying the Rating Agency Condition that has a net worth of not less than $15,000,000, and which is an approved SBA guaranteed lender in good standing, operating pursuant to an effective Loan Guaranty Agreement, as the successor to the X-3 Servicer hereunder in the assumption of all or any part of the responsibilities, duties or liabilities of the Servicer hereunder. Any collections received by the Servicer after removal or resignation shall be endorsed by it to the Trustee and remitted directly to the Trustee or, at the direction of the Trustee, to the successor servicer. The compensation of any successor servicer (including, without limitation, the Trustee) so appointed shall be the aggregate Servicing Fees and Premium Protection Fees and other servicing compensation in the form of assumption fees, late payment charges or otherwise. In the event the Trustee is required to solicit bids as provided herein, the Trustee shall solicit, by public announcement, bids from banks and mortgage servicing institutions meeting the qualifications set forth above. Such public announcement shall specify that the successor servicer shall be entitled to the full amount of the aggregate Servicing Fees and Premium Protection Fees as servicing compensation, together with the other servicing compensation in the form of assumption fees, late payment charges or otherwise. Within thirty days after any such public announcement, the Trustee shall negotiate and effect the sale, transfer and assignment of the servicing rights and responsibilities hereunder to the qualified party submitting the highest qualifying bid. The Trustee shall deduct from any sum received by the Trustee from the successor to the Servicer in respect of such sale, transfer and assignment all costs and expenses of any public announcement and of any sale, transfer and assignment of the servicing rights and responsibilities hereunder and the amount of any unreimbursed Servicing Advances and Monthly Advances. After such deductions, the remainder of such sum shall be paid by the Trustee as a servicing fee to the SBA at the time of such sale, transfer and assignment to the Servicer's successor. The Trustee and such successor shall take such action, consistent with this Agreement, as shall be necessary to effectuate any such succession. The Servicer agrees to cooperate with the Trustee and any successor servicer in effecting the termination of the Servicer's servicing responsibilities and rights hereunder and shall promptly provide the Trustee or such successor servicer, as applicable, all documents and records reasonably requested by it to enable it to assume the Servicer's functions hereunder and shall promptly also transfer to the Trustee or such successor servicer, as applicable, all amounts which then have been or should have been deposited in the Principal and Interest Account or Spread Account by the Servicer or which are thereafter received with respect to the SBA Loans. Neither the Trustee nor any other successor servicer shall be held liable by reason of any failure to make, or any delay in making, any distribution hereunder or any portion thereof caused by (i) the failure of the Servicer to deliver, or any delay in delivering, cash, documents or records to it, or (ii) restrictions imposed by any regulatory authority having jurisdiction over the Servicer hereunder. No X-4 appointment of a successor to the Servicer hereunder shall be effective until written notice of such proposed appointment shall have been provided by the Trustee to each Certificateholder and the SBA and the Trustee and the SBA shall have consented thereto. The Trustee shall not resign as servicer until a successor servicer reasonably acceptable to the SBA has been appointed. Pending appointment of a successor to the Servicer hereunder, the Trustee shall act in such capacity as hereinabove provided. In connection with such appointment and assumption, the Trustee may make such arrangements for the compensation of such successor out of payments on SBA Loans as it and such successor shall agree; provided, however, that no such compensation shall be in excess of that permitted the Servicer pursuant to Section 7.03 or otherwise as provided in this Agreement. The Servicer, the Trustee and such successor shall take such action, consistent with this Agreement, as shall be necessary to effectuate any such succession. Section 10.03 Waiver of Defaults. ------------------ The SBA may, or the Majority Certificateholders may on behalf of all Certificateholders and subject to the consent of the SBA, which consent may not be unreasonably withheld, and satisfaction of the Rating Agency Condition, waive any events permitting removal of the Servicer pursuant to this Article X; provided, however, that the Majority Certificateholders or the SBA may not waive a default in making a required distribution on a Certificate without the consent of the holder of such Certificate. Upon any waiver of a past default, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been remedied for every purpose of this Agreement. No such waiver shall extend to any subsequent or other default or impair any right consequent thereto except to the extent expressly so waived. Section 10.04. Control by Majority Certificateholders and Others. ------------------------------------------------- The SBA may, or the Majority Certificateholders with the consent of the SBA may, direct the time, method and place of conducting any proceeding relating to the Trust Fund or the Certificates or for any remedy available to the Trustee with respect to the Certificates or exercising any trust or power conferred on the Trustee with respect to the Certificates or the Trust Fund provided that: - -------- ---- (i) such direction shall not be in conflict with any rule of law or with this Agreement; X-5 (ii) the Trustee shall have been provided with indemnity satisfactory to it; and (iii) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction; provided, -------- however, that the Trustee, as the case may be, need not take any ------- action which it determines might involve it in liability or may be unjustly prejudicial to the Certificateholders not so directing. X-6 ARTICLE XI TERMINATION ----------- Section 11.01 Termination. ----------- This Agreement shall terminate upon notice to the Trustee of the earlier of the following events: (a) the final payment or other liquidation of the last SBA Loan or the disposition of all property acquired upon foreclosure or deed in lieu of foreclosure of any SBA Loan and the remittance of all funds due thereunder, or (b) mutual consent of the Servicer and all Certificateholders in writing; provided, however, that in no event shall the Trust Fund established by this Agreement terminate later than twenty-one years after the death of the last surviving lineal descendant of Joseph P. Kennedy, late Ambassador of the United States to the Court of St. James, alive as of the date hereof. The Servicer may, at its option, terminate this Agreement on any date on which the Pool Principal Balance is less than 5.0% of the sum of (i) the Original Pool Principal Balance and (ii) the Original Pre-Funded Amount by purchasing, on the next succeeding Remittance Date, all of the Unguaranteed Interests in the SBA Loans and Foreclosed Properties at a price equal to the sum of (i) 100% of the then outstanding Aggregate Class A and Class B Certificate Principal Balances, and (ii) 30 days' interest thereon at the then applicable Class A and Class B Remittance Rates, as the case may be (the "Termination Price"). Notwithstanding the prior sentence, if at the time the Servicer determines to exercise such option the unsecured long-term debt obligations of the Servicer are not rated at least Baa3 by Moody's, if such Rating Agency is still rating the Certificates, the Servicer shall give such Rating Agency prior written notice of the Servicer's determination to exercise such option and shall not exercise such option, without the consent of each such Rating Agency, prior to furnishing each such Rating Agency with an Opinion of Counsel, in form and substance reasonably satisfactory to each such Rating Agency, that the exercise of such option would not be deemed a fraudulent conveyance by the Servicer. Notice of any termination, specifying the Remittance Date upon which the Trust Fund will terminate and that the Certificateholders shall surrender their Certificates to the Trustee for payment of the final distribution and cancellation shall be given promptly by the Servicer by letter to Certificateholders mailed during the month of such final distribution before the Determination Date in such month, specifying (i) the Remittance Date upon which final payment of XI-1 the Certificates will be made upon presentation and surrender of Certificates at the office of the Trustee therein designated, (ii) the amount of any such final payment and (iii) that the Record Date otherwise applicable to such Remittance Date is not applicable, payments being made only upon presentation and surrender of the Certificates at the office of the Trustee therein specified. The Servicer shall give such notice to the Trustee therein specified. The Servicer shall give such notice to the Trustee at the time such notice is given to Certificateholders. Any obligation of the Servicer to pay amounts due to the Trustee shall survive the termination of this Agreement. In the event that all of the Certificateholders shall not surrender their Certificates for cancellation within six months after the time specified in the above-mentioned written notice, the Servicer shall give a second written notice to the remaining Certificateholders to surrender their Certificates for cancellation and receive the final distribution with respect thereto and shall at the expense of the Trust Fund cause to be published once, in the national edition of The Wall Street Journal notice that such money remains unclaimed. If ----------------------- within six months after the second notice all of the Certificates shall not have been surrendered for cancellation, the Trustee may take appropriate steps, or may appoint an agent to take appropriate steps, to contact the remaining Certificateholders concerning surrender of their Certificates and the cost thereof shall be paid out of the funds and other assets which remain subject hereto. If within the period then specified in the escheat laws of the State of New York after the second notice all the Certificates shall not have been surrendered for cancellation, the Seller shall be entitled to all unclaimed funds and other assets which remain subject hereto and the Trustee upon transfer of such funds shall be discharged of any responsibility for such funds and the Certificateholders shall look to the Seller for payment. Section 11.02 Accounting Upon Termination of Servicer --------------------------------------- Upon termination of the Servicer under Article X hereof, the Servicer shall: (a) deliver to its successor or, if none shall yet have been appointed, to the Trustee the funds in any Principal and Interest Account; (b) deliver to its successor or, if none shall yet have been appointed, to the Trustee all SBA Files and related XI-2 documents and statements held by it hereunder and a SBA Loan portfolio computer diskette; (c) deliver to its successor or, if none shall yet have been appointed, to the Trustee and, upon request, to the Certificateholders a full accounting of all funds, including a statement showing the Monthly Payments collected by it and a statement of moneys held in trust by it for the payments or charges with respect to the SBA Loans; and (d) execute and deliver such instruments and perform all acts reasonably requested in order to effect the orderly and efficient transfer of servicing of the SBA Loans to its successor and to more fully and definitively vest in such successor all rights, powers, duties, responsibilities, obligations and liabilities of the Servicer under this Agreement. XI-3 ARTICLE XII THE TRUSTEE ----------- Section 12.01 Duties of Trustee. ----------------- The Trustee, prior to the occurrence of an Event of Default and after the curing of all Events of Default which may have occurred, undertakes to perform such duties and only such duties as are specifically set forth in this Agreement. If an Event of Default has occurred and has not been cured or waived, the Trustee shall exercise such of the rights and powers vested in it by this Agreement, and use the same degree of care and skill in its exercise as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. The Trustee, upon receipt of all resolutions, certificates, statements, opinions, reports, documents, orders or other instruments furnished to the Trustee which are specifically required to be furnished pursuant to any provision of this Agreement, shall examine them to determine whether they conform to the requirements of this Agreement, provided, however that the Trustee shall not be responsible for the accuracy or content of any resolution, certificate, statement, opinion, report, document, order or other instrument furnished by the Servicer or the Seller hereunder. If any such instrument is found not to conform to the requirements of this Agreement in a material manner, the Trustee shall take action as it deems appropriate to have the instrument corrected, and if the instrument is not corrected to the Trustee's satisfaction, the Trustee will provide notice thereof to the Certificateholders and the Servicer. No provision of this Agreement shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct or bad faith; provided, however, that: (a) Prior to the occurrence of an Event of Default, and after the curing of all such Events of Default which may have occurred, the duties and obligations of the Trustee shall be determined solely by the express provisions of this Agreement, the Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Agreement, no implied covenants or obligations shall be read into this Agreement against the Trustee and, in the absence of bad faith on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions XII-1 furnished to the Trustee and conforming to the requirements of this Agreement; (b) The Trustee shall not be personally liable for an error of judgment made in good faith by officers of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; (c) The Trustee shall not be personally liable with respect to any action taken, suffered or omitted to be taken by it in good faith in accordance with the direction of the Majority Certificateholders, relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Agreement; (d) In the absence of actual knowledge of an officer of the Trustee in its Corporate Trust Office of an Event of Default, the Trustee shall not be required to take notice or be deemed to have notice or knowledge of any default or Event of Default unless the Trustee shall be specifically notified in writing by the Servicer or any of the Certificateholders. In the absence of actual knowledge or receipt of such notice, the Trustee may conclusively assume that there is no default or Event of Default; and (e) The Trustee shall not be required to expend or risk its own funds or otherwise incur financial liability for the performance of any of its duties hereunder or the exercise of any of its rights or powers if there is reasonable ground for believing that the repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. Section 12.02 Certain Matters Affecting the Trustee. ------------------------------------- (a) Except as otherwise provided in Section 12.01: (i) The Trustee may request and rely and shall be protected in acting or refraining from acting upon any resolution, Officer's Certificate, certificate of auditors or any other certificate, statement, instrument, opinion, report, notice, request, consent, order, appraisal, bond or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (ii) The Trustee may consult with counsel and any opinion of counsel shall be full and complete authorization and protection in respect of any action XII-2 taken or suffered or omitted by it hereunder in good faith and in accordance with such opinion of counsel; (iii) The Trustee shall be under no obligation to exercise any of the trusts or powers vested in it by this Agreement or to institute, conduct or defend by litigation hereunder or in relation hereto at the request, order or direction of the Certificateholders, pursuant to the provisions of this Agreement, unless such Certificateholders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby; nothing contained herein shall, however, relieve the Trustee of the obligation, upon the occurrence of an Event of Default (which has not been cured), to exercise such of the rights and powers vested in it by this Agreement, and to use the same degree of care and skill in its exercise as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs; (iv) The Trustee shall not be personally liable for any action taken, suffered or omitted by it in good faith and reasonably believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Agreement; (v) Prior to the occurrence of an Event of Default hereunder and after the curing of all Events of Default which may have occurred, the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond or other paper or document, unless requested in writing to do so by Holders of Certificates evidencing Percentage Interests aggregating not less than 25% provided, however, that if the payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Agreement, the Trustee may require reasonable indemnity against such expense or liability as a condition to taking any such action. The reasonable expense of every such examination shall be paid by the Servicer or, if paid by the Trustee, shall be repaid by the Servicer upon demand from the Servicer's own funds; XII-3 (vi) The right of the Trustee to perform any discretionary act enumerated in this Agreement shall not be construed as a duty, and the Trustee shall not be answerable for other than its negligence or willful misconduct or bad faith in the performance of such act; (vii) The Trustee shall not be required to give any bond or surety in respect of the execution of the trust created hereby or the powers granted hereunder; (viii) The Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys; and (ix) In the event that the Trustee is also acting as Paying Agent, Registrar or Spread Account Custodian, the rights and protections afforded to the Trustee shall be afforded to such Paying Agent, Registrar or Spread Account Custodian. Section 12.03 Trustee Not Liable for Certificates or SBA Loans. ------------------------------------------------ The recitals contained herein and in the Certificates (other than the certificate of authentication on the Certificates) shall be taken as the statements of the Servicer, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Agreement or of the Certificates or of any SBA Loan or related document. The Trustee shall not be accountable for the use or application by the Servicer of any of the Certificates or of the proceeds of such Certificates, or for the use or application of any funds paid to the Servicer in respect of the SBA Loans or deposited in or withdrawn from the Principal and Interest Account by the Servicer. The Trustee shall not be responsible for the legality or validity of the Agreement or the validity, priority, perfection or sufficiency of the security for the Certificates issued or intended to be issued hereunder. Section 12.04 Trustee May Own Certificates. ---------------------------- The Trustee in its individual or any other capacity may become the owner or pledgee of Certificates with the same rights it would have if it were not Trustee, and may otherwise deal with the parties hereto. XII-4 Section 12.05 Servicer To Pay Trustee's Fees and Expenses. ------------------------------------------- The Servicer covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to, reasonable compensation (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust) for all services rendered by it in the execution of the trusts hereby created and in the exercise and performance of any of the powers and duties hereunder of the Trustee, and the Servicer will pay or reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any of the provisions of this Agreement (including the reasonable compensation and the expenses and disbursements of its counsel and of all persons not regularly in its employ) except any such expense, disbursement or advance as may arise from its negligence or bad faith, provided that the Trustee shall have no lien on the Trust Fund for the payment of its fees and expenses. To the extent that actual fees and expenses of the Trustee exceed the amount available for payment thereof on deposit in the Expense Account as of the date such fees and expenses are due and payable, the Servicer shall reimburse the Trustee for such shortfall out of its own funds without reimbursement therefor, except as provided in Section 6.03. The Trustee and any director, officer, employee or agent of the Trustee and the Spread Account Custodian and any director, officer, employee or agent of the Spread Account Custodian shall be indemnified by the Servicer and held harmless against any loss, liability or expense (i) incurred in connection with any legal action relating to this Agreement or the Certificates, other than any loss, liability or expense incurred by reason of willful misfeasance, bad faith or negligence in the performance of duties hereunder or by reason of reckless disregard of obligations and duties hereunder, and (ii) resulting from any error in any tax or information return prepared by the Servicer. The obligations of the Servicer under this Section 12.05 shall survive payment of the Certificates, and shall extend to any co- trustee appointed pursuant to this Article XII. Section 12.06 Eligibility Requirements for Trustee. ------------------------------------ The Trustee hereunder shall at all times be (i) a national banking association or banking corporation or trust company organized and doing business under the laws of any state or the United States of America, (ii) authorized under such laws to exercise corporate trust powers, (iii) having a combined capital and surplus of at least $30,000,000, (iv) having unsecured and unguaranteed long-term debt obligations rated at least Baa3 by Moody's or such other rating as is acceptable to the SBA, (v) is subject to supervision or examination by federal XII-5 or state authority, (vi) is an approved SBA guaranteed lender in good standing, operating pursuant to an effective Loan Guaranty Agreement, and (vii) is reasonably acceptable to the SBA. If such banking association publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section its combined capital and surplus shall be deemed to be as set forth in its most recent report of condition so published. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, the Trustee shall (a) give prompt notice to the SBA and each Certificateholder that it has so ceased to be eligible to be the Trustee and (b) resign, upon the request of the SBA or the Majority Certificateholders, in the manner and with the effect specified in Section 12.07. Section 12.07 Resignation and Removal of the Trustee. -------------------------------------- The Trustee may at any time resign and be discharged from the trusts hereby created by giving written notice thereof to the Servicer, the SBA, and to all Certificateholders. Upon receiving such notice of resignation, the Servicer shall with the consent of the SBA promptly appoint a successor trustee by written instrument, in duplicate, which instrument shall be delivered to the resigning Trustee and to the successor trustee. A copy of such instrument shall be delivered to the Certificateholders by the Servicer. Unless a successor trustee shall have been so appointed and have accepted appointment within 60 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor trustee. If the resigning Trustee fails to petition an appropriate court, the SBA may, after such 60 day period, petition any court of competent jurisdiction for the appointment of a successor trustee. If at any time the Trustee shall cease to be eligible in accordance with the provisions of Section 12.06 and shall fail to resign after written request therefor by the Servicer, or if at any time the Trustee shall become incapable of acting, or shall be adjudged bankrupt or insolvent, or a receiver of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then the Servicer may remove the Trustee and appoint, subject to the approval of the SBA, a successor trustee by written instrument, in duplicate, which instrument shall be delivered to the Trustee so removed and to the successor trustee. A copy of such instrument shall be delivered to the Certificateholders and the SBA by the Servicer. XII-6 The Majority Certificateholders with the consent of the SBA, which consent will not be unreasonably withheld, and upon satisfaction of the Rating Agency Condition, or the SBA may at any time remove the Trustee and appoint a successor trustee by written instrument or instruments, in triplicate, signed by such Holders or their attorneys-in-fact duly authorized, one complete set of which instruments shall be delivered to the Servicer, one complete set to the Trustee so removed and one complete set to the successor Trustee so appointed. Any resignation or removal of the Trustee and appointment of a successor trustee pursuant to any of the provisions of this Section shall become effective upon acceptance of appointment by the successor trustee as provided in Section 12.08. Section 12.08 Successor Trustee. ----------------- Any successor trustee appointed as provided in Section 12.07 shall execute, acknowledge and deliver to the Servicer and to its predecessor trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the predecessor trustee shall become effective and such successor trustee, without any further act, deed or conveyance, shall become fully vested with all the rights, powers, duties and obligations of its predecessor hereunder, with the like effect as if originally named as trustee herein. The predecessor trustee shall deliver to the successor trustee all SBA Files and related documents and statements held by it hereunder, and the Servicer and the predecessor trustee shall execute and deliver such instruments and do such other things as may reasonably be required for more fully and certainly vesting and confirming in the successor trustee all such rights, powers, duties and obligations. No successor trustee shall accept appointment as provided in this Section unless at the time of such acceptance such successor trustee shall be eligible under the provisions of Section 12.06. Upon acceptance of appointment by a successor trustee as provided in this Section, the Servicer shall mail notice of the succession of such trustee hereunder to all Holders of Certificates at their addresses as shown in the Certificate Register. If the Servicer fails to mail such notice within 10 days after acceptance of appointment by the successor trustee, the successor trustee shall cause such notice to be mailed at the expense of the Servicer. XII-7 Section 12.09 Merger or Consolidation of Trustee. ---------------------------------- Any Person into which the Trustee may be merged or converted or with which it may be consolidated or any corporation or national banking association resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation or national banking association succeeding to the business of the trustee, shall be the successor of the Trustee hereunder, provided such corporation or national banking association shall be eligible under the provisions of Section 12.06, without the execution or filing of any paper or any further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding. The Trustee shall send notice of any such merger or consolidation to the Rating Agency. Section 12.10 Appointment of Co-Trustee or Separate Trustee. --------------------------------------------- Notwithstanding any other provisions hereof, at any time, for the purpose of meeting any legal requirements of any jurisdiction in which any part of the Trust Fund or property securing the same may at the time be located, the Servicer and the Trustee acting jointly shall have the power and shall execute and deliver all instruments to appoint one or more Persons approved by the Trustee and the SBA pursuant to the procedure set forth below, to act as co- trustee or co-trustees, jointly with the Trustee, or separate trustee or separate trustees, of all or any part of the Trust Fund, and to vest in such Person or Persons, in such capacity, such title to the Trust Fund, or any part thereof, and, subject to the other provisions of this Section 12.10, such powers, duties, obligations, rights and trusts as the Servicer and the Trustee may consider necessary or desirable. If the Servicer shall not have joined in such appointment within 15 days after the receipt by it of a request so to do, or in case an Event of Default shall have occurred and be continuing, the Trustee alone shall have the power to make such appointment. No co-trustee or separate trustee hereunder shall be required to meet the terms of eligibility as a successor trustee under Section 12.06 hereunder. No notice to Holders of Certificates of the appointment of co-trustee(s) or separate trustee(s) shall be required under Section 12.08 hereof. The Trustee shall notify the SBA prior to the appointment of any co-trustee(s) or separate trustee(s) and the SBA shall have ten Business Days from its receipt of such notice to notify the Trustee whether it, in its XII-8 reasonable judgment, disapproves of such co-trustee(s) or separate trustee(s). If the SBA does not notify the Trustee within such time frame, it will be deemed to have approved such co-trustee(s) or separate trustee(s). If the SBA notifies the Trustee within such time frame that it, in its reasonable judgment, disapproves of such co-trustee(s) or separate trustee(s) (which notice shall be accompanied by the name(s) of the SBA's alternative proposed co-trustee(s) or separate trustee(s)), such appointments shall not be effective. In the case of any appointment of a co-trustee or separate trustee pursuant to this Section 12.10, all rights, powers, duties and obligations conferred or imposed upon the trustee shall be conferred or imposed upon and exercised or performed by the Trustee and such separate trustee or co-trustee jointly except to the extent that under any law of any jurisdiction in which any particular act or acts are to be performed (whether as Trustee hereunder or as successor to the Servicer hereunder), the Trustee shall be incompetent or unqualified to perform such act or acts, in which event such rights, powers, duties and obligations (including the holding of title to the Trust Fund or any portion thereof in any such jurisdiction) shall be exercised and performed by such separate trustee or co-trustee at the direction of the Trustee. Any notice, request or other writing given to the Trustee shall be deemed to have been given to each of the then separate trustees and co-trustees, as effectively as if given to each of them. Every instrument appointing any separate trustee or co-trustee shall refer to this Agreement and the conditions of this Article XII. Each separate trustee and co-trustee, upon its acceptance of the trusts conferred, shall be vested with the estates or property specified in its instrument of appointment, either jointly with the Trustee or separately, as may be provided therein, subject to all the provisions of this Agreement, specifically including every provision of this Agreement relating to the conduct of, affecting the liability of, or affording protection to, the Trustee. Every such instrument shall be filed with the Trustee. Any separate trustee or co-trustee may, at any time, constitute the Trustee, its agent or attorney-in-fact, with full power and authority, to the extent not prohibited by law, to do any lawful act under or in respect of this Agreement on its behalf and in its name. The Trustee shall not be responsible for any action or inaction of any such separate trustee or co-trustee. If any separate trustee or co-trustee shall die, become incapable of acting, resign or be removed, all of its estates, properties, rights, remedies and trusts shall vest in and be exercised by the Trustee, to the extent permitted by law, without the appointment of a new or successor trustee. XII-9 Section 12.11 Authenticating Agent. -------------------- Upon the request of the Servicer, the Trustee shall appoint an Authenticating Agent, initially, Marine Midland Bank, with power to act on the Trustee's behalf and subject to its direction in the authentication and delivery of the Certificates in connection with transfers and exchanges under Section 4.02, as fully to all intents and purposes as though the Authenticating Agent had been expressly authorized by that Section to authenticate and deliver Certificates. For all purposes of this Agreement, the authentication and delivery of Certificates by the Authenticating Agent pursuant to this Section shall be deemed to be the authentication and delivery of Certificates by the Trustee. Such Authenticating Agent shall at all times be a Person meeting the requirements for the Trustee set forth in Section 12.06. Any corporation or national banking association into which any Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation or national banking association resulting from any merger, consolidation or conversion to which any Authenticating Agent shall be a party, or any corporation or national banking association succeeding to the corporate trust business of any Authenticating Agent, shall be the successor of the Authenticating Agent hereunder, if such successor corporation or national banking association is otherwise eligible under this Section, without the execution or filing of any further act on the part of the parties hereto or the Authenticating Agent or such successor corporation. Any Authenticating Agent may at any time resign by giving notice of resignation to the Trustee and the Servicer. The Trustee may at any time terminate the agency of any Authenticating Agent by giving written notice of termination to such Authenticating Agent and the Servicer. Upon receiving such a notice of resignation or upon such a termination, or in case at any time any Authenticating Agent shall cease to be eligible under this Section, the Trustee shall promptly appoint a successor Authenticating Agent and shall give written notice of such appointment to all Certificateholders as their names and addresses appear on the Certificate Register. The Servicer agrees to pay to the Authenticating Agent from time to time reasonable compensation for its services. The provisions of Sections 4.04 and 12.03 shall be applicable to any Authenticating Agent. Section 12.12 Tax Returns and Reports. ----------------------- The Trustee, upon request, will furnish the Servicer with all such information as may be reasonably required in XII-10 connection with the Servicer's preparation of all Tax Returns of the Trust Fund and, upon request within five (5) Business Days after its receipt thereof, shall (i) sign on behalf of the Trust Fund any Tax Return that the Trustee is required to sign pursuant to applicable federal, state or local tax laws, and (ii) cause such Tax Return to have been returned to the Servicer for filing. The Servicer shall prepare and file or cause to be filed with the Internal Revenue Service Federal tax information returns with respect to the Trust Fund and the Certificates containing such information and at the times and in the manner as may be required by the Code or applicable Treasury regulations, and shall furnish to each Holder of Certificates at any time during the calendar year for which such returns or reports are made such statements or information at the times and in the manner as may be required thereby. The Trustee shall sign all tax information returns filed pursuant to this Section and any other returns as may be required by the Code, and in doing so shall rely entirely upon, and shall have no liability for information provided by, or calculations provided by, the Servicer. Section 12.13 Protection of Trust Fund. ------------------------ (a) The Trustee will hold the Trust Fund and such other assets as may from time to time be deposited with it hereunder in trust for the benefit of the Holders and the SBA and at the request of the Seller or the SBA will from time to time execute and deliver all such supplements and amendments hereto pursuant to Section 13.02 hereof and all instruments of further assurance and other instruments, and will take such other action upon such request as it deems reasonably necessary or advisable, to: (i) more effectively hold in trust all or any portion of the Trust Fund or such other assets; (ii) perfect, publish notice of, or protect the validity of any grant made or to be made by this Agreement; (iii) enforce any of the SBA Loans; or (iv) preserve and defend title to the Trust Fund and the rights of the Trustee, and the ownership interests of the Certificateholders represented thereby, in such Trust Fund against the claims of all Persons and parties. XII-11 The Trustee shall send copies of any request received from the Seller or the SBA to take any action pursuant to this Section 12.13 to the Holders. (b) Subject to Article X hereof, the Trustee shall have the power to enforce, and shall enforce the obligations of the other parties to this Agreement by action, suit or proceeding at law or equity, and shall also have the power to enjoin, by action or suit in equity, any acts or occurrences which may be unlawful or in violation of the rights of the Holders; provided, however, that nothing in this Section 12.13 shall require any action by the Trustee unless the Trustee shall first (i) have been furnished indemnity satisfactory to it and (ii) when required by this Agreement, have been requested to take such action by the Majority Certificateholders, the SBA or the Seller in accordance with the terms of this Agreement. (c) The Trustee shall execute any instrument required pursuant to this Section so long as such instrument does not conflict with this Agreement or with the Trustee's fiduciary duties. Section 12.14 Representations, Warranties and Covenants of Trustee. ---------------------------------------------------- The Trustee hereby makes the following representations, warranties and covenants on which the Seller, the Servicer, the SBA and the Certificateholders shall rely: (a) The Trustee is a banking corporation and trust company duly organized, validly existing and in good standing under the laws of the State of New York. (b) The Trustee has full power, authority and legal right to execute, deliver and perform this Agreement, and shall have taken all necessary action to authorize the execution, delivery and performance by it of this Agreement. (c) The execution, delivery and performance by the Trustee of this Agreement shall not (i) violate any provision of any law or any order, writ, judgment or decree of any court, arbitrator or governmental authority applicable to the Trustee or any of its assets, (ii) violate any provision of the corporate charter or By-laws of the Trustee or (iii) violate any provision of, or constitute, with or without notice or lapse of time, a default under, or result in the creation or imposition of any lien on any properties included in the Trust Fund pursuant to the provisions of, any mortgage, indenture, contract, agreement or other undertaking to which it is a party, which violation, default or lien could reasonably be expected to materially and XII-12 adversely affect the Trustee's performance or ability to perform its duties under this Agreement or the transactions contemplated in this Agreement. (d) The execution, delivery and performance by the Trustee of this Agreement shall not require the authorization, consent or approval of, the giving of notice to, the filing or registration with or the taking of any other action in respect of any governmental authority or agency regulating the banking and corporate trust activities of the Trustee. (e) This Agreement has been duly executed and delivered by the Trustee and constitutes the legal, valid and binding agreement of the Trustee, enforceable in accordance with its terms, subject to the effect of bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally or the application of equitable principles in any proceeding, whether at law or in equity. The Trustee hereby agrees and covenants that it will not at any time in the future, deny that this Agreement constitutes the legal, valid and binding agreement of the Trustee. (f) The Trustee shall not take any action, or fail to take any action, if such action or failure to take action will materially interfere with the enforcement of any rights of the SBA or the Certificateholders under this Agreement or the Certificates. (g) The Trustee will comply at all times with the provisions of the SBA Rules and Regulations in respect of its activities concerning the SBA Loans, and will at all times hold an effective Loan Guaranty Agreement. XII-13 ARTICLE XIII MISCELLANEOUS PROVISIONS ------------------------ Section 13.01 Acts of Certificateholders -------------------------- Except as otherwise specifically provided herein, whenever Certificateholder action, consent or approval is required under this Agreement, such action, consent or approval shall be deemed to have been taken or given on behalf of, and shall be binding upon, all Certificateholders if the Majority Certificateholders agree to take such action or give such consent or approval. Section 13.02 Amendment. --------- (a) This Agreement may be amended from time to time by the Seller, the Servicer and the Trustee by written agreement, upon the prior written consent of the SBA, without the notice to or consent of the Certificateholders, to cure any ambiguity, to correct or supplement any provisions herein, to comply with any changes in the Code, or to make any other provisions with respect to matters or questions arising under this Agreement which shall not be inconsistent with the provisions of this Agreement; provided, however, that such action shall not, as evidenced by an Opinion of Counsel delivered to the Trustee, adversely affect the interests of any Certificateholder or any other party and further provided that no such amendment shall reduce in any manner the amount of, or delay the timing of, any amounts received on SBA Loans which are required to be distributed on any Certificate without the consent of the Holder of such Certificate, or change the rights or obligations of any other party hereto without the consent of such party. (b) This Agreement may be amended from time to time by the Seller, the Servicer, the Trustee and the Majority Certificateholders, upon the prior written consent of the SBA, for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement or of modifying in any manner the rights of the Holders; provided, however, that no such amendment shall reduce in any manner the amount of, or delay the timing of, any amounts which are required to be distributed on any Certificate without the consent of the Holder of such Certificate or reduce the percentage of Holders which are required to consent to any such amendment without the consent of the Holders of 100% of the Certificates affected thereby and, provided further, that no amendment affecting only one class of Certificates shall require the approval of Holders of Certificates of the other Class. XIII-1 (c) It shall not be necessary for the consent of Holders under this Section to approve the particular form of any proposed amendment, but it shall be sufficient if such consent shall approve the substance thereof. Section 13.03 Recordation of Agreement. ------------------------ To the extent permitted by applicable law, this Agreement is subject to recordation in all appropriate public offices for real property records in all of the counties or other comparable jurisdictions in which any or all of the properties subject to the Mortgages are situated, and in any other appropriate public recording office or elsewhere, such recordation to be effected by the Servicer at the Certificateholders' expense on direction of the Majority Certificateholders, but only when accompanied by an Opinion of Counsel to the effect that such recordation materially and beneficially affects the interests of the Certificateholders or is necessary for the administration or servicing of the SBA Loans. Section 13.04 Duration of Agreement. --------------------- This Agreement shall continue in existence and effect until terminated as herein provided. SECTION 13.05 GOVERNING LAW. ------------- THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS, WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. Section 13.06 Notices. ------- All demands, notices and communications hereunder shall be in writing and shall be deemed to have been duly given if personally delivered at or mailed by overnight mail, certified mail or registered mail, postage prepaid, to (i) in the case of the Bank, First National Bank of New England, One Commercial Plaza, Hartford, Connecticut 06103, Attention: Leslie Galbraith, or such other addresses as may hereafter be furnished to the Certificateholders in writing by the Bank, (ii) in the case of the Trustee, Marine Midland Bank, 140 Broadway, New York, New York 10005, 12th Floor, Attention: Corporate Trust Department, (iii) in the case of the Certificateholders, as set forth in the Certificate Register, (iv) in the case of Moody's, to Moody's Investors Service, ABS Monitoring Department, 99 Church Street, XIII-2 4th Floor, New York, New York 10007, and (v) in the case of the SBA, the United States Small Business Administration, 409 Third Street, S.W., Washington, D.C. 20416, Attention: Associate Administrator for Financial Assistance. Any such notices shall be deemed to be effective with respect to any party hereto upon the receipt of such notice by such party, except that notices to the Certificateholders shall be effective upon mailing or personal delivery. Section 13.07 Severability of Provisions . -------------------------- If any one or more of the covenants, agreements, provisions or terms of this Agreement shall be held invalid for any reason whatsoever, then such covenants, agreements, provisions or terms shall be deemed severable from the remaining covenants, agreements, provisions or terms of this Agreement and shall in no way affect the validity or enforceability of the other covenants, agreements, provisions or terms of this Agreement. Section 13.08 No Partnership. -------------- Nothing herein contained shall be deemed or construed to create a co- partnership or joint venture between the parties hereto and the services of the Servicer shall be rendered as an independent contractor and not as agent for the Certificateholders. Section 13.09 Counterparts. ------------ This Agreement may be executed in one or more counterparts and by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed to be an original; such counterparts, together, shall constitute one and the same agreement. Section 13.10 Successors and Assigns. ---------------------- This Agreement shall inure to the benefit of and be binding upon the Seller and the Servicer, the Trustee and the Certificateholders and their respective successors and assigns. Section 13.11 Headings. -------- The headings of the various sections of this Agreement have been inserted for convenience of reference only and shall not be deemed to be part of this Agreement. XIII-3 Section 13.12 Paying Agent. ------------ The Trustee hereby appoints Marine Midland Bank as Paying Agent. The Trustee may appoint one or more other Paying Agents or successor Paying Agents meeting the eligibility requirements of a Trustee set forth in Section 12.06 (i), (ii), (iii), (iv), (v) and (vii) hereof. Each Paying Agent, immediately upon such appointment, shall signify its acceptance of the duties and obligations imposed upon it by this Agreement by written instrument of acceptance deposited with the Trustee. Each such Paying Agent other than the Trustee shall execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of Section 6.06, that such Paying Agent will: (a) allocate all sums received for distribution to the Holders of Certificates for which it is acting as Paying Agent on each Remittance Date among such Holders in the proportion specified by the Trustee; and (b) hold all sums held by it for the distribution of amounts due with respect to the Certificates in trust for the benefit of the Holders entitled thereto until such sums shall be paid to such Holders or otherwise disposed of as herein provided and pay such sums to such Persons as herein provided. Any Paying Agent other than the Trustee may at any time resign and be discharged of the duties and obligations created by this Agreement by giving at least sixty (60) days written notice to the Trustee. Any such Paying Agent may be removed at any time by an instrument filed with such Paying Agent signed by the Trustee. In the event of the resignation or removal of any Paying Agent other than the Trustee such Paying Agent shall pay over, assign and deliver any moneys held by it as Paying Agent to its successor, or if there be no successor, to the Trustee. Upon the appointment, removal or notice of resignation of any Paying Agent, the Trustee shall notify the Certificateholders by mailing notice thereof to their addresses appearing on the Certificate Register. Section 13.13 Notification to Rating Agency. ----------------------------- The Trustee shall give prompt notice to the Rating Agency of the occurrence of any of the following events of which XIII-4 it has received notice: (1) any modification or amendment to this Agreement, (2) any change of the Trustee, the Servicer or Paying Agent, (3) any Event of Default or waiver of an Event of Default, (4) that any superior lienholder has accelerated or intends to accelerate the obligations secured by a Prior Lien, and (5) the final payment of all the Certificates. The Servicer shall promptly deliver to the Rating Agency a copy of each of the Servicer's Certificates. Further, the Servicer shall give prompt notice to the Rating Agency if the Servicer or any of its affiliates acquire any Certificates. Section 13.14 Third Party Rights ------------------ The Trustee, the FTA, the Spread Account Custodian and the Servicer agree that the SBA shall be deemed a third-party beneficiary of this Agreement entitled to all the rights and benefits set forth herein as fully as if it were a party hereto. XIII-5 IN WITNESS WHEREOF, the Bank and the Trustee have caused their names to be signed hereto by their respective officers thereunto duly authorized as of the day and year first above written. FIRST NATIONAL BANK OF NEW ENGLAND, as Seller and Servicer By:______________________________ Name: Title: MARINE MIDLAND BANK, as Trustee By:______________________________ Name: Title: XIII-6 Acceptance of Marine Midland Bank --------------------------------- Marine Midland Bank hereby accepts its appointment under the within instrument to serve as initial Authenticating Agent, Certificate Registrar and Paying Agent. In connection therewith, Marine Midland Bank agrees to be bound by all applicable provisions of such instrument. MARINE MIDLAND BANK, as initial Authenticating Agent, Certificate Registrar and Paying Agent By:______________________________ Name: Title: XIII-7 STATE OF NEW YORK _____________) : ss.: COUNTY OF NEW YORK ____________) On the ____ day of June, 1998 before me, a Notary Public in and for said State, personally appeared ____________________ known to me to be an officer of the Trustee, the trust company that executed the within instrument, and also known to me to be the person who executed it on behalf of said banking corporation, and acknowledged to me that such banking corporation executed the within instrument. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year in this certificate first above written. __________________________________ Notary Public My Commission expires ___________ STATE OF __________ ) : ss.: COUNTY OF __________) On the ____ day of June, 1998 before me, a Notary Public in and for said State, personally appeared ___________ known to me to be the _______________ of First National Bank of New England, the corporation that executed the within instrument as seller and servicer, and also known to me to be the person who executed it on behalf of said corporation, and acknowledged to me that such corporation executed the within instrument. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year in this certificate first above written. __________________________________ Notary Public My Commission expires ___________ EXHIBIT A CONTENTS OF SBA FILE With respect to each SBA Loan, the SBA File shall include a copy of any of the following items delivered to the Trustee or, with respect to 1 below for the SBA (S) 7(a) Loans, the FTA: 1. The original SBA Note, endorsed by means of an allonge as follows: "Pay to the order of Marine Midland Bank, and its successors and assigns, as trustee under that certain Pooling and Servicing Agreement dated as of May 31, 1998, for the benefit of the United States Small Business Administration and holders of First National Bank of New England SBA Loan-Backed Adjustable Rate Certificates, Series 1998-1, Class A and Class B, as their respective interests may appear, without recourse" and signed, by facsimile or manual signature, in the name of the Seller by a Responsible Officer, with all prior and intervening endorsements showing a complete chain of endorsement from the originator to the Seller, if the Seller was not the originator; provided, -------- however, that in lieu of the original SBA Note relating to one SBA Loan, where the original SBA Note has been lost the Seller may deliver a lost note affidavit and, if a copy exists, a copy of the original SBA Note; 2. With respect to those SBA Loans secured by Mortgaged Properties, either: (i) the original Mortgage, with evidence of recording thereon, (ii) a copy of the Mortgage certified as a true copy by a Responsible Officer of the Seller where the original has been transmitted for recording until such time as the original is returned by the public recording office or duly licensed title or escrow officer or (iii) a copy of the Mortgage certified by the public recording office in those instances where the original recorded Mortgage has been lost; 3. With respect to those SBA Loans secured by Mortgaged Properties, either: (i) the original Assignment of Mortgage from the Seller endorsed as follows: "Marine Midland Bank, ("Assignee") its successors and assigns, as trustee under the Pooling and Servicing Agreement dated as of May A-1 31, 1998 subject to the Multi-Party Agreement dated as of May 31, 1998" with evidence of recording thereon (provided, however, that where permitted under the laws of the jurisdiction wherein the Mortgaged Property is located, the Assignment of Mortgage may be effected by one or more blanket assignments for SBA Loans secured by Mortgaged Properties located in the same county), or (ii) a copy of such Assignment of Mortgage certified as a true copy by a Responsible Officer of the Seller where the original has been transmitted for recording (provided, however, that where the -------- ------- original Assignment of Mortgage is not being delivered to the Trustee, each such Responsible Officer may complete one or more blanket certificates attaching copies of one or more Assignments of Mortgage relating to the Mortgages originated by the Seller); 4. With respect to those SBA Loans secured by Mortgaged Properties, either: (i) originals of all intervening assignments, if any, showing a complete chain of title from the originator to the Seller, including warehousing assignments, with evidence of recording thereon if such assignments were recorded, (ii) copies of any assignments certified as true copies by a Responsible Officer of the Seller where the originals have been submitted for recording until such time as the originals are returned by the public recording officer, or (iii) copies of any assignments certified by the public recording office in any instances where the original recorded assignments have been lost; 5. With respect to those SBA Loans secured by Mortgaged Properties, either: (i) originals of all title insurance policies relating to the Mortgaged Properties to the extent the Seller obtained such policies or (ii) copies of any title insurance policies or other evidence of lien position, including but not limited to PIRT policies, limited liability reports and lot book reports, to the extent the Seller obtains such policies or other evidence of lien position, certified as true by the Seller; 6. With respect to these SBA Loans secured by other items of Collateral, the original or certified copy of all filed UCC financing statements A-2 securing such Collateral naming the Seller as "Secured Party;" 7. For all SBA Loans, blanket assignment of all Collateral securing the SBA Loan, including without limitation, all rights under applicable guarantees and insurance policies; 8. For all SBA Loans, irrevocable power of attorney of the Seller to the Trustee to execute, deliver, file or record and otherwise deal with the Collateral for the SBA Loans in accordance with the Agreement. The power of attorney will be delegable by the Trustee to the Servicer and any successor servicer and will permit the Trustee or its delegate to prepare, execute and file or record UCC financing statements and notices to insurers; and 9. For all SBA Loans, blanket UCC-1 financing statements identifying by type all Collateral for the SBA Loans in the SBA Loan Pool and naming the Trustee as Secured Party and the Seller as the Debtor. The UCC-1 financing statements will be filed promptly following the Closing Date in New York and Connecticut and will be in the nature of protective notice filings rather than a true financing statement. A-3 EXHIBIT B-1 [FORM OF CLASS A CERTIFICATE] UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE CERTIFICATE REGISTRAR OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. THIS CERTIFICATE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR UNDER ANY STATE SECURITIES OR BLUE SKY LAW OF ANY STATE. THE HOLDER HEREOF, BY PURCHASING THIS CERTIFICATE, AGREES THAT THIS CERTIFICATE MAY BE REOFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY IN COMPLIANCE WITH THE SECURITIES ACT AND OTHER APPLICABLE LAWS AND ONLY (1) (A) PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A") TO A PERSON THAT THE HOLDER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A (A "QIB"), PURCHASING FOR ITS OWN ACCOUNT OR A QIB PURCHASING FOR THE ACCOUNT OF A QIB, WHOM THE HOLDER HAS INFORMED THAT THE REOFFER, RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, OR (B) IN CERTIFICATED FORM TO AN INSTITUTIONAL "ACCREDITED INVESTOR" (WITHIN THE MEANING OF RULE 501(A)(1)-(3) OR (7) UNDER THE SECURITIES ACT) PURCHASING FOR INVESTMENT AND NOT FOR DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, IN EACH CASE, SUBJECT TO (X) THE RECEIPT BY THE TRUSTEE OF A LETTER SUBSTANTIALLY IN THE FORM PROVIDED IN THE AGREEMENT AND (Y) THE RECEIPT BY THE TRUSTEE OF SUCH OTHER EVIDENCE ACCEPTABLE TO THE TRUSTEE THAT SUCH REOFFER, RESALE, PLEDGE OR TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT AND OTHER APPLICABLE LAWS OR IN EACH CASE IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE UNITED STATES AND SECURITIES AND BLUE SKY LAWS OF ANY STATE OF THE UNITED STATES AND ANY OTHER APPLICABLE JURISDICTION, (2) PURSUANT TO ANOTHER EXEMPTION AVAILABLE UNDER THE SECURITIES ACT AND IN ACCORDANCE WITH ANY APPLICABLE STATE SECURITIES LAWS, OR (3) PURSUANT TO A VALID REGISTRATION STATEMENT. B-1-1 THIS CERTIFICATE IS NOT GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY ANY OTHER PERSON. THIS CERTIFICATE MAY NOT BE ACQUIRED FOR OR ON BEHALF OF (1) AN EMPLOYEE BENEFIT PLAN OR RETIREMENT ARRANGEMENT SUBJECT TO THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED, AND/OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED, OR (2) ANY ENTITY, THE ASSETS OF WHICH WOULD BE DEEMED PLAN ASSETS UNDER THE DEPARTMENT OF LABOR REGULATIONS SET FORTH AT 29 C.F.R. (S)2510.3-101. THE RIGHTS OF THE HOLDERS OF THE CLASS B CERTIFICATES TO RECEIVE DISTRIBUTIONS WITH RESPECT TO INTEREST AND PRINCIPAL WILL BE SUBORDINATED TO SUCH RIGHTS OF THE HOLDERS OF THE CLASS A CERTIFICATES TO THE EXTENT DESCRIBED IN THE POOLING AND SERVICING AGREEMENT REFERRED TO HEREIN. B-1-2 FIRST NATIONAL BANK OF NEW ENGLAND SBA LOAN-BACKED ADJUSTABLE RATE CERTIFICATES Series 1998-1 Original Class A Certificate Class A Principal Balance: No. 1 $24,211,000 Original Dollar Amount as of the Cut-Off Date Represented by this Certificate: $24,211,000 Remittance Rate: Percentage Interest of Variable the Class A Certificates Evidenced by this Certificate: 100% Date of Pooling and Servicer: Servicing Agreement First National Bank and Cut-Off Date: of New England May 31, 1998 First Remittance Date: Latest Maturity Date: August 17, 1998 September 15, 2024 CUSIP No.: 32110F AC 0 Closing Date: Trustee: June 30, 1998 Marine Midland Bank First National Bank of New England certifies that CEDE & CO. is the registered owner of a percentage interest (the "Percentage Interest") in a trust consisting of certain Unguaranteed Interests in a pool of loans partially guaranteed by the U.S. Small Business Administration (the "SBA Loans") and serviced by First National Bank of New England (hereinafter called the "Servicer," in its capacity as the Servicer, and the "Seller," in its capacity as Seller, which terms include any successor entity under the Pooling and Servicing Agreement referred to below). The SBA Loans were originated or purchased by the Seller. The SBA Loans will be serviced pursuant to the terms and conditions of that certain Pooling and Servicing Agreement dated as of May 31, 1998 (the "Pooling and Servicing Agreement") between First National Bank of New England, as Seller B-1-3 and Servicer, and Marine Midland Bank, as trustee (the "Trustee"), certain of the pertinent provisions of which are set forth herein. To the extent not defined herein, the capitalized terms used herein have the meanings assigned in the Pooling and Servicing Agreement. This Certificate is issued under and is subject to the terms, provisions and conditions of the Pooling and Servicing Agreement, to which Pooling and Servicing Agreement the holder of this Certificate by virtue of the acceptance hereof assents and by which such holder is bound. On each Remittance Date, commencing on August 17, 1998, the Trustee or Paying Agent shall distribute to the Person in whose name this Certificate is registered at the close of business on the last day of the month next preceding the month of such distribution (the "Record Date"), an amount equal to the product of the Percentage Interest of the Class A Certificates evidenced by this Certificate and the amount required to be distributed to Holders of Class A Certificates on such Remittance Date pursuant to Section 6.07 of the Pooling and Servicing Agreement. During the initial Interest Accrual Period, this Certificate will bear interest at the rate of 6.50% per annum. During each subsequent Interest Accrual Period, this Certificate will bear interest at a per annum rate equal to the Prime Rate in effect on the preceding Adjustment Date minus 2.00% per annum, subject to the limits described in the Pooling and Servicing Agreement. Distributions on this Certificate will be made by the Trustee or Paying Agent by check mailed to the address of the Person entitled thereto as such name and address shall appear on the Certificate Register or, upon written request to the Trustee, by wire transfer of immediately available funds to the account of the Person entitled thereto as shall appear on the Certificate Register without the presentation or surrender of this Certificate or the making of any notation thereon, at a bank or other entity having appropriate facilities therefor, and, in the case of wire transfers, at the expense of such Person unless such Person shall own of record Certificates which have initial Certificate Principal Balances aggregating at least $5,000,000. Notwithstanding the above, the final distribution on this Certificate will be made after due notice by the Trustee of the pendency of such distribution and only upon presentation and surrender of this Class A Certificate at the office or agency maintained for that purpose by the Certificate Registrar in New York, New York. B-1-4 This Certificate is one of a duly authorized issue of Certificates designated as First National Bank of New England SBA Loan-Backed, Adjustable Rate Certificates, Series 1998-1, Class A and Class B (herein called the "Certificates") and representing undivided ownership in the right to receive the principal portion of the Unguaranteed Interests of the SBA Loans together with interest thereon at the then applicable Class A or Class B Remittance Rate, as the case may be. Neither the Certificates nor the SBA Loans represent an obligation of, or an interest in, the Servicer and are not insured or guaranteed by the Federal Deposit Insurance Corporation, the Small Business Administration, the Government National Mortgage Association or the Veterans Administration or any other governmental agency. The Certificates are limited in right of payment to certain collections and recoveries respecting the SBA Loans, all as more specifically set forth herein and in the Pooling and Servicing Agreement. In the event Servicer funds are advanced with respect to any SBA Loan, such advance is reimbursable to the Servicer from late recoveries of interest on the SBA Loans generally. As provided in the Pooling and Servicing Agreement, deposits and withdrawals from the Certificate Account, the Spread Account and the Expense Account may be made by the Trustee from time to time for purposes other than distributions to Certificateholders, such purposes including reimbursement to the Servicer of advances made, or certain expenses incurred, by it, and investment in Permitted Instruments. Subject to certain restrictions, the Pooling and Servicing Agreement permits the amendment thereof with respect to certain modifications (a) by the Seller, the Servicer and the Trustee without the consent of the Certificateholders and (b) by the Seller, the Servicer and the Trustee with the consent of the Majority Certificateholders. The Pooling and Servicing Agreement permits the Majority Certificateholders to waive, on behalf of all Certificateholders, any default by the Servicer in the performance of its obligations under the Pooling and Servicing Agreement and its consequences, except in a default in making any required distribution on a Certificate. Any such consent or waiver by the Majority Certificateholders shall be conclusive and binding on the holder of this Certificate and upon all future holders of this Certificate and of any Certificate issued upon the transfer hereof or in exchange herefor or in lieu hereof whether or not notation of such consent is made upon this Certificate. As provided in the Pooling and Servicing Agreement and subject to certain limitations therein set forth, the transfer of B-1-5 this Certificate is registrable in the Certificate Register upon surrender of this Certificate for registration of transfer at the offices or agencies maintained by the Certificate Registrar in New York, New York, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to, the Trustee, duly executed by the holder hereof or such holder's attorney duly authorized in writing, and thereupon one or more new Certificates in authorized denominations evidencing the same aggregate undivided Percentage Interest will be issued to the designated transferee or transferees. The Certificates are issuable only as registered Certificates. As provided in the Pooling and Servicing Agreement and subject to certain limitations therein set forth, the Certificate is exchangeable for a new Certificate evidencing the same undivided ownership interest, as requested by the holder surrendering the same. No service charge will be made for any such registration of transfer or exchange, but the Certificate Registrar may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. The Servicer, the Seller, the Trustee and the Certificate Registrar, and any agent of any of the foregoing, may treat the person in whose name this Certificate is registered as the owner hereof for all purposes, and none of the foregoing shall be affected by notice to the contrary. Except for certain obligations of the Servicer to the Trustee, the obligations created by the Pooling and Servicing Agreement shall terminate upon notice to the Trustee of the later of the following events: (i) the final payment or other liquidation of the last SBA Loan or the disposition of all property acquired upon foreclosure, deed in lieu of foreclosure or other legal process of any SBA Loan and the remittance of all funds due thereunder or (ii) mutual consent of the Servicer and all Certificateholders in writing; provided, however, that in no event shall the Trust Fund established by the Agreement terminate later than twenty-one years after the death of the last surviving lineal descendant of Joseph P. Kennedy, late Ambassador of the United States to the Court of St. James, alive as of the date of the Agreement. B-1-6 IN WITNESS WHEREOF, the Servicer has caused this Certificate to be duly executed. FIRST NATIONAL BANK OF NEW ENGLAND, Servicer By::__________________________ Name: Title: This is one of the Certificates referred to in the within- mentioned Agreement. MARINE MIDLAND BANK, as Trustee By:______________________ Authorized Signatory or MARINE MIDLAND BANK as Authenticating Agent By:______________________ Authorized Signatory B-1-7 EXHIBIT B-2 [FORM OF CLASS B CERTIFICATE] THIS CERTIFICATE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR UNDER ANY STATE SECURITIES OR BLUE SKY LAW OF ANY STATE. THE HOLDER HEREOF, BY PURCHASING THIS CERTIFICATE, AGREES THAT THIS CERTIFICATE MAY BE REOFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY IN COMPLIANCE WITH THE SECURITIES ACT AND OTHER APPLICABLE LAWS AND ONLY (1) (A) PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A") TO A PERSON THAT THE HOLDER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A (A "QIB"), PURCHASING FOR ITS OWN ACCOUNT OR A QIB PURCHASING FOR THE ACCOUNT OF A QIB, WHOM THE HOLDER HAS INFORMED THAT THE REOFFER, RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, OR (B) IN CERTIFICATED FORM TO AN INSTITUTIONAL "ACCREDITED INVESTOR" (WITHIN THE MEANING OF RULE 501(A)(1)-(3) OR (7) UNDER THE SECURITIES ACT) PURCHASING FOR INVESTMENT AND NOT FOR DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, IN EACH CASE, SUBJECT TO (X) THE RECEIPT BY THE TRUSTEE OF A LETTER SUBSTANTIALLY IN THE FORM PROVIDED IN THE AGREEMENT AND (Y) THE RECEIPT BY THE TRUSTEE OF SUCH OTHER EVIDENCE ACCEPTABLE TO THE TRUSTEE THAT SUCH REOFFER, RESALE, PLEDGE OR TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT AND OTHER APPLICABLE LAWS OR IN EACH CASE IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE UNITED STATES AND SECURITIES AND BLUE SKY LAWS OF ANY STATE OF THE UNITED STATES AND ANY OTHER APPLICABLE JURISDICTION, (2) PURSUANT TO ANOTHER EXEMPTION AVAILABLE UNDER THE SECURITIES ACT AND IN ACCORDANCE WITH ANY APPLICABLE STATE SECURITIES LAWS, OR (3) PURSUANT TO A VALID REGISTRATION STATEMENT. THIS CERTIFICATE MAY NOT BE ACQUIRED FOR OR ON BEHALF OF (1) AN EMPLOYEE BENEFIT PLAN OR RETIREMENT ARRANGEMENT SUBJECT TO THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED, AND/OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED, OR (2) ANY ENTITY, THE ASSETS OF WHICH WOULD BE DEEMED PLAN ASSETS UNDER THE DEPARTMENT OF LABOR REGULATIONS SET FORTH AT 29 C.F.R. (S)2510.3-101. THIS CERTIFICATE IS NOT GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY ANY OTHER PERSON. B-2-1 THE RIGHTS OF THE HOLDERS OF THE CLASS B CERTIFICATES TO RECEIVE DISTRIBUTIONS WITH RESPECT TO INTEREST AND PRINCIPAL WILL BE SUBORDINATED TO SUCH RIGHTS OF THE HOLDERS OF THE CLASS A CERTIFICATES TO THE EXTENT DESCRIBED IN THE POOLING AND SERVICING AGREEMENT REFERRED TO HEREIN. SO LONG AS THIS CLASS B CERTIFICATE IS REGISTERED IN THE NAME OF FNBNE SBA HOLDINGS, INC., THIS CLASS B CERTIFICATE MAY NOT BE SOLD, PLEDGED, TRANSFERRED, ASSIGNED OR OTHERWISE CONVEYED, IN WHOLE OR IN PART, WITHOUT THE PRIOR WRITTEN APPROVAL OF THE UNITED STATES SMALL BUSINESS ADMINISTRATION. THE RIGHTS OF THE HOLDERS OF THE CLASS B CERTIFICATES TO RECEIVE DISTRIBUTIONS WITH RESPECT TO INTEREST AND PRINCIPAL WILL BE SUBORDINATED TO SUCH RIGHTS OF THE HOLDERS OF THE CLASS A CERTIFICATES TO THE EXTENT DESCRIBED IN THE POOLING AND SERVICING AGREEMENT REFERRED TO HEREIN. B-2-2 FIRST NATIONAL BANK OF NEW ENGLAND SBA LOAN-BACKED ADJUSTABLE RATE CERTIFICATES Series 1998-1 Original Class B Certificate Class B Principal Balance: No. 1 $2,690,728.97 Original Dollar Amount as of the Cut-Off Date Represented by this Certificate: $2,690,728.97 Remittance Rate: Percentage Interest of Variable the Class B Certificates Evidence by this Certificate: 100% Date of Pooling and Servicer: Servicing Agreement First National Bank of and Cut-Off Date: New England May 31, 1998 First Remittance Latest Maturity Date: Date: September 15, 2024 August 17, 1998 CUSIP NO.: 32110F AD 8 Closing Date: Trustee: June 30, 1998 Marine Midland Bank First National Bank of New England certifies that FNBNE SBA HOLDINGS, INC. is the registered owner of a percentage interest (the "Percentage Interest") in a trust consisting of certain Unguaranteed Interests in a pool of loans partially guaranteed by the U.S. Small Business Administration and, to the extent delivered pursuant to the Pooling and Servicing Agreement referred to below, certain loans originated in connection with such loans (the "SBA Loans") and serviced by First National Bank of New England (hereinafter called the "Servicer," in its capacity as the Servicer, and the "Seller," in its capacity as Seller, which terms include any successor entity under the Pooling and Servicing Agreement referred to below). The SBA Loans were originated or purchased by the Seller. The SBA Loans will be serviced pursuant to the terms and conditions of that certain Pooling and Servicing Agreement dated as of May 31, 1998 (the "Pooling and Servicing Agreement") between First National B-2-3 Bank of New England, as Seller and Servicer and Marine Midland Bank, as trustee (the "Trustee"), certain of the pertinent provisions of which are set forth herein. To the extent not defined herein, the capitalized terms used herein have the meanings assigned in the Pooling and Servicing Agreement. This Certificate is issued under and is subject to the terms, provisions and conditions of the Pooling and Servicing Agreement, to which Agreement the holder of this Certificate by virtue of the acceptance hereof assents and by which such holder is bound. On each Remittance Date, commencing on August 17, 1998, the Trustee or Paying Agent shall distribute to the Person in whose name this Certificate is registered at the close of business on the last day of the month next preceding the month of such distribution (the "Record Date"), an amount equal to the product of the Percentage Interest of the Class B Certificates evidenced by this Certificate and the amount required to be distributed to Holders of Class B Certificates on such Remittance Date pursuant to Section 6.07 of the Pooling and Servicing Agreement. During the initial Interest Accrual Period, this Certificate will bear interest at the rate of 7.50% per annum. During each subsequent Interest Accrual Period, this Certificate will bear interest at a per annum rate equal to the Prime Rate in effect on the preceding Adjustment Date minus 1.00% per annum, subject to the limits described in the Pooling and Servicing Agreement. Distributions on this Certificate will be made by the Trustee or Paying Agent by check mailed to the address of the Person entitled thereto as such name and address shall appear on the Certificate Register or, upon written request to the Trustee, by wire transfer of immediately available funds to the account of the Person entitled thereto as shall appear on the Certificate Register without the presentation or surrender of this Certificate or the making of any notation thereon, at a bank or other entity having appropriate facilities therefor, and, in the case of wire transfers, at the expense of such Person unless such Person shall own of record Certificates which have initial Certificate Principal Balances aggregating at least $5,000,000. Notwithstanding the above, the final distribution on this Certificate will be made after due notice by the Trustee of the pendency of such distribution and only upon presentation and surrender of this Certificate at the office or agency maintained for that purpose by the Certificate Registrar in New York, New York. B-2-4 This Certificate is one of a duly authorized issue of Certificates designated as First National Bank of New England SBA Loan-Backed, Adjustable Rate Certificates, Series 1998-1, Class A and Class B (herein called the "Certificates") and representing undivided ownership in the right to receive the principal portion of the Unguaranteed Interests of the SBA Loans together with interest thereon at the then applicable Class A or Class B Remittance Rate, as the case may be. Neither the Certificates nor the SBA Loans represent an obligation of, or an interest in, the Servicer and are not insured or guaranteed by the Federal Deposit Insurance Corporation, the Small Business Administration, the Government National Mortgage Association or the Veterans Administration or any other governmental agency. The Certificates are limited in right of payment to certain collections and recoveries respecting the SBA Loans, all as more specifically set forth herein and in the Pooling and Servicing Agreement. In the event Servicer funds are advanced with respect to any SBA Loan, such advance is reimbursable to the Servicer from late recoveries of interest on the SBA Loans generally. As provided in the Pooling and Servicing Agreement, deposits and withdrawals from the Certificate Account, the Spread Account and the Expense Account may be made by the Trustee from time to time for purposes other than distributions to Certificateholders, such purposes including reimbursement to the Servicer of advances made, or certain expenses incurred, by it, and investment in Permitted Instruments. Subject to certain restrictions, the Pooling and Servicing Agreement permits the amendment thereof with respect to certain modifications (a) by the Seller, the Servicer and the Trustee without the consent of the Certificateholders and (b) by the Seller, the Servicer and the Trustee with the consent of the Majority Certificateholders. The Pooling and Servicing Agreement permits the Majority Certificateholders to waive, on behalf of all Certificateholders, any default by the Servicer in the performance of its obligations under the Pooling and Servicing Agreement and its consequences, except in a default in making any required distribution on a Certificate. Any such consent or waiver by the Majority Certificateholders shall be conclusive and binding on the holder of this Certificate and upon all future holders of this Certificate and of any Certificate issued upon the transfer hereof or in exchange herefor or in lieu hereof whether or not notation of such consent is made upon this Certificate. As provided in the Pooling and Servicing Agreement and subject to certain limitations therein set forth, the transfer of B-2-5 this Certificate is registrable in the Certificate Register upon surrender of this Certificate for registration of transfer at the offices or agencies maintained by the Certificate Registrar in New York, New York, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to, the Trustee, duly executed by the holder hereof or such holder's attorney duly authorized in writing, and thereupon one or more new Certificates in authorized denominations evidencing the same aggregate undivided Percentage Interest will be issued to the designated transferee or transferees. The Certificates are issuable only as registered Certificates. As provided in the Pooling and Servicing Agreement and subject to certain limitations therein set forth, the Certificate is exchangeable for a new Certificate evidencing the same undivided ownership interest, as requested by the holder surrendering the same. No service charge will be made for any such registration of transfer or exchange, but the Certificate Registrar may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. The Servicer, the Seller, the Trustee and the Certificate Registrar, and any agent of any of the foregoing, may treat the person in whose name this Certificate is registered as the owner hereof for all purposes, and none of the foregoing shall be affected by notice to the contrary. Except for certain obligations of the Servicer to the Trustee, the obligations created by the Pooling and Servicing Agreement shall terminate upon notice to the Trustee of the later of the following events: (i) the final payment or other liquidation of the last SBA Loan or the disposition of all property acquired upon foreclosure, deed in lieu of foreclosure or other legal process of any SBA Loan and the remittance of all funds due thereunder or (ii) mutual consent of the Servicer and all Certificateholders in writing; provided, however, that in no event shall the Trust Fund established by the Agreement terminate later than twenty-one years after the death of the last surviving lineal descendant of Joseph P. Kennedy, late Ambassador of the United States to the Court of St. James, alive as of the date of the Agreement. B-2-6 IN WITNESS WHEREOF, the Servicer has caused this Certificate to be duly executed. FIRST NATIONAL BANK OF NEW ENGLAND, Servicer By: ___________________________ Name: Title: This is one of the Certificates referred to in the within- mentioned Agreement. MARINE MIDLAND BANK, as Trustee By:_____________________ Authorized Signatory or MARINE MIDLAND BANK, as Authenticating Agent By:_____________________ Authorized Signatory B-2-7 EXHIBIT C PRINCIPAL AND INTEREST ACCOUNT LETTER AGREEMENT (date) To: Marine Midland Bank 140 Broadway, 12th Floor New York, New York 1005 (the "Depository") As "Servicer" under the Pooling and Servicing Agreement, dated as of May 31, 1998, First National Bank of New England SBA Loan-Backed Adjustable Rate Certificates, Series 1998-1 Class A and Class B (the "Agreement"), we hereby authorize and request you to establish an account, as a Principal and Interest Account pursuant to Section 5.03 of the Agreement, to be designated as "First National Bank of New England, in trust for the registered holders of First National Bank of New England SBA Loan-Backed Adjustable Rate Certificates, Series 1998-1." All deposits in the account shall be subject to withdrawal therefrom by order signed by the Servicer. You may refuse any deposit which would result in violation of the requirement that the account be fully insured as described below. This letter is submitted to you in duplicate. Please execute and return one original to us. FIRST NATIONAL BANK OF NEW ENGLAND By:_______________________________ Name: Title: C-1 The undersigned, as Depository, hereby certifies that the above described account has been established under Account Number 10-875345, at the office of the depository indicated above, and agrees to honor withdrawals on such account as provided above. The amounts deposited at any time in the account will be insured to the maximum amount provided by applicable law by the Federal Deposit Insurance Corporation. MARINE MIDLAND BANK ------------------- (Name of Depository) By:______________________________ Name: Title: C-2 EXHIBIT D [OMITTED] D-1 EXHIBIT E WIRING INSTRUCTIONS FORM _______________,19__ [Paying Agent] [Trustee] ________________________ ________________________ ________________________ Re: First National Bank of New England SBA Loan-Backed Adjustable Rate Certificates, Series 1998-1, [Class A] [Class B] Number ____ ------------------------------------ Dear Sir: In connection with the sale of the above-captioned Certificate by ___________________________________ to ___________________________________, ("Transferee") you, as Paying Agent, are instructed to make all remittances to Transferee as Certificateholder as of ____________, 19__ by wire transfer. For such wire transfer, the wiring instructions are as follows: ___________________________ ___________________________ ___________________________ ________________________________ Transferee Certificateholder's mailing address: Name: Address: E-1 EXHIBIT F-1 FORM OF INITIAL CERTIFICATION ___________, 1998 [Seller] [Servicer] [SBA] Re: Pooling and Servicing Agreement First National Bank of New England SBA Loan-Backed Adjustable Rate Certificates, Series 1998-1, dated as of May 31, 1998 between First National Bank of New England and Marine Midland Bank, as Trustee ---------------- Gentlemen: In accordance with Section 2.05 of the above-captioned Pooling and Servicing Agreement (the "Agreement"), the undersigned, as Trustee, hereby certifies that, except as noted on the attachment hereto, if any (the "Loan Exception Report"), it has received each of the documents required to be delivered to it pursuant to Section 2.04 of the Agreement (not including the original SBA Notes relating to the SBA (S) 7(a) Loans, which are to be delivered to the FTA) with respect to each [Initial] [Subsequent] SBA Loan listed in the SBA Loan Schedule and the documents contained therein appear to bear original signatures. The Trustee has made no independent examination of any such documents beyond the review specifically required in the above-referenced Pooling and Servicing Agreement. F-1-1 The Trustee makes no representations as to: (i) the validity, legality, sufficiency, enforceability or genuineness of any such documents or any of the SBA Loans identified on the SBA Loan Schedule, or (ii) the collectibility, insurability, effectiveness or suitability of any such SBA Loan. MARINE MIDLAND BANK, as Trustee By:______________________________ Name: Title: F-1-2 EXHIBIT F-2 FORM OF FINAL CERTIFICATION [date] [Servicer] [Seller] [SBA] Re: Pooling and Servicing Agreement First National Bank of New England SBA Loan-Backed Adjustable Rate Certificates, Series 1998-1, dated as of May 31, 1998 between First National Bank of New England and Marine Midland Bank, as Trustee ---------------- Gentlemen: In accordance with Section 2.05 of the above-captioned Pooling and Servicing Agreement, the undersigned, as Trustee, hereby certifies that, except as noted on the attachment hereto, as to each SBA Loan listed in the SBA Loan Schedule (other than any SBA Loan paid in full or listed on the attachment hereto) it has reviewed the documents delivered to it pursuant to Section 2.04 of the Pooling and Servicing Agreement and has determined that (i) all such documents are in its possession, (ii) such documents have been reviewed by it and have not been mutilated, damaged, torn or otherwise physically altered and relate to such SBA Loan and (iii) based on its examination, and only as to the foregoing documents, the information set forth in the SBA Loan Schedule respecting such SBA Loan is correct. The Trustee has made no independent examination or inquiring of such documents beyond the review specifically required in the above-referenced Pooling and Servicing Agreement. F-2-1 The Trustee makes no representations as to: (i) the validity, legality, enforceability or genuineness of any such documents contained in each or any of the Loans identified on the SBA Loan Schedule, (ii) the collectibility, insurability, effectiveness or suitability of any such SBA Loan, or (iii) the compliance by such documents with statutory or regulatory guidelines. MARINE MIDLAND BANK, as Trustee By:______________________________ Name: Title: F-2-2 EXHIBIT G [OMITTED] G-1 EXHIBIT H SBA LOAN SCHEDULE [SEE TAB 8] H-1 EXHIBIT I REQUEST FOR RELEASE OF DOCUMENTS To: [Trustee] [FTA] Re: Pooling and Servicing Agreement First National Bank of New England SBA Loan-Backed Adjustable Rate Certificates, Series 1998-1, dated as of May 31, 1998, between First National Bank of New England and Marine Midland Bank, as Trustee -------------------------------- In connection with the administration of the pool of SBA Loans held by you, we request the release, and acknowledge receipt, of the (Trustee's SBA File/[specify document]) for the SBA Loan described below, for the reason indicated. Please execute the attached documents, if any, for the described SBA Loan for the reasons indicated. Obligor's Name, Address & Zip Code: - ---------------------------------- SBA Loan Number: - --------------- Reason for Requesting Documents (check one) - ------------------------------- ____ 1. SBA Loan Paid in Full (Servicer hereby certifies that all amounts received in connection therewith have been credited to the Principal and Interest Account and remitted to the Trustee for deposit into the Certificate Account pursuant to the Pooling and Servicing Agreement.) ____ 2. SBA Loan Liquidated (Servicer hereby certifies that all proceeds of foreclosure, insurance or other liquidation have been finally received and credited to the Principal and Interest Account and remitted to the Trustee for deposit into the Certificate Account pursuant to the Pooling and Servicing Agreement.) ____ 3. SBA Loan in Foreclosure or other Legal Process I-1 _____4. SBA Loan Repurchased Pursuant to Section 11.01 of the Pooling and Servicing Agreement. _____5. SBA Loan Repurchased or Substituted Pursuant to Article II or III of the Pooling and Servicing Agreement (Servicer hereby certifies that the repurchase price or Substitution Adjustment has been credited to the Principal and Interest Account and/or remitted to the Trustee for deposit into the Certificate Account pursuant to the Pooling and Servicing Agreement.) ____ 6. Collateral Being Released Pursuant to Section 5.01(f) of the Pooling and Servicing Agreement. ____ 7. SBA Loan Collateral being substituted or subordinated. If box 1 or 2 above is checked, and if all or part of the Trustee's SBA File was previously released to us, please release to us our previous receipt on file with you, as well as any additional documents in your possession relating to the above specified SBA Loan. If box 3, 4, 5, 6 or 7 above is checked, upon our return of all of the above documents to you, please acknowledge your receipt by signing in the space indicated below, and returning this form. FIRST NATIONAL BANK OF NEW ENGLAND, as Servicer By:__________________________ Name: Title: Date: ____________________________________________________________ Documents returned to Trustee: MARINE MIDLAND BANK, as Trustee By:__________________________ Name: Title Date: I-2 EXHIBIT J FORM OF LIQUIDATION REPORT Customer Name: Account number: Original Principal Balance: 1. Unguaranteed Percentage of Liquidation Proceeds Principal Prepayment $________ Property Sale Proceeds ________ Insurance Proceeds ________ Other (Itemize) ________ Unguaranteed Percentage of Total Proceeds $________ 2. Servicing Advances $________ Monthly Advances ________ Total Advances $________ 3. Net Liquidation Proceeds $________ (Line 1 minus Line 2) 4. Principal Balance of the SBA Loan on date of liquidation $________ 5. Realized (Loss) or Gain $________ (Line 3 minus Line 4) J-1 EXHIBIT K FORM OF DELINQUENCY REPORT DELINQUENCY, REO PROPERTY AND FORECLOSURE INFORMATION
Total Ranges Total Gross Unguaranteed Series (in days) Acct Loan Amount Interest Amount Ungtd Pct - ---------------------------------------------------------------------------------------------- 1 to 29 Days 30 to 59 Days 60 to 89 Days 90 to 179 Days 180 to 719 Days 720 and Over Foreclosure REO Property Total Delinquency Outstanding by Category
K-1 EXHIBIT L SERVICER'S MONTHLY COMPUTER DISKETTE FORMAT The computer diskette to be delivered to the Trustee pursuant to Section 6.09 shall contain the following information for each SBA Loan as of the related Record Date: 1. Name of the Obligor, address of the Mortgaged Property, if applicable, and Account Number. 2. The SBA Loan Interest Rate. 3. The Monthly Payment. 4. The dates on which the payments were received for the applicable Due Period and the amount of such payments segregated into the following categories; (a) total interest received (including Servicing Fee, interest payable to holder of the Guaranteed Interest, the Premium Protection Fee, FTA's Fee, Extra Interest and, if applicable, Additional Fee); (b) interest payable to the holder of the Guaranteed Interest and FTA's Fee; (c) principal and Excess Payments received; (d) Curtailments received; and (e) Principal Prepayments received. 5. The SBA Loan principal balance. 6. The SBA Loan date and original term to maturity. 7. A "Delinquency Flag" noting that the SBA Loan is current or delinquent. If delinquent, state the date on which the last payment was received. 8. For any SBA Loan that is not either 24 months delinquent or otherwise determined to be uncollectible, a "Foreclosure Flag" noting that the SBA Loan is the subject of foreclosure proceedings or other legal process. 9. For any SBA Loan that is not either 24 months delinquent or otherwise determined to be uncollectible, an "REO Flag" noting that title to the Mortgaged Property or Repossessed Collateral has been acquired. K-1 10. A "Liquidated SBA Loan Flag" noting that the SBA Loan is a Liquidated SBA Loan and the Net Liquidation Proceeds received in connection therewith. 11. Any additional information reasonably requested by the Trustee. K-2 EXHIBIT M MULTI-PARTY AGREEMENT AMONG FIRST NATIONAL BANK OF NEW ENGLAND, MARINE MIDLAND BANK, COLSON SERVICES CORP. AND SBA This Multi-Party Agreement is entered into as of May 31, 1998 (this "Agreement"), by and among First National Bank of New England (the "SBA Lender"), Marine Midland Bank, not in its individual capacity but solely as Trustee (the "Trustee"), Colson Services Corp. ("FTA"), and the United States Small Business Administration ("SBA"). The SBA Lender has made and intends to continue to make loans to small businesses under the Small Business Act, as amended. SBA guarantees a portion of each SBA Lender Loan in accordance with 13 C.F.R. Part 120 and one or more Small Business Administration Loan Guaranty Agreements (SBA Form 750), between SBA and the SBA Lender (the "SBA Agreements"). Because SBA guarantees a portion of each SBA Lender Loan, SBA has an interest in the SBA Lender Loans, the underlying collateral, and the Loan Documents. The SBA Lender has entered into certain Secondary Participation Guaranty Agreements on SBA Form 1086 (each, a "Participation Agreement") with a purchaser (each, a "Guaranteed Holder"), SBA and FTA. Under the Participation Agreements, the SBA Lender has sold the guaranteed portion (the "Guaranteed Interest") in certain SBA Lender Loans. SBA has caused FTA to issue a certificate to each Guaranteed Holder which entitles the Guaranteed Holder to receive the payments and other recoveries of principal relating to the Guaranteed Interest on the related SBA Lender Loans, together with interest on the Guaranteed Interest at a per annum rate in effect from time to time in accordance with the Participation Agreement. The SBA Lender and the Trustee have entered into a Pooling and Servicing Agreement, dated as of May 31, 1998 (the "Pooling and Servicing Agreement"), which establishes a trust (the "Trust"). Under the Pooling and Servicing Agreement, the SBA Lender will convey the Conveyed Interest to the Trust. The Trust will issue certificates (the "Certificates") evidencing the right to receive the Unguaranteed Interest in the SBA Lender Loans together with interest. 13 C.F.R. Section 120.420 and the SBA Agreements require the SBA Lender to obtain SBA's written consent before it sells the Unguaranteed Interest. The SBA Lender, the Trustee and SBA want to assure consistency between the SBA Agreements and the Pooling and Servicing Agreement and clarify the respective rights of the parties. The SBA Lender, the Trustee, FTA and SBA agree as follows: 1. Definitions. In this Agreement, the following terms have the ----------- following meanings: a. "Conveyed Interest": the Unguaranteed Interest of each SBA Lender Loan. b. "Event of Default": as defined in the Pooling and Servicing Agreement. c. "Loan Documents": all Notes, mortgages, deeds of trust, security deeds, security agreements, instruments of hypothecation, guarantees and other agreements and documents that relate to the SBA Lender Loans. d. "Notes": the notes evidencing the SBA Lender Loans. e. "Premium Protection Fee": 0.60% per annum of the then outstanding principal balance of the Guaranteed Interest. f. "SBA Lender Loan Debtor": any debtor obligated under an SBA Lender Loan. g. "SBA Lender Loans": the loans listed on Exhibit H of the Pooling and Servicing Agreement (including any Subsequent SBA Loans (as defined in the Pooling and Servicing Agreement)) and any other loans included in the Trust Fund (as defined in the Pooling and Servicing Agreement). h. "SBA Rules and Regulations": the Small Business Act, as amended, the SBA Agreements, all rules and regulations promulgated from time to time under the Small Business Act, and SBA Standard Operating Procedures and official Notices as from time to time in effect. i. "Servicer": The "Servicer" (as defined in the Pooling and Servicing Agreement) and, if applicable, any Subservicer (as defined in the Pooling and Servicing Agreement). j. "Servicing Fee": 0.40% per annum of the then outstanding principal balance of the entire SBA Lender Loan. k. "Spread Account Excess": as defined in the Pooling and Servicing Agreement. l. "Unguaranteed Interest": the portion of each SBA Lender Loan not guaranteed by SBA. 2. SBA's Guaranteed Interest. The SBA Lender, the Trustee (on ------------------------- behalf of itself and the holders of the Certificates) and FTA acknowledges SBA's interest in the Guaranteed Interest of all SBA Lender Loans, together with the collateral securing the SBA Lender Loans and the Loan Documents, and in all payments and recoveries with respect to the SBA Lender Loans and the collateral, including insurance proceeds, and agree to recognize and uphold such interest under SBA Rules and Regulations. The SBA Lender and the Trustee will execute any release, assignment, endorsement or other document that SBA may from time to time reasonably request with respect to the Guaranteed Interest. The SBA Lender and the Trustee will remit funds received in respect of the Guaranteed Interest in the SBA Lender Loans to FTA or SBA, as appropriate. If SBA purchases the Guaranteed Interest in any SBA Lender Loan, any recoveries from the SBA Lender Loan Debtor or the collateral securing the SBA Lender Loan will be distributed pro rata to SBA as holder of the Guaranteed Interest and to the Trustee as holder of the Unguaranteed Interest. 3. Unguaranteed Interest. SBA acknowledges that it has no --------------------- interest in the Unguaranteed Interest, the Servicing Fee or the Premium Protection Fee. SBA further acknowledges that it has no interest in any collateral that secures any SBA Lender Loan or any Loan Document, except to the extent the collateral secures or a Loan Document relates to the Guaranteed Interest. The collateral for an SBA Lender Loan secures the Guaranteed Interest and the Unguaranteed Interest pari passu and all recoveries from insurance or any other source will be shared pro rata. If SBA receives any amount in respect of the Conveyed Interest, SBA will remit the sum to the Trustee for the credit of the SBA Lender, provided that in no event will SBA have any obligation to pay any amount not owed by SBA under SBA Rules and Regulations. If SBA receives any amount in respect of the Servicing Fee or the Premium Protection Fee, SBA will remit the sum to the SBA Lender for distribution to itself, or, if the SBA Lender is not the Servicer, the Servicer, provided that the Trustee shall have given FTA and SBA 15 days prior written notice under this Agreement of the change in Servicer. This Agreement constitutes a notice of claims assignment for the full term of the Pooling and Servicing Agreement under the Federal Assignment of Claims Act of 1940, as amended, 31 U.S.C. Section 3727, with respect to any right to payment of any Unguaranteed Interest or the Servicing Fee or the Premium Protection Fee. 4. SBA Consent to Pooling and Servicing Agreement. ----------------------------------------------- (a) SBA consents to the SBA Lender's execution and performance of the Pooling and Servicing Agreement and the transactions contemplated in it including, but not limited to, the sales of Certificates, other than the Class B Certificates (as defined in the Pooling and Servicing Agreement). (b) Notwithstanding anything to the contrary contained in the Pooling and Servicing Agreement, a default by the SBA Lender under another agreement or a default by an entity other than the SBA Lender under another agreement may not be an event of default under the Pooling and Servicing Agreement. The Trustee waives any rights it may have, including rights of set-off and banker's liens, to any account of the SBA Lender into which payments from SBA Lender Loan Debtors are received and the Principal and Interest Account (as defined in the Pooling and Servicing Agreement). (c) It will be a condition precedent to the effectiveness of this Agreement that the SBA receives opinions of counsel stating that the Multi-Party Agreement is enforceable against the Trustee and the SBA Lender. 5. SBA Lender to Retain Ultimate Risk of Loss. As required by 13 ------------------------------------------ C.F.R. Section 120.420(b)(2), the SBA Lender must retain an economic risk in and bear the ultimate risk of loss on the Unguaranteed Interest. The SBA Lender will establish the Spread Account under the Pooling and Servicing Agreement and cause a wholly owned subsidiary of the SBA Lender, or a wholly-owned subsidiary of such other entity succeeding to the business of SBA Lender relating to originating and servicing SBA Loans as may be approved by SBA in its sole discretion, to be and remain the Spread Account Depositor (as defined in the Pooling and Servicing Agreement). The Trust will issue the Class B Certificates to a wholly owned subsidiary of the SBA Lender, which will retain legal and beneficial ownership thereof in accordance with Section 11 hereof. Such wholly owned subsidiary will retain the Spread Account Excess. 6. Premium Protection Fee and Servicing Fee. The SBA Lender ----------------------------------------- will retain the Premium Protection Fee and the Servicing Fee with respect to all its SBA Lender Loans. 7. Restriction on Use of SBA Lender Loans. The SBA Lender will --------------------------------------- not use the SBA Lender Loans or the collateral supporting the SBA Lender Loans for any borrowing or other financing not related to financing of the guaranteed or unguaranteed portions of the SBA Lender Loans. 8. FTA To Hold Original SBA Lender Notes; Possession of Loan --------------------------------------------------------- Documents. (a) The SBA Lender will deliver all original Notes or in the --------- case of a lost note, a lost note affidavit (the "Affidavit") relating to the Initial SBA Loans (as defined in the Pooling and Servicing Agreement) to FTA prior to the issuance of the Certificates and the SBA Lender will deliver all original Notes relating to the Subsequent SBA Loans (as defined in the Pooling and Servicing Agreement) to FTA prior to each Subsequent Transfer of the Subsequent SBA Loans. Each Note will be endorsed by means of an allonge (an endorsement of the Note constituting a separate piece of paper) as follows: "Pay to the order of Marine Midland Bank, and its successors and assigns, as trustee under the Pooling and Servicing Agreement dated as of May 31, 1998, for the benefit of the United States Small Business Administration and the holders of First National Bank of New England SBA Loan Backed Certificates, Series 1998-1, Class A and Class B as their respective interests may appear, without recourse." Upon receiving the Note or Affidavit, and if a copy exists, a copy of the SBA Note, FTA will deliver to the SBA Lender and the Trustee a receipt for such Note or Affidavit in the form of Exhibit 1. (b) The Notes and Affidavit are being delivered to FTA for the purposes of protecting SBA's and the Certificateholders' respective interests. SBA appoints FTA as its fiscal and transfer agent and each of SBA and the Trustee appoint FTA as its agent to hold the Notes and Affidavit. FTA does not and will not during the term of this Agreement have any interest in the SBA Lender Loans in the Loan Pool or the related Loan Documents. (c) FTA will not release any Note or Affidavit to either the SBA Lender or any other person except (i) upon receipt from the SBA Lender of a Request for Release of Note in the form of Exhibit 3, along with a confirmation of release from the Trustee, or (ii) with SBA's prior written consent. Upon receipt of the required request and confirmation or consent, FTA will release, within 3 Business Days, the related Note or Affidavit. The Servicer will return the Notes or Affidavit to FTA in accordance with the appropriate provisions of the Pooling and Servicing Agreement and when the Notes are returned to FTA, FTA will issue a receipt in the form of Exhibit 1 hereto. SBA will notify Moody's Investors Service, Inc. if FTA releases any Note solely upon the instructions of SBA. (d) Upon reasonable notice to FTA, SBA will have the right during normal business hours to inspect the original Notes or Affidavit at FTA's office. (e) The SBA Lender will deliver to the Trustee the Loan Documents and assignments of Loan Documents in accordance with the Pooling and Servicing Agreement. All instruments of assignment will assign the applicable collateral to "Marine Midland Bank, ("Assignee") its successors and assigns, as trustee under the Pooling and Servicing Agreement dated as of May 31, 1998, subject to the Multi-Party Agreement dated as of May 31, 1998." All financing statements will name the Trustee as secured party. Any power of attorney from the SBA Lender to the Trustee must require the Trustee to deal with the collateral in accordance with the terms of the Pooling and Servicing Agreement and this Agreement. (f) If the Servicer or SBA must be the record owner or secured party with respect to any Note or any collateral securing any Note for any purpose including, without limitation, to liquidate (including by any judicial means) or otherwise pursue remedies against any SBA Lender Loan Debtor or any collateral securing any Note, the Trustee will assign such Note or collateral to the Servicer, or SBA, as necessary. 9. Servicing of SBA Lender Loans. The Servicer will service ------------------------------ the SBA Lender Loans in the Loan Pool. Any servicing actions required of the Servicer under the Pooling and Servicing Agreement or this Agreement may be performed by a Subservicer, but performance by such Subservicer will not limit or reduce the Servicer's obligations or liabilities as Servicer under the Pooling and Servicing Agreement or this Agreement. The Servicer will remit funds to which the Guaranteed Holders or SBA is entitled in accordance with the terms of the Participation Agreements, and will remit to the Trustee funds which are required to be remitted to the Trustee in accordance with the terms of the Pooling and Servicing Agreement. The Servicer must proceed with all collection, enforcement of remedies and liquidation actions against SBA Lender Loan Debtors in default in accordance with SBA Rules and Regulations. The Servicer must perform all servicing activities in accordance with SBA Rules and Regulations, the Participation Agreements and, to the extent there is no conflict, the Pooling and Servicing Agreement. Property acquired through foreclosure or deed in lieu of foreclosure will be titled in the name of the Trustee for the benefit of SBA and the holders of the Certificates, as their interests may appear, subject to the terms of this Agreement. The Servicer will continue to administer such property and will be responsible for its disposition in accordance with the SBA Rules and Regulations and, to the extent there is no conflict, the terms of the Pooling and Servicing Agreement. The Servicer will distribute disposition proceeds to SBA, as party in interest with respect to the Guaranteed Interest, and to the Trustee in respect of the Unguaranteed Interest, pro rata. SBA may, at its --- ---- option, assume servicing of any SBA Lender Loan in accordance with SBA Rules and Regulations. Unless Trustee becomes the Servicer, the Trustee will not take (i) any action regarding the servicing of any SBA Lender Loan or (ii) any action with respect to any SBA Lender Loan Debtor or any collateral securing any SBA Lender Loan. Any actions required of SBA Lender under the Pooling and Servicing Agreement or this Agreement may be performed by or through a subservicer approved by SBA under an agreement approved by SBA, but any such subservicing arrangement will not limit or reduce the SBA Lender's obligations or liabilities as servicer under the Pooling and Servicing Agreement or this Agreement. 10. Default Under Pooling and Servicing Agreement. The Trustee --------------------------------------------- will give SBA prompt written notice of an Event of Default and prompt written notice of any termination of the Servicer, as Servicer under the Pooling and Servicing Agreement. Upon an Event of Default and termination of the Servicer, as Servicer in accordance with the terms of the Pooling and Servicing Agreement, the Trustee may be substituted as Servicer so long as the Trustee is then an approved SBA participating lender in good standing, operating under a current Small Business Administration Loan Guaranty Agreement (Deferred Participation) (Form 750). If the Trustee does not meet that condition or is otherwise unable to act or if SBA requests in writing, the Trustee will appoint another Servicer in accordance with the Pooling and Servicing Agreement. Any successor Servicer must agree to be bound by the terms of this Agreement and must execute an agreement in the form of Exhibit 2. Any substitute Servicer will be entitled to receive the Servicing Fee and the Premium Protection Fee. 11. Transferees. Other than the issuance of the Certificates, ----------- the Trustee will not sell, participate, pledge, hypothecate, enter into any repurchase agreement with respect to, or otherwise transfer any of its interest in any SBA Lender Loan or any Note without SBA's prior written consent. The proposed transferee must be an approved SBA participating lender in good standing, operating under a current Small Business Administration Loan Guaranty Agreement (Deferred Participation) (Form 750) and must be acceptable to SBA. Upon consenting to any proposed transfer, SBA will give FTA prompt written notice. Any transferee must agree to be bound by the terms of this Agreement. Upon initial issuance, the Class B Certificates will be issued to and registered in the name of FNBNE SBA Holdings, Inc., a wholly owned subsidiary of the SBA Lender ("Holdings"), which will retain legal and beneficial ownership of the Class B Certificates. Holdings will remain a wholly-owned subsidiary of the SBA Lender or a wholly-owned subsidiary of such other entity succeeding to the business of SBA Lender relating to originating and servicing SBA Loans as may be approved by SBA in its sole discretion. The SBA Lender agrees that Holdings may not pledge, transfer, assign or otherwise convey, in whole or in part, the Class B Certificates without the prior written consent of SBA. 12. SBA Lender Acknowledgment of Continuing Obligation; No ------------------------------------------------------ Assumption of Liabilities. No action taken by the Trustee, SBA or the -------------------------- Servicer under this Agreement, the SBA Agreements, or the Pooling and Servicing Agreement will release or relieve the SBA Lender of any of its obligations to SBA or to the Trustee. None of SBA, the Trustee, FTA or the Servicer will incur any liability or obligation to the SBA Lender by reason of any reasonable or customary action taken in carrying out the provisions of this Agreement. Neither the execution of this Agreement, nor the taking of any action by the Trustee, SBA, FTA or the Servicer under this Agreement will be an assumption by the Trustee, SBA, FTA or the Servicer of any liabilities or obligations of the SBA Lender. The provisions of this Section will survive termination of this Agreement. 13. FTA's and SBA's Limited Liability and Expenses. (a) FTA may ---------------------------------------------- rely upon any signature, notice, certificate, or other document reasonably believed by it to be genuine and to have been signed by the party purporting to sign it. The SBA Lender will assume liability for and indemnify, protect, and hold harmless FTA from any liabilities or losses arising out of this Agreement, except in the case of FTA's gross negligence or willful misconduct. The SBA Lender will reimburse FTA for all expenses, taxes, and other charges that FTA incurs in administering this Agreement. The SBA Lender will pay FTA its standard fee for its services under this Agreement. In performing its obligations under this Agreement, FTA will not follow instructions from any party other than SBA or, pursuant to Section 8(c), upon the request of the SBA Lender and concurring instructions of the Trustee. The SBA Lender will not hold FTA liable for any action taken in accordance with such instructions. (b) SBA may rely on any signature, notice, certificate, request or other document reasonably believed by it to be genuine and to have been signed by the party purporting to sign it. The SBA Lender will assume liability for and indemnify, protect and hold harmless SBA from all liabilities or losses arising out of this Agreement, except in the case of gross negligence or willful misconduct. Upon request by SBA, SBA Lender will reimburse SBA for all reasonable expenses and other charges that SBA incurs in connection with this Agreement. (c) The provisions of this Section 13 will survive any termination of this Agreement. 14. Counterparts. This Agreement may be executed in any number ------------ of counterparts each of which will be an original. 15. Inconsistencies. If any provision of this Agreement is --------------- inconsistent with any provision in any other agreement, including but not limited to the Pooling and Servicing Agreement, the provision of this Agreement controls. The Pooling and Servicing Agreement and any agreements entered into in connection with such agreement are amended to the extent necessary to give effect to the prior sentence. The SBA Agreements are amended to provide that FTA will hold the Notes that are transferred pursuant to the Pooling and Servicing Agreement and that the Trustee may hold the Loan Documents as provided in this Agreement. 16. Amendment and Term. This Agreement may not be terminated or ------------------ amended without the prior written consent of the parties. Neither the SBA Agreements nor the Pooling and Servicing Agreement may be amended in any manner that would impair the respective rights of SBA or the Trustee under this Agreement without the prior written consent of the party so affected. 17. GOVERNING LAW. THIS AGREEMENT WILL BE INTERPRETED AND ------------- CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REFERENCE TO ITS CONFLICT OF LAWS RULES. 18. Successors and Assigns. This Agreement binds and benefits ---------------------- the parties and their respective successors and assigns. 19. Section Headings. The section headings in this Agreement ---------------- are for convenience only, and are without substantive meaning or content. 20. Severability. Any provision of this Agreement which is ------------ prohibited or unenforceable in any jurisdiction will be given no effect and shall not invalidate any other provision of this Agreement. 21. Notices and Deliveries. Except as otherwise expressly ---------------------- provided in this document, all notices or deliveries under this Agreement will be given by actual delivery to the parties at the addresses below or to such other addresses that any party may designate for itself by written notice to each of the other parties. All notices will be effective upon receipt by the applicable party. If to SBA Lender, at: First National Bank of New England One Commercial Plaza Hartford, Connecticut 06103 Telecopy No.: 860-241-2501 Attention: Leslie Galbraith If to the Trustee, at: Marine Midland Bank 140 Broadway, 12th Floor New York, New York 10005 Attention: Corporate Trust Administration If to FTA, at: Colson Services Corp. 150 Nassau Street New York, New York 10038 Attn.: President If to SBA, at: U.S. Small Business Administration 409 3rd Street, S.W. Washington, D.C. 20416 Attn.: Associate Administrator for Financial Assistance Additionally, SBA Lender will provide SBA with a copy of (i) the SBA Loan Schedule included as Exhibit H to the Pooling and Servicing Agreement, along with any amendments thereto delivered to the Trustee, and (ii) each delinquency and foreclosure report prepared in accordance with clause (viii) of Section 6.09 of the Pooling and Servicing Agreement. Such Schedules and reports will be sent (to the extent practicable, in electronic format) to Mr. James Hammersley, Director of Secondary Market Sales (james.hammersley@sba.gov). In witness whereof the SBA Lender, the Trustee, FTA, and SBA have executed this Agreement below. FIRST NATIONAL BANK OF NEW ENGLAND By: _______________________________________ Name: Title: MARINE MIDLAND BANK , not in its individual capacity but solely as Trustee By: _______________________________________ Name: Title: UNITED STATES SMALL BUSINESS ADMINISTRATION By: _______________________________________ Name: Jane Palsgrove Butler Title: Acting Associate Administrator for Financial Assistance COLSON SERVICES CORP. By: _______________________________________ Name: Title: EXHIBIT 1 --------- ACKNOWLEDGMENT OF RECEIPT OF NOTE OR LOST NOTE AFFIDAVIT ___________, 1998 In accordance with Section 8 of the Multi-Party Agreement, dated as of May 31, 1998, by and among First National Bank of New England, Marine Midland Bank, as trustee, Colson Services Corp. ("Colson") and the United States Small Business Administration ("SBA"), Colson, as agent for SBA, hereby acknowledges receipt of the SBA guaranteed Note or with respect to a lost SBA Note, a lost note affidavit and if a copy exists, a copy of the original SBA Note described below with respect to the following: MAKER: ORIGINAL PRINCIPAL AMOUNT: DATE OF NOTE: SBA LOAN NUMBER (GP NUMBER): ACCOUNT NUMBER: COLSON SERVICES CORP., AS AGENT FOR THE UNITED STATES SMALL BUSINESS ADMINISTRATION By: ___________________________ Name: Title: INSTRUCTIONS TO COLSON SERVICES CORP. One original executed copy of this receipt should be made available for pick-up at the office of Colson or delivered to Marine Midland Bank, as trustee, 140 Broadway, 12th Floor, New York, New York 10005, and a copy First National Bank of New England, One Commercial Plaza, Hartford, Connecticut, 06103, Attention: Leslie Galbraith. M-1-1 EXHIBIT 2 --------- The undersigned consents and agrees to be bound as successor Servicer by the terms of foregoing Multi-Party Agreement, dated as of May 31, 1998 among First National Bank of New England, Marine Midland Bank, as trustee, Colson Services Corp. and the United States Small Business Administration. ___________________________________ By:________________________________ Name: Title: M-2-1 EXHIBIT 3 --------- REQUEST FOR RELEASE OF NOTE _____________, 199__ Colson Services Corp. As Agent for the United States Small Business Administration 150 Nassau Street New York, NY 10038 In accordance with Section 8(c) of the Multi-Party Agreement dated as of May 31, 1998 by and among First National Bank of New England, Marine Midland Bank, as trustee, Colson Services Corp. ("Colson") and the United States Small Business Administration ("SBA") and, subject to your receipt of concurrence from Marine Midland Bank, as trustee, First National Bank of New England hereby requests release of the Note described below: OBLIGOR'S NAME AND ADDRESS: SBA LOAN NUMBER (GP NUMBER): Reason for Requesting Note (ONE OF THESE MUST BE CHECKED) ____1. SBA Loan Paid in Full ____2. SBA Loan Liquidated ____3. SBA Loan in Foreclosure or other Legal Process ____4. SBA Loan repurchased pursuant to Section 11.01 of the Pooling and Servicing Agreement, dated as of May 31, 1998, relating to First National Bank of New England SBA Loan-Backed Adjustable Rate Certificates, Series 1998-1 (The "Pooling and Servicing Agreement") ____5. SBA Loan repurchased or substituted pursuant to Article II or Article III of the Pooling and Servicing Agreement M-3-1 ____6. Collateral being released pursuant to Section 5.01(f) of the Pooling and Servicing Agreement ____7. SBA Loan Collateral being substituted or subordinated FIRST NATIONAL BANK OF NEW ENGLAND By: ___________________ Name: Title: M-3-2 EXHIBIT N SPREAD ACCOUNT AGREEMENT This Spread Account Agreement is dated as of June 30, 1998 (the "Agreement") among FNBNE SBA Holdings, Inc., a Delaware corporation, as Spread Account Depositor (the "Spread Account Depositor"), Marine Midland Bank, as trustee (the "Trustee"), and Marine Midland Bank, in its capacity as custodian hereunder (the "Spread Account Custodian"). All capitalized terms used but not otherwise defined herein shall have the meanings set forth in the Pooling and Servicing Agreement referred to below. WHEREAS, First National Bank of New England (in its capacity as the "Seller") and Marine Midland Bank, in its capacity as Trustee, have entered into a Pooling and Servicing Agreement, dated as of May 31, 1998 (the "Pooling and Servicing Agreement"), in connection with the establishment of a Trust (the "Trust") and the issuance of First National Bank of New England SBA Loan-Backed, Adjustable Rate Certificates, Series 1998-1, representing an undivided beneficial ownership interest in the Trust; WHEREAS, the Spread Account Depositor wishes to establish the Spread Account (the "Account") with the Spread Account Custodian, to be used in accordance with the provisions of Section 6.02 of the Pooling and Servicing Agreement; and WHEREAS, the Spread Account Custodian herein agrees to maintain the Account in accordance with the terms of this Agreement and the Pooling and Servicing Agreement. NOW, THEREFORE, in consideration of the premises and of the mutual agreements herein contained, the parties hereto agree as follows: Section 1. Definitions. In addition to those terms defined in the ----------- Pooling and Servicing Agreement and otherwise herein, the following words and phrases, unless the context otherwise requires, shall have the following meanings: "Account" has the meaning set forth in the second WHEREAS clause hereof. "Account Property" has the meaning set forth in Section 3 hereof. N-1 "Certificated Securities" has the meaning set forth in Section 8- 102(4) of the UCC. "Clearing Corporation" has the meaning set forth in Section 8- 102(5) of the UCC. "Delivery" when used with respect to Account Property means: (a) with respect to bankers' acceptances, commercial paper, negotiable certificates of deposit and other obligations that constitute instruments and are susceptible of physical delivery ("Physical Property"): (i) transfer of possession thereof to the Spread Account Custodian, endorsed to, or registered in the name of, the Spread Account Custodian or its nominee or endorsed in blank; (b) with respect to a certificated security: (i) delivery thereof in bearer form to the Spread Account Custodian; or (ii) delivery thereof in registered form to the Spread Account Custodian and (A) the certificate is endorsed to the Spread Account Custodian or in blank by effective endorsement; or (B) the certificate is registered in the name of the Spread Account Custodian, upon original issue or registration of transfer by the issuer; (c) with respect to an uncertificated security: (i) the delivery of the uncertificated security to the Spread Account Custodian; or (ii) the issuer has agreed that it will comply with instructions originated by the Spread Account Custodian without further consent by the registered owner; (d) with respect to any security issued by the U.S. Treasury that is a book-entry security held through the Federal Reserve System pursuant to Federal book-entry regulations: N-2 (i) a Federal Reserve Bank by book entry credits the book-entry security to the securities account (as defined in 31 CFR Part 357) of a participant (as defined in 31 CFR Part 357) which is also a securities intermediary; and (ii) the participant indicates by book entry that the book-entry security has been credited to the Spread Account Custodian's securities account; (e) with respect to a security entitlement: (i) the Spread Account Custodian becomes the entitlement holder; or (ii) the securities intermediary has agreed that it will comply with entitlement orders originated by the Spread Account Custodian without further consent by the entitlement holder; (f) for the purpose of clauses (b) and (c) hereof "delivery" means: (i) with respect to a certificated security: (A) the Spread Account Custodian acquires possession thereof; (B) another person (other than a securities intermediary) either acquires possession thereof on behalf of the Spread Account Custodian or, having previously acquired possession thereof, acknowledges that it holds for the Spread Account Custodian; or (C) a securities intermediary acting on behalf of the Spread Account Custodian acquires possession thereof, only if the certificate is in registered form and has been specially endorsed to the Spread Account Custodian by an effective endorsement; (ii) with respect to an uncertificated security: (A) the issuer registers the Spread Account Custodian as the registered owner, upon original issue or registration of transfer; or (B) another person (other than a securities intermediary) either becomes the registered owner thereof on behalf of the Spread Account Custodian or, N-3 having previously become the registered owner, acknowledges that it holds for the Spread Account Custodian; (g) for purposes of this definition, except as otherwise indicated, the following terms shall have the meaning assigned to each such term in the UCC: (i) "certificated security" (ii) "effective endorsement" (iii) "entitlement holder" (iv) "instrument" (v) "securities account" (vi) "securities entitlement" (vii) "securities intermediary" (viii) "uncertificated security" (h) in each case of Delivery contemplated herein, the Spread Account Custodian shall make appropriate notations on its records, and shall cause the same to be made on the records of its nominees, indicating that securities are held in trust pursuant to and as provided in this Agreement. "Depositary" has the meaning set forth in 31 C.F.R. 306.118 or similar federal regulations governing the transfer of securities issued by the United States Treasury which are maintained in book- entry form. "Securities Intermediary" has the meaning set forth in Section 8- 102(a)(14) of the UCC. "Instruments" has the meaning set forth in Section 9-105(l)(ii) of the UCC but excludes any "instruments" that are "certificated securities" as defined in Section 8-102(l) (a) of the UCC. "Physical Property" has the meaning set forth in clause (i) of the definition of "Delivery" in this Section 1. "UCC" means the New York Uniform Commercial Code. N-4 "Uncertificated Security" has the meaning set forth in Section 8- 102(a)(18) of the UCC. Section 2. Appointment of Spread Account Custodian. The Spread --------------------------------------- Account Depositor and the Trustee hereby appoint Marine Midland Bank as their agent under this Agreement to act on their behalf in accordance with the terms of this Agreement with respect to their interests in the Account and all amounts and investments deposited therein or credited thereto. Marine Midland Bank hereby accepts and acknowledges its appointment as agent on behalf of the Spread Account Depositor and the Trustee. Section 3. Pledge of Security Interest. The Spread Account Depositor --------------------------- hereby assigns, sells, conveys and transfers to the Spread Account Custodian and its successors and assigns, and grants thereto a security interest in, all of its right, title and interest in and to all amounts payable to the Spread Account pursuant to Section 6.02 of the Pooling and Servicing Agreement, the Account, all amounts deposited therein or credited thereto, from time to time, and all proceeds of the foregoing, including, without limitation, all other amounts and investments held from time to time in the Account (whether in the form of deposit accounts, Physical Property, book-entry securities, Uncertificated Securities, or otherwise) (all of the foregoing, collectively, the "Account Property"), to have and to hold all the aforesaid property, rights and privileges unto the Spread Account Custodian, its successors and assigns, in trust for the benefit of the Trustee and the Certificateholders, subject to the terms and provisions, set forth in this Agreement. The Spread Account Custodian hereby acknowledges such transfer and, upon receipt, shall hold and distribute the Account Property in accordance with the terms and provisions of this Agreement. Section 4. Establishment of the Account. The Spread Account ---------------------------- Depositor hereby establishes and shall hereafter maintain with the Spread Account Custodian the Account as a separate trust account to include the money and other property deposited and held therein pursuant hereto. The Account shall be a segregated trust account maintained in New York and initially established with the Spread Account Custodian and maintained with the Spread Account Custodian in the Corporate Trust Department of the Spread Account Custodian. The Spread Account Custodian acknowledges the interest of the Trustee in the Account, as set forth herein and in Article VI of the Pooling and Servicing Agreement. The Spread Account Custodian further acknowledges and agrees that (i) any deposits to the Account shall be made solely by the Servicer or the Trustee in accordance with Section 6.02(a) of the Pooling and Servicing Agreement; (ii) any withdrawals from the Account shall be made by the Spread Account Custodian solely upon instructions N-5 therefor given by the Trustee as specifically set forth in Section 6.02(b) of the Pooling and Servicing Agreement; and (iii) the Seller and the Servicer and the Spread Account Depositor shall have no rights to receive any amounts in the Account other than as specifically set forth herein and in Section 6.02(b) of the Pooling and Servicing Agreement. Section 5. Delivery of Account Property. With respect to the Account ---------------------------- Property, the Spread Account Depositor and the Spread Account Custodian agree that: (a) any Account Property that is held in deposit accounts shall be held solely with a Designated Depository Institution; and each such deposit account shall be subject to the exclusive dominion and control of the Spread Account Custodian, and the Spread Account Custodian shall have sole signature authority with respect thereto; (b) any Account Property that is Physical Property shall be delivered to the Spread Account Custodian in accordance with paragraph (a) of the definition of "Delivery" and shall be held, pending maturity or disposition, solely by the Spread Account Custodian or a securities intermediary (as such term is defined in Section 8- 102(a)(14) of the Relevant UCC); (c) any Account Property that is a "certificated security" under Article 8 of the Relevant UCC shall be delivered to the Spread Account Custodian in accordance with paragraph (b) of the definition of "Delivery" and shall be held, pending maturity or disposition, solely by the Spread Account Custodian or a securities intermediary (as such term is defined in Section 8-102(a)(14) of the Relevant UCC); (d) any Account Property that is an "uncertificated security" under Article 8 of the Relevant UCC shall be delivered to the Spread Account Custodian in accordance with paragraph (c) of the definition of "Delivery" and shall be maintained by the Spread Account Custodian, pending maturity or disposition, through continued registration on the books and records of the issuer thereof of the ownership of such security by the Spread Account Custodian (or its nominee) or a securities intermediary (as such term is defined in Section 8- 102(a)(14) of the Relevant UCC); N-6 (e) any Account Property that is a book-entry security held through the Federal Reserve System pursuant to Federal book-entry regulations shall be delivered to the Spread Account Custodian in accordance with paragraph (d) of the definition of "Delivery" and shall be maintained by the Spread Account Custodian, pending maturity or disposition, through continued book-entry registration of such Account Property in the name of the Spread Account Custodian or a securities intermediary (as such term is defined in Section 8- 102(a)(14) of the Relevant UCC); and (f) any Account Property held through a securities intermediary (as such term is defined in Section 8-102(a)(14) of the Relevant UCC) shall be held in a securities account (as such term is defined in Section 8-501(a) of the Relevant UCC) that is established by such securities intermediary in the name of the Spread Account Custodian for which the Spread Account Custodian is the sole entitlement holder (as defined in Section 8-102(a)(7) of the Relevant UCC). Section 6. Investment. Amounts held in the Account shall be invested ---------- in Permitted Instruments in accordance with the provisions of Section 6.06 of the Pooling and Servicing Agreement. All such investments shall be made in the name of the Spread Account Custodian or its nominee, and all income and gain realized thereon shall be retained in the Account until withdrawals are permitted under Section 6.02(b)(iii) of the Pooling and Servicing Agreement. Section 7. Statement of Account. On or before each Determination -------------------- Date, the Spread Account Custodian shall deliver to the Trustee, the Servicer and the Spread Account Depositor an account statement of the Spread Account Custodian setting forth, as of such date, (i) the amount on deposit in the Account, (ii) the activity in the Account for the preceding month and (iii) the amount of any income or gain (or loss) on amounts held in the Account. Section 8. Termination. This Agreement shall terminate upon the ----------- termination of the Pooling and Servicing Agreement in accordance with their terms. Upon termination of this Agreement, any amounts on deposit in the Account shall be paid by the Spread Account Custodian to the Spread Account Depositor in accordance with the terms of the Pooling and Servicing Agreement. N-7 Section 9. Amendment. This Agreement may be amended by the Spread --------- Account Depositor and the Spread Account Custodian with the consent of the Trustee. The parties hereto agree to make any changes to this Agreement required by Moody's in order to obtain an investment-grade rating. Section 10. Counterparts. This Agreement may be executed in one or ------------ more counterparts and by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed to be an original; such counterparts, together, shall constitute one and the same Agreement. SECTION 11. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ------------- ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES UNDER THIS AGREEMENT SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. Section 12. Notices. All demands, notices and communications upon or ------- to the Spread Account Depositor, the Servicer, the Spread Account Custodian or the Trustee under this Agreement shall be in writing, personally delivered or mailed by certified mail, return receipt requested, and shall be deemed to have been duly given upon receipt (a) in the case of the Spread Account Depositor, the Servicer and the Trustee, at the addresses therefor set forth in Section 13.06 of the Pooling and Servicing Agreement; (b) in the case of the Spread Account Custodian, at 140 Broadway, New York, New York 10005, 12th Floor, Attention: Corporate Trust Department; and (c) in the case of the Spread Account Depositor, c/o First National Bank of New England, One Commercial Plaza, Hartford, Connecticut 06103, Attention: Leslie Galbraith. Section 13. Severability of Provisions. If any one or more of the -------------------------- agreements, provisions or terms of this Agreement shall be for any reason whatsoever held invalid, then such agreements, provisions or terms shall be deemed severable from the remaining agreements, provisions or terms of this Agreement and shall in no way affect the validity or enforceability of the other provisions of this Agreement. Section 14. Assignment; Benefit of Agreement. Notwithstanding -------------------------------- anything to the contrary contained herein, this Agreement may not be assigned by the Spread Account Depositor Spread Account Custodian without the prior written consent of the Trustee. Subject to the foregoing, this Agreement will inure to the benefit of and be binding upon the parties hereto and the Trustee and their respective successors and permitted assigns. N-8 IN WITNESS WHEREOF, the Trustee, the Spread Account Depositor and the Spread Account Custodian have caused this Spread Account Agreement to be duly executed by their respective officers as of the day and year first above written. MARINE MIDLAND BANK, not in its individual capacity but solely as Trustee By_____________________________ Name: Title: MARINE MIDLAND BANK, as Spread Account Custodian By_____________________________ Name: Title: FNBNE SBA HOLDINGS, INC., as Spread Account Depositor By_____________________________ Name: Title: N-9 EXHIBIT O-1 FORM OF TRANSFEREE LETTER [NON-RULE 144A] First National Bank of New England as Servicer One Commercial Plaza Hartford, Connecticut 06103 Attention: Leslie Galbraith Marine Midland Bank, as Trustee 140 Broadway, 12th Floor New York, New York 10005 Attention: Corporate Trust Administration __________, 199__ Re:First National Bank of New England SBA Loan-Backed Adjustable Rate Certificates, Series 1998-1, Class [A] [B] -------------------------------------------- Ladies and Gentlemen: In connection with our acquisition of the above-captioned Certificates, we certify that (a) we understand that the Certificates are not being registered under the Securities Act of 1933, as amended (the "Act"), or any state securities laws and are being transferred to us in a transaction that is exempt from the registration requirements of the Act and any such laws, (b) we are an institutional "Accredited Investor," as defined in the Pooling and Servicing Agreement pursuant to which the Certificates were issued (the "Agreement"), and have such knowledge and experience in financial and business matters that we are capable of evaluating the merits and risks of investments in the Certificates, (c) we have had the opportunity to ask questions of and receive answers from the Seller concerning the purchase of the Certificates and all matters relating thereto or any additional information deemed necessary to our decision to purchase the Certificates, (d) we are acquiring the Certificates for investment for our own account and not with a view to any distribution of such Certificates (but without prejudice to our right at all times to sell or otherwise dispose of the Certificates in accordance with clause (f) below), (e) we have not offered or sold any Certificates to, or solicited offers to buy any Certificates from, any person, or otherwise approached or negotiated with any person with respect thereto, or taken any other action which would result in a violation of Section 5 of O-1-1 the Act, (f) we will not sell, transfer or otherwise dispose of any Certificates unless (1) such sale, transfer or other disposition is made pursuant to an effective registration statement under the Act or is exempt from such registration requirements, and if requested, we will at our expense provide an opinion of counsel satisfactory to the addressees of this Certificate that such sale, transfer or other disposition may be made pursuant to an exemption from the Act, (2) the purchaser or transferee of such Certificate has executed and delivered to you a certificate to substantially the same effect as this certificate if required by the Agreement, and (3) the purchaser or transferee has otherwise complied with any conditions for transfer set forth in the Agreement and (g) the purchaser is not acquiring a Certificate, directly or indirectly, for or on behalf of: (i) an employee benefit plan or other retirement arrangement subject to the Employee Retirement Income Security Act of 1974, as amended, and/or Section 4975 of the Internal Revenue Code of 1986, as amended, or (ii) any entity, the assets of which would be deemed plan assets under the Department of Labor regulations set forth at 29 C.F.R. (S)2510.3-101. Very truly yours, ___________________________________ Print Name of Transferee By:________________________________ Authorized Officer O-1-2 EXHIBIT O-2 FORM OF RULE 144A CERTIFICATION First National Bank of New England as Servicer One Commercial Plaza Hartford, Connecticut 06103 Attention: Leslie Galbraith Marine Midland Bank, as Trustee 140 Broadway, 12th Floor New York, New York 10005 Attention: Corporate Trust Administration __________, 199__ Re: First National Bank of New England SBA Loan-Backed Adjustable Rate Certificates, Series 1998-1, Class [A] [B] -------------------------------------------- Ladies and Gentlemen: In connection with our acquisition of the above Certificates we certify that (a) we understand that the Certificates are not being registered under the Securities Act of 1933, as amended (the "Act"), or any state securities laws and are being transferred to us in a transaction that is exempt from the registration requirements of the Act and any such laws, (b) we have had the opportunity to ask questions of and receive answers from the Seller concerning the purchase of the Certificates and all matters relating thereto or any additional information deemed necessary to our decision to purchase the Certificates, (c) we have not, nor has anyone acting on our behalf offered, transferred, pledged, sold or otherwise disposed of the Certificates, any interest in the Certificates or any other similar security to, or solicited any offer to buy or accept a transfer, pledge or other disposition of the Certificates, any interest in the Certificates or any other similar security from, or otherwise approached or negotiated with respect to the Certificates, any interest in the Certificates or any other similar security with, any person in any manner, or made any general solicitation by means of general advertising or in any other manner, or taken any other action, that would constitute a distribution of the Certificates under the Act or that would render the disposition of the Certificates a violation of Section 5 of the Act or require registration pursuant thereto, nor will act, nor has authorized or will authorize any person to act, in such manner with respect to the Certificates, (d) we are a "qualified institutional buyer" as that term is defined in Rule 144A under the Act and have completed the form of certification to that effect attached hereto as Annex 1 and (e) we are not acquiring a Certificate, directly or indirectly, for or on behalf of: (i) an employee benefit plan or other retirement arrangement subject to the Employee Retirement Income Security Act of 1974, as amended, and/or Section 4975 of the Internal Revenue Code of 1986, as amended, or (ii) any entity, the assets of which would be deemed plan assets under the Department of Labor regulations set forth at 29 C.F.R. (S)2510.3-101. We are aware that the sale to us is being made in reliance on Rule 144A. We are acquiring the Certificates for our own account or for resale pursuant to Rule 144A and further, understand that such Certificates may be resold, pledged or transferred only (i) to a person reasonably believed to be a qualified institutional buyer that purchases for its own account or for the account of a qualified institutional buyer to whom notice is given that the resale, pledge or transfer is being made in reliance on Rule 144A, or (ii) pursuant to another exemption from registration under the Act. Very truly yours, _______________________________ Print Name of Transferee By:____________________________ Authorized Officer O-2-2 ANNEX 1 TO EXHIBIT O-2 ---------------------- [FORM OF CERTIFICATION] [Date] First National Bank of New England as Servicer One Commercial Plaza Hartford, Connecticut 06103 Attention: Leslie Galbraith Marine Midland Bank, as Trustee 140 Broadway, 12th Floor New York, New York 10005 Attention: Corporate Trust Administration Re: First National Bank of New England SBA Loan-Backed Adjustable Rate Certificates, Series 1998-1, Class [A] [B] (the "Confidentially Offered Securities") ----------------------------------------- Ladies and Gentlemen: In connection with our purchase of Confidentially Offered Securities, the undersigned certifies to each of the parties to whom this letter is addressed that it is a qualified institutional buyer (as defined in Rule 144A under the Securities Act of 1933, as amended (the "Act")) as follows: 1. It owns and/or invests on a discretionary basis eligible securities (excluding affiliate's securities, bank deposit notes and CD's, loan participations, repurchase agreements, securities owned but subject to a repurchase agreement and currency, interest rate and commodity swaps), as described below: Amount:/1/ $_________________; and 2. The dollar amount set forth above is: a. greater than $100 million and the undersigned is one of the following entities: ___________________ /1/ Must be calculated using only securities which the undersigned beneficially held as of the date below. O-2-3 (1) [_] an insurance company as defined in Section 2(13) of the Act;* or (2) [_] an investment company registered under the Investment Company Act or any business development company as defined in Section 2(a)(48) of the Investment Company Act of 1940 or as defined in Section 202(a)(22) of the Investment Advisers Act of 1940; or (3) [_] a Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958; or (4) [_] a plan (i) established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, the laws of which permit the purchase of securities of this type, for the benefit of its employees and (ii) the governing investment guidelines of which permit the purchase of securities of this type; or (5) [_] a corporation (other than a U.S. bank, savings and loan association or equivalent foreign institution), partnership, Massachusetts or similar business trust, or an organization described in Section 501(c)(3) of the Internal Revenue Code; or (6) [_] a U.S. bank, savings and loan association or equivalent foreign institution, which has an audited net worth of at least $25 million as demonstrated in its latest annual financial statements as of a date not more than 16 months preceding the date of sale in the case of a U.S. institution or 18 months in the case of a foreign institution.; or * A purchase by an insurance company for one or more of its separate accounts, as defined by section 2(a)(37) of the Investment Company Act of 1940, which are neither registered nor required to be registered thereunder, shall be deemed to be a purchase for the account of such insurance company. O-2-4 date of sale in the case of a U.S. institution or 18 months in the case of a foreign institution.; or (7) [_] an investment adviser registered under the Investment Advisers Act; or b. [_] greater than $10 million, and the undersigned is a broker-dealer registered with the SEC; or c. [_] less than $10 million, and the undersigned is a broker-dealer registered with the SEC and will only purchase Rule 144A securities in riskless principal transactions (as defined in Rule 144A); or d. [_] less than $100 million, and the undersigned is an investment company registered under the Investment Company Act of 1940, which, together with one or more registered investment companies having the same or an affiliated investment adviser, owns at least $100 million of eligible securities; or e. [_] less than $100 million, and the undersigned is an entity, all the equity owners of which are qualified institutional buyers. The undersigned further certifies that it is purchasing Confidentially Offered Securities for its own account or for the account of others that independently qualify as "Qualified Institutional Buyers" as defined in Rule 144A. It is aware that the sale of the Confidentially Offered Securities are being made in reliance on its continued compliance with Rule 144A. It is aware that the transferor may rely on the exemption from the provisions of Section 5 of the Act provided by Rule 144A. The undersigned understands that the Confidentially Offered Securities may be resold, pledged or transferred only to a person reasonably believed to be a Qualified Institutional Buyer that purchases for its own account or for the account of a Qualified Institutional Buyer to whom notice is given that the resale, pledge or transfer is being made in reliance in Rule 144A. O-2-5 The undersigned agrees that if at some time before the expiration of the holding period described in Rule 144 it wishes to dispose of or exchange any of the Confidentially Offered Securities, it will not transfer or exchange any of the Confidentially Offered Securities to a Qualified Institutional Buyer without first obtaining a letter in the form hereof from the transferee and delivering such certificate to the addressees hereof. IN WITNESS WHEREOF, this document has been executed by the undersigned who is duly authorized to do so on behalf of the undersigned Qualified Institutional Buyer on the _____ day of ___________, 1998. Name of Institution Signature Name Title** ________________________ ** Must be President, Chief Financial Officer, or other executive officer. O-2-6 EXHIBIT P LIST OF SBA LOANS WITH LOST SBA NOTES [SEE TAB 38] P-1 EX-10.15 8 SALE AND SERVICING AGREEMENT EXECUTION COPY EXHIBIT 10.15 SALE AND SERVICING AGREEMENT Dated as of December 1, 1998 Between FNBNE BUSINESS LOAN TRUST 1998-A (Trust) and FIRST NATIONAL BANK OF NEW ENGLAND (Seller and Servicer) FNBNE Business Loan Notes, Series 1998-A TABLE OF CONTENTS -----------------
Section Page - ------- ---- ARTICLE I DEFINITIONS ----------- Section 1.01 Definitions........................................................................... 2 ----------- Section 1.02 Use of Words and Phrases.............................................................. 2 ------------------------ Section 1.03 Captions; Table of Contents........................................................... 2 --------------------------- ARTICLE II SALE AND CONVEYANCE OF THE TRUST FUND ------------------------------------- Section 2.01 Sale and Conveyance of Trust Fund............................................... 3 --------------------------------- Section 2.02 Possession of Business Files.................................................... 3 ---------------------------- Section 2.03 Books and Records............................................................... 3 Section 2.04 Delivery of Business Loan Documents............................................. 3 ----------------------------------- Section 2.05 Acceptance by Trustee of the Trust Fund; Certain Substitutions; Certification by -------------------------------------------------------------------------------- Indenture Trustee............................................................... 6 ----------------- Section 2.06 [Reserved]...................................................................... 7 Section 2.07 [Reserved]...................................................................... 7 Section 2.08 Fees and Expenses of the Owner Trustee and the Indenture Trustee................ 7 ---------------------------------------------------------------- Section 2.09 Transfer and Conveyance of the Subsequent Business Loans........................ 8 -------------------------------------------------------- Section 2.10 Optional Repurchase of Defaulted Business Loans................................. 10 ARTICLE III REPRESENTATIONS AND WARRANTIES Section 3.01 Representations of the Seller................................................... 11 Section 3.02 Individual Business Loans....................................................... 14 ------------------------- Section 3.03 Purchase and Substitution of Defective Loans.................................... 18 --------------------------------------------
(i) ARTICLE IV ADMINISTRATION AND SERVICING OF BUSINESS LOANS ---------------------------------------------- Section 4.01 Duties of the Servicer.......................................................... 21 ---------------------- Section 4.02 Liquidation of Business Loans................................................... 24 ----------------------------- Section 4.03 Establishment of Principal and Interest Accounts; Deposits in Principal and --------------------------------------------------------------------------- Interest Accounts............................................................... 25 ----------------- Section 4.04 Permitted Withdrawals From the Applicable Principal and Interest Account........ 26 ------------------------------------------------------------------------ Section 4.05 [Intentionally Omitted]......................................................... 27 Section 4.06 Transfer of Accounts............................................................ 28 -------------------- Section 4.07 Maintenance of Hazard Insurance................................................. 28 ------------------------------- Section 4.08 [Intentionally Omitted]......................................................... 28 Section 4.09 Fidelity Bond................................................................... 28 ------------- Section 4.10 Title, Management and Disposition of Foreclosed Property........................ 29 -------------------------------------------------------- Section 4.11 [Intentionally Omitted]......................................................... 29 --------------------- Section 4.12 Collection of Certain Business Loan Payments.................................... 29 -------------------------------------------- Section 4.13 Access to Certain Documentation and............................................. 30 ----------------------------------- ARTICLE V PAYMENTS TO THE CERTIFICATEHOLDERS ---------------------------------- Section 5.01 Establishment of Note Distribution Account; Deposits in Note Distribution ------------------------------------------------------------------------- Account; Permitted Withdrawals from Note Distribution Account.................. 31 -------------------------------------------------------------- Section 5.02 Establishment of Spread Account; Deposits in Spread Account; Permitted ---------------------------------------------------------------------- Withdrawals from Spread Account................................................. 32 ------------------------------- Section 5.03 Establishment of Expense Account; Deposits in Expense Account; Permitted ------------------------------------------------------------------------ Withdrawals from Expense Account................................................ 33 -------------------------------- Section 5.04 Pre-Funding Account and Capitalized Interest Account............................ 35 ---------------------------------------------------- Section 5.05 [Intentionally Omitted]......................................................... 36 Section 5.06 Investment of Accounts.......................................................... 36 ---------------------- Section 5.07 Distributions................................................................... 37 ------------- Section 5.08 [Intentionally Omitted]......................................................... 39 ---------------------- Section 5.09 Statements...................................................................... 39 ---------- Section 5.10 Advances by the Servicer........................................................ 42 ------------------------ Section 5.11 Compensating Interest........................................................... 42 --------------------- Section 5.12 Reports of Foreclosure and Abandonment.......................................... 43 --------------------------------------
(ii) ARTICLE VI GENERAL SERVICING PROCEDURE --------------------------- Section 6.01 [Omitted]........................................................................ 44 Section 6.02 Satisfaction of Mortgages and Collateral and Release of Business Files........... 44 ---------------------------------------------------------------------- Section 6.03 Servicing Compensation........................................................... 45 ---------------------- Section 6.04 Annual Statement as to Compliance................................................ 45 --------------------------------- Section 6.05 Annual Independent Public........................................................ 46 ------------------------- Section 6.06 Trustee's Right to Examine Servicer Records and Audit Operations................. 46 ---------------------------------------------------------------- Section 6.07 Reports to the Trustee; Principal and Interest Account Statements................ 46 ----------------------------------------------------------------- ARTICLE VII REPORTS TO BE PROVIDED BY SERVICER ---------------------------------- Section 7.01 Financial Statements............................................................. 47 -------------------- ARTICLE VIII THE SERVICER ------------ Section 8.01 Indemnification; Third Party Claims.............................................. 48 ----------------------------------- Section 8.02 Merger or Consolidation of the Servicer.......................................... 49 --------------------------------------- Section 8.03 Limitation on Liability of the Servicer and Others............................... 49 -------------------------------------------------- Section 8.04 Servicer Not to Resign........................................................... 49 ---------------------- ARTICLE IX DEFAULT ------- Section 9.01 Events of Default................................................................ 51 ----------------- Section 9.02 Trustee to Act; Appointment of Successor......................................... 52 ---------------------------------------- Section 9.03 Waiver of Defaults............................................................... 54 ------------------ Section 9.04. Control by Majority Noteholders.................................................. 54 ------------------------------- ARTICLE X TERMINATION ----------- Section 10.01 Termination...................................................................... 56 -----------
(iii) Section 10.02 Accounting Upon Termination of Servicer.......................................... 57 --------------------------------------- ARTICLE XI MISCELLANEOUS PROVISIONS ------------------------ Section 11.01 Acts of Noteholders.............................................................. 58 ------------------- Section 11.02 Amendment........................................................................ 58 --------- Section 11.03 Recordation of Agreement......................................................... 58 ------------------------ Section 11.04 Duration of Agreement............................................................ 59 --------------------- Section 11.05 Governing Law.................................................................... 59 Section 11.06 Notices.......................................................................... 59 ------- Section 11.07 Severability of Provisions....................................................... 59 -------------------------- Section 11.08 No Partnership................................................................... 60 -------------- Section 11.09 Counterparts..................................................................... 60 ------------ Section 11.10 Successors and Assigns........................................................... 60 ---------------------- Section 11.11 Headings......................................................................... 60 -------- Section 11.12 Notification to Rating Agencies.................................................. 60 ------------------------------- Section 11.13. Limitation of Liability.......................................................... 60 -----------------------
(iv) APPENDIX A Definitions and Usage EXHIBIT INDEX ------------- EXHIBIT A Contents of Business File EXHIBIT B [Intentionally Omitted] EXHIBIT C Principal and Interest Account Letter Agreement EXHIBIT D [Intentionally Omitted] EXHIBIT E [Intentionally Omitted] EXHIBIT F Initial Certification EXHIBIT F-1 Interim Certification EXHIBIT F-2 Final Certification EXHIBIT G [Intentionally Omitted] EXHIBIT H Business Loan Schedule EXHIBIT I Request for Release of Documents EXHIBIT J Form of Liquidation Report EXHIBIT K Form of Delinquency Report EXHIBIT L Servicer's Monthly Computer Tape Format (v) Sale and Servicing Agreement dated as of December 1, 1998, between FNBNE Business Loan Trust 1998-A (the "Trust"), and First National Bank of New England, as Seller (the "Seller") and as Servicer (the "Servicer"). PRELIMINARY STATEMENT The Trust was formed for the purpose of issuing asset backed notes and asset backed certificates secured by the Business Loans. The Issuer has entered into a trust indenture, dated as of December 1, 1998 (the "Indenture"), between the Trust and the Indenture Trustee, pursuant to which the Trust intends to issue its FNBNE Business Loan Notes, Series 1998-A, Adjustable Rate Class A, Adjustable Rate Class M-1, Adjustable Rate Class M-2 and Adjustable Rate Class B in the aggregate initial principal amounts of $55,250,000, $3,250,000, $3,250,000, and $3,250,000, respectively (collectively, the "Notes"). Pursuant to the Indenture, as security for the indebtedness represented by the Notes, the Issuer is and will be pledging to the Indenture Trustee, or granting the Indenture Trustee a security interest in, among other things, certain Business Loans and Subsequent Business Loans and its rights under this Agreement. The parties desire to enter into this Agreement to provide, among other things, for the servicing of the Business Loans by the Servicer. The Servicer acknowledges that, in order further to secure the Notes, the Trust is and will be granting to the Indenture Trustee a security interest in, among other things, its rights under this Agreement, and the Servicer agrees that all covenants and agreements made by the Servicer herein with respect to the Business Loans shall also be for the benefit and security of the Indenture Trustee and Holders of the Notes. For its services hereunder, the Servicer will receive a Servicing Fee (as defined herein) with respect to each Business Loan serviced hereunder. ARTICLE I DEFINITIONS ----------- Section 1.01 Definitions. For all purposes of this Agreement, capitalized ----------- terms used herein shall have the meanings set forth in Appendix A, unless the context clearly indicates otherwise. Section 1.02 Use of Words and Phrases. "Herein", "hereby", "hereunder", ------------------------ "hereof", "hereinbefore", "hereinafter" and other equivalent words refer to this Agreement as a whole and not solely to the particular section of this Agreement in which any such word is used. Section 1.03 Captions; Table of Contents. The captions or headings in --------------------------- this Agreement and the Table of Contents are for convenience only and in no way define, limit or describe the scope and intent of any provisions of this Agreement. 2 ARTICLE II SALE AND CONVEYANCE OF THE TRUST FUND ------------------------------------- Section 2.01 Sale and Conveyance of Trust Fund. --------------------------------- The Seller hereby sells, transfers, assigns, sets over and conveys to the Trust without recourse, subject to the terms of this Agreement, all of the right, title and interest of the Seller in and to the Initial Business Loans and all other assets included or to be included in the Trust Fund in exchange for the Notes and the Certificates. Section 2.02 Possession of Business Files. ---------------------------- (a) Upon the issuance of the Notes and Certificates, the ownership of each Business Note, the Mortgage, if applicable, and the contents of the related Business File relating to the Initial Business Loans is, and upon each Subsequent Transfer Date the ownership of each Business Note, the Mortgage, if applicable, and the contents of the related Business File relating to the applicable Subsequent Business Loans will be, vested in the Trust for the benefit of the Noteholders and Certificateholders, as the case may be. (b) Pursuant to Section 2.04, with respect to the Initial Business Loans the Seller has delivered or caused to be delivered, and, on each Subsequent Transfer Date, the Seller will deliver or cause to be delivered, each Business File to the Indenture Trustee. Section 2.03 Books and Records. ----------------- The transfer of each Business Loan shall be reflected on the Seller's balance sheet and other financial statements and for tax purposes as a sale of assets by the Seller and the Seller shall respond to any third-party inquiry that such transfer is so reflected as a sale. The Seller shall be responsible for maintaining, and shall maintain, a complete set of books and records for each Business Loan which shall be clearly marked to reflect the ownership of each Business Loan by the Trust for the benefit of the Noteholders and Certificateholders. Section 2.04 Delivery of Business Loan Documents. ----------------------------------- The Seller, (i) contemporaneously with the delivery of this Agreement, has delivered or caused to be delivered to the Indenture Trustee and (ii) on each Subsequent Transfer Date, will deliver or cause to be delivered to the Indenture Trustee, each of the following documents: (a) For each Initial Business Loan or Subsequent Business Loan, as the case may be: 3 (1) The original Business Note, endorsed by means of an allonge as follows: "Pay to the order of Marine Midland Bank, and its successors and assigns, as indenture trustee under that certain Indenture dated as of December 1, 1998 relating to FNBNE Business Loan Trust, 1998-A, without recourse" and signed, by facsimile or manual signature, in the name of the Seller by a Responsible Officer, with all prior and intervening endorsements showing a complete chain of endorsement from the originator to the Seller, if the Seller was not the originator; (2) Blanket assignment of all Collateral securing the Business Loan, including without limitation, all rights under applicable guarantees and insurance policies; (3) Irrevocable power of attorney of the Seller to the Indenture Trustee to execute, deliver, file or record and otherwise deal with the Collateral for the Business Loans in accordance with this Agreement. The power of attorney will be delegable by the Indenture Trustee to the Servicer and any successor servicer and will permit the Indenture Trustee or its delegate to prepare, execute and file or record UCC financing statements and notices to insurers; and (4) Blanket UCC-1 financing statements identifying by type all Collateral for the Business Loans and naming the Indenture Trustee, as assignee of the Trust, as Secured Party and the Seller as the Debtor. The UCC-1 financing statements will be filed promptly following the Closing Date in Connecticut and will be in the nature of protective notice filings rather than true financing statements. (b) For each Initial Business Loan or Subsequent Business Loan secured by Commercial Property or Residential Property, as the case may be: (1) Either: (i) the original Mortgage, with evidence of recording thereon, (ii) a copy of the Mortgage certified as a true copy by a Responsible Officer of the Seller where the original has been transmitted for recording until such time as the original is returned by the public recording office or duly licensed title or escrow officer or (iii) a copy of the Mortgage certified by the public recording office in those instances where the original recorded Mortgage has been lost; (2) Either: (i) the original Assignment of Mortgage from the Seller endorsed as follows: "Marine Midland Bank ("Assignee"), its successors and assigns, as indenture trustee under the Indenture dated as of December 1, 1998 relating to FNBNE Business Loan Trust 1998-A" with evidence of recording thereon (provided, however, that where permitted under the laws of the jurisdiction wherein the Mortgaged Property is located, the Assignment of Mortgage may be effected by one or more blanket assignments for Business Loans secured by Mortgaged Properties located in the same county), or (ii) a copy of such Assignment of Mortgage certified as a true copy by a Responsible Officer of the Seller where the original has been transmitted for recording (provided, however, -------- ------- that where the original Assignment of Mortgage is not being delivered to the Indenture Trustee, the Responsible Officer may complete one or more blanket 4 certificates attaching copies of one or more Assignments of Mortgage relating to the Mortgages originated by the Seller); (3) Either: (i) originals of all intervening assignments, if any, showing a complete chain of title from the originator to the Seller, including warehousing assignments, with evidence of recording thereon if such assignments were recorded, (ii) copies of any assignments certified as true copies by a Responsible Officer of the Seller where the originals have been submitted for recording until such time as the originals are returned by the public recording officer, or (iii) copies of any assignments certified by the public recording office in any instances where the original recorded assignments have been lost; (4) Either: (i) originals of all title insurance policies relating to the Mortgaged Properties to the extent the Seller obtained such policies or (ii) copies of any title insurance policies or other evidence of lien position, including but not limited to PIRT policies, limited liability reports and lot book reports, to the extent the Seller obtain such policies or other evidence of lien position, certified as true by the Seller; The Seller shall, within ten Business Days after the receipt thereof, and in any event, within one year of the Closing Date (or, with respect to the Subsequent Business Loans, within one year of the related Subsequent Transfer Date), deliver or cause to be delivered to the Indenture Trustee: (i) the original recorded Mortgage in those instances where a copy thereof certified by the Seller was delivered to the Indenture Trustee; (ii) the original recorded Assignment of Mortgage from the Seller to the Indenture Trustee, which, together with any intervening assignments of Mortgage, evidences a complete chain of title from the originator to the Indenture Trustee in those instances where copies thereof certified by the Seller were delivered to the Indenture Trustee; and (iii) any intervening assignments of Mortgage in those instances where copies thereof certified by the Seller were delivered to the Indenture Trustee. Notwithstanding anything to the contrary contained in this Section 2.04, in those instances where the public recording office retains the original Mortgage, Assignment of Mortgage or the intervening assignments of the Mortgage after it has been recorded, the Seller shall be deemed to have satisfied its obligations hereunder upon delivery to the Indenture Trustee of a copy of such Mortgage, Assignment of Mortgage or assignments of Mortgage certified by the public recording office to be a true copy of the recorded original thereof. All Business Loan documents held by the Indenture Trustee as to each Business Loan are referred to herein as the "Indenture Trustee's Document File." Although it is the intent of the parties to this Agreement that the conveyance of the Seller's right, title and interest in and to the Business Loans and other assets in the Trust Fund pursuant to this Agreement shall constitute a purchase and sale and not a loan, in the event that such conveyance is deemed to be a loan, it is the intent of the parties to this Agreement that the Seller shall be deemed to have granted, and hereby does grant, to the Trust a first priority perfected security interest in all of the Seller's right, title and interest in, to and under the Business Loans and other assets in the Trust Fund, and that this Agreement shall constitute a security agreement under applicable law. 5 All recording required pursuant to this Section 2.04 shall be accomplished by and at the expense of the Servicer. Section 2.05 Acceptance by Indenture Trustee of the Trust Fund; -------------------------------------------------- Certain Substitutions; Certification by --------------------------------------- Indenture Trustee. ----------------- (a) The Indenture Trustee shall execute and deliver on the Closing Date (or, with respect to the Subsequent Business Loans, on the related Subsequent Closing Date), an acknowledgment of receipt in the form attached as Exhibit F hereto, stating that it has received, for each Business Loan, a Business Note, and a file, and declares that the Indenture Trustee will hold such documents and any amendments, replacements or supplements thereto, for the benefit of the Noteholders and the Certificateholders. The Indenture Trustee agrees, for the benefit of the Noteholders and the Certificateholders, to review each Indenture Trustee's Document File within 90 days after the Closing Date or Subsequent Closing Date, as the case may be, (or, with respect to any Qualified Substitute Business Loan, within 45 days after the assignment thereof), and to deliver to the Seller and the Servicer a certification in the form attached hereto as Exhibit F-1. Within 360 days after the Closing Date (or, with respect to any Qualified Substitute Business Loan, within 360 days after the assignment thereof), the Indenture Trustee shall deliver to the Servicer, the Seller, the Rating Agencies and any Noteholder who requests a copy from the Indenture Trustee a final certification in the form attached hereto as Exhibit F-2 evidencing the completeness of the Indenture Trustee's Document Files. (b) If the Indenture Trustee, during the process of reviewing the Indenture Trustee's Document Files finds any document constituting a part of a Indenture Trustee's Document File which is not properly executed, has not been received, is unrelated to a Business Loan identified in the Business Loan Schedule, or does not conform in a material respect to the requirements of Section 2.04 or the description thereof as set forth in the Business Loan Schedule, the Indenture Trustee shall promptly so notify the Servicer and the Seller. In performing any such review, the Indenture Trustee may conclusively rely on the Seller as to the purported genuineness of any such document and any signature thereon. It is understood that the scope of the Indenture Trustee's review of the Indenture Trustee's Document Files is limited solely to confirming that the documents listed in Section 2.04 have been executed and received and relate to the Business Loans identified in the Business Loan Schedule. The Seller agrees to use reasonable efforts to remedy a material defect in a document constituting part of a Business File of which it is so notified by the Indenture Trustee. If, however, within 60 days after the Indenture Trustee's notice to it respecting such material defect the Seller has not remedied the defect and such defect materially and adversely affects the value of the related Business Loan, the Seller will (i) substitute in lieu of such Business Loan a Qualified Substitute Business Loan in the manner and subject to the conditions set forth in Section 3.03 or (ii) purchase such Business Loan at a purchase price equal to the Principal Balance of such Business Loan as of the date of purchase, plus 30 days' interest on such Principal Balance, computed at the Adjusted Business Loan Remittance Rate as of the next succeeding Determination Date, plus any accrued unpaid 6 Servicing Fees, Monthly Advances and Servicing Advances reimbursable to the Servicer, which purchase price shall be deposited in the Principal and Interest Account on the next succeeding Determination Date. (c) Upon receipt by the Indenture Trustee of a certification of a Servicing Officer of the Servicer of such purchase and the deposit of the amounts described above in the Principal and Interest Account (which certification shall be in the form of Exhibit I hereto), the Indenture Trustee shall release to the Servicer for release to the Seller the related Indenture Trustee's Document File and the Indenture Trustee shall execute, without recourse, and deliver such instruments of transfer necessary to transfer such Business Loan to the Seller. All costs of any such transfer shall be borne by the Servicer. (d) If in connection with taking any action the Servicer requires any item constituting part of the Indenture Trustee's Document File, or the release from the lien of the related Business Loan of all or part of any Mortgaged Property or other Collateral, the Servicer shall deliver to the Indenture Trustee a certificate to such effect in the form attached as Exhibit I hereto. Upon receipt of such certification, the Indenture Trustee shall deliver to the Servicer the requested documentation and the Indenture Trustee shall execute, without recourse, and deliver such instruments of transfer necessary to release all or the requested part of the Mortgaged Property or other Collateral from the lien of the related Business Loan. On the Remittance Date in March of each year commencing March 2000, the Indenture Trustee shall deliver to the Seller and the Servicer a certification detailing all transactions with respect to the Business Loans for which the Indenture Trustee holds a Indenture Trustee's Document File pursuant to this Agreement during the prior calendar year. Such certification shall list all Indenture Trustee's Document Files which were released by or returned to the Indenture Trustee during the prior calendar year, the date of such release or return and the reason for such release or return. Section 2.06 [Reserved]. -------- Section 2.07 [Reserved]. ---------- Section 2.08 Fees and Expenses of the Owner Trustee and the ---------------------------------------------- Indenture Trustee. - ----------------- The fees and expenses of the Owner Trustee and the Indenture Trustee including (i) the annual fees of the Owner Trustee and the Indenture Trustee, payable quarterly in advance, and subject to rebate to the Servicer as additional servicing compensation hereunder for any fraction of a calendar quarter in which this Agreement terminates, (ii) any other fees and expenses to which the Owner Trustee and the Indenture Trustee are entitled, and (iii) reimbursements to the Servicer for any advances made by the Servicer to the Expense Account pursuant to Section 5.03 hereof, shall be paid from the Expense Account in the manner set forth in Section 5.03 hereof; provided, however, that -------- ------- the Seller shall be liable for any expenses of the Trust Fund incurred prior to the Closing Date. The Servicer, the Indenture 7 Trustee and the Owner Trustee hereby covenant with the Noteholders and the Certificateholders that every material contract or other material agreement entered into by the Owner Trustee, the Indenture Trustee, or the Servicer, acting as attorney-in-fact for the Indenture Trustee or the Owner Trustee, on behalf of the Trust Fund shall expressly state therein that no Noteholder or Certificateholder shall be personally liable in connection with such contract or agreement. Section 2.09 Transfer and Conveyance of the Subsequent ----------------------------------------- Business Loans. -------------- (a) Subject to the conditions set forth in paragraph (b) below, in consideration of the Indenture Trustee's delivery on the related Subsequent Transfer Dates to or upon the order of the Seller of all or a portion of the balance of funds in the Pre-Funding Account, the Seller shall on any Subsequent Transfer Date contribute, transfer, assign, set over and otherwise convey without recourse, to the Trust all right, title and interest of the Seller in and to each Subsequent Business Loan listed on the Business Loan Schedule delivered by the Seller on such Subsequent Transfer Date, all its right, title and interest in and to principal collected and interest accruing on each such Subsequent Business Loan on and after the related Subsequent Cut-Off Date and all its right, title and interest in and to all insurance policies; provided, -------- however, that the Seller reserves and retains all its right, title and interest - ------- in and to principal (including Principal Prepayments) collected and interest accruing on each such Subsequent Business Loan prior to the related Subsequent Cut-Off Date. The transfer by the Seller of the Subsequent Business Loans set forth on the Business Loan Schedule to the Trust shall be absolute and shall be intended by all parties hereto to be treated as a contribution by the Seller. The amount released from the Pre-Funding Account shall be one-hundred percent (100%) of the aggregate Principal Balances as of the related Subsequent Transfer Date of the Subsequent Business Loans so transferred. (b) The Seller shall transfer to the Trust the Subsequent Business Loans and the other property and rights related thereto described in paragraph (a) above only upon the satisfaction of each of the following conditions on or prior to the related Subsequent Transfer Date: (i) the Seller shall have provided the Indenture Trustee with a timely Addition Notice and shall have provided any information reasonably requested by it with respect to the Subsequent Business Loans; (ii) the Seller shall have delivered to the Indenture Trustee a duly executed written assignment (including an acceptance by the Indenture Trustee) that shall include a Business Loan Schedule, listing the Subsequent Business Loans and any other exhibits listed thereon; 8 (iii) the Seller shall have deposited in the applicable Principal and Interest Account all collections in respect of the Subsequent Business Loans received on or after the related Subsequent Cut-Off Date; (iv) as of each Subsequent Transfer Date, neither the Seller nor the Servicer was insolvent nor will either of them have been made insolvent by such transfer nor is either of them aware of any pending insolvency; (v) such addition will not result in a material adverse tax consequence to the Trust Fund or the Holders of the Notes and the Certificates; (vi) the Pre-Funding Period shall not have terminated; (vii) the Seller shall have delivered to the Indenture Trustee an Officer's Certificate confirming the satisfaction of each condition precedent specified in this paragraph (b) and in the related Subsequent Transfer Agreement; (viii) the Seller shall have delivered to the Rating Agencies, the Owner Trustee and the Indenture Trustee, Opinions of Counsel with respect to the transfer of the Subsequent Business Loans substantially in the form of the Opinions of Counsel delivered to the Indenture Trustee and the Owner Trustee on the Closing Date (bankruptcy, corporate and tax opinions); (ix) such addition will not cause the Principal Balance of the Business Loans secured by accounts receivables and inventory to be greater than 25% of the aggregate Principal Balance of the Business Loans; and (x) such addition will not cause the Principal Balance of the Business Loans secured by first liens on commercial real estate or machinery and equipment to be less than 70% of the aggregate Principal Balance of the Business Loans; provided however, in no event shall any such transfer cause 50% or more of the aggregate Principal Balance of the Business Loans to be "real estate mortgages (or interest therein)" within the meaning of Section 7701(i)(A)(i) of the Code and Treasury Regulations Section 301.7701-1(d). (c) The obligation of the Trust to purchase a Subsequent Business Loan on any Subsequent Transfer Date is subject to the requirement, as evidenced by a certificate from a Responsible Officer of the Seller, that such Subsequent Business Loan conforms in all material respects to the representations and warranties concerning the individual Initial Business Loans set forth in Sections 3.01 and 3.02 (except that any reference therein to the Cut-Off Date shall be deemed a reference to the applicable Subsequent Cut-Off Date) or in the Private Placement Memorandum under the heading "The Business Loan Pool- Subsequent Business Loans" and that the inclusion of all Subsequent Business Loans being transferred to the Trust on such 9 Subsequent Transfer Date will not change, in any material respect, the characteristics of the Initial Business Loans in the aggregate, set forth in Sections 3.01 and 3.02. (d) In connection with the transfer and assignment of the Subsequent Business Loans, the Seller agrees to satisfy the conditions set forth in Sections 2.02, 2.03, 2.04 and 2.05. (e) In connection with each Subsequent Transfer Date, on the Remittance Dates in January, February and March 1999 and the Special Remittance Date, the Seller shall determine, and the Indenture Trustee shall cooperate with the Seller in determining (i) the amount and correct dispositions of the Capitalized Interest Requirements and the Pre-Funding Earnings and (ii) any other necessary matters in connection with the administration of the Pre-Funding Account and of the Capitalized Interest Account. If any amounts are incorrectly released to the Seller from the Capitalized Interest Account, the Seller shall immediately repay such amounts to the Indenture Trustee. (f) No later than March 31, 1999, the Seller shall obtain a letter from an independent accountant stating whether or not the characteristics of the Subsequent Business Loans conform to the characteristics set forth herein. Section 2.10 Optional Purchase of Defaulted Business Loans. The Servicer shall have the right, but not the obligation, to purchase any Defaulted Business Loan for a purchase price equal to the then outstanding principal balance of such Defaulted Business Loan as of the date of such purchase plus accrued interest thereon at the Adjusted Business Loan Remittance Rate, which purchase price shall be deposited in the Principal and Interest Account on the next succeeding Determination Date. In no event, however, may the aggregate principal balance of all Defaulted Business Loans purchased pursuant to this Section 2.10 exceed 5% of the sum of (i) the Original Pool Principal Balance and (ii) the initial Pre-Funded Amount. 10 ARTICLE III REPRESENTATIONS AND WARRANTIES ------------------------------ Section 3.01 Representations of the Seller. ----------------------------- The Seller hereby represents and warrants to the Indenture Trustee, the Owner Trustee, the Certificateholders and the Noteholders as of the Closing Date: (a) The Seller is a nationally chartered bank duly organized and validly existing under the laws of the United States and has all licenses necessary to carry on its business as now being conducted and is licensed and qualified in each state where the laws of such state require licensing or qualification in order to conduct business of the type conducted by the Seller and perform its obligations hereunder; the Seller has all requisite power and authority to execute and deliver this Agreement and each other Basic Document to which it is a party and to perform in accordance herewith and therewith; the execution, delivery and performance of this Agreement and each other Basic Document to which it is a party (including all instruments of transfer to be delivered pursuant to this Agreement) by the Seller and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action; this Agreement and each other Basic Document to which it is a party evidence the valid, binding and enforceable obligations of the Seller; and all requisite corporate action has been taken by the Seller to make this Agreement and each other Basic Document to which it is a party valid, binding and enforceable upon the Seller in accordance with its respective terms, subject to the effect of bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally or the application of equitable principles in any proceeding, whether at law or in equity, none of which will affect the ownership of the Business Loans by the Trust. (b) All actions, approvals, consents, waivers, exemptions, variances, franchises, orders, permits, authorizations, rights and licenses required to be taken, given or obtained, as the case may be, by or from any federal, state or other governmental authority or agency (other than any such actions, approvals, etc., under any state securities laws, real estate syndication or "Blue Sky" statutes, as to which the Seller makes no such representation or warranty), that are necessary or advisable in connection with the purchase and sale of the Notes and the execution and delivery by the Seller of the documents to which it is a party, have been duly taken, given or obtained, as the case may be, are in full force and effect on the date hereof, are not subject to any pending proceedings or appeals (administrative, judicial or otherwise) and either the time within which any appeal therefrom may be taken or review thereof may be obtained has expired or no review thereof may be obtained or appeal therefrom taken, and are adequate to authorize the consummation of the transactions contemplated by this Agreement and each other Basic Document to which it is a party and the other documents on the part of the Seller and the performance by the Seller of its obligations under this Agreement and the other Basic Documents to which it is a party; 11 (c) The consummation of the transactions contemplated by this Agreement and the other Basic Documents to which the Seller is a party will not result in the breach of any terms or provisions of the articles of association or by-laws of the Seller or result in the breach of any term or provision of, or conflict with or constitute a default under or result in the acceleration of any obligation under, any material agreement, indenture or loan or credit agreement or other material instrument to which the Seller or its property is subject, or result in the violation of any law, rule, regulation, order, judgment or decree to which the or its property is subject; (d) Neither this Agreement or any other Basic Document to which the Seller is a party nor any statement, report or other document furnished or to be furnished pursuant to this Agreement or any other Basic Document to which the Seller is a party or in connection with the transactions contemplated hereby and thereby contains any untrue statement of material fact or omits to state a material fact necessary to make the statements contained herein or therein not misleading in light of the circumstances under which they were made; (e) The Seller does not believe, nor does it have any reason or cause to believe, that it cannot perform each and every covenant contained in this Agreement or any other Basic Document to which the Seller is a party; (f) There is no action, suit, proceeding or investigation pending or, to the best of the Seller's knowledge, threatened against the Seller which, either in any one instance or in the aggregate, may (i) result in any material adverse change in the business, operations, financial condition, properties or assets of the Seller or in any material impairment of the right or ability of the to carry on its business substantially as now conducted, or in any material liability on the part of the Seller or of any action taken or to be taken in connection with the obligations of the Seller contemplated herein, or which would be likely to impair materially the ability of the Seller to perform under the terms of this Agreement or any other Basic Document to which the Seller is a party or (ii) which would draw into question the validity of this Agreement or any other Basic Document to which the Seller is a party or the Business Loans; (g) The Trust will not constitute an "investment company" within the meaning of the Investment Company Act of 1940, as amended; (h) The Seller is not in default with respect to any order or decree of any court or any order, regulation or demand of any federal, state, municipal or governmental agency, which default might have consequences that would materially and adversely affect the condition (financial or other) or operations of the Seller or its properties or might have consequences that would materially and adversely affect its performance hereunder; (i) The statements contained in the Private Placement Memorandum which describe the Seller or the Business Loans or matters or activities for which the Seller is responsible in accordance with the Private Placement Memorandum, this Agreement or any other Basic Document to which the Seller is a party and all documents referred to therein or herein or delivered in connection therewith or herewith, or which are attributable to the Seller therein or 12 herein are true and correct in all material respects, and the Private Placement Memorandum does not contain any untrue statement of a material fact with respect to the Seller or the Business Loans and does not omit to state a material fact necessary to make the statements contained therein with respect to the Seller or the Business Loans not misleading in light of the circumstances under which they were made. The Seller is not aware that the Private Placement Memorandum contains any untrue statement of a material fact or omits to state any material fact necessary to make the statements contained therein not misleading in light of the circumstances under which they were made. There is no fact peculiar to the Seller or the Business Loans and known to the Seller that materially adversely affects or in the future may (so far as the Seller can now reasonably foresee) materially adversely affect the Seller or the Business Loans that has not been set forth in the Private Placement Memorandum; (j) No Noteholder or Certificateholder is subject to Connecticut state licensing requirements solely by virtue of holding the Notes or the Certificates; (k) The transfer, assignment and conveyance of the Business Notes and the Mortgages by the Seller pursuant to this Agreement are not or, with respect to the Subsequent Business Loans, will not be, subject to the bulk transfer laws or any similar statutory provisions in effect in any applicable jurisdiction; (l) The origination and collection practices used by the Seller with respect to each Business Note and Mortgage relating to the Initial Business Loans have been, and the origination and collection practices to be used by the Seller with respect to each Business Note and Mortgage relating to the Subsequent Business Loans will have been, in all material respects legal, proper, prudent and customary in the business loan origination and servicing business; (m) Each Initial Business Loan was, and each Subsequent Business Loan will be, selected from among the existing business loans in the Seller's portfolio at the date hereof or, in the case of the Subsequent Business Loans, at the related Subsequent Cut-Off Date, in a manner not designed to adversely affect the Noteholders or the Certificateholders; (n) The Seller received fair consideration and reasonably equivalent value or, in the case of the Subsequent Business Loans, will have received fair consideration and reasonably equivalent value, in exchange for the sale of the Business Loans; (o) Neither the Seller nor any of its affiliates sold or, in the case of the Subsequent Business Loans, will have sold any interest in any Business Loan with any intent to hinder, delay or defraud any of their respective creditors; (p) The Seller is solvent, and the Seller will not be rendered insolvent as a result of the transfer of the Business Loans to the Trust or the sale of the Notes; and (q) The chief executive office and legal name of the Seller is as set forth on the respective UCC-1 financing statement filed on behalf of the Seller pursuant to Section 2.04(a)(4), 13 such office is the place where the Seller is "located" for the purposes of Section 9-103(3)(d) of the Uniform Commercial Code as in effect in the State of New York, and neither the location of such office nor the legal name of the Seller has changed in the past four months. Section 3.02 Individual Business Loans. ------------------------- The Seller hereby represents and warrants to the Indenture Trustee and the Noteholders, with respect to each Initial Business Loan as of the Closing Date, and with respect to each Subsequent Business Loan, as of the related Subsequent Transfer Date: (a) The information with respect to each Business Loan set forth in the Business Loan Schedule is true and correct; (b) All of the original or certified documentation set forth in Section 2.04 (including all material documents related thereto) has been or will be delivered to the Indenture Trustee on the Closing Date or as otherwise provided in Section 2.04; (c) Each Mortgaged Property serving as the primary collateral is improved by a Commercial Property or a Residential Property and does not constitute other than real property under state law; (d) Each Initial Business Loan was (and each Subsequent Business Loan will be) originated and underwritten by the Seller, in its capacity as Seller and each Business Loan is being serviced by the Seller, in its capacity as Servicer; (e) [Intentionally Omitted]; (f) Approximately 27.06% of the Initial Business Loans (by Principal Balance) bear fixed rates of interest and approximately 54.00%, .46%, 11.48% and 7.00% of the Business Loans (by Principal Balance) bear interest that adjusts monthly based on the Prime Rate, annually based on One-Year CMT, every five years based on Five-Year CMT, and every ten years based on Ten-Year CMT, respectively. Except for up to approximately 9.7% of the Business Loans (by Principal Balance) that are Balloon Loans, each Business Note will, with respect to principal payments, provide for a schedule of Monthly Payments which are, if timely paid, sufficient to fully amortize the principal balance of such Business Loan on its respective maturity date; (g) With respect to those Business Loans secured by a Mortgaged Property, each Mortgage is a valid and subsisting lien of record on the Mortgaged Property subject only to any applicable Prior Liens on such Mortgaged Property and subject in all cases to such exceptions that are generally acceptable to banking institutions in connection with their regular commercial lending activities, and such other exceptions to which similar properties are commonly subject and which do not individually, or in the aggregate, materially and adversely affect the benefits of the security intended to be provided by such Mortgage; 14 (h) Immediately prior to the transfer and assignment herein contemplated, the Seller held good and indefeasible title to, and was the sole owner of, each Business Loan conveyed by the Seller subject to no liens, charges, mortgages, encumbrances or rights of others except liens which will be released simultaneously with such transfer and assignment; and immediately upon the transfer and assignment herein contemplated, the Trust will hold good and indefeasible title, to, and be the sole owner of, each Business Loan subject to no liens, charges, mortgages, encumbrances or rights of others except liens which will be released simultaneously with such transfer and assignment; (i) As of the Cut-Off Date (or, with respect to any Subsequent Business Loan, as of the related Subsequent Cut-Off Date), no Business Loan is more than 30 days delinquent in payment; (j) To the best of the Seller's knowledge, there is no delinquent tax or assessment lien on any Mortgaged Property which is the primary Collateral for the related Business Loan, and each Mortgaged Property is free of material damage and is in good repair; (k) No Business Loan is subject to any right of rescission, set-off, counterclaim or defense, including the defense of usury, nor will the operation of any of the terms of the Business Note or any related Mortgage, or the exercise of any right thereunder, render either the Business Note or any related Mortgage unenforceable in whole or in part, or subject to any right of rescission, set-off, counterclaim or defense, including the defense of usury, and no such right of rescission, set-off, counterclaim or defense has been asserted with respect thereto; (l) Each Business Loan at the time it was made complied, and as of the Closing Date complies, in all material respects with applicable state and federal laws and regulations, including, without limitation, usury, equal credit opportunity, disclosure and recording laws; (m) Each Initial Business Loan was (and each Subsequent Business Loan will be) originated and underwritten or purchased and reunderwritten by the Business in accordance with the underwriting criteria set forth in the Private Placement Memorandum; (n) The Seller requires that the improvements upon each Mortgaged Property are covered by a valid and existing hazard insurance policy with a generally acceptable carrier that provides for fire and extended coverage representing coverage described in Section 4.07; (o) The Seller requires that if a Mortgaged Property is in an area identified in the Federal Register by the Federal Emergency Management Agency as having special flood hazards, a flood insurance policy is in effect with respect to such Mortgaged Property with a generally acceptable carrier in an amount representing coverage described in Section 4.07; (p) Each Business Note, any related Mortgage and any other agreement pursuant to which Collateral is pledged to the Seller is the legal, valid and binding obligation of the maker thereof and is enforceable in accordance with its terms, except only as such enforcement may be 15 limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by general principles of equity (whether considered in a proceeding or action in equity or at law), none of which will prevent the ultimate realization of the security provided by the Collateral or other agreement, and all parties to each Business Loan had full legal capacity to execute all Business Loan documents and convey the estate therein purported to be conveyed; (q) The Seller has caused and will cause to be performed any and all acts reasonably required to be performed to preserve the rights and remedies of the Indenture Trustee and the Owner Trustee in any insurance policies applicable to the Business Loans including, without limitation, in each case, any necessary notifications of insurers, assignments of policies or interests therein, and establishments of co-insured, joint loss payee and mortgagee rights in favor of the Indenture Trustee or the Seller, respectively; (r) Each original Mortgage was recorded, and all subsequent assignments of the original Mortgage have been recorded in the appropriate jurisdictions wherein such recordation is necessary to perfect the lien thereof as against creditors of the Seller (or, subject to Section 2.04 hereof, are in the process of being recorded); (s) Each Business Loan conforms, and all such Business Loans in the aggregate conform, to the description thereof set forth in the Private Placement Memorandum; (t) The terms of the Business Note and the related Mortgage or other security agreement pursuant to which Collateral was pledged have not been impaired, altered or modified in any respect, except by a written instrument which has been recorded, if necessary, to protect the interest of the Noteholders and the Certificateholders and which has been delivered to the Indenture Trustee; (u) There are no material defaults in complying with the terms of any applicable Mortgage, and all taxes, governmental assessments, insurance premiums, water, sewer and municipal charges, leasehold payments or ground rents which previously became due and owing have been paid, or an escrow of funds has been established in an amount sufficient to pay for every such item which remains unpaid and which has been assessed but is not yet due and payable; (v) There is no proceeding pending or threatened for the total or partial condemnation of any Mortgaged Property, nor is such a proceeding currently occurring, and such property is undamaged by waste, fire, earthquake or earth movement, windstorm, flood, tornado or other casualty, so as to affect adversely the value of the Mortgaged Property as security for the Business Loan or the use for which the premises were intended; (w) Each Mortgaged Property which is the primary collateral for the related Business Loan underwent, at the time of origination of such Business Loan, the standard environmental studies and such studies revealed that such Mortgaged Property was free of 16 contamination from toxic substances or hazardous wastes requiring action under applicable laws or is subject to ongoing environmental rehabilitation satisfactory to the Seller; (x) The proceeds of the Business Loan have been fully disbursed, and there is no obligation on the part of the Seller to make future advances thereunder. Any and all requirements as to disbursements of any escrow funds therefor have been complied with. All costs, fees and expenses incurred in making or closing or recording the Business Loans were paid; (y) There is no obligation on the part of the Seller or any other party (except for any guarantor of a Business Loan) to make Monthly Payments (except for Monthly Advances) in addition to those made by the Obligor; (z) No statement, report or other document signed by the Seller constituting a part of the Business File contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained therein not misleading in light of the circumstances under which they were made; (aa) With respect to each Mortgage constituting a deed of trust, a trustee, duly qualified under applicable law to serve as such, has been properly designated and currently so serves and is named in such Mortgage, and no fees or expenses are or will become payable by the Noteholders and/or the Certificateholders to the trustee under the deed of trust, except in connection with a trustee's sale after default by the Obligor; (bb) No Business Loan has a shared appreciation feature, or other contingent interest feature; (cc) With respect to each Business Loan secured by a Mortgaged Property or other Collateral and that is not a first priority lien, either (i) no consent for the Business Loan is required by the holder of any related Prior Lien or (ii) such consent has been obtained; (dd) Each Business Loan was originated to a business located in the State identified in the Business Loan Schedule; (ee) All parties which have had any interest in the Business Loan, whether as mortgagee, assignee, pledgee or otherwise, are (or, during the period in which they held and disposed of such interest, were) (1) in compliance with any and all applicable licensing requirements of the laws of the state wherein any Mortgaged Property is located, and (2)(A) organized under the laws of such state, or (B) qualified to do business in such state, or (C) federal savings and loan associations or national banks having principal offices in such state, or (D) not doing business in such state; (ff) Any related Mortgage contains customary and enforceable provisions which render the rights and remedies of the holder thereof adequate for the realization against the 17 Mortgaged Property of the benefits of the security, including, (i) in the case of a Mortgage designated as a deed of trust, by trustee's sale, and (ii) otherwise by judicial foreclosure. There is no homestead or other exemption available to the Mortgagor which would materially interfere with the right to sell the Mortgaged Property at a trustee's sale or the right to foreclose the Mortgage; (gg) There is no default, breach, violation or event of acceleration existing under the Business Note and no event which, with the passage of time or with notice and the expiration of any grace or cure period, would constitute a default, breach, violation or event of acceleration; and the Seller, in its capacity as either Servicer or Seller, has not waived any default, breach, violation or event of acceleration; (hh) All parties to the Business Note and any related Mortgage or other document pursuant to which Collateral was pledged had legal capacity to execute the Business Note and any such Mortgage or other document and each Business Note and Mortgage or other document have been duly and properly executed by such parties; (ii) The Business Loan was not selected for inclusion under this Agreement from the Seller's portfolio of comparable business loans on any basis which would have a material adverse affect on a Noteholder or Certificateholder; (jj) All amounts received on or after the Cut-Off Date (or, with respect to the Subsequent Business Loans, on or after the related Subsequent Cut-Off Date) with respect to the Business Loans have been, to the extent required by this Agreement, deposited into the Principal and Interest Account and are, as of the Closing Date (or with respect to the Subsequent Business Loans, as of the related Subsequent Closing Date), in the Principal and Interest Account; (kk) With respect to those Business Loans secured by Collateral other than a Mortgaged Property, the related Business Note, security agreements, if any, and UCC-1 filed with respect to such Collateral creates a valid and subsisting lien of record on such Collateral subject only to any Prior Liens, if any, on such Collateral and subject in all cases to such exceptions that are generally acceptable to lending institutions in connection with their regular commercial lending activities, and such other exceptions to which similar Collateral is commonly subject and which do not individually, or in the aggregate, materially and adversely affect the benefits of the security intended to be provided by such Business Note, security agreement and UCC-1; and (ll) As of the Closing Date, less than 50% of the Business Loans, by Principal Balance, are (and after the Funding Period less than 50% of Initial Business Loans and Subsequent Business Loans will be) "real estate mortgages (or interests therein)" within the meaning of Section 7701(i)(A)(i) of the Code and Treasury regulations Section 301.7701-1(d). Section 3.03 Purchase and Substitution of Defective -------------------------------------- Loans. ----- 18 It is understood and agreed that the representations and warranties set forth in Sections 3.01 and 3.02 shall survive delivery of the Notes to the Noteholders and the Certificates to the Certificateholders. Upon discovery by the Servicer, any Subservicer, the Owner Trustee or the Indenture Trustee of a breach of any of such representations and warranties which materially and adversely affects the value of the Business Loans or the interest of the Notes and Certificates therein or which materially and adversely affects the interests of the Notes and Certificates in the related Business Loan in the case of a representation and warranty relating to a particular Business Loan (notwithstanding that such representation and warranty was made to the Seller's best knowledge), the party discovering such breach shall give prompt written notice to the others. Within 60 days of the earlier of its discovery or its receipt of notice of any breach of a representation or warranty, the Seller shall (a) promptly cure such breach in all material respects, (b) purchase such Business Loan by depositing in the applicable Principal and Interest Account, on the next succeeding Determination Date, an amount in the manner specified in Section 2.05(b), or (c) if within two years of the Closing Date, remove such Business Loan from the Trust Fund (in which case it shall become a Deleted Business Loan) and substitute one or more Qualified Substitute Business Loans provided such substitution is effected not later than the date which is two years after the Closing Date or at such later date, if the Indenture Trustee receives an Opinion of Counsel that such substitution would not constitute a Prohibited Transaction at any time the Notes are outstanding. Any such substitution shall be accompanied by payment by the Seller of the Substitution Adjustment, if any. As to any Deleted Business Loan for which the Seller substitutes a Qualified Substitute Business Loan or Loans, the Servicer shall effect such substitution by delivering to the Indenture Trustee a certification in the form attached hereto as Exhibit I, executed by a Servicing Officer, and shall also deliver to the Indenture Trustee, the documents constituting the Indenture Trustee's Document File for such Qualified Substitute Business Loan or Loans. The Servicer shall deposit in the applicable Principal and Interest Account all payments of principal received in connection with such Qualified Substitute Business Loan or Loans after the date of such substitution together with all interest (net of the Servicing Fee). Monthly Payments received with respect to Qualified Substitute Business Loans on or before the date of substitution will be retained by the Seller. The Trust will own all payments received with respect to the Deleted Business Loan on or before the date of substitution, and the Seller shall thereafter be entitled to retain all amounts subsequently received in respect of such Deleted Business Loan. The Servicer shall give written notice to the Indenture Trustee that such substitution has taken place and shall amend the Business Loan Schedule to reflect the removal of such Deleted Business Loan from the terms of this Agreement and the substitution of the Qualified Substitute Business Loan or Loans. Upon such substitution, such Qualified Substitute Business Loan or Loans shall be subject to the terms of this Agreement in all respects, including Sections 2.04 and 2.05, and the Seller shall be deemed to have made with respect to such Qualified Substitute Business Loan or Loans, as of the date of substitution, the covenants, representations and warranties set forth in Sections 3.01 and 3.02. On the date of such 19 substitution, the Seller will remit to the Servicer, and the Servicer will deposit into the applicable Principal and Interest Account an amount equal to the Substitution Adjustment. In addition to the cure, purchase and substitution obligation in Section 2.05 and this Section 3.03, the Seller shall indemnify and hold harmless the Trust, the Indenture Trustee, the Noteholders and the Certificateholders against any loss, damages, penalties, fines, forfeitures, reasonable legal fees and related costs, judgments and other costs and expenses resulting from any claim, demand, defense or assertion based on or grounded upon, or resulting from, a breach of the Seller's representations and warranties contained in this Agreement. It is understood and agreed that the obligations of the Seller set forth in Sections 2.05 and 3.03 to cure, purchase or substitute for a defective Business Loan and to indemnify the Noteholders, the Certificateholders, the Indenture Trustee and the Owner Trustee as provided in Sections 2.05 and 3.03 constitute the sole remedies of the Indenture Trustee, the Noteholders, the Certificateholders and the Owner Trustee, respecting a breach of the foregoing representations and warranties. Any cause of action against the Servicer or the Seller relating to or arising out of the breach of any representations and warranties made in Sections 2.05, 3.01 or 3.02 shall accrue as to any Business Loan upon (i) discovery of such breach by any party and notice thereof to the Seller and or notice thereof by the Seller to the Indenture Trustee, (ii) failure by the Seller to cure such breach or purchase or substitute such Business Loan as specified above, and (iii) demand upon the Seller by the Indenture Trustee for all amounts payable hereunder in respect of such Business Loan. 20 ARTICLE IV. ADMINISTRATION AND SERVICING OF BUSINESS LOANS ---------------------------------------------- Section 4.01 Duties of the Servicer. ---------------------- (a) The Servicer, as an independent contract servicer, shall service and administer the Business Loans and shall have full power and authority, acting alone, to do any and all things in connection with such servicing and administration which the Servicer may deem necessary or desirable and consistent with the terms of this Agreement. The Servicer may enter into Subservicing Agreements for any servicing and administration of Business Loans so long as the Rating Agency Condition is satisfied. The Servicer shall be entitled to terminate any Subservicing Agreement in accordance with the terms and conditions of such Subservicing Agreement and to either itself directly service the related Business Loans or enter into a Subservicing Agreement with a successor subservicer which qualifies hereunder. (b) Notwithstanding any Subservicing Agreement, any of the provisions of this Agreement relating to agreements or arrangements between the Servicer and Subservicer or reference to actions taken through a Subservicer or otherwise, the Servicer shall remain obligated and primarily liable to the Indenture Trustee and the Noteholders for the servicing and administering of the Business Loans in accordance with the provisions of this Agreement, without diminution of such obligation or liability by virtue of such Subservicing Agreements or arrangements or by virtue of indemnification from the Subservicer and to the same extent and under the same terms and conditions as if the Servicer alone were servicing and administering the Business Loans. For purposes of this Agreement, the Servicer shall be deemed to have received payments on Business Loans when any Subservicer has received such payments. The Servicer shall be entitled to enter into any agreement with a Subservicer for indemnification of the Servicer by such Subservicer, and nothing contained in this Agreement shall be deemed to limit or modify such indemnification. (d) Any Subservicing Agreement that may be entered into and any transactions or services relating to the Business Loans involving a Subservicer in its capacity as such and not as an originator shall be deemed to be between the Subservicer and the Servicer alone, and the Indenture Trustee and the Noteholders shall not be deemed parties thereto and shall have no claims, rights, obligations, duties or liabilities with respect to the Subservicer except as set forth in Section 4.01(e). (e) In the event the Servicer shall for any reason no longer be the Servicer (including by reason of a Servicer Termination Event), the Indenture Trustee or its designee shall, subject to Section 9.02 hereof, thereupon assume all of the rights and obligations of the Servicer under each Subservicing Agreement that the Servicer may have entered into, unless the Indenture Trustee is then permitted and elects to terminate any Subservicing Agreement in accordance with its terms. The Indenture Trustee, its designee or the successor servicer for the Indenture Trustee shall be deemed to have assumed all of the Servicer's interest therein and to 21 have replaced the Servicer as a party to each Subservicing Agreement to the same extent as if the Subservicing Agreements had been assigned to the assuming party, except that the Servicer shall not thereby be relieved of any liability or obligations under the Subservicing Agreements. The Servicer at its expense and without right of reimbursement therefor, shall, upon request of the Indenture Trustee, deliver to the assuming party all documents and records relating to each Subservicing Agreement and the Business Loans then being serviced and an accounting of amounts collected and held by it and otherwise use its best efforts to effect the orderly and efficient transfer of the Subservicing Agreements to the assuming party. (f) Consistent with the terms of this Agreement, the Servicer may waive, modify or vary any term of any Business Loan or consent to the postponement of strict compliance with any such term or in any manner grant indulgence to any Obligor if in the Servicer's determination such waiver, modification, postponement or indulgence is not materially adverse to the interests of the Noteholders, provided, however, that (unless (x) the Obligor is -------- ------- in default with respect to the Business Loan, or such default is, in the judgment of the Servicer, imminent and (y) the Servicer determines that any modification would not be considered a new loan for federal income tax purposes) the Servicer may not permit any modification with respect to any Business Loan that would change the Business Loan Interest Rate, defer (subject to Section 4.12), or forgive the payment of any principal or interest (unless in connection with the liquidation of the related Business Loan), or extend the final maturity date on such Business Loan. No costs incurred by the Servicer or any Subservicer in respect of Servicing Advances shall for the purposes of distributions to Noteholders be added to the amount owing under the related Business Loan. Without limiting the generality of the foregoing, the Servicer shall continue, and is hereby authorized and empowered to execute and deliver on behalf of the Trust, the Indenture Trustee, the Owner Trustee, each Noteholder and each Certificateholder, all instruments of satisfaction or cancellation, or of partial or full release, discharge and all other comparable instruments, with respect to the Business Loans and with respect to any Mortgaged Properties or other Collateral. If reasonably required by the Servicer, the Indenture Trustee, on behalf of the Trust, shall furnish the Servicer, within 5 Business Days of receipt of the Servicer's request, with any powers of attorney and other documents necessary or appropriate to enable the Servicer to carry out its servicing and administrative duties under this Agreement. Any such request to the Indenture Trustee, on behalf of the Trust, shall be accompanied by a certification in the form of Exhibit I attached hereto signed by a Servicing Officer. The Servicer, in servicing and administering the Business Loans, shall employ or cause to be employed procedures (including collection, foreclosure and Foreclosed Property management procedures) and exercise the same care that it customarily employs and exercises in servicing and administering business loans for its own account, giving due consideration to the Noteholders' and Certificateholders' reliance on the Servicer. (g) On and after such time as the Indenture Trustee and the Trust receive the resignation of, or notice of the removal of, the Servicer from its rights and obligations under this Agreement, and with respect to resignation pursuant to Section 8.04, after receipt of the Opinion of Counsel required pursuant to Section 8.04 addressed to the Indenture Trustee, the Indenture 22 Trustee or its designee shall assume all of the rights and obligations of the Servicer, subject to Section 9.02 hereof. The Servicer shall, upon request of the Indenture Trustee but at the expense of the Servicer, deliver to the Indenture Trustee all documents and records (including computer tapes and diskettes) relating to the Business Loans and an accounting of amounts collected and held by the Servicer and otherwise use its best efforts to effect the orderly and efficient transfer of servicing rights and obligations to the assuming party. (h) The Servicer shall perform the duties of the Issuer and the Owner Trustee under the Basic Documents. In furtherance of the foregoing, the Servicer shall consult with the Owner Trustee as the Servicer deems appropriate regarding the duties of the Issuer and the Owner Trustee under the Basic Documents. The Servicer shall monitor the performance of the Issuer and the Owner Trustee and shall advise the Owner Trustee when action is necessary to comply with the Issuer's or the Owner Trustee's duties under the Basic Documents. The Servicer shall prepare for execution by the Owner Trustee or shall cause the preparation by other appropriate Persons of all such documents, reports, filings, instruments, certificates and opinions as it shall be the duty of the Issuer or the Owner Trustee to prepare, file or deliver pursuant to the Basic Documents. (i) In addition to the duties of the Servicer set forth in this Agreement or any of the Basic Documents, the Servicer shall perform such calculations and shall prepare for execution by the Issuer or the Owner Trustee or shall cause the preparation by other appropriate Persons of all such documents, reports, filings, instruments, certificates and opinions as it shall be the duty of the Issuer to prepare, file or deliver pursuant to state and federal tax and securities laws. In accordance with the directions of the Issuer or the Owner Trustee, the Servicer shall administer, perform or supervise the performance of such other activities in connection with the Issuer as are not covered by any of the foregoing provisions and as are expressly requested by the Issuer or the Owner Trustee and are reasonably within the capability of the Servicer. (j) Notwithstanding anything in this Agreement or any of the Basic Documents to the contrary, the Servicer shall be responsible for promptly notifying the Owner Trustee and the Paying Agent in the event that any withholding tax is imposed on the Issuer's payments (or allocations of income) to a Noteholder or a Certificateholder. Any such notice shall be in writing and specify the amount of any withholding tax required to be withheld by the Owner Trustee or the Paying Agent pursuant to such provision. (k) The Servicer shall prepare and file, on behalf of the Issuer, all tax returns tax elections, financial statements and such annual or other reports of the Issuer as are necessary for the preparation of tax reports as provided in the Trust Agreement or required by applicable law. All tax returns will be signed by the Servicer on behalf of the Issuer. (l) The Servicer shall maintain appropriate books of account and records relating to services performed under this Agreement, which books of account and records shall be accessible for inspection by the Owner Trustee at any time during normal business hours. 23 (m) The Servicer shall furnish to the Owner Trustee from time to time such additional information regarding the Issuer or the Basic Documents as the Owner Trustee shall reasonably request. For so long as any of the Notes are outstanding and are "restricted securities" within the meaning of Rule 144 (a) (3) of the Securities Act, (1) the Servicer will provide or cause to be provided to any holder of such Notes and any prospective purchaser thereof designated by such holder, upon the request of such a holder or prospective purchaser, the information required to be provided to such holder or prospective purchaser by Rule 144A(d) (4) under the Securities Act; and (2) the Servicer shall update such information from time to time in order to prevent such information from becoming false and misleading and will take such other actions as are necessary to ensure that the safe harbor exemption from the registration requirements of the Securities Act under Rule 144A is and will be available for resales of such Notes conducted in accordance with Rule 144A. Section 4.02 Liquidation of Business Loans. ----------------------------- In the event that any payment due under any Business Loan and not postponed pursuant to Section 4.01 is not paid when the same becomes due and payable, or in the event the Obligor fails to perform any other covenant or obligation under the Business Loan, the Servicer shall take such action as it shall deem to be in the best interests of the Noteholders and Certificateholders. The Servicer shall foreclose upon or otherwise comparably effect the ownership in the name of the Trust of Mortgaged Properties or other Collateral relating to defaulted Business Loans for which the related Business Loan is still outstanding, as to which no satisfactory arrangements can be made for collection of delinquent payments in accordance with the provisions of Section 4.10. In connection with such foreclosure or other conversion, the Servicer shall exercise collection and foreclosure procedures with the same degree of care and skill in its exercise or use as it would exercise or use under the circumstances in the conduct of its own affairs. Any amounts advanced in connection with such foreclosure or other action shall constitute "Servicing Advances." The Servicer shall take into account the existence of any hazardous substances, hazardous wastes or solid wastes on Mortgaged Properties in determining whether to foreclose upon or otherwise comparably convert the ownership of such Mortgaged Property, and will not foreclose on a Mortgaged Property where it has cause to believe such substances exist unless it (i) has received a Phase I environmental report and such report reveals no environmental problems, or (ii) any problems revealed by such Phase I environmental report have been corrected or such Mortgaged Property is subject to an environmental rehabilitation for which the Servicer is not responsible. After a Business Loan has become a Liquidated Business Loan, the Servicer shall promptly prepare and forward to the Indenture Trustee and upon request, any Noteholder or Certificateholder, a Liquidation Report, in the form attached hereto as Exhibit J, detailing the Liquidation Proceeds received from the Liquidated Business Loan, expenses incurred with respect thereto, and any loss incurred in connection therewith. 24 Section 4.03 Establishment of Principal and ------------------------------ Interest Accounts; Deposits in ------------------------------ Principal and Interest Accounts. ------------------------------- (a) The Servicer shall cause to be established and maintained one or more Principal and Interest Accounts, in one or more Eligible Deposit Accounts, in the form of time deposit or demand accounts, which may be interest-bearing or such accounts may be trust accounts wherein the moneys therein are invested in Permitted Instruments, titled "First National Bank of New England, as Servicer, in trust for the registered holders of FNBNE Business Loan Notes, Series 1998- A." All funds in such Principal and Interest Accounts shall be insured by the BIF or SAIF administered by the FDIC to the maximum extent provided by law. The creation of any Principal and Interest Account shall be evidenced by a letter agreement in the form of Exhibit C hereto. A copy of such letter agreement shall be furnished to the Indenture Trustee, the Owner Trustee and, upon request, any Noteholder or Certificateholder. (b) The Servicer and each Subservicer shall deposit without duplication (within two Business Days of receipt thereof) in the applicable Principal and Interest Account and retain therein: (i) all payments received on or after the Cut-Off Date on account of principal on the Business Loans, including all Excess Payments, Principal Prepayments and Curtailments collected on or after the Cut-Off Date; (ii) all payments received on or after the Cut-Off Date on account of interest on the Business Loans (net of the Servicing Fee with respect to each Business Loan and other servicing compensation payable to the Servicer as permitted herein); (iii) all Net Liquidation Proceeds; (iv) all Insurance Proceeds (other than amounts to be applied to restoration or repair of any related Mortgaged Property, or to be released to the Obligor in accordance with customary servicing procedures); (v) all Released Mortgaged Property Proceeds and any other proceeds from any other released property securing the Business Loans; (vi) any amounts paid in connection with the repurchase of any Business Loan and the amount of any Substitution Adjustment received pursuant to Sections 2.05 and 3.03; 25 (vii) any amount required to be deposited in the Principal and Interest Account pursuant to Section 4.04 or 4.10; and (viii) the amount of any losses incurred in connection with investments in Permitted Instruments. (c) The foregoing requirements for deposit in the applicable Principal and Interest Account shall be exclusive, it being understood and agreed that, without limiting the generality of the foregoing, payments with respect to the Servicing Fee (to the extent received and permitted by Section 6.03), with respect to each Business Loan, together with the difference between any Liquidation Proceeds and the related Net Liquidation Proceeds, need not be deposited by the Servicer in the applicable Principal and Interest Account. (d) Any interest earnings on funds held in the applicable Principal and Interest Account paid by an Eligible Deposit Account shall be for the account of the Servicer and may only be withdrawn from the applicable Principal and Interest Account by the Servicer immediately following its monthly remittance to the Indenture Trustee pursuant to Section 4.04(a). Any reference herein to amounts on deposit in the applicable Principal and Interest Account shall refer to amounts net of such investment earnings. Section 4.04 Permitted Withdrawals From the Applicable ------------------------------------------ Principal and Interest Account. ------------------------------ The Servicer shall withdraw funds from the applicable Principal and Interest Account for the following purposes: (a) to effect the remittance to the Indenture Trustee on each Determination Date for deposit into the Note Distribution Account that portion of the Available Funds for the related Remittance Date that is net of Compensating Interest, the Monthly Advances and amounts then on deposit in the Spread Account (and, with respect to the Determination Dates occurring during the Funding Period, net of amounts then on deposit in the Pre-Funding Account and the Capitalized Interest Account); (b) to reimburse itself for any accrued unpaid Servicing Fees, unreimbursed Monthly Advances and for unreimbursed Servicing Advances to the extent deposited in the Principal and Interest Account (and not netted from Monthly Payments received). The Servicer's right to reimbursement for unpaid Servicing Fees and, except as provided in the following sentence, Servicing Advances and Monthly Advances shall be limited to Liquidation Proceeds, Released Mortgaged Property Proceeds, Insurance Proceeds and such other amounts as may be collected by the Servicer from the Obligor or otherwise relating to the Business Loan in respect of which such unreimbursed amounts are owed. The Servicer's right to reimbursement for Servicing Advances and Monthly Advances in excess of such amounts shall be limited to any late collections of interest received on the Business Loans generally, including Liquidation Proceeds, Released Mortgaged Property Proceeds, Insurance Proceeds and any other amounts; 26 provided, however, that the Servicer's right to such reimbursement pursuant - -------- ------- hereto shall be subordinate to the rights of the Noteholders and may be exercised only if the Spread Balance equals the then applicable Specified Spread Account Requirement; (c) to withdraw any amount received from an Obligor that is recoverable and sought to be recovered as a voidable preference by a trustee in bankruptcy pursuant to the United States Bankruptcy Code in accordance with a final, nonappealable order of a court having competent jurisdiction; (d) (i) to make investments in Permitted Instruments and (ii) to pay to itself, as permitted by Section 4.03(d), interest paid in respect of Permitted Instruments or by an Eligible Deposit Account on funds deposited in the Principal and Interest Account; (e) to withdraw any funds deposited in the Principal and Interest Account that were not required to be deposited therein or were deposited therein in error; (f) to pay itself servicing compensation pursuant to Section 6.03 hereof or interest as permitted under the definition of Excess Proceeds; and (g) to clear and terminate the Principal and Interest Accounts upon the termination of this Agreement. So long as no default or Servicer Termination Event shall have occurred and be continuing, and consistent with any requirements of the Code, the Principal and Interest Accounts shall either be maintained with an Eligible Deposit Account as an interest-bearing account meeting the requirements set forth in Section 4.03(a), or the funds held therein may be invested by the Servicer (to the extent practicable) in Permitted Instruments, as directed in writing by the Servicer. In either case, funds in the Principal and Interest Account must be available for withdrawal without penalty, and any Permitted Instruments must mature not later than the Business Day immediately preceding the Determination Date next following the date of such investment (except that if such Permitted Instrument is an obligation of the institution that maintains such account, then such Permitted Instrument shall mature not later than such Determination Date) and shall not be sold or disposed of prior to its maturity. All Permitted Instruments must be held by or registered in the name of "First National Bank of New England, as Servicer, in trust for the registered holders of FNBNE Business Loan Notes, Series 1998-A." All interest or other earnings from funds on deposit in the Principal and Interest Account (or any Permitted Instruments thereof) shall be the exclusive property of the Servicer, and may be withdrawn from the Principal and Interest Account pursuant to clause (d) above. The amount of any losses incurred in connection with the investment of funds in the Principal and Interest Account in Permitted Instruments shall be deposited in the Principal and Interest Account by the Servicer from its own funds immediately as realized without reimbursement therefor. Section 4.05 [Intentionally Omitted] 27 Section 4.06 Transfer of Accounts. -------------------- The Servicer may, upon written notice to the Indenture Trustee, transfer any Principal and Interest Account to a different Eligible Deposit Account. Section 4.07 Maintenance of Hazard Insurance. ------------------------------- The Servicer shall comply with the customary servicing procedures concerning the issuance and maintenance of fire and hazard insurance with extended coverage customary in the area where the Mortgaged Property is located. If at origination of a Business Loan, to the best of the Servicer's knowledge after reasonable investigation, the related Mortgaged Property is in an area identified in the Federal Register by the Flood Emergency Management Agency as having special flood hazards (and such flood insurance has been made available), the Servicer will require the related Obligor to purchase a flood insurance policy with a generally acceptable insurance carrier, in an amount representing coverage not less than the least of (i) the full insurable value of the Mortgaged Property, or (ii) the maximum amount of insurance available under the National Flood Insurance Act of 1968, as amended. The Servicer shall also maintain, to the extent such insurance is available, and in accordance with the Servicer's policies, on Foreclosed Property constituting real property, fire and hazard insurance in the amounts described above and liability insurance. Any amounts collected by the Servicer under any such policies (other than amounts to be applied to the restoration or repair of the Mortgaged Property, or to be released to the Obligor in accordance with applicable law) shall be deposited in the Principal and Interest Account, subject to withdrawal pursuant to Section 4.04. It is understood and agreed that no earthquake or other additional insurance need be required by the Servicer of any Obligor or maintained on Foreclosed Property, other than pursuant to such applicable laws and regulations as shall at any time be in force and as shall require such additional insurance. All policies required hereunder shall be endorsed with standard mortgagee clauses with losses payable to the Servicer or its affiliates. Section 4.08 [Intentionally Omitted]. Section 4.09 Fidelity Bond. ------------- The Servicer shall maintain with a responsible company, and at its own expense, a blanket fidelity bond and an errors and omissions insurance policy, in a minimum amount equal to $1,500,000,and a maximum deductible of $100,000, if commercially available, with coverage on all employees acting in any capacity requiring such persons to handle funds, money, documents or papers relating to the Business Loans ("Servicer Employees"). The fidelity bond shall insure the Indenture Trustee and the Owner Trustee, their respective officers and employees against losses resulting from forgery, theft, embezzlement or fraud by such Servicer Employees. The errors and omissions policy shall insure against losses resulting from the errors, omissions and negligent acts of such Servicer employees. No provision of this Section 4.09 requiring such fidelity bond and errors and omissions insurance shall relieve the Servicer from its duties as set forth in this Agreement. Upon the request of the Indenture Trustee, the Owner Trustee or any 28 Noteholder or Certificateholder, the Servicer shall cause to be delivered to the Indenture Trustee, Owner Trustee or such Noteholder or such Certificateholder a certified true copy of such fidelity bond and insurance policy. The current issuer of such fidelity bond and insurance policy is The Hartford Underwriters Insurance Company. Section 4.10 Title, Management and Disposition --------------------------------- of Foreclosed Property. ---------------------- In the event that title to a Mortgaged Property or other Collateral is acquired in foreclosure or by deed in lieu of foreclosure or by other legal process (a "Foreclosed Property"), the deed or certificate of sale, or the repossessed Collateral shall be taken in the name of the Trust for the benefit of the Noteholders and Certificateholders. The Servicer, subject to Sections 4.01 and 4.02 hereof, shall manage, conserve, protect and operate each Foreclosed Property for the Noteholders and the Certificateholders solely for the purpose of its prudent and prompt disposition and sale. The Servicer shall, either itself or through an agent selected by the Servicer, manage, conserve, protect and operate the Foreclosed Property in the same manner that it manages, conserves, protects and operates other foreclosed property for its own account, and in the same manner that similar property in the same locality as the Foreclosed Property is managed. The Servicer shall attempt to sell the same (and may temporarily rent the same) on such terms and conditions as the Servicer deems to be in the best interest of the Noteholders and Certificateholders. The Servicer shall cause to be deposited in the Principal and Interest Account, no later than five Business Days after the receipt thereof, all revenues received with respect to the conservation and disposition of the related Foreclosed Property net of Servicing Advances. The disposition of Foreclosed Property shall be carried out by the Servicer at such price, and upon such terms and conditions, as the Servicer, deems to be in the best interest of the Noteholders and the Certificateholders. The proceeds of sale of the Foreclosed Property shall promptly, but in no event later than two Business Days after receipt, be deposited in the Principal and Interest Account as received from time to time and, as soon as practicable thereafter, the expenses of such sale shall be paid, the Servicer shall, subject to Section 4.04, reimburse itself for any related unreimbursed Servicing Advances, unpaid Servicing Fees and unreimbursed Monthly Advances, and the Servicer shall deposit in the Principal and Interest Account the net cash proceeds of such sale to be distributed to the Noteholders in accordance with Section 5.07 hereof. Section 4.11 [Intentionally Omitted]. --------------------- Section 4.12 Collection of Certain Business ------------------------------ Loan Payments. ------------- 29 The Servicer shall make reasonable efforts to collect all payments called for under the terms and provisions of the Business Loans, and shall, to the extent such procedures shall be consistent with this Agreement, comply with the terms and provisions of any applicable hazard insurance policy. Consistent with the foregoing , the Servicer may in its discretion waive or permit to be waived any fee or charge which the Servicer would be entitled to retain hereunder as servicing compensation and extend the due date for payments due on a Business Note for a period (with respect to each payment as to which the due date is extended) not greater than 180 days after the initially scheduled due date for such payment provided that the Servicer determines such extension would not be considered a new mortgage loan for federal income tax purposes. In the event the Servicer shall consent to the deferment of the due dates for payments due on a Business Note, the Servicer shall nonetheless make payment of any required Monthly Advance with respect to the payments so extended to the same extent as if such installment were due, owing and delinquent and had not been deferred, and shall be entitled to reimbursement therefor in accordance with Section 4.04(b) hereof. Section 4.13 Access to Certain Documentation and ------------------------------------ Information Regarding the Business Loans. ---------------------------------------- The Servicer shall provide to the Owner Trustee, the Indenture Trustee, the FDIC, the OCC, the Federal Reserve, the Office of Thrift Supervision and the supervisory agents and examiners of the foregoing, access to the documentation regarding the Business Loans required by applicable local, state and federal regulations, such access being afforded without charge but only upon reasonable request and during normal business hours at the offices of the Servicer designated by it. 30 ARTICLE V PAYMENTS TO THE CERTIFICATEHOLDERS ---------------------------------- Section 5.01 Establishment of Note Distribution Account; Deposits in ------------------------------------------------------- Note Distribution Account; Permitted Withdrawals from ----------------------------------------------------- Note Distribution Account . ------------------------- (a) No later than the Closing Date, the Indenture Trustee will establish and maintain with itself in its trust department a trust account, which shall not be interest-bearing, titled "Note Distribution Account, Marine Midland Bank, as Indenture Trustee for the registered holders of FNBNE Business Loan Notes, Series 1998-A" (the " Note Distribution Account"). The Indenture Trustee shall, promptly upon receipt, deposit in the Note Distribution Account and retain therein: (i) the Available Funds (net of the amount of Monthly Advances and Compensating Interest deposited pursuant to subclause (ii) below); (ii) the Compensating Interest and the portion of the Monthly Advance remitted to the Indenture Trustee by the Servicer; (iii) amounts transferred from the Spread Account pursuant to Section 5.02(b)(i); (iv) amounts required to be paid by the Servicer pursuant to Section 5.06(e) in connection with losses on investments of amounts in the Accounts; and (v) amounts transferred from the Pre-Funding Account and the Capitalized Interest Account on the Special Remittance Date pursuant to Sections 5.04(c) and (h), respectively. (b) Amounts on deposit in the Note Distribution Account shall be withdrawn on each Remittance Date by the Indenture Trustee, or the Paying Agent, on its behalf, to effect the distribution described in Section 5.07(b) and thereafter by the following parties in no particular order of priority: (i) by the Indenture Trustee, to invest amounts on deposit in the Note Distribution Account in Permitted Instruments pursuant to Section 5.06; (ii) by the Indenture Trustee, to pay on a monthly basis to the Servicer as additional servicing compensation interest paid and earnings realized on Permitted Instruments; 31 (iii) by the Indenture Trustee, to withdraw any amount not required to be deposited in the Note Distribution Account or deposited therein in error; and (iv) by the Indenture Trustee, to clear and terminate the Note Distribution Account upon the termination of this Agreement in accordance with the terms of Section 10.01 hereof. Section 5.02 Establishment of Spread Account; -------------------------------- Deposits in Spread Account; Permitted ------------------------------------- Withdrawals from Spread Account. ------------------------------- (a) No later than the Closing Date, the Indenture Trustee will establish and maintain with itself in its trust department a trust account, which shall not be interest bearing, titled "Spread Account, Marine Midland Bank, as Indenture Trustee for the registered holders of FNBNE Business Loan Notes, Series 1998-A" (the "Spread Account"). The Spread Account shall constitute part of the Trust Fund, and the funds held therein may be invested in Permitted Instruments. On the Closing Date, the Indenture Trustee will make an initial cash deposit from the proceeds of the sale of the Class A Notes into the Spread Account in an amount equal to $4,550,000.00. Thereafter, on each Remittance Date, the Indenture Trustee shall, promptly upon receipt, deposit into the Spread Account: (i) that portion of the Available Funds required to be deposited into the Spread Account pursuant to Section 5.07(b)(xi) until the Spread Balance equals the then applicable Specified Spread Account Requirement; and (ii) amounts required to be paid by the Servicer pursuant to Section 5.06(e) in connection with losses on investments of amounts in the Spread Account. (b) Amounts on deposit in the Spread Account shall be withdrawn by Indenture Trustee for distribution in the manner set forth in subclause (c) below on each Remittance Date in the following order of priority: (i) to deposit in the Note Distribution Account an amount by which (a) the sum of (i) the Class A, Class M-1 and Class M-2 Interest Distribution Amounts, (ii) the Class A, Class M-1 and Class M-2 Principal Distribution Amounts, (iii) the Class M-1 and Class M-2 Carry Forward Interest Amounts and (iv) the Class A, Class M-1 and Class M-2 Carry Forward Amounts exceeds (b) the Available Funds for such Remittance Date (but excluding from such definition, amounts in the Spread Account); (ii) to deposit in the Note Distribution Account the amount, if any, required to make the full distribution to the Expense Account pursuant to Section 5.07(b)(vii); and 32 (iii) to the extent that the amount then on deposit in the Spread Account after giving effect to all required transfers from the Spread Account to the Note Distribution Account on such Remittance Date then exceeds the Specified Spread Account Requirement as of such Remittance Date (such excess, a "Spread Account Excess"), an amount equal to such Spread Account Excess shall be distributed first, to make any payments required pursuant to Section 5.07(b)(xii) -- (xix), in that order, and then, to the Holders of the Certificates; and also, in no particular order of priority: (iv) to invest amounts on deposit in the Spread Account in Permitted Instruments pursuant to Section 5.06; (v) to withdraw any amount not required to be deposited in the Spread Account or deposited therein in error; and (vi) to clear and terminate the Spread Account upon the termination of this Agreement in accordance with the terms of Section 10.01. (c) Any amounts which are required to be withdrawn from the Spread Account pursuant to paragraph (b) above shall be withdrawn from the Spread Account in the following order of priority: (i) first, from any uninvested ----- funds therein, and (ii) second, from the proceeds of the liquidation of any ------ investments therein pursuant to Section 5.06(b). (d) Any amounts which are distributed by the Indenture Trustee to the holders of the Certificates pursuant to paragraph (b) above will not be required to be refunded, regardless of whether there are sufficient funds on a Subsequent Remittance Date to make a full distribution to holders of the Notes on such Remittance Date. Section 5.03 Establishment of Expense Account; --------------------------------- Deposits in Expense Account; Permitted -------------------------------------- Withdrawals from Expense Account -------------------------------- (a) No later than the Closing Date, the Indenture Trustee will establish with itself an account (the "Expense Account"). The Expense Account shall not constitute part of the Trust Fund and is for the benefit of the Indenture Trustee and the Owner Trustee to pay their fees and expenses related to the Trust and, on a subordinate basis, for the benefit of the Servicer as described in (b)(ii) and (c) below. The Indenture Trustee shall deposit into the Expense Account: (i) on each Remittance Date from the amounts on deposit in the Note Distribution Account an amount equal to one-twelfth of the Annual Expense Escrow Amount; and 33 (ii) upon receipt, amounts required to be paid by the Servicer pursuant to Section 5.06(e) in connection with losses on investments of amounts in the Expense Account. If, at any time the amount then on deposit in the Expense Accounts shall be insufficient to pay in full the fees and expenses of the Indenture Trustee and the Owner Trustee then due, the Indenture Trustee and the Owner Trustee shall make demand on the Servicer to advance the amount of such insufficiency, and the Servicer shall promptly advance such amount. Thereafter, the Servicer shall be entitled to reimbursement from the Expense Account for the amount of any such advance from any excess funds available pursuant to subclause (c)(ii) below. Without limiting the obligation of the Servicer to advance such insufficiency, in the event the Servicer does not advance the full amount of such insufficiency by the Business Day immediately preceding the Determination Date, the amount of such insufficiency shall be deposited into the Expense Account for payment to the Indenture Trustee pursuant to Section 5.07(b)(vii), to the extent of available funds in the Note Distribution Account. (b) The Indenture Trustee may invest amounts on deposit in the Expense Accounts in Permitted Instruments pursuant to Section 5.06 hereof, and the Indenture Trustee shall withdraw amounts on deposit in the Expense Accounts to: (i) pay the Indenture Trustee's and Owner Trustee's fees and expenses as described in Section 2.08 hereof; (ii) pay on a monthly basis to the Servicer as additional servicing compensation interest paid and earnings realized on Permitted Instruments; (iii) withdraw any amounts not required to be deposited in the Expense Accounts or deposited therein in error; and (iv) clear and terminate the Expense Account upon the termination of this Agreement in accordance with the terms of Section 10.01. (c) On the twelfth Remittance Date following the Closing Date, and on each twelfth Remittance Date thereafter, the Indenture Trustee shall determine that all payments required to be made during the prior twelve month period pursuant to subclauses (b)(i), (b)(ii) and (b)(iii) above, have been made, and, if all such payments have been made, from the amounts remaining in the Expense Accounts, the Indenture Trustee shall (in the following order of priority): (i) reimburse the Servicer and/or the Seller, for reimbursable advances made pursuant to Section 8.01; (ii) reimburse the Servicer for advances made by it pursuant to the last paragraph of subclause (a) above; and 34 (iii) remit to the Servicer as additional servicing compensation any amounts remaining in the Expense Account after payments made pursuant to subclauses (b)(i), (b)(ii), (b)(iii), (c)(i) and (c)(ii), above. Section 5.04 Pre-Funding Account and Capitalized ----------------------------------- Interest Account ---------------- (a) No later than the Closing Date, the Indenture Trustee shall establish and maintain in its trust department a trust account, which shall not be interest-bearing, titled "FNBNE Business Loan Pre-Funding Account 1998-A" (the "Pre-Funding Account"). The Pre-Funding Account shall constitute part of the Trust Fund and may only be invested in Permitted Investments. The Indenture Trustee shall, promptly upon receipt, deposit into the Pre-Funding Account and retain therein the Original Pre-Funded Amount in an amount equal to the sum of $13,044,782.35 from the proceeds of the sale of the Class A Notes. (b) On each Subsequent Transfer Date, the Servicer shall instruct the Indenture Trustee to withdraw from the Pre-Funding Account an amount equal to 100% of the aggregate Principal Balances of the Subsequent Business Loans sold to the Trust Fund on such Subsequent Transfer Date and pay such amount to or upon the order of the Seller with respect to such transfer. In no event shall the Servicer be permitted to instruct the Indenture Trustee to release from the Pre-Funding Account in excess of $13,044,782.35. (c) If at the end of the Funding Period amounts still remain in the Pre-Funding Account, the Servicer shall instruct the Indenture Trustee to withdraw from the Pre-Funding Account on the immediately following Remittance Date and deposit such amounts in the Note Distribution Account. However, if at the close of business on the Determination Date in March 1999 amounts still remain in the Pre-Funding Account, the Servicer shall instruct the Indenture Trustee to withdraw from the Pre-Funding Account on the Special Remittance Date and deposit in the Note Distribution Account any Pre-Funded Amount then remaining in the Pre-Funding Account. (d) On the Remittance Dates occurring in January, February and March, 1999, the Indenture Trustee shall transfer from the Pre-Funding Account to the Note Distribution Account, the Pre-Funding Earnings, if any, applicable to each such Remittance Date. (e) No later than the Closing Date, the Indenture Trustee shall establish and maintain in its trust department a trust account which shall not be interest-bearing, titled "FNBNE Business Loan Capitalized Interest Account 1998-A" (the " Capitalized Interest Account"). The Capitalized Interest Account shall constitute part of the Trust Fund and may only be invested in Permitted Investments. The Indenture Trustee shall, promptly upon receipt, deposit into the Capitalized Interest Account $127,050.12. If prior to the end of the Funding Period the funds on deposit in the Pre-Funding Account are invested in a guaranteed investment contract, repurchase agreement or other arrangement acceptable to the Rating Agencies, that 35 constitutes a Permitted Instrument, the Indenture Trustee shall, within one Business Day of its receipt of notification of satisfaction of the Rating Agency Condition, withdraw from the Capitalized Interest Account and pay to the Seller the amount set forth in such notification. (f) On the Remittance Dates occurring in January, February and March, the Indenture Trustee shall transfer from the Capitalized Interest Account to the Note Distribution Account, the Capitalized Interest Requirement, if any, for such Remittance Dates. (g) On the Special Remittance Date, the Indenture Trustee shall transfer from the Capitalized Interest Account to the Note Distribution Account the Capitalized Interest Requirement, if any, for such Special Remittance Date. Any amounts remaining in the Capitalized Interest Account after taking into account such transfer shall be paid on such Special Remittance Date to the Certificateholders, and the Capitalized Interest Account shall be closed. Section 5.05 [Intentionally Omitted] Section 5.06 Investment of Accounts. ---------------------- (a) So long as no default or Event of Default shall have occurred and be continuing, and consistent with any requirements of the Code, all or a portion of any Account which by the terms of this Agreement shall be invested in Permitted Instruments by the Indenture Trustee, as directed in writing by the Servicer, in one or more Permitted Instruments in the name of the Indenture Trustee, bearing interest or sold at a discount. No such investment in the Principal and Interest Account, Note Distribution Account, the Pre-Funding Account, the Capitalized Interest Account and the Spread Account shall mature later than the Business Day immediately preceding the next Remittance Date and no such investment in the Expense Account shall mature later than the Business Day immediately preceding the date such funds will be needed to pay fees or premiums; provided, however, the Indenture Trustee or any affiliate thereof, may -------- ------- be the obligor on any investment which otherwise qualifies as a Permitted Instrument and any investment on which the Indenture Trustee is the obligor may mature on such Remittance Date or date when needed, as the case may be. (b) If any amounts are needed for disbursement from any Account held by the Indenture Trustee and sufficient uninvested funds are not available to make such disbursement, the Indenture Trustee shall cause to be sold or otherwise converted to cash a sufficient amount of the investments in such Account. The Indenture Trustee shall not be liable for any investment loss or other charge resulting therefrom. (c) The Indenture Trustee shall not in any way be held liable by reason of any insufficiency in any Account held by the Indenture Trustee resulting from any investment loss on any Permitted Instrument included therein (except to the extent that the Indenture Trustee is the obligor thereon). 36 (d) The Indenture Trustee shall invest and reinvest funds in the Accounts held by the Indenture Trustee to the fullest extent practicable, in such manner as the Servicer shall from time to time direct in writing, but only in one or more Permitted Instruments. (e) All income or other gain from investments in any Account held by the Indenture Trustee shall be deposited in such Account, immediately on receipt, and the Indenture Trustee shall notify the Servicer of any loss resulting from such investments. The Servicer shall remit the amount of any such loss from its own funds, without reimbursement therefor, to the Indenture Trustee for deposit in the Account from which the related funds were withdrawn for investment by the next Determination Date following receipt by the Servicer of such notice. Section 5.07 Distributions. ------------- (a) The rights of the Noteholders and Certificateholders to receive distributions from the proceeds of the Trust Fund, and all ownership interests of the Certificateholders in such distributions, shall be as set forth in this Agreement. (b) On each Remittance Date the Indenture Trustee shall withdraw from the Note Distribution Account an amount equal to (A) that portion of the Available Funds received from the Servicer pursuant to Section 5.01(a)(i), (ii), (iv) and (v), (B) the amounts deposited therein pursuant to Section 5.02(b)(i) and make distributions thereof in the following order of priority: (i) first, to the Class A Noteholders, in an amount up to the Class A Interest Distribution Amount; (ii) second, to the Class M-1 Noteholders, in an amount up to the Class M-1 Interest Distribution Amount, minus the Class Carry Forward Interest Amount for the Class M-1 Notes; (iii) third, to the Class M-2 Noteholders, in an amount up to the Class M-2 Interest Distribution Amount, minus the Class Carry Forward Interest Amount for the Class M-2 Notes; (iv) fourth, to the Class A Noteholders, in an amount up to the sum of (a) the Class A Principal Distribution Amount for the Class A Notes and (b) the Class Carry Forward Amount for the Class A Notes; (v) fifth, to the Class M-1 Noteholders, in an amount up to the sum of (a) the Class M-1 Principal Distribution Amount for the Class M-1 Notes and (b) the Class Carry Forward Amount for the Class M-1 Notes; 37 (vi) sixth, to the Class M-2 Noteholders, in an amount up to the sum of (a) the Class M-2 Principal Distribution Amount for the Class M-2 Notes and (b) the Class Carry Forward Amount for the Class M-2 Notes; (vii) seventh, to the Expense Account in an amount up to one-twelfth of the Annual Expense Escrow Amount plus any amount required to be paid to the Owner Trustee and the Indenture Trustee pursuant to this Agreement; (viii) eighth, to the Class M-1 Noteholders, the Class Carry Forward Interest Amount for the Class M-1 Notes; (ix) ninth, to the Class M-2 Noteholders, the Class Carry Forward Interest Amount for the Class M-2 Notes; (x) tenth, to the Servicer, certain amounts reimbursable pursuant to the Sale and Servicing Agreement; (xi) eleventh, to the Spread Account, unless and until the amount therein equals the Specified Spread Account Requirement; (xii) twelfth, to the Class A Noteholders, any Interest Carryover for the Class A Notes; (xiii) thirteenth, to the Class M-1 Noteholders, any Interest Carryover for the Class M-1 Notes; (xiv) fourteenth, to the Class M-2 Noteholders, any Interest Carryover for the Class M-2 Notes; (xv) fifteenth, to the Class B Noteholders, in an amount up to the Class B Interest Distribution Amount, minus the Class Carry Forward Interest Amount for the Class B Notes; (xvi) sixteenth, to the Class B Noteholders, in an amount up to the Class B Principal Distribution Amount for the Class B Notes; (xvii) seventeenth, to the Class B Noteholders, the Class Carry Forward Interest Amount for the Class B Notes; (xviii) eighteenth, to the Class B Noteholders, the Class Carry Forward Amount for the Class B Notes; (xix) nineteenth, to the Class B Noteholders, any Interest Carryover for the Class B Notes; and 38 (xx) twentieth, to the Owner Trustee, for Distribution to the Certificateholders, any excess. Additionally, on the Special Remittance Date, the Indenture Trustee shall withdraw from the Note Distribution Account the amount, if any, deposited therein pursuant to Section 5.01(a)(v) and make distributions thereof to Noteholders as follows: (i) from amounts transferred from the Pre-Funding Account, distributions of principal to the Notes of each Class pro rata based upon the applicable Class A, Class M-1, Class M-2 and Class B Percentages and (ii) from amounts transferred from the Capitalized Interest Account, distributions of interest to the Holders of each Class of Notes equal to the Capitalized Interest Requirement. (c) All distributions made to the Noteholders of a particular Class will be made on a pro rata basis among the Noteholders of record of the applicable Class on the next preceding Record Date based on the Percentage Interest represented by their respective Notes, and shall be made by check or, upon request by a Noteholders, by wire transfer of immediately available funds to the account of such Noteholders at a bank or other entity having appropriate facilities therefor, and, in the case of wire transfers, at the expense of such Noteholder unless such Noteholder shall own of record Notes which have initial principal balances aggregating at least $1,000,000. Section 5.08 [Intentionally Omitted]. --------------------- Section 5.09 Statements. ---------- Each month, not later than 12:00 noon New York time on the Determination Date, the Servicer shall deliver to the Indenture Trustee, by telecopy, for distribution to the Noteholders, the receipt and legibility of which shall be confirmed telephonically, with hard copy thereof and the Servicer's Monthly Computer Tape in the form attached hereto as Exhibit L (both in hard copy and in computer tape form) to be delivered on the Business Day following the Determination Date, a certificate signed by a Servicing Officer (a "Servicer's Certificate") stating the date (day, month and year), the Series number of the Notes, the date of this Agreement, and, as of the close of business on the Record Date for such month: (i) Available Funds for the related Remittance Date; (ii) The Aggregate Class A Note Principal Balance, the Aggregate Class M-1 Note Principal Balance, the Aggregate Class M-2 Note Principal Balance, and the Aggregate Class B Note Principal Balance as reported in the prior Servicer's Certificate pursuant to subclause (xi) below, or, in the case of the first Determination Date, the Original Class A, Class M-1, Class M-2, and Class B Note Principal Balance; (iii) The number and Principal Balances of all Business Loans which were the subject of Principal Prepayments during the Due Period and the number and Principal Balances of all Defaulted Business Loans purchased by the Servicer during the Due Period; 39 (iv) The amount of all Curtailments which were received during the Due Period; (v) The amount of all Excess Payments and the amount of all Monthly Payments in respect of principal received during the Due Period; (vi) The aggregate amount of interest received on Business Loans; (vii) The amount of the Monthly Advances to be made on the Determination Date and the Compensating Interest payment to be made on the Determination Date; (viii) The delinquency and foreclosure information set forth in the form attached hereto as Exhibit K; (ix) The Interest Distribution Amounts and Principal Distribution Amounts for each Class for the Remittance Date with the components thereof stated separately; (x) The amount available in the Spread Account as of the related Record Date in cash and from liquidation of Permitted Instruments and the amount, if any, to be transferred from the Spread Account to the Note Distribution Account pursuant to Section 5.02(b)(i); (xi) The Aggregate Class A Note Principal Balance, Aggregate Class M-1 Note Principal Balance, Aggregate Class M-2 Note Principal Balance and Aggregate Class B Note Principal Balance after giving effect to the distribution to be made on the Remittance Date; (xii) The weighted average maturity and weighted average Business Loan Interest Rate; (xiii) The Servicing Fees and amounts to be deposited to the Expense Account; (xiv) The amount of all payments and reimbursements to the Servicer; (xv) The Class A, Class M-1, Class M-2 and Class B Remittance Rates with respect to such Remittance Date; (xvi) During the Funding Period, the aggregate Principal Balance of the Subsequent Business Loans purchased during the prior Due Period and the amount on deposit in the Pre-Funding Account as of the end of such Due Period; (xvii) The Net Interest Cap with respect to the Remittance Date; 40 (xviii) If the Class Remittance Rate for a Class of Notes for such Remittance Date is based on the Net Interest Cap, the amount of any Interest Carryover for such Class of Notes for such Remittance Date; (xix) the amount of the distribution, if any, allocable to Interest Carryover and the amount of any Interest Carryover for all prior Remittance Dates after giving effect to such distribution (in each case, stated separately by Class and in the aggregate); and (xx) Such other information as the Indenture Trustee, the Noteholders and the Certificateholders or the Rating Agencies may reasonably require. The Indenture Trustee shall forward such report to the Noteholders, the Certificateholders, the Owner Trustee and the Rating Agencies on the Remittance Date, together with a separate report indicating the amount of funds deposited in each Note Distribution Account pursuant to Section 5.01(a)(iv); and the amounts which are reimbursable to the Servicer or the Seller pursuant to Sections 5.03(c)(i), 5.03(c)(ii) and 5.07(b)(x) (all reports prepared by the Indenture Trustee of such withdrawals and deposits will be based in whole or in part upon the information provided to the Indenture Trustee by the Servicer). To the extent that there are inconsistencies between the telecopy of the Servicer's Certificate and the hard copy thereof, the Indenture Trustee shall be entitled to rely upon the telecopy. In the case of information furnished pursuant to subclauses (ii), (iii), (iv), (v), (ix) and (xi), above, the amounts shall be expressed in a separate section of the report as a dollar amount for each Class per $1,000 original dollar amount as of the Cut-Off Date. Additionally, on the Special Remittance Date the Indenture Trustee shall, based upon information received from the Servicer, forward to the Noteholders, the Owner Trustee and the Rating Agencies a report setting forth the amount of principal and interest, if any, being paid to each Class of Notes on the Special Remittance Date. (a) Within a reasonable period of time after the end of each calendar year, the Servicer shall furnish to the Indenture Trustee and the Owner Trustee for distribution to each Person who at any time during the calendar year was a Noteholder or a Certificateholder such information as is reasonably necessary to provide to such Person a statement containing the information set forth in subclauses (vi), (ix), and (xiv), above, aggregated for such calendar year or applicable portion thereof during which such Person was a Noteholder or a Certificateholder. Such obligation of the Servicer shall be deemed to have been satisfied to the extent that substantially comparable information shall be provided by the Servicer pursuant to any requirements of the Code as from time to time are in force. (b) Upon reasonable advance notice in writing, the Servicer will provide to each Noteholder or Certificateholder which is a savings and loan association, bank or insurance company certain reports and access to information and documentation regarding the Business Loans sufficient to permit such Noteholder or Certificateholder to comply with applicable 41 regulations of the Office of Thrift Supervision or other regulatory authorities with respect to investment in the Notes or Certificates, as applicable. (c) The Servicer shall furnish to each Noteholder and Certificateholder, during the term of this Agreement, such periodic, special, or other reports or information, whether or not provided for herein, as shall be necessary, reasonable, or appropriate with respect to the Noteholder and Certificateholder or otherwise with respect to the purposes of this Agreement, all such reports or information to be provided by and in accordance with such applicable instructions and directions as the Noteholder and Certificateholder may reasonably require; provided, that the Servicer shall be entitled to be reimbursed by such Noteholder or Certificateholder for the Servicer's actual expenses incurred in providing such reports if such reports are not producable in the ordinary course of the Servicer's business. The Rating Agencies shall receive copies of any such reports or information furnished to the Noteholders and Certificateholders. Section 5.10 Advances by the Servicer. ------------------------ Not later than the close of business on each Determination Date, the Servicer shall remit to the Indenture Trustee for deposit in the Note Distribution Account an amount (as indicated in the Servicer's Certificate prepared pursuant to Section 5.09), to be distributed on the related Remittance Date pursuant to Section 5.07, equal to the amount by which (i) 30 days' interest at a rate equal to the then applicable Adjusted Business Loan Remittance Rate on the Aggregate Class A, Class M-1, Class M-2 and Class B Note Principal Balances immediately prior to the related Remittance Date exceeds (ii) the amount received by the Servicer as of the related Record Date in respect of interest on the Business Loans (plus, for the Remittance Dates during the Funding Period, the sum of (i) all funds to be transferred to the Note Distribution Account from the Capitalized Interest Account for such Remittance Date pursuant to Section 5.04(g) and (ii) the Pre-Funding Earnings for the applicable Remittance Date), such excess being defined herein as the "Monthly Advance." The Servicer may reimburse itself for Monthly Advances made pursuant to Section 4.04. Notwithstanding the foregoing, the Servicer shall not be required to make a Monthly Advance with respect to a Business Loan if it determines, in good faith, that such advance would be nonrecoverable from amounts received in respect of the Business Loans. Section 5.11 Compensating Interest. --------------------- Each Class of Notes shall be entitled to a full month's interest on the principal portion of each Business Loan at the then applicable Class A, Class M-1, Class M-2 or Class B Remittance Rate for such Class, as the case may be. Not later than the close of business on each Determination Date, with respect to each Business Loan for which a Principal Prepayment or Curtailment was received during the related Due Period, the Servicer shall remit to the Indenture Trustee for deposit in the Note Distribution Account from amounts otherwise payable to it as servicing compensation, an amount (such amount required to be delivered to the Indenture Trustee is referred to herein as "Compensating Interest") (as indicated in the Servicer's Certificate prepared pursuant to Section 5.09) equal to the difference between (a) 30 days' interest at the 42 Adjusted Business Loan Remittance Rate on the Principal Balance of each related Business Loan as of the beginning of the Due Period applicable to the Remittance Date on which such amount will be distributed, and (b) the amount of interest actually received on each such Business Loan for such Due Period net of the Servicing Fee, and the fees and expenses of the Owner Trsutee and the Indenture Trustee allocable to such interest. Section 5.12 Reports of Foreclosure and Abandonment of Mortgaged --------------------------------------------------- Property -------- Each year the Servicer shall make the reports of foreclosures and abandonment of any Mortgaged Property required by Section 6050J of the Code. Promptly after filing each such report with the Internal Revenue Service, the Servicer shall provide the Indenture Trustee with an Officer's Certificate certifying that such report has been filed. 43 ARTICLE VI GENERAL SERVICING PROCEDURE --------------------------- Section 6.01 [Intentionally Omitted] Section 6.02 Satisfaction of Mortgages and Collateral and Release of ------------------------------------------------------- Business Files -------------- The Servicer shall maintain the Fidelity Bond as provided for in Section 4.09 insuring the Servicer against any loss it may sustain with respect to any Business Loan not satisfied in accordance with the procedures set forth herein. Upon the payment in full of any Business Loan, or the receipt by the Servicer of a notification that payment in full will be escrowed in a manner customary for such purposes, the Servicer will immediately notify the Indenture Trustee by a certification in the form of Exhibit I attached hereto (which certification shall include a statement to the effect that all amounts received or to be received in connection with such payment which are required to be deposited in the Principal and Interest Account pursuant to Section 4.03 have been or will be so deposited) of a Servicing Officer and shall request delivery to it of the Indenture Trustee's Document File. Upon receipt of such certification and request, the Indenture Trustee shall release, within 3 Business Days, the related Indenture Trustee's Document File to the Servicer. Expenses incurred in connection with any instrument of satisfaction or deed of reconveyance shall be payable only from and to the extent of servicing compensation and shall not be chargeable to the Principal and Interest Account or the Note Distribution Account. From time to time and as appropriate for the servicing or foreclosure of any Business Loan, the Indenture Trustee shall, upon request of the Servicer and delivery to the Indenture Trustee of a certification in the form of Exhibit I attached hereto signed by a Servicing Officer, release the related Indenture Trustee's Document File to the Servicer within 3 Business Days, and the Indenture Trustee shall execute such documents as shall be necessary to the prosecution of any such proceedings. Such servicing receipt shall obligate the Servicer to return the Indenture Trustee's Document File to the Indenture Trustee when the need therefor by the Servicer no longer exists, unless the Business Loan has been liquidated and the Liquidation Proceeds relating to the Business Loan have been deposited in the Principal and Interest Account and remitted to the Indenture Trustee for deposit in the Note Distribution Account or the Business File or such document has been delivered to an attorney, or to a public Indenture Trustee or other public official as required by law, for purposes of initiating or pursuing legal action or other proceedings for the foreclosure of the Mortgaged Property or other Collateral either judicially or non-judicially, and the Servicer has delivered to the Indenture Trustee a certificate of a Servicing Officer certifying as to the name and address of the Person to which such Business File or such document was delivered and the purpose or purposes of such delivery. Upon receipt of a certificate of a Servicing Officer stating that such Business Loan was liquidated, the servicing receipt shall be released by the Indenture Trustee to the Servicer. 44 The Indenture Trustee shall execute and deliver to the Servicer any court pleadings, requests for Indenture Trustee's sale or other documents necessary to the foreclosure or Indenture Trustee's sale in respect of a Mortgaged Property or other Collateral or to any legal action brought to obtain judgment against any Obligor on the Business Note or Mortgage or other agreement securing Collateral or to obtain a deficiency judgment, or to enforce any other remedies or rights provided by the Business Note or Mortgage or other agreement securing Collateral or otherwise available at law or in equity. Together with such documents or pleadings, the Servicer shall deliver to the Indenture Trustee a certificate of a Servicing Officer requesting that such pleadings or documents be executed by the Indenture Trustee and certifying as to the reason such documents or pleadings are required and that the execution and delivery thereof by the Indenture Trustee will not invalidate or otherwise affect the lien of the Mortgage or other agreement securing Collateral, except for the termination of such a lien upon completion of the foreclosure or Indenture Trustee's sale. The Indenture Trustee shall, upon receipt of a written request from a Servicing Officer, execute any document provided to the Indenture Trustee by the Servicer or take any other action requested in such request, that is, in the opinion of the Servicer as evidenced by such request, required by any state or other jurisdiction to discharge the lien of a Mortgage or other agreement securing Collateral upon the satisfaction thereof and the Indenture Trustee will sign and post, but will not guarantee receipt of, any such documents to the Servicer, or such other party as the Servicer may direct, within five Business Days of the Indenture Trustee's receipt of such certificate or documents. Such certificate or documents shall establish to the Indenture Trustee's satisfaction that the related Business Loan has been paid in full by or on behalf of the Obligor and that such payment has been deposited in the Principal and Interest Account. Section 6.03 Servicing Compensation. ---------------------- As compensation for its services hereunder, the Servicer shall be entitled to withdraw from the Principal and Interest Account or to retain from interest payments on the Business Loans the Servicer's Servicing Fee; provided, however, that the Servicer only may withdraw from the Principal and Interest Account the Servicer's Servicing Fee related to the Business Loan for which Servicing Fee was received. Additional servicing compensation in the form of assumption and other administrative fees, prepayment penalties, interest paid on funds on deposit in the Principal and Interest Account, interest paid and earnings realized on Permitted Instruments and amounts remitted pursuant to Section 5.03(c)(iii) shall be retained by or remitted to the Servicer to the extent not required to be remitted to the Indenture Trustee for deposit in the Note Distribution Account. The Servicer shall be required to pay all expenses incurred by it in connection with its servicing activities hereunder and shall not be entitled to reimbursement therefor except as specifically provided for herein. Section 6.04 Annual Statement as to Compliance. --------------------------------- The Servicer will deliver to the Indenture Trustee, the Rating Agencies and the Owner Trustee on or before March 31 of each year beginning March 31, 2000, an Officer's 45 Certificate stating that (i) the Servicer has fully complied with the provisions of Articles IV, V, VI and VII, (ii) a review of the activities of the Servicer during the preceding calendar year and of performance under this Agreement has been made under such officers' supervision, and (iii) to the best of such officers' knowledge, based on such review, the Servicer has fulfilled all its obligations under this Agreement throughout such year, or, if there has been a default in the fulfillment of any such obligation, specifying each such default known to such officers and the nature and status thereof including the steps being taken by the Servicer to remedy such default. Section 6.05 Annual Independent Public Accountants' Servicing ------------------------------------------------ Report ------ On or before March 31 of each year beginning March 31, 2000, the Servicer, at its expense, shall cause a firm of nationally recognized independent public accountants reasonably acceptable to the Indenture Trustee to furnish a letter or letters to the Indenture Trustee, the Owner Trustee and the Rating Agencies to the effect that such firm has with respect to the Servicer's overall servicing operations examined such operations in accordance with the requirements of the Uniform Single Audit Program for Mortgage Bankers, and stating such firm's conclusions relating thereto. Section 6.06 Indenture Trustee's and Owner Trustee's Right to ------------------------------------------------ Examine Servicer Records and Audit Operations --------------------------------------------- The Indenture Trustee, the Owner Trustee and the Rating Agencies shall have the right upon reasonable prior notice, during normal business hours and as often as reasonably required, to examine and audit any and all of the books, records or other information of the Servicer, whether held by the Servicer or by another on behalf of the Servicer, which may be relevant to the performance or observance by the Servicer of the terms, covenants or conditions of this Agreement. No amounts payable in respect of the foregoing shall be paid from the Trust Fund. Section 6.07 Reports to the Indenture Trustee; Principal and ----------------------------------------------- Interest Account Statements. --------------------------- Not later than 20 days after each Record Date, the Servicer shall forward to the Indenture Trustee a statement, certified by a Servicing Officer, setting forth the status of the Principal and Interest Account as of the close of business on the preceding Record Date and showing, for the period covered by such statement, the aggregate of deposits into the Principal and Interest Account for each category of deposit specified in Section 4.03, the aggregate of withdrawals from the Principal and Interest Account for each category of withdrawal specified in Section 4.04, the aggregate amount of permitted withdrawals not made in the related Due Period, and the amount of any Monthly Advances or payments of Compensating Interest, in each case, for the related Due Period. 46 ARTICLE VII REPORTS TO BE PROVIDED BY SERVICER ---------------------------------- Section 7.01 Financial Statements. -------------------- The Servicer understands that, in connection with the transfer of the Notes and the Certificates, Noteholders and Certificateholders may request that the Servicer make available to prospective Noteholders and Certificateholders the annual audited financial statements of the Servicer's parent (First International Bancorp, Inc. and any successor thereto) for one or more of the most recently completed five fiscal years for which such statements are publicly available, which request shall not be unreasonably denied. Such audited financial statements shall also be provided to the Rating Agencies by the Servicer upon request. The Servicer also agrees to make available on a reasonable basis to any prospective Noteholder a knowledgeable financial or accounting officer for the purpose of answering reasonable questions respecting recent developments affecting the Servicer or the financial statements of the Servicer and its parent (First International Bancorp, Inc. and any successor thereto) and to permit any prospective Noteholder to inspect the Servicer's servicing facilities during normal business hours for the purpose of satisfying such prospective Noteholder that the Servicer has the ability to service the Business Loans in accordance with this Agreement. 47 ARTICLE VIII THE SERVICER ------------ Section 8.01 Indemnification; Third Party Claims. ----------------------------------- (a) The Servicer agrees to indemnify and hold the Indenture Trustee, the Owner Trustee, and each Noteholder and Certificateholder harmless against any and all claims, losses, penalties, fines, forfeitures, legal fees and related costs, judgments, and any other costs, fees and expenses that the Indenture Trustee, the Owner Trustee, and any Noteholder or Certificateholder may sustain in any way related to the failure of the Servicer to perform its duties and service the Business Loans in compliance with the terms of this Agreement. The Servicer shall immediately notify the Indenture Trustee and the Owner Trustee if a claim is made by any party with respect to this Agreement, and the Servicer shall assume (with the consent of the Indenture Trustee) the defense of any such claim and pay all expenses in connection therewith, including reasonable counsel fees, and promptly pay, discharge and satisfy any judgment or decree which may be entered against the Servicer, the Indenture Trustee, the Owner Trustee, and/or a Noteholder or Certificateholder in respect of such claim. The Indenture Trustee may reimburse the Servicer from the Expense Account pursuant to Section 5.03(c)(i) for all amounts advanced by it pursuant to the preceding sentence except when the claim relates directly to the failure of the Servicer to service and administer the Business Loans in compliance with the terms of this Agreement. (b) The Seller agrees to indemnify and hold the Indenture Trustee, the Owner Trustee and each Noteholder and Certificateholder harmless against any and all claims, losses, penalties, fines, forfeitures, legal fees and related costs, judgments, and any other costs, fees and expenses that the Indenture Trustee, the Owner Trustee, and any Noteholder or Certificateholder may sustain in any way related to the failure of the Seller to perform its duties in compliance with the terms of this Agreement and in the best interests of the Noteholders and Certificateholders. The Seller shall immediately notify the Indenture Trustee and the Owner Trustee, if a claim is made by a third party with respect to this Agreement, and the Seller shall assume (with the consent of the Indenture Trustee) the defense of any such claim and pay all expenses in connection therewith, including reasonable counsel fees, and promptly pay, discharge and satisfy any judgment or decree which may be entered against the Servicer, the Seller, the Indenture Trustee, the Owner Trustee and/or a Noteholder or Certificateholder in respect of such claim. The Indenture Trustee may reimburse the Seller from the Expense Account pursuant to Section 5.03(c)(i) for all amounts advanced by it pursuant to the preceding sentence except when the claim relates directly to the Seller indemnification pursuant to Section 2.05 and Section 3.03 or to the failure of the Servicer, if it is an affiliate of the Seller, to perform its obligations to service and administer the Business Loans in compliance with the terms of this Agreement, or the failure of the Seller to perform its duties in compliance with the terms of this Agreement and in the best interests of the Noteholders and Certificateholders. 48 Section 8.02 Merger or Consolidation of the Servicer. --------------------------------------- The Servicer will keep in full effect its existence, rights and franchises as a corporation, bank or association and if required by applicable law will obtain and preserve its qualification to do business as a foreign entity, in each jurisdiction necessary to protect the validity and enforceability of this Agreement or any of the Business Loans and to perform its duties under this Agreement. Any Person into which the Servicer may be merged or consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Servicer shall be a party, or any Person succeeding to the business of the Servicer, shall be an established mortgage loan servicing institution that has a net worth of at least $15,000,000, and shall be the successor of the Servicer, hereunder, without the execution or filing of any paper or any further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding. The Servicer shall send notice of any such merger or consolidation to the Indenture Trustee and the Rating Agency. Subject to the satisfaction of the Rating Agency Condition, the Servicer is permitted to assign its rights and duties hereunder to, and such rights and duties can be assumed by, an affiliate of the Servicer having a net worth of at least $15,000,000 (the "Assignee") (in which case all of the provisions of this Agreement shall, to the same extent as they apply to the Servicer hereunder, apply to the Assignee rather than the Servicer), without the execution or filing of any paper or any further act on the part of any parties hereto, anything herein to the contrary notwithstanding. The Servicer shall send notice of any such assignment to the Indenture Trustee, the Owner Trustee, and the Rating Agencies. Section 8.03 Limitation on Liability of the Servicer and Others. -------------------------------------------------- The Servicer and any director, officer, employee or agent of the Servicer may rely on any document of any kind which it in good faith reasonably believes to be genuine and to have been adopted or signed by the proper authorities respecting any matters arising hereunder. Subject to the terms of Section 8.01 herein, the Servicer shall have no obligation to appear with respect to, prosecute or defend any legal action which is not incidental to the Servicer's duty to service the Business Loans in accordance with this Agreement. Section 8.04 Servicer Not to Resign. ---------------------- The Servicer shall not assign this Agreement nor resign from the obligations and duties hereby imposed on it except (i) by mutual consent of the Servicer, the Indenture Trustee, the Owner Trustee and the Majority Noteholders, or (ii) in connection with a merger, conversion or consolidation permitted pursuant to Section 8.02 and upon satisfaction of the Rating Agency Condition (in which case the Person resulting from the merger, conversion or consolidation shall 49 be the successor of the Servicer), or (iii) in connection with an assignment permitted pursuant to Section 8.02 and upon satisfaction of the Rating Agency Condition (in which case the Assignee shall be the successor of the Servicer) or (iv) upon the determination that the Servicer's duties hereunder are no longer permissible under applicable law or administrative determination and such incapacity cannot be cured by the Servicer. Any such determination permitting the resignation of the Servicer shall be evidenced by a written Opinion of Counsel (who may be counsel for the Servicer) to such effect delivered to the Indenture Trustee and the Owner Trustee, which Opinion of Counsel shall be in form and substance acceptable to the Indenture Trustee and the Owner Trustee. No such resignation shall become effective until a successor has assumed the Servicer's responsibilities and obligations hereunder in accordance with Section 9.02. 50 ARTICLE IX SERVICER TERMINATION -------------------- Section 9.01 Servicer Termination Events. --------------------------- (a) In case one or more of the following events (each a "Servicer Termination Event") by the Servicer shall occur and be continuing, that is to say: (i) (A) the failure by the Servicer to make any required Servicing Advance, to the extent such failure materially and adversely affects the interests of the Noteholders; (B) the failure by the Servicer to make any required Monthly Advance to the extent such failure materially and adversely affects the interests of the Noteholders; (C) the failure by the Servicer to remit any Compensating Interest to the extent such failure materially and adversely affects the interests of the Noteholders; or (D) any failure by the Servicer to remit to Noteholders, or to the Indenture Trustee for the benefit of the Noteholders, or to the Owner Trustee for the benefit of the Certificateholders, any payment required to be made under the terms of this Agreement which continues unremedied after the date upon which written notice of such failure, requiring the same to be remedied, shall have been given to the Servicer by the Indenture Trustee or to the Servicer and the Indenture Trustee by any Noteholder or Certificateholder; or (ii) failure by the Servicer or the Seller duly to observe or perform, in any material respect, any other covenants, obligations or agreements of the Servicer or the Seller as set forth in this Agreement, which failure continues unremedied for a period of 60 days after the date on which written notice of such failure, requiring the same to be remedied, shall have been given to the Servicer or the Seller, as the case may be, by the Indenture Trustee or to the Servicer, or the Seller, as the case may be, and the Indenture Trustee by any Noteholder or Certificateholder; or (iii) a decree or order of a court or agency or supervisory authority having jurisdiction for the appointment of a conservator or receiver or liquidator in any insolvency, readjustment of debt, marshaling of assets and liabilities or similar proceedings, or for the winding-up or liquidation of its affairs, shall have been entered against the Servicer and such decree or order shall have remained in force, undischarged or unstayed for a period of 60 days; or (iv) the Servicer shall consent to the appointment of a conservator or receiver or liquidator in any insolvency, readjustment of debt, marshaling of assets and liabilities or similar proceedings of or relating to the Servicer or of or relating to all or substantially all of the Servicer's property; or 51 (v) the Servicer shall admit in writing its inability to pay its debts as they become due, file a petition to take advantage of any applicable insolvency or reorganization statute, make an assignment for the benefit of its creditors, or voluntarily suspend payment of its obligations; (b) then, and in each and every such case, so long as a Servicer Termination Event shall not have been remedied, and in the case of clause (i) above (except for clause (i)(B)), if such Servicer Termination Event shall not have been remedied within 30 days after the Servicer has received notice of such Servicer Termination Event, (x) with respect solely to clause (i)(B) above, if such Monthly Advance is not made earlier than 4:00 p.m. New York time on the Determination Date, the Indenture Trustee shall give immediate telephonic notice of such failure to a Servicing Officer of the Servicer and, unless such failure is cured, either by receipt of payment or receipt of evidence (e.g., a wire ---- reference number communicated by the sending bank) that such funds have been sent, by 12:00 Noon New York time on the following Business Day, the Indenture Trustee shall immediately assume, pursuant to Section 9.02 hereof, the duties of a successor Servicer; and (y) in the case of clauses (i)(A), (i)(C), (i)(D), (iii), (iv) and (v), the Majority Noteholders, by notice in writing to the Servicer (except with respect to (iii), (iv) and (v) for which no notice is required) may, in addition to whatever rights such Noteholders may have at law or equity including damages, injunctive relief and specific performance, in each case immediately terminate all the rights and obligations of the Servicer under this Agreement and in and to the Business Loans and the proceeds thereof, as Servicer. Upon such receipt by the Servicer of a second written notice from the Majority Noteholders stating that they or it intend to terminate the Servicer as a result of such Servicer Termination Event, all authority and power of the Servicer under this Agreement, whether with respect to the Business Loans or otherwise, shall, subject to Section 9.02, pass to and be vested in the Indenture Trustee and the Indenture Trustee is hereby authorized and empowered to execute and deliver, on behalf of the Servicer, as attorney-in-fact or otherwise, any and all documents and other instruments and do or cause to be done all other acts or things necessary or appropriate to effect the purposes of such notice of termination, including, but not limited to, the transfer and endorsement or assignment of the Business Loans and related documents. The Servicer agrees to cooperate with the Indenture Trustee in effecting the termination of the Servicer's responsibilities and rights hereunder, including, without limitation, the transfer to the Indenture Trustee for administration by it of all amounts which shall at the time be credited by the Servicer to each Principal and Interest Account or thereafter received with respect to the Business Loans. Section 9.02 Indenture Trustee to Act; Appointment of Successor -------------------------------------------------- On and after the time of the Servicer's immediate termination, or the Servicer's receipt of notice if required by Section 9.01, or at any time if the Indenture Trustee receives the resignation of the Servicer evidenced by an Opinion of Counsel pursuant to Section 8.04 or the Servicer is removed as Servicer pursuant to this Article IX, the Indenture Trustee shall be the successor in all respects to the Servicer in its capacity as Servicer under this Agreement and the transactions set forth or provided for herein and shall be subject to all the responsibilities, duties 52 and liabilities relating thereto placed on the Servicer by the terms and provisions hereof; provided, however, that the Indenture Trustee shall not be liable for any actions of any Servicer prior to it, and that the Indenture Trustee shall not be obligated to make advances or payments pursuant to Sections 4.03, 4.10, 5.03, 5.10 or 5.11 but only to the extent the Indenture Trustee determines reasonably and in good faith that such advances would not be recoverable, such determination to be evidenced with respect to each such advance by a certification of a Responsible Officer of the Indenture Trustee. As compensation therefor, the Indenture Trustee shall be entitled to all funds relating to the Business Loans which the Servicer would have been entitled to receive from the Principal and Interest Account pursuant to Section 4.04 if the Servicer had continued to act as Servicer hereunder, together with other servicing compensation in the form of assumption fees, late payment charges or otherwise as provided in Sections 5.01 and 5.03. Notwithstanding the above, the Indenture Trustee shall, if it is unable to so act, appoint, or petition a court of competent jurisdiction to appoint, any established servicing institution acceptable to the Rating Agencies that has a net worth of not less than $15,000,000, as the successor to the Servicer hereunder in the assumption of all or any part of the responsibilities, duties or liabilities of the Servicer hereunder. Any collections received by the Servicer after removal or resignation shall be endorsed by it to the Indenture Trustee and remitted directly to the Indenture Trustee or, at the direction of the Indenture Trustee, to the successor servicer. The compensation of any successor servicer (including, without limitation, the Indenture Trustee) so appointed shall be the aggregate Servicing Fees and other servicing compensation in the form of assumption fees, late payment charges or otherwise. In the event the Indenture Trustee is required to solicit bids as provided herein, the Indenture Trustee shall solicit, by public announcement, bids from banks and mortgage servicing institutions meeting the qualifications set forth above. Such public announcement shall specify that the successor servicer shall be entitled to the full amount of the aggregate Servicing Fees as servicing compensation, together with the other servicing compensation in the form of assumption fees, late payment charges or otherwise. Within thirty days after any such public announcement, the Indenture Trustee shall negotiate and effect the sale, transfer and assignment of the servicing rights and responsibilities hereunder to the qualified party submitting the highest qualifying bid. The Indenture Trustee shall deduct from any sum received by the Indenture Trustee from the successor to the Servicer in respect of such sale, transfer and assignment all costs and expenses of any public announcement and of any sale, transfer and assignment of the servicing rights and responsibilities hereunder and the amount of any unreimbursed Servicing Advances and Monthly Advances. After such deductions, the remainder of such sum shall be paid by the Indenture Trustee to the Servicer at the time of such sale, transfer and assignment to the Servicer's successor. The Indenture Trustee and such successor shall take such action, consistent with this Agreement, as shall be necessary to effectuate any such succession. The Servicer agrees to cooperate with the Indenture Trustee and any successor servicer in effecting the termination of the Servicer's servicing responsibilities and rights hereunder and shall promptly provide the Indenture Trustee or such successor servicer, as applicable, all documents and records reasonably requested by it to enable it to assume the Servicer's functions hereunder and shall promptly also transfer to the Indenture Trustee or such successor servicer, as applicable, all amounts which then have been or should have been 53 deposited in the Principal and Interest Account or Spread Account by the Servicer or which are thereafter received with respect to the Business Loans. Neither the Indenture Trustee nor any other successor servicer shall be held liable by reason of any failure to make, or any delay in making, any distribution hereunder or any portion thereof caused by (i) the failure of the Servicer to deliver, or any delay in delivering, cash, documents or records to it, or (ii) restrictions imposed by any regulatory authority having jurisdiction over the Servicer hereunder. No appointment of a successor to the Servicer hereunder shall be effective until written notice of such proposed appointment shall have been provided by the Indenture Trustee to each Noteholder and Certificateholder and the Indenture Trustee shall have consented thereto. The Indenture Trustee shall not resign as servicer until a successor servicer has been appointed. Pending appointment of a successor to the Servicer hereunder, the Indenture Trustee shall act in such capacity as hereinabove provided. In connection with such appointment and assumption, the Indenture Trustee may make such arrangements for the compensation of such successor out of payments on Business Loans as it and such successor shall agree; provided, however, that no such compensation shall be in excess of that permitted the Servicer pursuant to Section 5.03 or otherwise as provided in this Agreement. The Servicer, the Indenture Trustee and such successor shall take such action, consistent with this Agreement, as shall be necessary to effectuate any such succession. Section 9.03 Waiver of Defaults. ------------------ The Majority Noteholders may, and subject to satisfaction of the Rating Agency Condition, waive any events permitting removal of the Servicer pursuant to this Article IX; provided, however, that the Majority Noteholders may not waive a default in making a required distribution on a Note without the consent of the holder of such Note. Upon any waiver of a past default, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been remedied for every purpose of this Agreement. No such waiver shall extend to any subsequent or other default or impair any right consequent thereto except to the extent expressly so waived. Section 9.04. Control by Majority Noteholders. ------------------------------- The Majority Noteholders may direct the time, method and place of conducting any proceeding relating to the Trust or the Notes or for any remedy available to the Indenture Trustee or the Owner Trustee with respect to the Trust or exercising any trust or power conferred on the Indenture Trustee or the Owner Trustee with respect to the Trust provided that: -------- ---- (i) such direction shall not be in conflict with any rule of law or with this Agreement; (ii) the Indenture Trustee shall have been provided with indemnity satisfactory to it; and 54 (iii) the Indenture Trustee or the Owner Trustee may take any other action deemed proper by the Indenture Trustee or the Owner Trustee which is not inconsistent with such direction; provided, -------- however, that the Indenture Trustee or the Owner Trustee, as the case ------- may be, need not take any action which it determines might involve it in liability or may be unjustly prejudicial to the Holders not so directing. 55 ARTICLE X TERMINATION ----------- Section 10.01 Termination. ----------- This Agreement shall terminate upon notice to the Indenture Trustee of the earlier of the following events: (a) the final payment or other liquidation of the last Business Loan or the disposition of all property acquired upon foreclosure or deed in lieu of foreclosure of any Business Loan and the remittance of all funds due thereunder, or (b) mutual consent of the Servicer and all Noteholders and Certificateholders in writing; provided, however, that in no event shall this Agreement terminate later than twenty-one years after the death of the last surviving lineal descendant of Joseph P. Kennedy, late Ambassador of the United States to the Court of St. James, alive as of the date hereof. The Servicer may, at its option, terminate this Agreement on any date on which the Pool Principal Balance is less than 5% of the sum of (i) the Original Pool Principal Balance and (ii) the Original Pre-Funded Amount by purchasing, on the next succeeding Remittance Date, all of the Business Loans and Foreclosed Properties at a price equal to the sum of (i) 100% of the then outstanding Aggregate Class A, Aggregate Class M-1, Aggregate Class M-2 and Aggregate Class B Note Principal Balances, and (ii) 30 days' interest thereon at the then applicable weighted average Class A, Class M-1, Class M-2 and Class B Remittance Rates, as the case may be (the "Termination Price"). Notwithstanding the prior sentence, if at the time the Servicer determines to exercise such option the unsecured long-term debt obligations of the Servicer are not rated at least Baa3 by Moody's, if the Rating Agencies are still rating the Notes, the Servicer shall give the Rating Agencies prior written notice of the Servicer's determination to exercise such option and shall not exercise such option, without the consent of the Rating Agencies, prior to furnishing the Rating Agencies with an Opinion of Counsel, in form and substance reasonably satisfactory to the Rating Agencies, that the exercise of such option would not be deemed a fraudulent conveyance by the Servicer. Notice of any termination, specifying the Remittance Date upon which the Trust Fund will terminate and that the Noteholders shall surrender their Notes to the Indenture Trustee for payment of the final distribution and cancellation shall be given promptly by the Servicer by letter to Noteholders mailed during the month of such final distribution before the Determination Date in such month, specifying (i) the Remittance Date upon which final payment of the Notes will be made upon presentation and surrender of Notes at the office of the Indenture Trustee therein designated, (ii) the amount of any such final payment and (iii) that the Record Date otherwise applicable to such Remittance Date is not applicable, payments being made only upon presentation and surrender of the Notes at the office of the Indenture Trustee therein specified. The Servicer shall give such notice to the Indenture Trustee therein specified. The Servicer shall give such notice to the Indenture Trustee and the Rating Agencies at the time such notice is given to Noteholders. Any obligation of the Servicer to pay amounts due to the Indenture Trustee shall survive the termination of this Agreement. 56 Section 10.02 Accounting Upon Termination of Servicer --------------------------------------- Upon termination of the Servicer under Article IX hereof, the Servicer shall: (a) deliver to its successor or, if none shall yet have been appointed, to the Indenture Trustee the funds in any Principal and Interest Account; (b) deliver to its successor or, if none shall yet have been appointed, to the Indenture Trustee all Business Files and related documents and statements held by it hereunder and a Business Loan portfolio computer diskette; (c) deliver to its successor or, if none shall yet have been appointed, to the Indenture Trustee and, upon request, to the Noteholders a full accounting of all funds, including a statement showing the Monthly Payments collected by it and a statement of monies held in trust by it for the payments or charges with respect to the Business Loans; and (d) execute and deliver such instruments and perform all acts reasonably requested in order to effect the orderly and efficient transfer of servicing of the Business Loans to its successor and to more fully and definitively vest in such successor all rights, powers, duties, responsibilities, obligations and liabilities of the Servicer under this Agreement. 57 ARTICLE XI MISCELLANEOUS PROVISIONS ------------------------ Section 11.01 Acts of Noteholders. ------------------- Except as otherwise specifically provided herein, whenever Noteholder action, consent or approval is required under this Agreement, such action, consent or approval shall be deemed to have been taken or given on behalf of, and shall be binding upon, all Noteholders if the Majority Noteholders agree to take such action or give such consent or approval. Section 11.02 Amendment. --------- (a) This Agreement may be amended from time to time by the Servicer and the Owner Trustee with the consent of the Indenture Trustee (which consent may not be unreasonably withheld), without notice to or consent of the Noteholders or Certificateholders, to cure any ambiguity, to correct or supplement any provisions herein, to comply with any changes in the Code, or to make any other provisions with respect to matters or questions arising under this Agreement which shall not be inconsistent with the provisions of this Agreement; provided, however, that such action shall not, as evidenced by an Opinion of Counsel delivered to the Indenture Trustee, adversely affect the interests of any Noteholder or Certificateholder or any other party and further provided that no such amendment shall reduce in any manner the amount of, or delay the timing of, any amounts received on Business Loans which are required to be distributed on any Note Certificate without the consent of the Holder of such Note or Certificate, or change the rights or obligations of any other party hereto without the consent of such party. (b) This Agreement may be amended from time to time by the Servicer and the Owner Trustee with the consent of the Indenture Trustee and the consent of the Majority Noteholders, for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement or of modifying in any manner the rights of the Holders such amendment shall reduce in any manner the amount of, or delay the timing of, any amounts which are required to be distributed on any Note without the consent of the Holder of such Note or reduce the percentage of Holders which are required to consent to any such amendment without the consent of the Holders of 100% of the Notes and Certificates affected thereby and, provided further, that no amendment affecting only one or more Classes of Notes shall require the approval of holders of Notes of the other Classes. (c) It shall not be necessary for the consent of Holders under this Section to approve the particular form of any proposed amendment, but it shall be sufficient if such consent shall approve the substance thereof. Section 11.03 Recordation of Agreement. ------------------------ 58 To the extent permitted by applicable law, this Agreement is subject to recordation in all appropriate public offices for real property records in all of the counties or other comparable jurisdictions in which any or all of the properties subject to the Mortgages are situated, and in any other appropriate public recording office or elsewhere, such recordation to be effected by the Servicer at the Noteholders' expense on direction of the Majority Noteholders, but only when accompanied by an Opinion of Counsel to the effect that such recordation materially and beneficially affects the interests of the Noteholders or is necessary for the administration or servicing of the Business Loans. Section 11.04 Duration of Agreement. --------------------- This Agreement shall continue in existence and effect until terminated as herein provided. SECTION 11.05 GOVERNING LAW. ------------- THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS, WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. Section 11.06 Notices. ------- All demands, notices and communications hereunder shall be in writing and shall be deemed to have been duly given if personally delivered at or mailed by overnight mail, certified mail or registered mail, postage prepaid, to (i) in the case of the Servicer and the Seller, First National Bank of New England, One Commercial Plaza, Hartford, Connecticut 06103, Attention: Theodore J. Horan, or such other addresses as may hereafter be furnished to the Noteholders in writing by the Seller and the Servicer, (ii) in the case of the Indenture Trustee, Marine Midland Bank, 140 Broadway, New York, New York 10005, 12th Floor, Attention: Corporate Trust Department, (iii) in the case of the Owner Trustee, Wilmington Trust Company, Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890, (iv) in the case of the Noteholders, as set forth in the Note Register, (v) in the case of Moody's, to Moody's Investors Service, ABS Monitoring Department, 99 Church Street, 4th Floor, New York, New York 10007 and (vi) in the case of Duff & Phelps, Duff & Phelps Credit Rating Co., 55 East Monroe Street, Chicago, Illinois 60603, Attention: ABS Monitoring Group. Any such notices shall be deemed to be effective with respect to any party hereto upon the receipt of such notice by such party, except that notices to the Noteholders shall be effective upon mailing or personal delivery. Section 11.07 Severability of Provisions. -------------------------- 59 If any one or more of the covenants, agreements, provisions or terms of this Agreement shall be held invalid for any reason whatsoever, then such covenants, agreements, provisions or terms shall be deemed severable from the remaining covenants, agreements, provisions or terms of this Agreement and shall in no way affect the validity or enforceability of the other covenants, agreements, provisions or terms of this Agreement. Section 11.08 No Partnership. -------------- Nothing herein contained shall be deemed or construed to create a co- partnership or joint venture between the parties hereto and the services of the Servicer shall be rendered as an independent contractor and not as agent for the Noteholders. Section 11.09 Counterparts. ------------ This Agreement may be executed in one or more counterparts and by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed to be an original; such counterparts, together, shall constitute one and the same agreement. Section 11.10 Successors and Assigns. ---------------------- This Agreement shall inure to the benefit of and be binding upon the Seller and the Servicer, the Indenture Trustee and the Noteholders and their respective successors and assigns. Section 11.11 Headings. -------- The headings of the various sections of this Agreement have been inserted for convenience of reference only and shall not be deemed to be part of this Agreement. Section 11.12 Notification to Rating Agencies. ------------------------------- The Indenture Trustee shall give prompt notice to the Rating Agencies of the occurrence of any of the following events of which it has received notice: (1) any modification or amendment to this Agreement, (2) any change of the Indenture Trustee, the Servicer or Paying Agent, (3) any Event of Default, and (4) the final payment of all the Notes. The Servicer shall promptly deliver to the Rating Agencies a copy of each of the Servicer's Certificates. Further, the Servicer shall give prompt notice to the Rating Agencies if the Servicer or any of its affiliates acquire any Notes. Section 11.13. Limitation of Liability. ----------------------- It is expressly understood and agreed by the parties hereto that (a) this Agreement is executed and delivered by Wilmington Trust Company, not individually or personally but solely as Owner Trustee on behalf of the Issuer under the Trust Agreement, in the exercise of the 60 powers and authority conferred and vested in it, (b) each of the representations, undertaking and agreements herein made on the part of the Issuer is made and intended not as personal representations, undertakings and agreements by Wilmington Trust Company but is made and intended for the purpose of binding only the Issuer, (c) nothing herein contained shall be construed as creating any liability on Wilmington Trust Company individually or personally, to perform any covenant either expressed or implied contained herein, all such liability, if any, being expressly waived by the parties to the Agreement and by any person claiming by, through or under them and (d) under no circumstances shall Wilmington Trust Company be personally liable for the payment of any indebtedness or expenses of the Issuer or be liable for the payment of any indebtedness or expenses of the Issuer or be liable for the breach or failure of any obligation, representation, warranty or covenant made or undertaking by the Issuer under this Agreement or any related documents. [REMAINDER OF PAGE INTENTIONALLY BLANK] 61 IN WITNESS WHEREOF, the Seller, the Servicer and the Trust have caused their names to be signed hereto by their respective officers thereunto duly authorized as of the day and year first above written. FIRST NATIONAL BANK OF NEW ENGLAND as Seller and Servicer By: ________________________________ Name: Title: FNBNE BUSINESS LOAN TRUST 1998-A, By: Wilmington Trust Company, not in its individual capacity but solely as Owner Trustee on behalf of the Trust By: ________________________________ Name: Title: 62 Accepted and Agreed to: MARINE MIDLAND BANK, not in its individual capacity, but solely as Indenture Trustee By:_________________________________ Name: Title: 63 STATE OF NEW YORK ) : ss.: COUNTY OF NEW YORK ) On the 30th day of December, 1998 before me, a Notary Public in and for said State, personally appeared Emmett R. Harmon known to me to be an officer of Wilmington Trust Company, the trust company that executed the within instrument, and also known to me to be the person who executed it on behalf of said banking corporation, and acknowledged to me that such banking corporation executed the within instrument. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year in this certificate first above written. ____________________ Notary Public My Commission expires ___________ STATE OF __________ ) : ss.: COUNTY OF ________ ) On the 30th day of December, 1998 before me, a Notary Public in and for the State of ________, personally appeared ______________ known to me to be the ________________________ of First National Bank of New England, one of the corporations that executed the within instrument and also known to me to be the person who executed it on behalf of said corporation, and acknowledged to me that such corporation executed the within instrument. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year in this certificate first above written. ______________________ Notary Public My Commission expires ________ EXHIBIT A CONTENTS OF BUSINESS FILE With respect to each Business Loan, the Business File shall include a copy of any of the following items delivered to the Indenture Trustee: 1. The original Business Note, endorsed by means of an allonge as follows: "Pay to the order of Marine Midland Bank, and its successors and assigns, as Indenture trustee under that certain Indenture dated as of December 1, 1998, relating to FNBNE Business Loan Trust 1998-A, without recourse" and signed, by facsimile or manual signature, in the name of the Seller by a Responsible Officer, with all prior and intervening endorsements showing a complete chain of endorsement from the originator to the Seller, if the Seller was not the originator; provided, -------- however, that in lieu of the original Business Note relating to one Business Loan, where the original Business Note has been lost the Seller may deliver a lost note affidavit and, if a copy exists, a copy of the original Business Note; 2. With respect to those Business Loans secured by Mortgaged Properties, either: (i) the original Mortgage, with evidence of recording thereon, (ii) a copy of the Mortgage certified as a true copy by a Responsible Officer of the Seller where the original has been transmitted for recording until such time as the original is returned by the public recording office or duly licensed title or escrow officer or (iii) a copy of the Mortgage certified by the public recording office in those instances where the original recorded Mortgage has been lost; 3. With respect to those Business Loans secured by Mortgaged Properties, either: (i) the original Assignment of Mortgage from the Seller endorsed as follows: "Marine Midland Bank, ("Assignee") its successors and assigns, as Indenture Trustee under the Indenture dated as of December 1, 1998 relating to FNBNE Business Loan Trust 1998-A" with evidence of recording thereon (provided, however, that where permitted under the laws of the jurisdiction wherein the Mortgaged Property is located, the Assignment of Mortgage may be A-1 effected by one or more blanket assignments for Business Loans secured by Mortgaged Properties located in the same county), or (ii) a copy of such Assignment of Mortgage certified as a true copy by a Responsible Officer of the Seller where the original has been transmitted for recording (provided, however, that where -------- ------- the original Assignment of Mortgage is not being delivered to the Trustee, each such Responsible Officer may complete one or more blanket certificates attaching copies of one or more Assignments of Mortgage relating to the Mortgages originated by the Seller); 4. With respect to those Business Loans secured by Mortgaged Properties, either: (i) originals of all intervening assignments, if any, showing a complete chain of title from the originator to the Seller, including warehousing assignments, with evidence of recording thereon if such assignments were recorded, (ii) copies of any assignments certified as true copies by a Responsible Officer of the Seller where the originals have been submitted for recording until such time as the originals are returned by the public recording officer, or (iii) copies of any assignments certified by the public recording office in any instances where the original recorded assignments have been lost; 5. With respect to those Business Loans secured by Mortgaged Properties, either: (i) originals of all title insurance policies relating to the Mortgaged Properties to the extent the Seller obtained such policies or (ii) copies of any title insurance policies or other evidence of lien position, including but not limited to PIRT policies, limited liability reports and lot book reports, to the extent the Seller obtains such policies or other evidence of lien position, certified as true by the Seller; 6. With respect to these Business Loans secured by other items of Collateral, the original or certified copy of all filed UCC financing statements securing such Collateral naming the Seller as "Secured Party;" 7. For all Business Loans, blanket assignment of all Collateral securing the Business Loan, including A-2 without limitation, all rights under applicable guarantees and insurance policies; 8. For all Business Loans, irrevocable power of attorney of the Seller to the Trustee to execute, deliver, file or record and otherwise deal with the Collateral for the Business Loans in accordance with the Agreement. The power of attorney will be delegable by the Trustee to the Servicer and any successor servicer and will permit the Trustee or its delegate to prepare, execute and file or record UCC financing statements and notices to insurers; and 9. For all Business Loans, blanket UCC-1 financing statements identifying by type all Collateral for the Business Loans in the Business Loan Pool and naming the Trustee as Secured Party and the Seller as the Debtor. The UCC-1 financing statements will be filed promptly following the Closing Date in New York and Connecticut and will be in the nature of protective notice filings rather than a true financing statement. A-3 EXHIBIT B [INTENTIONALLY OMITTED] B-1 EXHIBIT C PRINCIPAL AND INTEREST ACCOUNT LETTER AGREEMENT (date) To: Marine Midland Bank 140 Broadway, 12th Floor New York, New York 10005 (the "Depository") As "Servicer" under the Sale and Servicing Agreement, dated as of December 1, 1998, relating to the FNBNE Business Loan Notes, Series 1998-A (the "Agreement"), we hereby authorize and request you to establish an account, as a Principal and Interest Account pursuant to Section 4.03 of the Agreement, to be designated as "First National Bank of New England, as Servicer, in trust for the registered holders of FNBNE Business Loan Notes, Series 1998-A." All deposits in the account shall be subject to withdrawal therefrom by order signed by the Servicer. You may refuse any deposit which would result in violation of the requirement that the account be fully insured as described below. This letter is submitted to you in duplicate. Please execute and return one original to us. FIRST NATIONAL BANK OF NEW ENGLAND By:_______________________________ Name: Title: C-1 The undersigned, as Depository, hereby certifies that the above described account has been established under Account Number _____________, at the office of the depository indicated above, and agrees to honor withdrawals on such account as provided above. The amounts deposited at any time in the account will be insured to the maximum amount provided by applicable law by the Federal Deposit Insurance Corporation. MARINE MIDLAND BANK ------------------- (Name of Depository) By:______________________________ Name: Title: C-2 EXHIBIT D [Intentionally Omitted] D-1 EXHIBIT E [INTENTIONALLY OMITTED] E-1 EXHIBIT F FORM OF INITIAL CERTIFICATION ___________, 1998 [Seller] [Servicer] Re: Sale and Servicing Agreement FNBNE Business Notes, Series 1998-A, dated as of December 1, 1998 between FNBNE Business Loan Trust 1998-A,and First National Bank of New England,as Seller and Servicer ------------------------------------- Gentlemen: In accordance with Section 2.05 of the above-captioned Sale and Servicing Agreement (the "Agreement"), the undersigned, as Indenture Trustee, hereby certifies that, except as noted on the attachment hereto, if any (the "Loan Exception Report"), it has received for each Business Loan, a Business Note and a Business File and does declare that the Indenture Trustee will hold such documents and any amendments, replacements or supplements thereto, for the benefit of the Noteholders and the Certificateholders. The documents contained therein appear to bear original signatures. Capitalized but undefined terms have the meanings set forth in the Sale and Servicing Agreement. The Indenture Trustee has made no independent examination of any such documents beyond the review specifically required in the above-referenced Sale and Servicing Agreement. F-1 The Indenture Trustee makes no representations as to: (i) the validity, legality, sufficiency, enforceability or genuineness of any such documents or any of the Business Loans identified on the Business Loan Schedule, or (ii) the collectibility, insurability, effectiveness or suitability of any such Business Loan. MARINE MIDLAND BANK, as Indenture Trustee By:______________________________ Name: Susan Barstock Title: Assistant Vice President F-2 EXHIBIT F-1 FORM OF INTERIM CERTIFICATION _________, 1998 [Servicer] [Seller] Re: Sale and Servicing Agreement FNBNE Business Loan Notes, Series 1998-A, dated as of December 1, 1998 between FNBNE Business Loan Trust 1998-A and First National Bank of New England, as Seller and Servicer ---------------------------------------------------------------- Gentlemen: In accordance with Section 2.05 of the above-captioned Sale and Servicing Agreement (the "Agreement"), the undersigned, as Indenture Trustee, hereby certifies that, except as noted on the attachment hereto, if any (the "Loan Report"), it has received each of the documents required to be delivered to it pursuant to Section 2.04 of the Agreement with respect to each [Initial] [Subsequent] Business Loan listed in the Business Schedules and the documents contained therein appear to bear original signatures. The Indenture Trustee has made no independent examination of any such documents beyond the review specifically required in the above-referenced Sale and Servicing Agreement. F-1-1 The Indenture Trustee makes no representations as to: (i) the validity, legality, enforceability or genuineness of any such documents or any of the Business Loans identified on the Business Loan Schedule, or (ii) the collectibility, insurability, effectiveness or suitability of any such Business Loan. MARINE MIDLAND BANK, as Indenture Trustee By:______________________________ Name: Susan Barstock Title: Assistant Vice President F-1-2 EXHIBIT F-2 FORM OF FINAL CERTIFICATION [date] [Servicer] [Seller] Re: Sale and Servicing Agreement dated as of December 1, 1998 between FNBNE Business Loan Trust 1998-A and First National Bank of New England, as Seller and Servicer, relating to FNBNE Business Loan, Series 1998-A ------------------------------------------------------------- Gentlemen: In accordance with Section 2.05 of the above-captioned Sale and Servicing Agreement, the undersigned, as Indenture Trustee, hereby certifies that, except as noted on the attachment hereto, as to each Business Loan listed in the Business Loan Schedule (other than any Business Loan paid in full or listed on the attachment hereto) it has reviewed the documents delivered to it pursuant to Section 2.04 of the Sale and Servicing Agreement and has determined that (i) all such documents are in its possession, (ii) such documents have been reviewed by it and have not been mutilated, damaged, torn or otherwise physically altered and relate to such Business Loan and (iii) based on its examination, and only as to the foregoing documents, the information set forth in the Business Loan Schedule respecting such Business Loan is correct. MARINE MIDLAND BANK, as Indenture Trustee By:______________________________ Name: Susan Barstock Title: Assistant Vice President F-2-1 EXHIBIT G [INTENTIONALLY OMITTED] G-1 EXHIBIT H BUSINESS LOAN SCHEDULE H-1 EXHIBIT I REQUEST FOR RELEASE OF DOCUMENTS To: Marine Midland Bank Corporate Trust Administration 140 Broadway, 12th Floor New York, New York 10005-1180 Re: Sale and Servicing Agreement relating to FNBNE Business Loan Notes, Series 1998-A, dated as of December 1, 1998 ---------------- In connection with the administration of the pool of Business Loans held by you, we request the release, and acknowledge receipt, of the (Trustee's Business File/[specify document]) for the Business Loan described below, for the reason indicated. Obligor's Name, Address & Zip Code: - ---------------------------------- Business Loan Number: - -------------------- Reason for Requesting Documents (check one) - ------------------------------- ____ 1. Business Loan Paid in Full (Servicer hereby certifies that all amounts received in connection therewith have been credited to the Principal and Interest Account and remitted to the Trustee for deposit into the Note Distribution Account pursuant to the Sale and Servicing Agreement.) ____ 2. Business Loan Liquidated (Servicer hereby certifies that all proceeds of foreclosure, insurance or other liquidation have been finally received and credited to the Principal and Interest Account and remitted to the Indenture Trustee for deposit into the Note Distribution Account pursuant to the Sale and Servicing Agreement.) ____ 3. Business Loan in Foreclosure _____4. Business Loan Repurchased Pursuant to Section 10.01 of the Sale and Servicing Agreement. I-1 _____5. Business Loan Repurchased or Substituted Pursuant to Article II or III of the Sale and Servicing Agreement (Servicer hereby certifies that the repurchase price or Substitution Adjustment has been credited to the Principal and Interest Account and/or remitted to the Indenture Trustee for deposit into the Note Distribution Account pursuant to the Sale and Servicing Agreement.) ____ 6. Collateral Being Released Pursuant to Section 6.02(f) of the Sale and Servicing Agreement. ____ 7. Other (explain) ____________________________ _________________________________ If box 1 or 2 above is checked, and if all or part of the Indenture Trustee's Business File was previously released to us, please release to us our previous receipt on file with you, as well as any additional documents in your possession relating to the above specified Business Loan. If box 3, 4, 5, 6 or 7 above is checked, upon our return of all of the above documents to you, please acknowledge your receipt by signing in the space indicated below, and returning this form. FIRST NATIONAL BANK OF NEW ENGLAND, As Servicer By:____________________________ Name: William H. McGaughey Date: Documents returned to Indenture Trustee: Marine Midland Bank -------------------- Indenture Trustee By: Susan Barstock Date: I-2 EXHIBIT J FORM OF LIQUIDATION REPORT Customer Name: Account number: Original Principal Balance: 1. Liquidation Proceeds Principal Prepayment $________ Property Sale Proceeds _________ Insurance Proceeds ________ Other (Itemize) ________ 2. Servicing Advances $________ Monthly Advances ________ Total Advances $________ 3. Net Liquidation Proceeds $________ (Line 1 minus Line 2) 4. Principal Balance of the Business Loan on date of liquidation $________ 5. Realized (Loss) or Gain $________ (Line 3 minus Line 4) J-1 EXHIBIT K FORM OF DELINQUENCY REPORT DELINQUENCY, REO PROPERTY AND FORECLOSURE INFORMATION
Total Ranges Total Gross Unguaranteed Series (in days) Acct Loan Amount Interest Amount Ungtd Pct - ---------------------------------------------------------------------------------------------- 1 to 29 Days 30 to 59 Days 60 to 89 Days 90 to 179 Days 180 to 719 Days 720 and Over Foreclosure REO Property Total Delinquency Outstanding by Category
K-1 EXHIBIT L SERVICER'S MONTHLY COMPUTER TAPE FORMAT The computer tape to be delivered to the Indenture Trustee pursuant to Section 5.09 shall contain the following information for each Business Loan as of the related Record Date: 1. Name of the Obligor, address of the Mortgaged Property, if applicable, and Account Number. 2. The Business Loan Interest Rate. 3. The Monthly Payment. 4. The dates on which the payments were received for the applicable Due Period and the amount of such payments segregated into the following categories; (a) total interest received (including Servicing Fee); (b) principal received; (c) Curtailments received; and (d) Principal Prepayments received. 5. The Business Loan principal balance at the beginning and end of the period. 6. The original disbursement date and current maturity date. 7. A "Delinquency Flag" noting that the Business Loan is current or delinquent. If delinquent, state the date on which the last payment was received. 8. For any Business Loan that is not either 24 months delinquent or otherwise determined to be uncollectible, a "Foreclosure Flag" noting that the Business Loan is the subject of foreclosure proceedings. 9. For any Business Loan that is not either 24 months delinquent or otherwise determined to be uncollectible, an "REO Flag" noting that the Mortgaged Property is an REO Property. L-1 10. A "Liquidated Business Loan Flag" noting that the Business Loan is a Liquidated Business Loan and the Net Liquidation Proceeds received in connection therewith. 11. Any additional information reasonably requested by the Indenture Trustee. L-2 EX-13.1 9 1998 ANNUAL REPORT TO SHAREHOLDERS EXHIBIT 13.1 Financing Manufacturers Worldwide(R) [GRAPHIC APPEARS HERE] First International Bancorp First International Bank 1998 Annual Report Corporate Profile First International Bancorp, Inc. and First International Bank, N.A., both headquartered in Hartford, Connecticut, specialize in providing innovative credit, trade and financial solutions to small and medium size manufacturing companies located in the United States and international emerging markets. The Company offers flexible and attractive terms to borrowers and is a national leader in the use of commercial loan guarantee programs made available by the U. S. Small Business Administration, the U. S. Department of Agriculture and the Export-Import Bank of the U. S. The Company maintains preferred status under these programs in several jurisdictions and received Ex-Im Bank's "Small Business Bank of the Year" award for 1997. [LOGO OF FIRST INTERNATIONAL BANK APPEARS HERE] www.FirstInterBank.com First International Bancorp, Inc. Index to Consolidated Financial Statements 2 Letter to Shareholders and Clients 4 Summary Financial Highlights 5 Management's Discussion and Analysis of Financial Condition and Results of Operations 21 Report of Independent Accountants 22 Consolidated Balance Sheets as of December 31, 1998 and 1997 23 Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996 24 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996 25 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 26 Notes to Consolidated Financial Statements 44 Directors and Officers and General Information 1 To Our Shareholders and Clients I am pleased to report that 1998 was a year of excellent performance and major strategic accomplishments for First International Bancorp, Inc. and First International Bank. Our Company's net income increased approximately 60% to $7.0 million ($.86 per share), which represents the fifth consecutive year of record earnings. Return on average equity for 1998 was 16% calculated on an equity base that had grown significantly following our September 1997 public offering. As a reflection of our Company's continuing geographical expansion and commitment to financing small and medium size manufacturers worldwide, we adopted a new logo and changed the banking subsidiary's name to First International Bank from First National Bank of New England in early 1999. We have also launched a new interactive website, www.FirstInterBank.com, and invite you to visit this useful source of information about our Company's products, resources and initiatives. In 1998 the Company once again achieved the status of the largest combined user in the United States of the three primary federal commercial loan guarantee programs. First International Bank underwrote $121 million in SBA 7(a) loans, ranking 10th in the nation overall and 4th among banks. The Company finished second nationally under the USDA's Business & Industry program, with $37 million in loan originations. For the second year in a row, we were also the largest user of Ex-Im Bank guarantee and insurance programs in the United States measured by number of transactions, with 103. The Bank enjoys SBA preferred lender status in 19 U.S. locations, USDA certified lender status on a national basis, and Ex-Im Bank AA delegated lending authority nationally for export working capital lines of credit. We are proud to remain a leader in working with these agencies to deliver their programs to qualifying manufacturing companies. [GRAPHIC OF WORLD MAP APPEARS HERE] Representatives Throughout The World The Company opened new domestic representative offices during 1998 in Cleveland, Ohio and Detroit, Michigan, bringing our network of U.S. offices to 11. We plan to open at least two more domestic offices this year in the Midwest, where there is a high concentration of profile manufacturing companies. Internationally, we established a new representative relationship with a firm based in Ghana to cover West Africa. Our international representatives now total 12 and provide us with a presence in most of the major international emerging markets. The Company's marketing capabilities were further enhanced in 1998 through the establishment of strategic alliances with large, national and international organizations which are leaders in their fields. Products are (or will soon be) available to our manufacturing clients for equipment finance in conjunction with six chapters of the National Tooling & Machining Association, for energy finance in conjunction with the National Rural Utilities Cooperative Finance Corporation and North American Power Brokers, Inc., and for international trade finance in association with Panalpina, Inc. In addition, we have entered into a business relationship with CIGNA Financial Services, Inc. with respect to providing investment, discount brokerage and cash management services. All investment related services will be supported by CIGNA Financial Services' registered representatives. These alliances will help leverage our resources in order to identify prospects and serve existing clients. The diversity of our Company's international capabilities in terms of both locations and products has enabled us to turn global economic turbulence into a business opportunity. First International Bank finances two-way trade flows, so that in countries such as Korea and Brazil where currency devaluations have negatively impacted local demand for U.S. exports, we are actively assisting our local clients in their effort to export more to the U.S. and other countries. Conversely, demand for U.S. exports in markets such as Mexico, which recovered from earlier economic difficulties, is strong and represents a growing source of export financing business for us. In 1998 our Company obtained private insurance policies covering our trade financing activities in multiple countries and with respect to multiple products and borrowers. These policies are complementary to our use of Ex-Im Bank programs. We lend internationally only in U.S. dollars (taking no currency 2 risk), and we continue to see vast opportunities for our Company in the international marketplace. 1998 was an important year for the Company in terms of increasing the diversity of our funding sources. Despite volatility in the capital markets during the second half of the year, we successfully completed two commercial loan securitizations, obtained commitments for warehouse lines totaling $125 million, and entered into a $65 million commercial paper conduit facility. The new funding sources provided us with the opportunity to sell our last retail branch together with its checking, savings and money market accounts. Following the closing of this sale, which is planned for March 1999, the Company will fund its lending operations through a combination of federally-insured certificates of deposit and capital markets activities. This diversified wholesale funding strategy is more closely aligned with the Company's overall business, and allows us to exit the operationally expensive and highly regulated retail banking business. I was pleased to announce in December 1998 that Leslie A. Galbraith, First International Bank's Chief Financial Officer since 1990, was promoted to the additional positions of President and Chief Operating Officer. Leslie has also assumed the chairmanship of the Bank's Operating Committee, which is comprised of Executive Vice Presidents Richard W. Bradshaw, Brian J. Charlebois, David J. Etter, Paul J. Falvey, James G. Fortsch and Frank P. La Monaca. These management changes have allowed me to focus more on our strategic direction and business alliances, product innovation and delivery, and human resources development. Beginning in February 1999, we welcomed to First International Bank's board of directors two new members, Dean Goodermote, President and CEO of Process Software Corporation, and Douglas Woods, President and CEO of Liberty Precision Industries, Ltd. These two outside directors, who are "sitting" chief executive officers of their companies, will provide valuable counsel and oversight with respect to our business. [PIE CHART APPEARS HERE] Total Loans Managed at December 31, 1998 Ex-Im Bank 16% SBA/USDA Loans Guaranteed 42% Consumer 1% Other Commercial 24% Other International 2% SBA/USDA Loans Unguaranteed 15% $779 Million [PHOTO APPEARS HERE] First International Bank's Operating Committee; standing left to right Dave Etter, Rich Bradshaw, Jim Fortsch and Paul Falvey; seated left to right Brian Charlebois, Leslie Galbraith and Frank La Monaca. Sadly, I must note the passing in August 1998 of Mr. Bernard M. Waldman, a director of our Company since 1971. Much more than a director, Mr. Waldman was a beloved friend and inspiration for all who knew him. Our achievements are his legacy. On behalf of our employees, I would like to thank you for continuing to support the Company's exciting and challenging mission in the global marketplace. /s/ Brett N. Silvers Brett N. Silvers Chairman and Chief Executive Officer March 1999 [PHOTO APPEARS HERE] 3 Summary Financial Highlights (Dollars in Thousands)
- --------------------------------------------------------------------------------------------------------------------- Year Ended December 31 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------- Total Loans Managed $779,055 $573,545 $380,432 $260,842 $193,369 Non-Interest Income to Net Revenue 68.5% 64.7% 50.6% 38.2% 42.7% Return on Average Equity 15.9% 20.5% 25.5% 19.3% 11.7% Return on Average Assets 3.0% 2.5% 2.1% 1.5% .9% Interest Income $ 18,088 $ 14,625 $ 13,305 $ 11,601 $ 7,997 Interest Expense $ 7,924 $ 6,371 $ 5,741 $ 4,869 $ 3,150 Net Interest Income $ 10,164 $ 8,254 $ 7,564 $ 6,732 $ 4,847 Gain on Loan Sales $ 16,959 $ 11,810 $ 5,844 $ 2,859 $ 2,730 Loan Servicing Income and Other Fees $ 5,153 $ 3,300 $ 1,899 $ 1,294 $ 878 Total Net Revenues $ 32,276 $ 23,364 $ 17,509 $ 10,885 $ 8,455 Operating Expenses $ 17,700 $ 13,801 $ 8,425 $ 6,128 $ 5,129 Provision for Possible Loan Losses $ 3,071 $ 2,239 $ 3,487 $ 1,237 $ 1,683 Net Income $ 7,033 $ 4,429 $ 3,244 $ 2,026 $ 1,060 Basic Earnings Per Share $ .89 $ .70 $ .56 $ .35 $ .18 Diluted Earnings Per Share $ .86 $ .67 $ .56 $ .35 $ .18 Dividend Payout Ratio 13.5% 16.5% 20.3% 8.1% .0% Average Equity to Average Assets 18.8% 12.2% 8.1% 7.8% 7.9% Total Capital to Risk Weighted Assets 21.8% 17.6% 11.6% 10.7% 9.3% Total Assets $273,726 $218,851 $161,642 $141,223 $125,609 Total Loans $113,946 $135,398 $114,627 $106,992 $ 95,118 Total Stockholders' Equity $ 49,071 $ 42,148 $ 14,216 $ 11,602 $ 9,675 Non-performing Loans $ 3,104 $ 2,364 $ 2,252 $ 1,258 $ 2,246 Allowance for Loan Losses $ 4,000 $ 3,100 $ 3,000 $ 2,000 $ 2,000 Allowance for Loan Losses to Non-performing Loans 129% 131% 133% 159% 89% Allowance to Total Loans 3.3% 2.3% 2.6% 1.9% 2.1% - ---------------------------------------------------------------------------------------------------------------------
Net Income [BAR CHART APPEARS HERE] 1998 $7,000,000 1997 $4,400,000 1996 $3,200,000 1995 $2,000,000 1994 $1,100,000 Total Loans Managed [BAR CHART APPEARS HERE] 1998 $779,000,000 1997 $574,000,000 1996 $380,000,000 1995 $261,000,000 1994 $193,000,000 4 Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of the consolidated financial condition and results of operations of First International Bancorp, Inc. (the "Company") should be read in conjunction with the Company's consolidated financial statements, including the related notes thereto, and other information. General First International Bancorp, Inc., a Delaware corporation, is a one bank holding company incorporated in 1985 and regulated by the Board of Governors of the Federal Reserve System. Its principal asset and subsidiary is First International Bank, N.A., (the "Bank") a national banking association established in 1955 and regulated by the Office of the Comptroller of the Currency (the "OCC"). The Bank changed its name from First National Bank of New England on February 1, 1999 to more closely reflect the markets it serves. In September 1997, the Company completed an underwritten public offering whereby 1,955,000 shares of common stock were issued for net proceeds of $23.8 million. On December 31, 1998 the Company entered into an agreement with Hudson United Bank to sell the Company's last retail branch and its checking, savings and money market deposits. The Company will retain its certificates of deposit and continue to offer certificates of deposit to retail and brokered depositors. The transaction is expected to close by the end of the first quarter of 1999. (See "Anticipated Changes in Funding Sources" for further discussion of the funding sources to be used by the Company.) The Company specializes in providing credit, trade and financial solutions to small and medium size manufacturing companies located in the United States and international emerging markets. The Company serves its target market by offering flexible and attractive terms to borrowers and manages its credit risk through the combined utilization of commercial loan guarantee programs made available by three U. S. federal agencies, the U. S. Small Business Administration (the "SBA"), the U. S. Department of Agriculture (the "USDA") and the Export-Import Bank of the U. S. ("Ex-Im Bank"), as well as through the use of private credit insurance policies. For the federal fiscal year ending September 30, 1998, the Company was the country's largest Ex-Im Bank lender measured by number of transactions; the second largest USDA Business and Industry lender measured by dollar volume; and the tenth largest SBA 7(a) lender measured by dollar volume (and the largest in New England). The Company maintains preferred status for government guaranteed lending programs in several jurisdictions. Except for historical information contained herein, certain matters discussed in this annual report are "forward looking statements" as defined in the Private Securities Litigation Reform Act (PSLRA) of 1995, which involve risk and uncertainties that exist in the Company's operations and business environment, and are subject to change based on various factors. The Company wishes to take advantage of the "safe harbor" provisions of the PSLRA by cautioning readers that numerous important factors discussed below, among others, in some cases have caused and in the future could cause the Company's actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. The following include some, but not all, of the factors or uncertainties that could cause actual results to differ from projections: . A general economic slowdown. . Inability of the Company to continue its growth strategy either domestically or internationally. . Disruption in the U. S. capital markets, delaying or preventing the Company from receiving funding under warehouse lines of credit or completing loan sales or securitizations. . Unpredictable delays or difficulties in the development and introduction of new products and programs. . Risks associated with government guarantee loan programs, since a substantial portion of the Company's business still depends upon the continuation of the various government guarantee loan programs as discussed below. The Company believes that it has the product offerings, facilities, personnel and financial resources for continued business success in competitive markets. However, future revenues, costs, margins and profits are all influenced by a number of factors, including those discussed above. Recent Growth In contrast to many other banks, the Company derives a majority of its revenues from non-interest income, principally gains on the sale of commercial and international loans and related loan servicing income. During the past three years of operations, the Company has achieved significant earnings growth primarily as a result of increases in the sale and, most recently, the securitization of government guaranteed and other commercial loans, net interest income, which is the difference between interest earned on interest-earning 5 assets (principally loans) and interest paid on interest-bearing liabilities (principally deposits), and fee income on loans serviced for others. The Company has expanded its domestic loan origination activities into the Northeast, Mid-atlantic and Midwest regions of the United States and its international presence in emerging markets. The Company plans to continue its U. S. expansion in 1999 by opening additional representative offices. - -------------------------------------------------------------------------------- December 31, 1998 1997 1996 - -------------------------------------------------------------------------------- (net income in thousands) Net income ........................ $ 7,033 $ 4,429 $ 3,244 Basic earnings per share .......... $ .89 $ .70 $ .56 Diluted earnings per share ........ $ .86 $ .67 $ .56 Anticipated Changes in Funding Sources During 1998 and the first quarter of 1999, the Company entered into transactions that effected changes in the manner in which the Company obtains funding for its lending business. Such transactions included: . the sale of the Company's last branch, including checking, savings and money market accounts; . establishment of a warehouse loan facility, pursuant to which up to $75 million is available to the Company (based upon the contractual advance rates against the qualifying principal balance of the loans pledged to secure the facility); . a commitment for a second warehouse loan facility pursuant to which up to $50 million would be available to the Company (based upon the contractual advance rates against the qualifying principal balance of the loans pledged to secure the facility; the pledged loans will consist of the unguaranteed portion of loans guaranteed by the SBA); the Company plans to establish this facility once SBA approval is received; . establishment of a commercial paper conduit facility, pursuant to which the Company has the right to sell commercial revolving lines of credit and other qualifying loans during the term of the facility. The Company will be required to retain ownership of subordinated interests in the loans sold to provide a credit enhancement to the purchaser in varying percentages depending on the type of loan sold. The Company sold loans totaling approximately $21 million in December 1998 under this facility; . a securitization transaction completed in June 1998 pursuant to which the Company received approximately $24 million from a sale of the unguaranteed portions of loans originated by the Company that were guaranteed in part by the SBA; and . a securitization transaction in December 1998 pursuant to which the Company received approximately $55 million from a sale of other loans originated by the Company. Following the sale of the Company's checking, savings and money market accounts, the Company expects to obtain funding for its operations from retail and brokered certificates of deposit, warehouse lines of credit, the sale of loans on a loan-by-loan basis, through private placement securitizations and from the sale of loans to a commercial paper conduit. See "Quantitative and Qualitative Disclosures about Market Risk and Asset/Liability Management" for further discussion of certain risks associated with such funding sources. The following discussions make reference to average balances of certain assets and liabilities as well as volume and rate changes. For further information with respect to these matters see the tables set forth on pages 11 and 12. Accounting for Loan Sales Gains from loan sales, securitizations and servicing income represented approximately 66% of the total net interest income and non-interest income for the year ended December 31, 1998. Detailed below is a discussion of the relevant accounting principles governing loan sales and securitizations and the Company's servicing activities. SBA and USDA Loan Sales The majority of the Company's SBA and USDA guaranteed loans are variable rate, indexed to the Prime Rate as quoted in The Wall Street Journal ("Prime"). The Company generally sells the guaranteed portions of these loans at origination at a premium. For example, if the Company sells a 20-year SBA or USDA guaranteed mortgage loan with an interest rate of Prime plus 1.50%, the Company receives a premium because the market demands a yield of less than Prime plus 1.50%. Investors in the guaranteed portions demand rates between U.S. Treasury bills and commercial loans due to prepayment risks and other factors inherent in the guaranteed loans. After the loan sale, an investor will receive the pro rata principal and pro rata interest at the note rate less any ongoing guarantee and Company servicing fees. When the Company sells an SBA loan for a premium, it will generally retain the minimum required servicing fee of 1%. The Company does elect from time to time to retain a higher servicing fee and sell a loan for a lesser premium or at par. The Company does sell the unguaranteed portions of the SBA and USDA loans on a loan-by-loan basis at or above par. In accordance with SBA and USDA regulations, the Company is required to retain a 5% interest in the unguaranteed portion of the loan when some of the unguaranteed portion is sold on a loan-by-loan basis. The SBA has recently published new rules regarding the securitization of the unguaranteed portions of SBA loans which are discussed below. In June 1998 the Company completed a securitization of the unguaranteed portions of SBA loans and expects to utilize securitizations for the sale of the unguaranteed portions of SBA and USDA loans. See "Securitization and Sale of Loans." When the Company sells part of a loan, the gain recognized is based on the relative fair market value of the loan sold, the portion of the loan retained and any other assets created in the transaction. The Company creates a servicing asset when it sells loans on a servicing-retained basis with a 6 servicing fee in excess of "adequate compensation." This servicing asset is equal to the net present value of the estimated cash flows in excess of such compensation. The original principal balance of a loan must be allocated between the guaranteed portion sold, the unguaranteed portion retained and the servicing asset, resulting in a discount being recognized on the unguaranteed retained portion of the loan. In connection with calculating gain on sale, the Company must make certain assumptions which include (i) the amount of adequate compensation used to determine the amount of the servicing asset that the Company will recognize at the date of the sale, (ii) the estimated life of the underlying loan used in projecting the time period over which the Company will receive the servicing fee, and (iii) the discount rate used in the present value calculation of the servicing asset. Prior to January 1, 1998, management defined adequate compensation as 40 basis points because there was no efficient market to determine market price. Effective January 1, 1998, based on estimates from potential sub-servicers, adequate compensation was defined as 20 basis points. Furthermore, the Company estimates its cost to service loans plus a normal profit to be less than 20 basis points. The constant prepayment rates utilized by the Company in estimating the lives of the loans depend on the original term of the loan, industry and Company historical data. Such constant prepayment rates range from 6% to 12% per annum. The discount rate utilized in the net present value calculation is equal to 400 basis points above the then current two year U.S. treasury rate, which for 1998 was approximately 8-10%. Actual prepayment rates may be affected by a variety of economic and other factors, including prevailing interest rates and the availability of alternative financing. The effect of these factors varies depending on the types of loans. Estimated prepayment rates are based on management's expectations of future prepayments, and, while management believes that the term of amortization and market interest rate on the variable rate loans somewhat reduce the prepayment risk, there can be no assurance that management's prepayment estimates are accurate. If the actual prepayment rate of loans sold is higher than projected at the time such loans were sold, the carrying value of the servicing asset would be reduced by a charge to earnings. Because the Company also recognizes a discount on the retained loan, an adjustment to the discount would be made which would partially offset the effect of the negative servicing adjustment. If the actual prepayment rate for loans sold is lower than estimated, the carrying value of the servicing asset is not increased, although the total income would exceed previously estimated amounts. The servicing asset is amortized against the servicing fee income received monthly, on an effective interest method, and the discount on the retained loan is accreted to interest income on an effective interest method. The servicing asset is carried at the lower of amortized cost or net realizable value. Ex-Im Bank and Other Commercial Loan Sales Sales of 100% of Ex-Im Bank guaranteed medium term loans are generally made at the carrying value, although the Company receives a servicing fee above the 20 basis points defined as adequate compensation resulting in the recognition of a gain at the time of the sale equal to the calculated servicing asset and any net loan origination fees. The Company uses a discount factor on the estimated cash flows equal to 400 basis points above the then current two-year U.S. treasury rate. The Company adjusts for prepayments on these 3-5 year term loans as they occur, although prepayments are minimal due to the lack of alternative U.S. dollar financing in the international markets served and the fact that such Ex-Im Bank financing is unsecured. The Company also sells 100% of certain other unguaranteed commercial loans and certain residential and other consumer loans on a loan by loan basis where no portion of the loan is retained on the Company's balance sheet. Securitization and Sale of Loans Beginning in 1998, the Company has securitized and sold certain whole loans and the unguaranteed portions of certain government guaranteed loans that it originates. In such securitization transactions the Company sells a pool of loans to a trust, which in turn issues certificates representing beneficial ownership interests in the trust or which issues notes and sells such securities through private placement transactions. For all securitizations, the Company is the servicer of the underlying loans. In order to provide credit enhancement for the certificates or notes, the Company will retain subordinated certificates or notes and establish a cash reserve account, all of which represent "retained interests" in the securitizations and are referred to as such in the discussion below. The Company established special purpose subsidiaries to facilitate the securitizations. The unguaranteed portions of SBA loans utilized "FNBNE SBA Holdings, Inc.", the commercial term loan securitization utilized "FNBNE Business Loans Holdings, Inc." and the sale of commercial revolving lines of credit to the commercial paper conduit was completed through "FNBNE Funding Corp." Generally, the Company retains risks in the form of default, prepayment and, in the revolving lines of credit, interest rate risk. The interest-only strips retained by the Company are recorded at estimated fair value and classified as an investment available-for-sale. The fair value of an interest-only strip is determined by computing the present value of the estimated cash flows to the Company as servicer, after providing for losses and prepayments and, in certain transactions, estimated interest rate risk. The Company as servicer, by contract, receives annual servicing fees ranging from 40-100 basis points of the outstanding principal balance of the loans and the rights to any additional cash flows arising after the investors in the securitization trust have received the contracted return. The investors and the securitization trust have no recourse to the Company's other assets. The Company's retained interests 7 are subordinate to the investor's interests. SBA regulations require that the Company hold retained interests in the unguaranteed portion of securitized loans equal to 10% of the transaction. Key economic assumptions used in calculating a gain on the transaction and in calculating the gain on sale and interest-only strips resulting from the securitizations and commercial paper sale completed during the year are as follows: - -------------------------------------------------------------------------------- Commercial Securitizations Paper Sale ------------------------- ------------ Unguaranteed Portions Term Revolving of SBA Loans Commercial Commercial -------------- ----------- ----------- Prepayment speed ........................... 8.0% 8.0% 7.5% Weighted-average life (in years) ........... 13.75 10.65 3.0 Aggregate expected credit losses ........... 5.74% 4.22% 1.25% Discount rate for servicing cash flows ..... 9.48% 8.43% 8.47% Results of Operations Comparison of the Years Ended December 31, 1998, 1997 and 1996 Net Income. Net income totaled $7.0 million in 1998 an increase of $2.6 million or 59% from 1997 net income of $4.4 million, which had increased $1.2 million or 37% from 1996 net income of $3.2 million. The increase in 1998 net income reflects a $5.2 million or 44% increase in the gain on loan sales to $17.0 million for 1998. Included in the gains for 1998 are $4.1 million of gains recognized on the securitization of certain loans. Gains from the sale of guaranteed loans increased $2.7 million or 29%. Operating expenses increased $3.9 million in 1998 reflecting additions to lending and credit administration personnel and the related office expense associated with increased employees. The increase in 1997 net income from 1996 reflects an increase in the sales of all loan types as the Company continued its domestic and international geographic expansion. Gains on loan sales increased by $6.0 million or 100% to $11.8 million from 1996 to 1997. The results for fiscal 1996 included a $2.2 million gain on the sale of a suburban branch facility and related deposits. Net Interest Income. Net interest income increased $1.9 million or 23% to $10.2 million in 1998 due to a $47.9 million or 29% increase in average interest-earning assets offset by a 42 basis point decrease in the yield on earning assets. The decrease in the earnings yield was a result of Prime rate decreases totaling 75 basis points over the last four months of the year and a reflection of the increase in assets held in liquid investment securities. The reduced yield on assets was somewhat mitigated by a relatively flat cost of funds. Average interest-bearing liabilities increased $30.8 million or 25% while the cost of funds decreased 2 basis points. Net interest income increased $690,000 or 9% to $8.3 million in 1997 from 1996 due to a $16 million or 12% increase in average interest-bearing assets offset by an 11 basis point decrease in the margin. The decrease in the margin was the result of a more significant portion of assets held in investment securities and an increase in the portion of interest-bearing liabilities in the Company's higher rate premier money market savings account. Average interest-bearing liabilities increased $6.4 million or 6%. Interest Income. Interest income increased $3.5 million or 24% to $18.1 million in 1998 from $14.6 million in 1997 due to a $33.9 million or 26% increase in average loans outstanding and a $13.9 million or 100% increase in average investments. The yield on loans and investments decreased by 34 basis points and 24 basis points, respectively, reflecting the 75 basis point decrease in the Prime rate during 1998. Interest income increased $1.3 million or 10% to $14.6 million in 1997 from $13.3 million in 1996 due to a $7.3 million or 6% increase in average loans outstanding and a $8.6 million or 82% increase in average investments. The yield on investments decreased 10 basis points due to the shorter term investments made in 1997. Interest Expense. Interest expense increased $1.5 million or 23% to $7.9 million from $6.4 million in 1998 due to a $31 million or 25% increase in interest bearing deposits. The increase in average balances was mitigated by a relatively flat cost of funds for interest bearing liabilities, which decreased by 2 basis points. The premier money market accounts average balance increased $20 million or 27% during 1998. Interest expense increased $1.0 million on these deposits to $4.9 million in 1998 from $3.9 million in 1997, although the cost of funds remained flat. A $5.1 million or 17% increase in non-interest bearing demand deposits contributed to keeping the overall cost of liabilities to 4.18% for 1998 or a total increase of 4 basis points from 1997. Interest expense increased $630,000 or 11% to $6.4 million in 1997 from $5.7 million in 1996 due to a 14 basis point increase in the average rate paid on the Company's premier money market accounts, as the underlying external index increased during 1997 and greater reliance was placed on these accounts to fund balance sheet growth. Total average deposits increased 5% while the average balance of the money market savings accounts increased 18% in 1997. An increase in the rates offered for time deposits due to competitive demands resulted in a 26 basis point increase in the cost of interest bearing liabilities, although a $4.2 million, or 17% increase in non-interest bearing demand deposits held the overall cost of liabilities to 4.14% for 1997, representing a 13 basis point increase for 1997. Provision for Possible Loan Losses. The provision for possible loan losses totaled $3.1 million in 1998, $2.2 million in 1997 and $3.5 million in 1996. The provision is affected by net loan charge-offs, changes in the level and mix of loans, changes in asset quality and general economic conditions. The allowance for loan losses balance was increased by $900,000 or 29% to $4.0 million at December 31, 1998. See "Allowance for Loan Losses." 8 Non-Interest Income. The components of non-interest income are detailed below: - -------------------------------------------------------------------------------- Years Ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------------- (dollars in thousands) Non-interest income: Gain on loan sales: SBA sales ................................ $ 6,101 $ 5,056 $ 3,558 USDA sales ............................... 3,390 1,901 805 Ex-Im working capital sales .............. 474 251 201 Ex-Im medium term sales .................. 2,274 2,305 340 Unguaranteed portions of SBA and USDA sales ..................... 436 1,522 842 Other commercial sales ................... 190 775 98 Loan-backed securitizations .............. 4,094 -- -- ------- ------- ------- Gain on loan sales ..................... 16,959 11,810 5,844 Loan servicing income and fees ............. 4,353 2,618 1,475 Other non-interest income .................. 703 438 424 Income on stockholder note receivable ...... 64 244 -- Gain on securities sales ................... 33 -- Gain on branch sale ........................ -- -- 2,202 ------- ------- ------- Total non-interest income .............. $22,112 $15,110 $ 9,945 ======= ======= ======= Non-interest income increased $7.0 million or 46% to $22.1 million in 1998 from $15.1 million in 1997 due to a $5.1 million increase in gain on loan sales and securitizations and a $1.7 million increase in loan servicing income. Gains on the guaranteed portions of SBA and USDA loan sales increased $2.5 million or 36% in 1998 reflecting the continuing contribution of the Company's four New England representative offices and the maturation of the five offices opened in 1997. The $223,000 or 89% increase in gains on Ex-Im working capital loan sales reflects the increased marketing and cross selling efforts by the Company's lenders. Gains on the sale of Ex-Im Bank medium term loans were relatively flat in 1998 as compared to 1997 as the Company's international lenders also originated loans under a newly introduced privately-insured short and medium term loan program which provides an alternative to the Ex-Im Bank guaranteed loans to foreign buyers of U.S. made goods. The insurance, which covers up to 95% of the commercial risk, is provided by a major triple A rated private company. The Company plans to include these privately-insured loans in securitizations in 1999. In 1998, the Company completed two securitizations and a sale to a commercial paper conduit; gains on these transactions totaled $4.1 million. (See "Loan Securitizations.") Although most of the unguaranteed portions of SBA loans were included in the June 1998 SBA Loan-backed securitization, the Company did complete sales of the unguaranteed portions of SBA and USDA loans on a non-recourse, servicing-retained loan-by-loan basis. In 1998 the gain on these sales was $436,000 on sales of loans totaling $8.2 million. In 1997, gains from the sale of unguaranteed portions of SBA and USDA loans totaled $1.5 million on sales of $29.2 million. Loan servicing income comprises the servicing fees received on loans sold on a servicing retained basis, net of amortization of the servicing asset. - -------------------------------------------------------------------------------- Years Ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------------- (dollars in thousands) Loan Servicing Income and Fees Loan servicing income: SBA guaranteed loans ..................... $ 1,716 $ 1,203 $ 921 USDA guaranteed loans .................... 348 278 151 Ex-Im working capital loans .............. 225 186 56 Ex-Im medium term loans .................. 448 264 43 Other commercial loans ................... 176 123 65 Securitized loans ........................ 53 -- -- Residential and consumer loans ........... 51 64 59 -------- -------- -------- Total loan servicing income ........ 3,017 2,118 1,295 Other loan fees ............................ 1,336 500 180 -------- -------- -------- Total loan servicing income and fees ....................... $ 4,353 $ 2,618 $ 1,475 ======== ======== ======== Loans serviced for others (at period end) Outstanding balance .................... $656,532 $429,077 $153,850 ======== ======== ======== The increases in total loan servicing income reflect the growth of the servicing portfolios. The $899,000 or 42% increase in loan servicing income to $3.0 million in 1998 reflects the $185.4 million or 62% increase in the average balance of commercial loans serviced for others to $486.2 million in 1998 from $300.8 million in 1997. The 64% increase in loan servicing income to $2.1 million in 1997 from $1.3 million in 1996 reflects the $115.1 million or 62% increase in the average balance of loans serviced for others over the period. Although servicing income continues to increase, the margin of servicing income to serviced loans has decreased as a result of an increase in the servicing portfolio of Ex-Im term loans and unguaranteed commercial loans which carry a lower servicing fee. Other loan fees are comprised primarily of fees earned on letters of credit, which increased $116,000 or 34% to $461,000 in 1998 from $345,000 in 1997 due to greater demand from the Company's exporting borrowers who have the need for letters of credit to support their trade activities. Included in other loan fees is a $97,000 gain on the sale of residential mortgage servicing rights to 168 residential mortgage loans as the Company divested operational functions not directly related to its primary commercial loan servicing business. Additionally, fees forfeited by potential borrowers who chose not to close loans with the Company increased by $174,000 to $231,000 in 1998 from $57,000 in 1997. The non-interest income increase of $5.2 million in 1997 from 1996 reflects a $6.0 million increase in gain on loans sales and a $1.1 million increase in the loan servicing income, offset by the $2.2 million non-recurring gain on the sale of the Company's suburban branch facility and its deposits in 1996. 9 The servicing asset for loans sold is as follows: - -------------------------------------------------------------------------------- At December 31, 1998 1997 1996 - -------------------------------------------------------------------------------- (dollars in thousands) Servicing Asset SBA .............................. $4,499 $3,155 $3,100 USDA ............................. 900 375 483 Ex-Im medium term ................ 2,749 2,025 374 Other commercial ................. 867 124 181 ------ ------ ------ Total servicing asset .......... $9,015 $5,679 $4,138 ====== ====== ====== In addition to the above, interest-only strips from the loan-backed securitizations and sale to the commercial paper conduit facility completed in 1998 totaling $4.1 million are included in the Company's available-for-sale investment portfolio. Non-Interest Expense. Increases in non-interest expense reflect the Company's growth over the periods as indicated below: - -------------------------------------------------------------------------------- Years Ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------------- (dollars in thousands) Non-interest expense: Salaries and benefits ................ $ 11,235 $ 9,537 $ 5,089 Occupancy ............................ 1,523 985 774 Furniture and equipment .............. 1,007 692 462 Outside services ..................... 773 556 321 Office expenses ...................... 834 556 421 Marketing ............................ 1,453 847 691 Other ................................ 875 628 667 -------- -------- -------- Total non-interest expense ......... $ 17,700 $ 13,801 $ 8,425 ======== ======== ======== Selected Data Total servicing portfolio ............ $779,055 $573,544 $380,432 ======== ======== ======== Number of loans serviced ............. 2,050 1,938 1,519 ======== ======== ======== Number of total personnel ............ 182 131 92 ======== ======== ======== Number of loan officers .............. 69 46 26 ======== ======== ======== Non-interest expenses increased $3.9 million or 28% in 1998 from 1997 due to a 39% increase in personnel. The number of loan officers increased by 50% to 69 in 1998 as two new domestic representative offices were opened and the existing offices and international business units were further staffed. The remaining additions to personnel were primarily in the credit administration and loan servicing business units. Geographic expansion and personnel additions resulted in an increase in occupancy and related expenses as new offices were leased and additional office space in the Company's Hartford, Connecticut headquarters was occupied. Marketing expense increased $606,000 or 72% in 1998 reflecting increased expenses associated with the marketing and referral activities of the Company's international Master Agents. These expenses increased $281,000 to $412,000 in 1998. Domestic and international travel expenses also increased reflecting the Company's continued geographic expansion. The $217,000 or 39% increase in outside services reflects the increase in accounting and legal fees associated with the increased reporting requirements of an SEC registrant and the diligence on banking laws in each of the new states and countries where domestic and international representative offices were opened in 1998. Non-interest expenses increased $5.4 million or 64% in 1997 from 1996 due to a 42% increase in personnel as five new representative offices were opened and the number of Hartford based loan officers in both the domestic and international business units was increased during the year. Salary and benefits expense for 1997 also included approximately $636,000 associated with bonuses paid to officers in connection with the successful completion of the September 1997 public offering. Marketing expenses increased $156,000 or 23% in 1997 reflecting the increase in international activity as the Company finalized Master Agency agreements in targeted countries. The $235,000 or 73% increase in 1997 from 1996 in outside services reflected the increase in legal fees associated with the Master Agency agreements as well as new product development and state banking law diligence associated with the opening of the five domestic representative offices. The Company's efficiency ratios, calculated as the ratio of non-interest expenses to the sum of net interest income and non-interest income, excluding the 1996 gain on the branch sale were 55%, 59% and 55% for the years ended December 31, 1998, 1997 and 1996, respectively. Income Taxes. The effective income tax rates for the years ended December 31, 1998, 1997 and 1996 were 38.9%, 39.5% and 42.0%, respectively, reflecting a 1% decrease in the State of Connecticut statutory tax rate in 1998 and a $34,000 State of Connecticut tax refund received in September 1998 that resulted from a statutory change relating to the 1991 through 1995 tax years. 10 The following table sets forth the components of the Company's net interest income and yield on average interest earning assets and rate on interest bearing liabilities.
- ------------------------------------------------------------------------------------------------------------------------------------ For the Years Ended December 31, 1998 December 31, 1997 December 31, 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Interest Average Interest Average Interest Average Average Earned/ Yield/ Average Earned/ Yield/ Average Earned/ Yield/ Balance Paid Rate Balance Paid Rate Balance Paid Rate -------------------------- ------------------------------- ----------------------------- (dollars in thousands) Total interest earning assets: Loans (1) Commercial ........................... $158,604 $ 15,016 9.47% $120,913 $12,002 9.93% $109,637 $ 10,882 9.93% Residential .......................... 4,847 392 8.09% 8,129 595 7.32% 12,848 1,059 8.24% Other consumer ....................... 1,247 114 9.15% 1,668 156 9.35% 874 86 9.84% -------- -------- ----- -------- ------- ----- -------- -------- ----- Total Loans ............................ 164,698 15,522 9.42% 130,710 12,753 9.76% 123,359 12,027 9.75% Investment securities(2) ............... 19,793 1,154 5.83% 19,085 1,156 6.06% 10,495 646 6.16% Federal funds sold ..................... 26,310 1,412 5.37% 13,139 716 5.45% 12,153 632 5.20% -------- -------- ----- -------- ------- ----- -------- -------- ----- Total investment securities and federal funds sold ................... 46,103 2,566 5.57% 32,224 1,872 5.81% 22,648 1,278 5.64% -------- -------- ----- -------- ------- ----- -------- -------- ----- Total earning assets ..................... 210,801 18,088 8.56% 162,934 14,625 8.98% 146,007 13,305 9.11% -------- ----- ------- ----- -------- ----- Total non-earning assets ................. 25,190 14,957 11,485 -------- -------- -------- Total assets ............................. $235,991 $177,891 $157,492 ======== ======== ======== Total interest bearing liabilities: Deposits Interest bearing demand deposits ..... $ 8,964 $ 212 2.37% $ 7,406 $ 183 2.47% $ 8,705 $ 241 2.77% Premier money market ................. 92,591 4,928 5.32% 72,965 3,869 5.30% 61,519 3,176 5.16% Other savings ........................ 9,889 295 2.98% 6,268 135 2.15% 12,607 386 3.06% Certificates of deposit .............. 34,184 1,934 5.66% 30,825 1,786 5.79% 28,384 1,564 5.51% IRA certificates of deposit .......... 9,310 527 5.66% 6,552 364 5.56% 6,436 347 5.39 -------- -------- ----- -------- ------- ----- -------- -------- ----- Total Deposits ........................... 154,938 7,896 5.10% 124,016 6,337 5.11% 117,651 5,714 4.86% Other borrowings ......................... 605 28 4.63% 702 34 4.84% 623 27 4.33% -------- -------- ----- -------- ------- ----- -------- -------- ----- Total interest bearing liabilities ..... 155,543 7,924 5.09% 124,718 6,371 5.11% 118,274 5,741 4.85% -------- -------- ----- -------- ------- ----- -------- -------- ----- Non-interest bearing liabilities Demand deposits ........................ 34,136 29,066 24,862 Other liabilities ...................... 2,042 2,458 1,630 -------- -------- -------- Total non-interest bearing liabilities ... 36,178 31,524 26,492 Stockholders' equity ..................... 44,270 21,649 12,726 -------- -------- -------- Total liabilities and stockholders' equity.................... $235,991 $177,891 $157,492 ======== ======== ======== Net interest income/net interest spread .. $ 10,164 3.47% $ 8,254 3.87% $ 7,564 4.26% ======== ===== ======== ===== ======== ====== Net interest margin .................... 4.82% 5.07% 5.18% ====== ===== ====== Average interest earning assets/average interest bearing liabilities ............ 135.53% 130.64% 123.45% ======= ======= ======= - ------------------------------------------------------------------------------------------------------------------------------------
(1) For purposes of these computations, non-accruing loans are included in the average balances. (2) The yield does not give effect to changes in fair value that are reflected as a component of stockholders' equity. 11 The following rate/volume analysis shows the portions of the net change in interest income due to changes in volume or rate. The changes in net interest income due to both volume and rate have been allocated proportionally to changes due to volume and changes due to rate.
- ----------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, Year Ended December 31, 1998 Compared to 1997 1997 Compared to 1996 Changes due to: Changes due to: -------------------------------- --------------------------------- Volume Rate Total Volume Rate Total -------------------------------- --------------------------------- (dollars in thousands) Increase (decrease) in net interest income due to: Loans Commercial loans ................................ $ 3,568 $(554) $ 3,014 $ 1,119 $ 1 $ 1,120 Residential loans ............................... (265) 62 (203) (346) (118) (464) Other consumer loans ............................ (39) (3) (42) 74 (4) 70 ------- ----- ------- ------- ----- ------- Total loans ................................... 3,264 (495) 2,769 847 (121) 726 Investment securities ............................. 42 (44) (2) 520 (10) 510 Federal funds sold ................................ 707 (11) 696 54 30 84 ------- ----- ------- ------- ----- ------- Total investments and federal funds sold ...... 749 (55) 694 574 20 594 ------- ----- ------- ------- ----- ------- Total interest earning assets ................. 4,013 (550) 3,463 1,421 (101) 1,320 ------- ----- ------- ------- ----- ------- Deposits Interest-bearing demand deposits ................ 37 (8) 29 (32) (26) (58) Premier money market savings .................... 1,043 16 1,059 607 86 693 Other savings ................................... 108 52 160 (136) (115) (251) Time deposits ................................... 189 (41) 148 141 81 222 IRA time deposits ............................... 156 7 163 6 11 17 ------- ----- ------- ------- ----- ------- Total deposits ................................ 1,533 26 1,559 586 37 623 FHLB advances ..................................... (5) (1) (6) 4 3 7 ------- ----- ------- ------- ----- ------- Total interest-bearing liabilities ............ 1,528 25 1,553 590 40 630 ------- ----- ------- ------- ----- ------- Change in net interest income ................. $ 2,485 $(575) $ 1,910 $ 831 $(141) $ 690 ======= ===== ======= ======= ===== =======
Financial Condition General. Total assets increased $54.9 million or 25% to $273.7 million at December 31, 1998 from $218.9 million at December 31, 1997 and $57.3 million or 36% from the December 31, 1996 balance of $161.6 million. These increases reflect increases in the receivables from loans sold, loan servicing assets and federal funds which was funded by growth in deposit accounts, retained earnings and net proceeds from the Company's September 30, 1997 public offering. Cash and Cash Equivalents. Cash and cash equivalents increased by $40.9 million or 235% to $58.3 million at December 31, 1998 reflecting receipt of the proceeds from commercial loan securitizations completed in December. The cash balances were relatively flat at $17.4 million at December 31, 1997 from $18.9 million at December 31, 1996. In 1998 the Company maintained greater funds on hand as federal funds sold which provided overnight liquidity for the Company's increased volume of loan originations. Investment Securities. The investment securities portfolio increased $13.3 million or 60% to $35.6 million at December 1998 from $22.3 million at December 31, 1997 and increased $6.4 million or 40% in 1997 from the December 31, 1996 balance of $15.9 million. The portfolios have historically been comprised of U.S. Treasury and other U.S. government mortgage-backed securities and collateralized mortgage obligations with average lives of less than five years. As a result of the Company's 1998 securitizations, the portfolios include $15.6 million of rated and unrated subordinate interests in securities and interest-only strips totaling $4.1 million from the transactions. Refer to Note 2 of the Company's consolidated financial statements for additional information. Loans. Loans decreased by $21.7 million or 17% to $108.9 million at December 31, 1998 from $130.6 million at December 31, 1997 and increased $21.2 million or 19% from $109.4 million at December 31, 1996. The decrease in the loan portfolios is the result of the successful securitization of $113.3 million of unguaranteed commercial loans during 1998, a portion of which was comprised of loans originated in prior years. Loan Securitizations. During 1998 the Company completed two commercial loan securitization transactions and a sale to a commercial paper conduit involving the issuance of $113.3 million of senior and subordinated securities. Approximately 56% of the $117.1 million loans included in the securitizations were originated in 1998. In connection with the "SBA Loan Backed Series 1998-1", completed in June 1998, a $24.2 million Class A certificate rated AA by Moody's Investor Services, Inc. was sold in a private placement. A $2.7 million Class B certificate rated BBB by Moody's Investor Services, Inc. is held by the Company. Related to "Business Loan Trust 1998-A" backed by commercial term loans and completed in December 1998, a $55 million senior note rated AAA by Duff and Phelps Credit Rating Co. and Aaa by Moody's Investor Services, Inc. was 12 sold in a private placement. A $3.2 million A rated note, a $3.2 million BBB rated note and a $3.1 million unrated note are held by the Company from this securitization. A $21.4 million sale to an asset-backed commercial paper conduit facility also occurred in December 1998. The Company holds a $3.8 million subordinated interest to the senior $21.4 million loans sold. In 1998, cash proceeds from the securitization of commercial loans totaled $85.3 million net of subordinated certificates and notes and the required initial deposits to the cash reserves held by the Company. The following table summarizes the Company's 1998 securitization transactions and the commercial paper sale.
- ------------------------------------------------------------------------------------------------------ Commercial Securitizations Paper Sale ----------------------------------- -------------- Unguaranteed Portions Term Revolving of SBA Loans Commercial Commercial --------------- ------------ -------------- (dollars in thousands) Total loans securitized or sold ................. $26,901 $65,000 $25,205 Senior certificates ............................. $24,210 $55,250 $21,424 Subordinate interests held by Company ..................................... $ 2,691 $ 9,750 $ 3,781 Total cash reserve requirement .................. 7% 10% N/A Initial cash reserve requirement ................ 3% 7% N/A Initial cash reserve deposit .................... $ 807 $ 4,550 N/A Gain recorded ................................... $ 2,648 $ 1,052 $ 394 Gain as a percentage of loans securitized ....... 9.84% 1.62% 1.56% Month closed .................................... June December December
The significantly higher gain, stated as a percentage of loans securitized, for the unguaranteed portions of SBA loans reflects the fact that such loans are carried at a discount following the sale of the guaranteed portions and the stronger capital markets environment in June 1998. Allowance for Loan Losses. The Company reviews the adequacy of the allowance for loan losses quarterly. The allowance totaled $4.0 million at December 31, 1998, an increase of $900,000 or 29% from the $3.1 million balance at December 31, 1997, which was a slight increase from the $3.0 million balance at December 31, 1996.
Activity in the Allowance for Loan Losses - ------------------------------------------------------------------------------------------ At December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------ (dollars in thousands) Balance of allowance for loan losses at the beginning of the period ............... $ 3,100 $ 3,000 $ 2,000 Charge-offs: Commercial ..................................... 876 279 168 SBA ............................................ 775 262 478 Investor mortgage .............................. 582 1,395 1,730 Private ........................................ 83 46 27 USDA ........................................... -- 68 -- Residential and other consumer ................. 8 195 124 -------- -------- -------- Total charge-offs ............................ 2,324 2,245 2,527 -------- -------- -------- Recoveries: Commercial ..................................... 30 77 16 SBA ............................................ -- 13 -- Investor mortgage .............................. 123 6 13 Private ........................................ -- -- 10 Residential and other consumer ................. -- 10 1 -------- -------- -------- Total recoveries ............................. 153 106 40 -------- -------- -------- Net charge-offs ..................................... 2,171 2,139 2,487 Provision for loan losses ........................... 3,071 2,239 3,487 -------- -------- -------- Balance of allowance for loan losses at end of period $ 4,000 $ 3,100 $ 3,000 ======== ======== ======== Total loans ......................................... $113,946 $135,398 $114,627 ======== ======== ======== Allowance to total loans ............................ 3.3% 2.3% 2.6% ======== ======== ======== Net charge-offs/average outstanding loans ........... 1.37% 1.71% 2.12% ======== ======== ========
13 During 1998, the trend in net charge-offs as measured against average outstanding loans continued to decline. Included in net charge-offs are SBA loan charge-offs which represent losses realized on the unguaranteed portion of SBA loans after the liquidation of collateral. The Company believes that the increase in charge-offs emanating from the SBA and commercial portfolios reflects the normal seasoning of these portfolios. As the Company generally extends both SBA and commercial loans to the same borrowers, it is expected that there will be a high degree of correlation as to the changes in credit losses from these two portfolios. The Company monitors the performance of the portfolios by use of Static Loss Pool Analysis. For purposes of this analysis, seasoned portfolios are defined as having been originated at least 8 quarters prior to the analysis. Using a 22-quarter time period, the SBA portfolio has generated an average annual loss of 73 basis points. During the same time period, the commercial loan portfolio has generated an average annual loss of 50 basis points. The average annual losses arising from originations in the most recent eight quarters have been substantially below the levels of the "seasoned" portfolios. Net charge-offs from the investor mortgage portfolio, which is comprised of multi-family urban residential units located in various Connecticut inner cities, represented 25%, 62% and 69% of the total charge-offs for the years ended 1998, 1997 and 1996, respectively. The outstanding balance of this portfolio at December 31, 1998 totaled $3.1 million. The Company tracks charge-offs by relationship and has noted no appreciable increase in the number of relationships charged off. For the years ended December 31, 1998, 1997 and 1996, the charge-offs were comprised of 16, 16 and 21 lending relationships, respectively. The Company estimates that it has approximately 998 commercial lending relationships at December 31, 1998. The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated. Management believes that the allowance can be allocated by category only on an approximate basis, and therefore allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict use of the allowance to absorb losses in any category. The unallocated portion of the allowance represents an amount that is not specifically allocated to one of the loan portfolios.
- -------------------------------------------------------------------------------------------------------------------------------- December 31, 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) Allocation of the allowance by category of loans Unguaranteed portions of: SBA and USDA loans ...................................... $ 1,050 $ 853 $ 491 $ 563 $ 338 Ex-Im Bank working capital loans ........................ 245 145 44 2 -- Other international loans ................................. 483 -- -- -- -- Commercial mortgage loans ................................. 128 250 271 483 237 Other commercial loans .................................... 1,367 1,052 475 316 353 Investor mortgage loans ................................... 63 269 1,061 399 581 Residential and other consumer loans ...................... 43 67 113 72 106 Loans held for sale ....................................... 43 -- -- -- -- Unallocated ............................................... 578 464 545 165 385 --------- --------- --------- --------- -------- Total allowance for loan losses ......................... $ 4,000 $ 3,100 $ 3,000 $ 2,000 $ 2,000 ========= ========= ========= ========= ========= Percent of loans in each category to total loans Unguaranteed portions of: SBA and USDA loans ....................................... 30.0% 26.9% 30.5% 38.5% 32.0% Ex-Im Bank working capital loans ........................ 3.9 2.8 3.0 0.2 -- Other international loans ................................. 15.4 -- -- -- -- Ex-Im Bank medium term loans .............................. -- 0.5 1.8 0.1 0.2 Commercial mortgage loans ............................... 8.5 14.7 16.4 14.5 17.1 Other commercial loans .................................. 29.7 44.8 29.4 26.9 21.6 Investor mortgage loans ................................. 2.6 4.1 6.6 7.2 9.9 Residential and other consumer loans .................... 2.9 6.2 12.3 12.6 19.2 Loans held for sale ....................................... 7.0 -- -- -- -- --------- --------- --------- --------- -------- Total ................................................... 100% 100.0% 100.0% 100.0% 100.0% ========= ========= ========= ========= =========
14 The following table sets forth information regarding the Company's non-performing loans at the dates indicated:
- ---------------------------------------------------------------------------------------------------------------------------------- December 31, 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) Non-Performing Loans Commercial: Unguaranteed portions: SBA and USDA loans ............................ $ 1,533 $ 1,226(1) $ 188 $ 419 $ -- Ex-Im Bank working capital loans .............. 418 -- -- -- -- Other international loans ....................... 112 -- -- -- -- Commercial mortgage loans ....................... 6 39 -- -- 703 Other commercial loans .......................... 890 535 132 -- 106 Investor mortgage loans ......................... -- 415 1,853 839 1,437 Consumer .......................................... 145 149 79 -- -- --------- --------- --------- --------- --------- Total non-performing loans ........................ $ 3,104 $ 2,364 $ 2,252 $ 1,258 $ 2,246 ========= ========= ========= ========= ========= Total loans ....................................... $113,946 $135,398 $114,627 $106,992 $95,118 ========= ========= ========= ========= ========= Non-performing loans to total loans ............... 2.53% 1.75% 1.96% 1.18% 2.36% ========= ========= ========= ========= ========= Non-performing loans to total assets .............. 1.13% 1.08% 1.39% 0.89% 1.79% ========= ========= ========= ========= ========= Allowance to total non-performing loans ........... 129% 131% 133% 159% 89% ========= ========= ========= ========= =========
(1)Excludes the Company's only guaranteed USDA loan not sold of $345,000 which is fully guaranteed as to the collection of principal and interest. Although the balance of non-performing SBA/USDA and commercial loans increased in 1998, the Company believes that this reflects the effects of the seasoning of the portfolio. The Company manages the non-performing assets actively, including a quarterly review of the net realizable value of collateral securing these loans. Any deterioration in the relationship between the loan amount and the net realizable value of the collateral will be considered in the evaluation of the allocation of the Allowance attributed to the subject loan and/or a partial charge-off. The Company had no loans past due 90 days and accruing interest at any period end as presented in the above table. Other Real Estate Owned. It is the Company's policy, whenever possible, not to take title to real property collateralizing loans, thereby avoiding management time and any environmental liabilities associated with holding such properties. From the year end 1996 to 1998 reporting periods discussed herein, the highest balance of other real estate owned totaled $97,000. Receivable From Loans Sold. Receivable from loans sold represents the balance of loans sold for which funding has not yet been received. Government guaranteed loans are generally sold within a day of origination and settled within 30 days of the trade date. During this thirty day period, the Company reviews and delivers closing documents to the investor. The receivable balance fluctuates with the month's loan sale activity and tends to be higher at any quarter end due to increased loan closing activity. The annual average balance of this receivable has ranged from $8-10 million. The Company actively monitors the settlement of loans to ensure that this source of liquidity is effectively managed. Prepaid Expenses and Other Assets. Prepaid Expenses and Other Assets is comprised principally of servicing assets as discussed in "Accounting for Loan Sales" and "Non-interest Income." - ------------------------------------------------------------------------------ At December 31, 1998 1997 1996 - ------------------------------------------------------------------------------ (dollars in thousands) Other Assets Servicing assets .......................... $ 9,015 $5,679 $4,138 Prepaid expenses and other assets ............................ 4,414 1,143 631 ------- ------ ------ Total other assets ........ $13,429 $6,822 $4,769 ======= ====== ====== At December 31, 1998 prepaid expenses and other assets includes $1.2 million of prepaid fees related to the warehouse facilities and the commercial paper conduit. These fees will be expensed over the terms of the underlying facilities. Additionally, other assets include $625,000 of accrued interest receivable related to the securitization transactions. Cash flows from the transactions will offset this amount after the required cash reserve accounts have been fully funded. Deposits. Deposits have historically been the Company's primary funding source and have increased to sustain the Company's balance sheet growth. See "Liquidity and Capital Resources." Federal Home Loan Bank of Boston Advances. Periodically, the Company utilizes Federal Home Loan Bank ("FHLB") advances to provide short term liquidity. As of December 31, 1998, the Bank had a $3.5 million unused line of credit from the FHLB. 15 Stockholders' Equity. Stockholders' equity increased $6.9 million to $49.0 million at December 31, 1998 from $42.1 million at December 31, 1997 primarily due to the retention of earnings. Stockholders' equity increased $27.9 million to $42.1 million at December 31, 1997 from $14.2 million at December 31, 1996 due to the issuance of 1,955,000 shares of common stock in an underwritten public offering completed in September 1997, resulting in net proceeds to the Company of $23.8 million and the retention of earnings. The Company has paid quarterly dividends of $.03 per share since the fourth quarter of 1995. As explained in Note 7 to the Company's consolidated financial statements, the Company holds a note receivable from the Company's Chief Executive Officer related to the issuance of 614,600 shares of common stock in June 1994, which is reflected as a separate component of stockholders' equity. Liquidity and Capital Resources Management considers scheduled cash flows from existing borrowers, projected deposit levels, estimated liquidity needs from maturing and disintermediating deposits, approved extensions of credit, and unadvanced commitments to existing borrowers in determining the level and maturity of funding necessary to support operations. Historically, the Company has increased the level of deposits to support its planned loan growth. The Company also has supported its growth by regularly selling loans on a servicing retained basis. In 1998 and during the first quarter of 1999, the Company entered into the following transactions, all of which taken together will significantly change the manner in which the Company funds its operations and plans to support its future growth: . Pursuant to an Agreement for Purchase and Sale of Assets and Assumption of Liabilities with Hudson United Bank (the "Deposit Buyer"), the Company agreed to sell its last retail branch and its checking, savings and money market accounts; . The Company obtained a warehouse loan facility pursuant to which up to $75 million is available to the Company (based upon the contractual advance rate against the principal balance of the loans pledged to secure the facility); . The Company obtained a commitment for a second warehouse loan facility pursuant to which, upon approval of the facility by the SBA and execution of definitive documents, up to $50 million will be available to the Company (based upon the contractual advance rate against the principal balance of the loans pledged to secure the facility; the pledged loans will consist of the unguaranteed portion of loans guaranteed by the SBA); . The Company obtained a commercial paper conduit facility, pursuant to which the Company has the right to sell up to $65 million of loans during the term of the facility. The Company must retain subordinated interests in the loans sold, equal to differing amounts based on the type of loan sold. The Company sold loans totaling $21 million under this facility in December; . The Company entered into a securitization transaction in June 1998 pursuant to which the Company received approximately $24 million from a sale of the unguaranteed portions of loans originated by the Company that were guaranteed in part by the SBA; and . The Company entered into a securitization transaction in December 1998 pursuant to which the Company received approximately $55 million from a sale of unguaranteed commercial loans originated by the Company. The funding provided and made available by the foregoing transactions, in addition to planned increases in brokered and retail certificates of deposit, is expected to be sufficient to fund the sale by the Company of its retail branch (that is, to fund the payment to the Deposit Buyer of the amount of the deposit liabilities assumed by the Deposit Buyer, less the premium and other amounts payable to the Company). Management of the Company believes that the funding provided by the foregoing transactions will also be sufficient, when combined with the amounts available to the Company from issuance of brokered and retail certificates of deposit and other sources of revenues, for the Company's on-going liquidity requirements. The Bank is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory and discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial condition. The regulations require that the Bank meet specific capital adequacy guidelines as calculated under regulatory accounting practices. The Bank's capital classification is also subject to qualitative judgments by the regulators about interest rate risk, concentration of credit risk and other factors. Quantitative measures established by regulations to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of Tier I capital to total average assets (as defined), and minimum ratios of Tier I and total capital to risk weighted assets. The Bank's capital ratios are well in excess of regulatory minimum requirements. As the Company is a small bank holding company, it is not subject to any additional capital ratio requirements. See Note 7 to the consolidated financial statements for a table of minimum required and actual capital ratios. Quantitative and Qualitative Disclosures About Market Risk and Asset/Liability Management The Company completed two loan sales and securitization transactions in 1998. In 1998, approximately 24% of the Company's $16.9 million gain on loan sales were attributed to the two securitizations of commercial loans and the sale of loans to a commercial paper conduit. The Company expects to continue to sell loans to the commercial paper conduit and complete asset-backed loan private placements in the capital markets to securitize and sell the unguaranteed portions of SBA and USDA loans, 16 commercial loans and privately-insured international loans. The Company expects to continue to sell the guaranteed portions of SBA, USDA and Ex-Im Bank loans on a loan-by-loan basis. Such government guaranteed loans represented approximately 50% of the total loans originated in 1998. Although reliance on the capital markets for the sale of such loans presents the Company with new risks related to liquidity and earnings volatility, the Company believes that its diversified sales and funding strategy provides it with the ability to manage such risks. The Company believes that its overall strategy of blending whole loan sales of government guaranteed loans with the securitization of commercial loans and its on-going ability to sell loans to the commercial paper conduit provide a diversified array of loan sales alternatives. As far as sources of funds, after the sale of the branch discussed earlier, the Company will continue to receive funding from retail and brokered certificates of deposit and from the warehouse lines provided by the investment banking firm that lead managed the Company's initial public offering in September 1997. Several factors will affect the Company's ability to access its warehouse lines of credit and complete securitizations in the future, including conditions in the securities markets generally, and in the asset-backed securities market specifically, the credit quality of the Company's loan portfolio, compliance of the Company's loans with the eligibility requirements established in connection with the warehouse lines and securitizations, the Company's ability to provide third-party credit enhancement and adequately service its loan portfolio, and the absence of any material downgrading or withdrawal of ratings given to securities previously issued in the Company's securitizations. During the third quarter of 1998 and continuing into the fourth quarter of 1998, the capital markets experienced rapid and extreme changes evidenced by a decline of investor demand for certain asset-backed securities that carried a credit agency rating less than the highest ratings available and a widening of the spreads between the interest rates on treasury securities and interest rates on asset-backed securities. The "flight to quality" by asset-backed investors requires issuers like the Company to provide a greater level of credit enhancement to attain higher credit ratings for a larger percentage of the securitization in order to make the transaction marketable. The widening of spreads in the asset-backed capital markets reduces the earnings on a securitization and, if such events were to occur in the future, could limit the amount of borrowings available to the Company under its warehouse lines of credit and may make future securitizations economically unfeasible. Any substantial reduction in the accessibility of the warehouse lines of credit or the securitization market for the Company's loans or any adverse change in the terms of such securitizations could have an adverse effect on the Company's financial condition or results of operations. An earnings at risk model is one tool utilized by the Company to measure interest rate risk. Such a model computes the estimated effect on net income from changes in interest earned on assets and expenses paid on liabilities, as well as the impact of off-balance sheet items in the event of a range of assumed changes in market interest rates. This analysis estimates the risk of loss in market risk sensitive instruments in the event of a sudden and sustained one hundred to three hundred basis point increase or decrease in the market interest rates. The Company's Board of Directors has adopted an interest rate risk policy, which establishes maximum decreases in net income and capital in the event of a sudden and sustained change in market interest rates. At December 31, 1998, the estimated changes in the Company's net income based on the hypothetical changes in interest rates were within the limits established by the Board of Directors. Such an earnings at risk calculation is based on the estimated change in interest income and interest expense utilizing numerous assumptions, including historical relationships between various indices utilized by the Company in setting interest rates and management's judgment as to the expected relationship of such rates in the current environment. This calculation utilizes such relative levels of market interest rates as well as assumptions regarding loan prepayments and deposit decays and should not be relied upon as indicative of actual results. Importantly, the computations do not contemplate any actions the Company could undertake in response to changes in interest rates. Certain shortcomings are inherent in the method of analysis presented in the computation of earnings at risk. Actual results may differ from those presented should market conditions vary from assumptions used in the calculation. In the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in the earnings at risk calculation. Finally, the ability of many borrowers to repay their adjustable rate loans and the value of the underlying collateral may decrease in the event of interest rate decreases. The Company seeks to manage its assets and liabilities to reduce the potential adverse impact on net interest income that might result from changes in interest rates. Control of interest rate risk is conducted through systematic monitoring of maturity mismatches. The Company's investment decision-making takes into account not only the rates of return and their underlying degree of risk, but also liquidity requirements, including minimum cash reserves, withdrawal and maturity of deposits and additional demand for funds. For any given period, the pricing structure is matched when an equal amount of assets and liabilities reprice. An excess of assets or liabilities over these matched items results in a gap or mismatch, as shown in the following table. A negative gap denotes liability sensitivity and normally means that 17 a decline in interest rates would have a positive effect on net interest income, while an increase in interest rates would have a negative effect on net interest income. However, significant variations may exist in the degree of interest rate sensitivity between individual asset and liability types within the repricing periods presented due to differences in their repricing elasticity relative to the change in the general level of interest rates. All of the Company's assets and liabilities are U.S. dollar-denominated and, therefore, the Company bears no foreign exchange risk. The majority of the Company's assets reprice according to contractual arrangements although the Company has historically had fairly broad discretion over the frequency and magnitude of interest rate changes on its liabilities which has enabled the Company to minimize the impact of any general changes in the interest rate environment. This discretion may be more limited in the future due to the sources of funds anticipated to be utilized in the future as discussed above and in "Liquidity and Capital Resources." The Company utilizes the analysis detailed below to generally monitor the composition of assets and liabilities and focuses on the one-year mismatch. The Company believes the positive one year cumulative gap of $4.1 million or 2% reflects a relatively balanced position. For purposes of the following analysis, checking and savings account repricing is presented 20% in the 0-90 day period, 20% in the 91-180 day period, 30% in the 181-365 day period and 30% in the 1-5 year period. Although the elasticity of such deposits cannot be tied to any one-time period, these are the assumptions which have been developed by the Company based on historical experience and are utilized for internal and regulatory reporting purposes.
- ----------------------------------------------------------------------------------------------------------------------------- December 31, 1998 0 to 90 91 to 180 181 to 365 1 to 5 Over 5 Days Days Days Years Years Total - ----------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) Commercial loans ................... $ 85,049 $ 6,833 $ 2,691 $ 4,340 $ 11,487 $ 110,400 Residential loans .................. -- 1,566 364 529 554 3,013 Other consumer loans ............... 160 8 41 270 54 533 Investments ........................ 21,073 4,310 3,632 4,535 2,033 35,583 Federal funds sold ................. 44,930 -- -- -- -- 44,930 -------- -------- -------- -------- -------- --------- Total interest earning assets .... $151,212 $ 12,717 $ 6,728 $ 9,674 $ 14,128 $ 194,459 ======== ======== ======== ======== ======== ========= Checking ........................... $ 11,187 $ 11,185 $ 16,778 $ 16,778 -- $ 55,928 Money market savings ............... 20,695 20,696 31,044 31,044 -- 103,479 Other savings ...................... 2,868 2,867 4,301 4,301 -- 14,337 Time deposits ...................... 31,374 4,938 7,560 2,258 -- 46,130 Treasury, tax and loan ............. 1,047 -- -- -- -- 1,047 -------- -------- -------- -------- -------- --------- Total interest bearing liabilities $ 67,171 $ 39,686 $ 59,683 $ 54,381 $ -- $ 220,921 ======== ======== ======== ======== ======== ========= Interest sensitivity gap ........... $ 84,041 $(26,969) $(52,955) $(44,707) $ 14,128 $ (26,462) ======== ======== ======== ======== ======== ========= Cumulative gap ..................... $ 84,041 $ 57,072 $ 4,117 $(40,590) $(26,462) ======== ======== ======== ======== ======== Cumulative gap as a percentage of total interest earning assets .. 43% 29% 2% (21)% (14)% ======== ======== ======== ======== ========
Importantly, the above table reflects the balance sheet as of December 31, 1998 and does not consider the projected sources of funding which are expected to be utilized after the sale of the Company's last retail branch and checking, savings and money market accounts. 18 Seasonality The Company's business is seasonal, as the level of domestic loan originations tends to be lower during the first quarter when many U. S. companies have not yet produced their fiscal financial statements and during the third quarter when many U. S. manufacturers shut down for a limited time for summer vacation. Further, as the Company relies more on securitizations for the sale of loans, the Company's earnings will also be lower in the quarters when loans originated are held in portfolio for a future securitization. Impact of Inflation The consolidated financial statements and related data presented elsewhere have been prepared in accordance with generally accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on the operations of the Company is reflected in increased operating costs. Interest rates have a significant impact on the Company's performance. Increases in interest rates affect the ability of the Company's borrowers to service their variable rate debt. Furthermore, inflation can directly affect the value of loan collateral in general, and real estate collateral in particular. These factors are taken into account in the initial underwriting process and over the life of the loans. The Company believes that it has the systems in place to continue to manage the rates, liquidity and interest rate sensitivity of the Company's assets and liabilities. Year 2000 Compliance As the Year 2000 approaches, a critical business issue has emerged regarding how existing application software programs and operating systems can accommodate this date value. In brief, many existing application software products in the marketplace were designed to only accommodate a two digit date position which represents the year (e.g., `95 is stored on the system and represents the year 1995). As a result, the year 1999 (i.e., `99) could be the maximum date value these systems will be able to accurately process. Utilizing the guidance provided by the Federal Institutions Examination Council ("FFIEC") as a framework, the Company has developed a Year 2000 Compliance Program as discussed below. The Company's Year 2000 Compliance Workplan ("Workplan") includes the following broad components: . Review of Mission Critical Systems for Year 2000 Readiness . Renovation of Internal Mission Critical Systems . Renovation of External Mission Critical Systems . Testing of Mission Critical Systems . Development of Business Resumption Contingency Plan . Assessment of Customer Risk . Remediation Contingency Plan Senior management and the Technology Committee of the Board of Directors are responsible for monitoring compliance with the Workplan. In addition, the Company's primary regulator, the Office of the Comptroller of the Currency, performs periodic off-site inquiries and on-site visitations to assess the status of the Company's Year 2000 readiness and progress against the Workplan and federal regulations. While the Company has devoted a significant amount of human resources to address its Year 2000 readiness, management does not believe that the resultant deferral of other information technology ("IT") projects has had a material impact on the Company's financial condition or results of operations. The Company has reviewed all mission critical systems, prioritized the details of the plan and its resources, and has established deadlines for each of the components of the Workplan. The Company's primary internal mission critical systems included a deposit item processing system, wide area network which supports word processing and spreadsheet applications as well as other external software systems, and an AS/400 operating system. The Company determined that the deposit item processing system could not be readily made Year 2000 compliant and, therefore, outsourced this function in the first quarter of 1998. Total annual costs for this third party service are estimated at $130,000 and are estimated to be reduced to $36,000 after the sale of the branch and related deposits. The Company's word processing and spreadsheet software applications and the AS/400 operating system were upgraded to Year 2000 compliant versions in the first half of 1998. Total costs of such software upgrades approximated $55,000. Certain hardware components were also upgraded in conjunction with these software initiatives at an estimated of cost of $20,000. Management estimates that additional costs to be incurred to execute the Workplan will not exceed $20,000. Third party vendors support the Company's other mission critical IT and non-IT systems. During the fourth quarter of 1998, the Year 2000 readiness of the systems provided by third party suppliers and other material third parties were tested and found to be compliant. Development of the Business Resumption Contingency Plan is well underway at December 31, 1998, as required by the FFIEC. Although the Company expects that each mission critical system will be Year 2000 Compliant, such a plan will be designed to mitigate serious disruptions to the Company's business flow. The Company's Workplan also requires that the Year 2000 readiness of major borrowers, wholesale time deposit brokers, investment bankers providing borrowing facilities to the Company, and primary loan purchasers be evaluated. Documentation has been received from these parties and it appears to meet the FFIEC standards for determining Year 2000 preparedness and provides information to assess any potential risk to the Company. The Company has reviewed the documentation and it appears that the parties have adequately assessed Year 2000 risks and undertaken efforts to mitigate potential problems. 19 The above expectations are subject to uncertainties. If for example, the Company fails to identify and address all Year 2000 problems in the mission critical operations, fails to develop a comprehensive contingency plan, or is affected by the inability of critical third parties to continue operations due to such problems, the results of the Company's operations or financial condition could be materially impacted. Such impact might result from operational difficulties of the Company's borrowers and their resultant inability to repay their loans to the Company; an inability of the Company to access wholesale funds providers or other borrowing facilities; and an inability of the Company to normally process deposit, loan or loan investor transactions. Based on the current information and the efforts to date, however, it is not expected that Year 2000 problems will have a material effect on the Company's results of operations or financial condition. It also does not appear that a Remediation Contingency Plan will be required. If it is subsequently determined that such a plan is required, it will be developed pursuant to the applicable FFIEC guidance. Recent Accounting Pronouncement SFAS No. 133 In June 1998, the FASB issued No. 133 "Accounting for Derivative Instruments and Hedging Activities," which is effective for all of the Company's financial statements issued after December 31, 1999. This statement establishes accounting and reporting standards for derivative instruments and for hedging activities, and requires that all derivatives be recognized as either assets or liabilities in the entity's balance sheet and be measured at fair value. Changes in the fair value of the derivative instruments are to be recognized depending on the intended use of the derivative and whether or not it has been designated as a hedge. This statement is not expected to have a significant impact upon the Company's financial position, results of operations or cash flows. 20 Report of Independent Accountants The Board of Directors and Stockholders of First International Bancorp, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, changes in stockholders' equity and cash flows present fairly, in all material respects, the financial position of First International Bancorp, Inc. and Subsidiary (the "Company") at December 31, 1998 and December 31, 1997 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP January 27, 1999 21 First International Bancorp, Inc. and Subsidiary Consolidated Balance Sheets December 31, 1998 and 1997 (dollars in thousands)
- ----------------------------------------------------------------------------------------- 1998 1997 - ----------------------------------------------------------------------------------------- Assets Cash and due from banks ....................................... $ 13,405 $ 10,944 Federal funds sold ............................................ 44,930 6,450 ---------- --------- Cash and cash equivalents ................................. 58,335 17,394 Investment securities (Note 2): Available for sale at fair value ............................ 31,456 12,767 Held to maturity at amortized cost (fair value $1,989 and $7,429) .............................. 1,986 7,435 U.S. Agency stocks at cost .................................... 2,177 2,069 Loans, net (Note 3) ........................................... 108,958 130,625 Loans held for sale ........................................... 8,577 9,070 Receivable from loans sold (Note 1) ........................... 43,610 28,775 Accrued interest receivable ................................... 1,383 1,200 Premises and equipment, net (Note 4) .......................... 3,815 2,694 Prepaid expenses and other assets ............................. 13,429 6,822 ---------- --------- Total assets ............................................... $273,726 $218,851 ========== ========= Liabilities and Stockholders' Equity Deposits (Note 5) ............................................. $219,874 $172,321 U.S. Treasury demand note ..................................... 1,047 1,085 Accrued interest payable ...................................... 768 745 Other liabilities ............................................. 2,966 2,552 ---------- --------- Total liabilities ......................................... 224,655 176,703 Commitments and Contingencies (Notes 3 and 4) Stockholders' equity (Notes 1, 7, 8, 9 and 13): Common stock, $.10 par value, 12,000,000 shares authorized; 7,952,637 and 7,866,735 shares issued and outstanding ....... 795 787 Preferred stock, $.10 par value, 2,000,000 shares authorized; no shares issued and outstanding .......................... -- -- Paid-in capital in excess of par value ...................... 32,561 32,083 Stockholder note receivable ................................. (941) (877) Accumulated other comprehensive income ...................... 428 12 Retained earnings ........................................... 16,228 10,143 ---------- --------- Total stockholders' equity ................................ 49,071 42,148 ---------- --------- Total liabilities and stockholders' equity ................ $ 273,726 $ 218,851 ========== ==========
- -------------------------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements 22 First International Bancorp, Inc. and Subsidiary Consolidated Statements of Income Years Ended December 31, 1998, 1997 and 1996 (dollars in thousands, except per share amounts)
- -------------------------------------------------------------------------------- 1998 1997 1996 - -------------------------------------------------------------------------------- Interest income: Loans, including net fees ..................... $15,522 $12,753 $12,027 Investment securities ......................... 1,154 1,156 646 Federal funds sold ............................ 1,412 716 632 --------- -------- -------- Total interest income ....................... 18,088 14,625 13,305 --------- -------- -------- Interest expense: Deposits ...................................... 7,896 6,337 5,714 Other ......................................... 28 34 27 --------- -------- -------- Total interest expense ...................... 7,924 6,371 5,741 --------- -------- -------- Net interest income ......................... 10,164 8,254 7,564 Provision for possible loan losses .............. 3,071 2,239 3,487 --------- -------- -------- Net interest income after provision for possible loan losses .......... 7,093 6,015 4,077 Non-interest income: Gain on sale of guaranteed commercial loans .... 12,239 9,513 4,904 Gain on commercial loan-backed securitizations . 4,094 -- -- Gain on sale of commercial loans ............... 626 2,297 940 Loan servicing income and fees ................. 4,353 2,618 1,475 Service charges and other deposit fees ......... 500 438 424 Other income ................................... 267 244 -- Gain on sale of securities ..................... 33 -- -- Gain on branch sale ............................ -- -- 2,202 --------- -------- -------- Total non-interest income .................... 22,112 15,110 9,945 --------- -------- -------- Total operating income ....................... 29,205 21,125 14,022 --------- -------- -------- Non-interest expense: Salaries and benefits ......................... 11,235 9,537 5,089 Occupancy ..................................... 1,523 985 774 Office expenses ............................... 834 556 421 Marketing ..................................... 1,453 847 691 Furniture and equipment ....................... 1,007 692 462 Outside services .............................. 773 556 321 Other ......................................... 875 628 667 --------- -------- -------- Total non-interest expense .................. 17,700 13,801 8,425 --------- -------- -------- Income before income taxes .................. 11,505 7,324 5,597 Provision for income taxes ...................... 4,472 2,895 2,353 --------- -------- -------- Net income .................................. $ 7,033 $ 4,429 $ 3,244 ========= ======== ======== Basic earnings per share (Notes 1 and 7) ....... $ .89 $ .70 $ .56 ========= ======== ======== Diluted earnings per share (Notes 1 and 7) ...... $ .86 $ .67 $ .56 ========= ======== ========
- -------------------------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements 23 First International Bancorp, Inc. and Subsidiary Consolidated Statements of Changes in Stockholders' Equity Years Ended December 31, 1998, 1997 and 1996 (dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------------------- Accumulated Other Comprehensive Income ------------------- Paid-in Unrealized Capital in Stockholder Holding Gain (Loss) Common Excess of Note on Investments Retained Stock Par Value Receivable Available-for-Sale Earnings Total - ---------------------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1996 ...................... $ 576 $ 8,202 $(1,007) $ (28) $ 3,859 $ 11,602 Repurchase and retirement of 7,875 shares of common stock (Note 7) ........................... (1) (21) -- -- -- (22) Issuance of 21,000 shares of common stock under option plan (Note 8) ............................ 2 41 -- -- -- 43 Dividends on common stock ($.11/share) ............ -- -- -- -- (658) (658) Principal payment on stockholder note receivable (Note 7) ............................. -- -- 53 -- -- 53 Comprehensive income: Increase in unrealized holding loss, net of taxes -- -- -- (46) -- (46) Net income ...................................... -- -- -- -- 3,244 3,244 -------- Comprehensive income ............................ -- -- -- -- -- 3,198 ----- -------- ------ ------ -------- -------- Balance at December 31, 1996 .................. 577 8,222 (954) (74) 6,445 14,216 Issuance of 145,350 shares of common stock under option plan (Note 8) ...................... 14 249 -- -- -- 263 Issuance of 1,955,000 shares of common stock at public offering (Note 1) ..................... 196 23,612 -- -- -- 23,808 Dividend on common stock ($.12/share) ............. -- -- -- -- (731) (731) Discount on stockholder note receivable (Note 7) .. -- -- 92 -- -- 92 Accretion on stockholder note receivable (Note 7) . -- -- (15) -- -- (15) Comprehensive income: Decrease in unrealized holding loss, net of taxes -- -- -- 86 -- 86 Net income ...................................... -- -- -- -- 4,429 4,429 -------- Comprehensive income ............................ -- -- -- -- -- 4,515 ----- -------- ------ ------ -------- -------- Balance at December 31, 1997 .................. 787 32,083 (877) 12 10,143 42,148 Issuance of 85,902 shares of common stock under option plan (Note 8 ) ..................... 8 478 -- -- -- 486 Dividends on common stock ($.12/share) ............ -- -- -- -- (948) (948) Accretion on stockholder note receivable (Note 7) . -- -- (64) -- -- (64) Comprehensive income: Increase in unrealized holding gain, net of taxes -- -- -- 416 -- 416 Net income ...................................... -- -- -- -- 7,033 7,033 -------- Comprehensive income ............................ -- -- -- -- -- 7,449 ===== ======== ======== ====== ======== ======== Balance at December 31, 1998 .................. $ 795 $ 32,561 $ (941) $ 428 $ 16,228 $ 49,071 ===== ======== ======== ====== ======== ======== - ----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements 24 First International Bancorp, Inc. and Subsidiary Consolidated Statements of Cash Flows For the Years Ended December 31, 1998, 1997 and 1996 (dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income ................................................................. $ 7,033 $ 4,429 $ 3,244 ------------ ----------- ----------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization .............................................. 678 644 374 Amortization of investment premiums, net ................................... 16 7 55 Accretion of loan discount, net ............................................ 1,930 1,161 1,042 Provision for possible loan losses ......................................... 3,071 2,239 3,487 Provision for loss on other real estate owned .............................. 35 -- 200 Increase in other liabilities .............................................. 745 1,004 686 Increase in deferred loan costs ............................................ (322) (42) (15) (Increase) decrease in accrued interest receivable ......................... (183) (377) 54 Increase in accrued interest payable ....................................... 22 123 324 Deferred income tax provision (benefit) .................................... (173) 121 (249) Gain on sale of investment securities ...................................... (33) -- -- Gain on sale of loans ...................................................... (16,959) (11,810) (5,844) Loss on sale of other real estate owned .................................... 3 -- -- (Increase) decrease in receivable from loans sold .......................... (14,836) (18,434) 932 Increase in prepaid expenses and other assets .............................. (6,786) (2,113) (1,395) Discount on stockholder note receivable .................................... -- 92 -- Accretion on stockholder note receivable ................................... (64) (15) -- (Increase) decrease in loans held for sale ................................. 493 (9,070) -- Loans originated for sale .................................................... (322,065) (223,830) (132,839) Proceeds from sale of loans originated for sale .............................. 342,399 244,516 141,568 ------------ ----------- ----------- Total adjustments ........................................................ (12,029) (15,784) 8,380 ------------ ----------- ----------- Net cash provided by (used in) operating activities ...................... (4,996) (11,355) 11,624 Cash flows from investing activities: Net decrease (increase) in loans ........................................... 13,516 (33,406) (14,119) Purchase of investment securities available for sale ....................... (34,486) (13,587) (10,514) Purchase of investment securities held to maturity ......................... -- (8,496) (500) Purchase of equity securities .............................................. (709) (782) (415) Proceeds from sales of investment securities available for sale ............ 4,537 -- -- Proceeds from maturities and principal repayments of investment securities available for sale ................................. 11,876 11,998 1,500 Proceeds from maturities of mortgage-backed securities available for sale .. 60 486 4,023 Proceeds from maturities and principal repayments of investment securities held to maturity ................................... 4,525 4,000 -- Proceeds from maturities of mortgage-backed securities held to maturity .... 925 123 1,526 Proceeds from sale of equity securities .................................... 602 -- -- Proceeds from sale of branch premises ...................................... -- -- 275 Proceeds from sale of other real estate owned .............................. 51 -- 100 Capital expenditures, net .................................................. (1,799) (1,823) (894) ------------ ----------- ----------- Net cash used in investing activities .................................... (902) (41,487) (19,018) ------------ ----------- ----------- Cash flows from financing activities: Net increase in deposits ................................................... 47,553 28,005 15,954 Net increase (decrease) in other borrowings ................................ (37) 24 841 Proceeds from sale of common stock at public offering, net ................. -- 23,808 -- Proceeds from issuance of common stock under option plan ................... 271 263 43 Repurchase of common stock ................................................. -- -- (22) Dividends paid ............................................................. (948) (731) (658) Principal payment on stockholder note receivable ........................... -- -- 53 ------------ ----------- ----------- Net cash provided by financing activities ................................ 46,839 51,369 16,211 ------------ ----------- ----------- Net increase (decrease) in cash and equivalents .......................... 40,941 (1,473) 8,817 Cash and cash equivalents at beginning of year ............................. 17,394 18,867 10,050 ------------ ----------- ----------- Cash and cash equivalents at end of year ................................... $ 58,335 $ 17,394 $ 18,867 ============ ============ =========== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest ................................................................... $ 7,902 $ 6,248 $ 5,418 Income taxes ............................................................... $ 3,182 $ 2,791 $ 2,664 Non-cash items: Real estate acquired in settlement of loans ................................ $ 186 -- -- - ------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements 25 First International Bancorp, Inc. and Subsidiary Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 1. Summary of Significant Accounting Policies: Basis of Presentation The consolidated financial statements include the accounts of First International Bancorp, Inc. (the "Company") and the consolidated accounts of its wholly-owned subsidiary, First International Bank, N. A., (the "Bank"), formerly known as First National Bank of New England. In 1998, the Bank established three special purpose subsidiaries to facilitate loan securitizations and sales to a commercial paper conduit. Intercompany accounts and transactions have been eliminated in consolidation. The Bank operates a full service branch at its headquarters in Hartford, Connecticut and representative offices, which are responsible for regional loan origination efforts, in Boston and Springfield, Massachusetts; Providence, Rhode Island; Rochester, New York; Morristown, New Jersey; Philadelphia and Pittsburgh, Pennsylvania; Washington D.C.; Cleveland, Ohio; and Detroit, Michigan. The Bank sold a suburban branch facility and certain deposits in 1996. In December 1998, the Company signed an agreement to sell its main branch premises, which is its only branch, and all of its checking, savings and money market accounts. This transaction is expected to close in March 1999. (See Note 16.) The Company will retain its retail and brokered certificate of deposit accounts. Expected other sources of funding will include warehouse credit lines, a commercial paper conduit and loan securitizations and sales. The Company's primary revenues are derived from net interest income and the origination and sale, on a servicing retained basis, of commercial loans. In 1998, the Company also began to securitize and sell commercial loans and portions thereof. The Company completed an underwritten public stock offering of 1,700,000 shares in September 1997 and issued an additional 255,000 shares in October when the underwriters exercised their option to purchase such shares. The offering resulted in net proceeds to the Company of $23.8 million. The Bank is a national leader in the use of loan guarantee programs offered by the U.S. Small Business Administration ("SBA"), the U.S. Department of Agriculture ("USDA") and the Export-Import Bank of the United States ("Ex-Im Bank"). Continued availability of such loan guarantees are dependent upon timely and adequate federal budget appropriations. Each of these federal programs is funded through September 1999, but there can be no assurance of sufficient budgetary allocations to allow a continuation of such programs in substantially their current form. In preparing the consolidated financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and the results of operations for the period. Material estimates in these consolidated financial statements relate to the allowance and provision for possible loan losses, the valuation of other real estate owned and the estimated lives of loans sold or securitized where servicing has been retained. Market conditions are evaluated and independent appraisals of significant properties are obtained by management as needed in the process of setting the estimates. Notwithstanding this diligence, such estimates are particularly sensitive to the economic environment and can be significantly affected by changing economic conditions affecting the value of the collateral, interest rates, borrowers' financial position and other factors. Accordingly, actual results could differ significantly from the estimates. Investment Securities Securities that may be sold as part of the Company's asset/liability or liquidity management, or in response to or in anticipation of changes in interest rates and resulting prepayment risk, or for other similar factors, are classified as available-for-sale and carried at fair market value. Unrealized holding gains and losses on such securities are reported net of related taxes as a separate component of stockholders' equity. Debt securities that the Company has the ability and positive intent to hold to maturity are classified as held-to-maturity and carried at amortized cost. Realized gains and losses on the sales of all investment securities are reported in earnings and computed using the specific identification cost basis. Declines in the market value of investment securities that are deemed to be other than temporary are charged to income. Loans Loans are stated at their principal amount outstanding. Interest income on loans is recognized on the simple interest method based upon the principal amount outstanding. Receivable from loans sold and gain on commercial loan sales are attributable to the sale of commercial loans which have been at least partially guaranteed by the SBA, the 26 USDA or Ex-Im Bank as well as the sale of unguaranteed commercial loans. Transactions are generally settled within 30 days of the sale. The gain on the sale of a portion of a loan is based on the relative fair market values of the loan sold and the loan retained. A portion of the gain on commercial loan sales is due to a servicing asset which represents the present value of the differential between the servicing fee received by the Company and adequate compensation, defined as the fee a sub-servicer would require to assume the role of servicer, after considering the estimated effects of prepayments. The discount rate utilized in calculating the servicing asset approximates the market rate an investor would demand on a risk-adjusted basis. The servicing asset is amortized as a charge to non-interest income over the estimated lives of the underlying loans on an effective interest method. The servicing asset is analyzed periodically for impairment based on the term of the serviced loan, the perceived alternatives for refinancing, the current interest rate environment and historical default and prepayment patterns, and is carried at the lower of amortized cost or net realizable value. The discount on retained loans, which relates to the retained portion of the unguaranteed portion of SBA and USDA loans, is reflected as a reduction of loans in the consolidated balance sheet. The discount is recorded in interest income over the estimated life of the retained loan on an effective interest method. Loans Held for Sale The Company classifies loans for which it does not have a positive intent to hold to maturity as loans held for sale and carries them at the lower of cost or market based on the aggregate value of the portfolio. Loan Origination Fees (Costs) Fees for loan originations and commitments, and related origination costs, are deferred and recognized as a yield adjustment utilizing the interest method over the contractual life of the related loan, adjusted for prepayment and sales. Provision/Allowance For Possible Loan Losses The Company evaluates the collectibility of impaired loans, as defined below, based on the present value of expected future cash flows discounted at the historical effective interest rate, except that all collateral-dependent loans are measured for collectibility of contractual principal and interest based on the estimated fair value of the collateral. Smaller-balance homogeneous loans consisting of residential mortgages and consumer loans are evaluated for collectibility by the Company based on historical loss experience rather than on an individual loan-by-loan basis. The Company evaluates all impaired loans, other than small balance loans, on an individual loan-by-loan basis; it does not aggregate impaired loans into major risk classifications. The Company considers a loan to be impaired when, based on current information and events, it is probable that it will be unable to collect all amounts of contractual interest and principal as scheduled in the loan agreement. An insignificant delay of under 60 days or a 10% shortfall in the amount of the payment is not an event that, when considered in isolation, would automatically cause the Company to consider a loan to be impaired. The Company places a loan on nonaccrual status when it is 90 days or more past due or when, in management's assessment, the full collectibility of principal and interest is uncertain. Except for certain restructured loans, impaired loans are loans that are on nonaccrual status. When an impaired loan or a portion of an impaired loan is deemed uncollectible, the portion deemed uncollectible is charged against the allowance for loan losses and subsequent recoveries, if any, are credited to the allowance. The Company recognizes interest income on impaired loans on a cash basis and reverses any accrued interest income at the date of determination. Management determines the adequacy of its allowance for possible loan losses primarily through periodic reviews of the loan portfolio, loan delinquencies, collateral on loans and past payment history adjusted for such factors as known changes in the character of the loan portfolio and current economic conditions. Consideration is also given to anticipated economic conditions, as well as other relevant factors in establishing the allowance. The allowance is increased by provisions for loan losses charged to income and decreased by charge offs, net of recoveries. Securitizations The Company securitizes and sells certain unguaranteed commercial loans and the unguaranteed portion of certain guaranteed commercial loans. In connection with these transactions, the Company records a gain which is based on the fair market value of the assets securitized and is required to retain one or more of the following retained interests in the securitized assets: interest-only strips, subordinated certificates, servicing rights and cash reserve accounts. Subsequent to the securitization, the retained interests are carried at fair value. To obtain fair values, quoted market prices are used if available. If fair value quotes are unavailable, the Company estimates fair value based on the present value of future cash flows expected based on key assumptions (i.e., credit loss, prepayment speed, discount rate). Subordinated certificates and interest-only strips are classified as investments available-for-sale. Other Real Estate Owned Other real estate owned ("OREO"), representing property acquired by foreclosure or acceptance of a deed in lieu of foreclosure, is carried at the lower of the unpaid loan balance at the date of acquisition or fair value less estimated disposal costs. Improvements are capitalized to the extent realizable. Holding and selling costs are expensed as incurred. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed on the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the period of the related lease. Costs of maintenance and repairs are expensed, while major improvements are capitalized. 27 Income Taxes Income taxes are provided based on the asset/liability method of accounting. Deferred income taxes and tax benefits are recognized for the future income tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is established when it is more likely than not that some portion of the deferred tax asset will not be realized. Earnings Per Share Earnings per share for all periods presented have been calculated in accordance with SFAS No. 128, "Earnings Per Share" which requires the presentation of basic and diluted earnings per share. Basic earnings per share is determined based on the weighted average shares outstanding, while diluted earnings per share reflects the potential dilution that could occur if options to issue common stock were exercised. (See Note 7.) Stock Option Plans The Company has chosen not to adopt fair value accounting for stock based compensation and continues to employ intrinsic value accounting for its option plans as detailed in Note 8. Certain disclosures as if fair value accounting had been adopted, including pro forma net income and earnings per share, have been made in these financial statements. Common Stock Split On June 26, 1997, the Company's stockholders approved a 3.5-for-1 stock split to stockholders of record on July 14, 1997, effective August 7, 1997. Stockholders' equity has been restated to give retroactive recognition to the stock split in prior periods by reclassifying from paid-in capital in excess of par value to common stock an amount equal to the par value of the additional shares arising from the split. In addition, all references to the number of shares, per share amounts and stock option data have been restated. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. Generally, federal funds are sold for one day periods or terms of less than 30 days. The Company is required to maintain certain levels of cash reserves at the Federal Reserve Bank of Boston based on its deposit accounts. Such required reserves totaled $1,082,000 at December 31, 1998. Included in cash are certain restricted deposit accounts, related to the Company's loan securitization transactions. Such deposits totaled $5,973,000 at December 31, 1998. Comprehensive Income In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income," which established standards for reporting comprehensive income, defined as the change in equity of a business enterprise during a period from nonowner sources. The Company's comprehensive income is comprised of net income and the unrealized holding gain (loss) on investments classified as available-for-sale. Segment Information In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS 131 supersedes SFAS 14 "Financial Reporting for Segments of a Business Enterprise," replacing the "industry segment" approach with the "management" approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. SFAS No. 131 also requires disclosures about products and services, geographic areas, and major customers. The adoption of SFAS No. 131 did not affect results of operations or financial position. (See Note 12.) Reclassifications Certain amounts from 1997 and 1996 have been reclassified to conform to the 1998 presentation. Recent Accounting Pronouncement SFAS No. 133 In June 1998, the FASB issued No. 133 "Accounting for Derivative Instruments and Hedging Activities," which is effective for all of the Company's financial statements issued after December 31, 1999. This statement establishes accounting and reporting standards for derivative instruments and for hedging activities, and requires that all derivatives be recognized as either assets or liabilities in the entity's balance sheet and be measured at fair value. Changes in the fair value of the derivative instruments are to be recognized depending on the intended use of the derivative and whether or not it has been designated as a hedge. This statement is not expected to have a significant impact upon the Company's financial position, results of operations or cash flows. 28 - -------------------------------------------------------------------------------- 2. Investment Securities: Securities classified as available-for-sale (carried at fair value) and as held to maturity (carried at amortized cost) as of December 31, 1998 and 1997 are as follows:
- -------------------------------------------------------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value - -------------------------------------------------------------------------------------------------------------------- (dollars in thousands) December 31, 1998 Available for Sale U.S. Treasury obligations ..................... $ 11,579 $ 15 $ (1) $11,593 U.S. Government mortgage-backed securities .... 88 3 -- 91 Mutual funds .................................. 19 -- -- 19 Commercial loan-backed securities ............. 14,930 696 -- 15,626 Interest-only strips .......................... 4,127 -- -- 4,127 -------- -------- --------- ------- $ 30,743 $ 714 $ (1) $31,456 ======== ======== ========= ======= Held to Maturity U.S. Government mortgage-backed securities .... $ 1,361 $ 4 $ (1) $ 1,364 Debt securities of foreign governments ........ 625 -- -- 625 -------- -------- --------- ------- $ 1,986 $ 4 $ (1) $ 1,989 ======== ======== ========= ======= December 31, 1997 Available for Sale U.S. Treasury obligations ..................... $ 12,013 $ 15 $ (3) $12,025 U.S. Government mortgage-backed securities .... 648 9 -- 657 Mutual funds .................................. 85 -- -- 85 -------- -------- --------- ------- $ 12,746 $ 24 $ (3) $12,767 ======== ======== ========= ======= Held to Maturity U.S. Government mortgage-backed securities .... $ 2,285 $ 4 $ (10) $ 2,279 Debt securities of foreign governments ........ 1,150 -- -- 1,150 Variable rate preferred stock ................. 4,000 -- -- 4,000 -------- -------- --------- ------- $ 7,435 $ 4 $ (10) $ 7,429 ======== ======== ========= =======
Stock securities are carried at cost and are comprised of the following:
- ------------------------------------------------------------------------------------------------------------------ December 31, - ------------------------------------------------------------------------------------------------------------------ 1998 1997 ----------------------- (dollars in thousands) Federal Reserve Bank ................................................................... $ 933 $ 224 Federal Home Loan Bank of Boston (FHLBB) ............................................... 645 1,246 Private Export Funding Corporation ..................................................... 599 599 ------ ------ $2,177 $2,069 ====== ======
The Company is required to hold common stock investments in the Federal Reserve Bank based on First International Bank's capital and in the FHLBB based on borrowings from the FHLBB (Note 6). At December 31, 1998 and December 31, 1997, investments with a carrying value of $13,303,000 and $14,422,000, respectively, were pledged to collateralize public and government deposits, as required by law, and certain of the Bank's lines of credit. The Bank sold two debt securities with a par value of $4,500,000 in 1998, recording gains of $32,600. There were no sales of debt securities for the two year period ended December 31, 1997. 29 The contractual maturities of debt securities at December 31, 1998 and 1997 are as follows: - -------------------------------------------------------------------------------- Weighted Amortized Fair Average Cost Value Yield - -------------------------------------------------------------------------------- (dollars in thousands) December 31, 1998 Available for sale Due in one year or less ............... $11,599 $11,613 6.18% Due after one year through five years ............ 3,669 3,669 7.62% Due after 10 years .................... 15,387 16,083 5.76% Mortgage-backed securities ............ 88 91 8.11% ------- ------- ----- $30,743 $31,456 6.15% ======= ======= ===== Held to maturity Due after one year through five years ............ $ 100 $ 100 7.75% Due after five years through ten years ............. 525 525 7.46% Mortgage-backed securities ............ 1,361 1,364 6.48% ------- ------- ----- $ 1,986 $ 1,989 6.80% ======= ======= ===== - -------------------------------------------------------------------------------- Weighted Amortized Fair Average Cost Value Yield - -------------------------------------------------------------------------------- (dollars in thousands) December 31, 1997 Available for sale Due in one year or less ............... $ 5,588 $ 5,588 5.65% Due after one year through five years ............ 6,510 6,522 5.82% Mortgage-backed securities ............ 648 657 6.22% ------- ------- ----- $12,746 $12,767 5.77% ======= ======= ===== Held to maturity Due after one year through five years ............ $ 4,545 $ 4,545 4.43% Due after five years through ten years ............. 1,100 1,100 7.88% Mortgage-backed securities ............ 1,790 1,784 6.09% ------- ------- ----- $ 7,435 $ 7,429 5.34% ======= ======= ===== - -------------------------------------------------------------------------------- 3. Loans: The outstanding balances of loans originated and held by the Company are as follows: - -------------------------------------------------------------------------------- December 31, 1998 1997 - -------------------------------------------------------------------------------- (dollars in thousands) Commercial and industrial ...................... $ 78,750 $ 71,836 Commercial real estate ......................... 31,650 55,192 Residential real estate ........................ 3,013 6,515 Consumer loans and lines of credit ............. 533 1,855 --------- --------- Total loans .............................. 113,946 135,398 ========= ========= Less: Allowance for possible loan losses ....... 4,000 3,100 Discount on retained loans ............... 1,419 1,782 Net deferred loan origination costs ...... (431) (109) --------- --------- Loans, net .......................... $ 108,958 $ 130,625 ========= ========= At December 31, 1998, the Company had fixed and variable rate loans with maturities greater than one year totaling $11,464,000 and $58,814,000 respectively. The scheduled maturities of the Company's loan portfolio as of December 31, 1998 are as follows:
- ------------------------------------------------------------------------------------- After One Within One Year Through After Five Year Five Years Years Total - ------------------------------------------------------------------------------------- (dollars in thousands) Commercial and industrial ....... $40,264 $11,095 $ 27,391 $ 78,750 Commercial real estate .......... 2,843 988 27,819 31,650 Residential loans ............... 436 493 2,084 3,013 Consumer loans and lines of credit ......... 125 270 138 533 ------- ------- -------- -------- $43,668 $12,846 $ 57,432 $113,946 ======= ======= ======== ========
The outstanding balances of loans originated by the Company and sold to others on a servicing retained basis are as follows: - -------------------------------------------------------------------------------- December 31, 1998 1997 - -------------------------------------------------------------------------------- (dollars in thousands) Guaranteed Loans: SBA .......................................... $245,073 $195,454 USDA ......................................... 75,526 45,806 Ex-Im Bank ................................... 117,726 82,794 FHLMC ........................................ 455 17,305 -------- -------- $438,780 $341,359 -------- -------- Unguaranteed Portions and Unguaranteed Loans: SBA .......................................... $ 48,323 $ 51,673 USDA ......................................... 6,173 5,326 Securitized commercial ....................... 104,133 -- Other commercial ............................. 56,957 27,235 Home equity lines ............................ 2,166 3,484 -------- -------- $217,752 $ 87,718 -------- -------- Total loans serviced for others .............. $656,532 $429,077 ======== ======== 30 During 1998 the Bank completed two commercial loan securitization transactions and a sale to a commercial paper conduit. These transactions resulted in the issuance of $113.3 million of senior and subordinated securities and included $117.1 million of loans. Key economic assumptions used in recording these transactions and in measuring the Bank's retained interests were as follows:
- -------------------------------------------------------------------------------------- Commercial Securitizations Paper Sale -------------------------- ---------- Unguaranteed Portions Term Revolving of SBA Loans Commercial Commercial ------------ ---------- ---------- Prepayment speed ......................... 8.0% 8.0% 7.5% Weighted-average life (in years) ....................... 13.75 10.65 3.0 Aggregate expected credit losses .................... 5.74% 4.22% 1.25% Discount rate for servicing cash flows ............. 9.48% 8.43% 8.47%
In connection with the December 1998 sale of revolving commercial loans, a subsidiary of the Bank entered into an interest rate swap with a notional amount of $19,000,000 to mitigate the interest rate risk inherent in the transaction. The swap provides for net settlement on a monthly basis, which is recorded as an adjustment to interest income. At December 31, 1998 there had been no settlements related to the swap transaction. Changes in the Allowance for possible loan losses were as follows: - -------------------------------------------------------------------------------- December 31, 1998 1997 1996 - -------------------------------------------------------------------------------- (dollars in thousands) Reserve at beginning of year .................. $ 3,100 $ 3,000 $ 2,000 Provision charged to income ................... 3,071 2,239 3,487 Recoveries on loans previously charged off .... 153 106 40 Loans charged off ............................. (2,324) (2,245) (2,527) ------- ------- ------- Balance at end of year ........ $ 4,000 $ 3,100 $ 3,000 ======= ======= ======= Certain information with regard to impaired loans is detailed below: - -------------------------------------------------------------------------------- December 31, 1998 1997 - -------------------------------------------------------------------------------- (dollars in thousands) Impaired loans ................................ $2,959 $2,215 Allocated allowance ........................... $ 731 $ 644 Average recorded investment ................... $2,587 $2,194 Interest income recognized .................... $ 152 $ 131 The carrying value of the impaired loans has been calculated based on the estimated fair value of the underlying collateral. Nonaccrual loans totaled $3,104,000 and $2,364,000 at December 31, 1998 and 1997, respectively. The gross interest income that would have been recorded if the non-accrual loans had been current in accordance with their original terms would have been $176,000 and $231,000 for the years ended December 31, 1998 and 1997, respectively. The actual amount of interest income recognized on those loans was $160,000 and $134,000 for the years ended December 31, 1998 and 1997, respectively. There were no loans over 90 days and still accruing interest at each period end presented. Loans to principal stockholders, directors, companies of which directors are principal owners, individuals directly related to or affiliated with directors, and executive officers aggregated $662,000 and $602,000 at December 31, 1998 and 1997, respectively. During 1998, repayments and sales amounted to $639,000 while advances under new or existing loans totaled $699,000. In the normal course of business, the Bank enters into agreements to extend credit which are not reflected in the accompanying consolidated financial statements. Outstanding credit commitments are detailed below: - -------------------------------------------------------------------------------- December 31, 1998 1997 - -------------------------------------------------------------------------------- (dollars in thousands) Commercial lines of credit ..................... $61,652 $47,987 Consumer lines of credit ....................... 373 530 Performance letters of credit .................. 8,284 18,975 Financial letters of credit .................... 14,593 1,415 Commercial letters of credit ................... 8,433 1,542 ------- ------- Total credit commitments ............... $93,335 $70,449 ======= ======= At December 31, 1998 and 1997, letters of credit totaling $18,801,000 and $17,548,000, respectively, carry the guarantee of Ex-Im Bank. Commitments to extend such credit are agreements to lend to a client as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Since some of the agreements may expire without being drawn upon or may be terminated by the Bank, these amounts do not necessarily represent a future cash requirement of the Bank. Prior to entering into any agreement to extend credit, the Bank evaluates the client's creditworthiness in accordance with loan underwriting standards as approved by the Board of Directors. The amount of collateral obtained, if deemed necessary, is based on management's credit evaluation of the client. Collateral for commercial loan commitments varies but may include accounts receivable, inventory, property, plant and equipment and commercial real estate. Although the Bank's maximum exposure to credit loss is the total contract amount of the commitments and letters of credit noted above, management does not anticipate any material losses as a result of these agreements and does not consider them to represent an undue level of credit, interest or liquidity risk for the Bank. 31 The Bank specializes in lending to small and medium size commercial enterprises and professional firms throughout the Northeast, the Mid-atlantic and Midwest regions of the U.S. Approximately 30% of the loans outstanding have been made to borrowers located in Connecticut. Such loans and loan commitments are generally collateralized by real estate or other assets. The Bank also lends to companies in various international emerging markets. Such U.S. dollar denominated loans are either (i) fully guaranteed by Ex-Im Bank and are sold at origination to various investors on a non-recourse, servicing retained basis or, (ii) insured by a privately issued credit insurance policy which provides coverage of up to 95% of the commercial risk of the transaction. Gains on the sale of these loans and the related servicing income in aggregate and by significant country is detailed below. - -------------------------------------------------------------------------------- For the Years Ended December 31, 1998 1997 1998 1997 Gains from loan sales Servicing income - -------------------------------------------------------------------------------- (dollars in thousands) All international .............. $2,274 $2,229 $430 $264 Brazil ......................... $ 873 $1,326 $284 $ 95 Dominican Republic ............. $ 320 $ 15 $ 9 -- Philippines .................... $ 275 -- $ 7 -- No other countries account for a significant portion of gain on loan sales or servicing income. Loans held by the Bank to borrowers located outside the U.S. totaled $14,272,000 at December 31, 1998. The Company reported total revenues from the gain on loan sales, interest income and loan servicing income from loans made to companies located outside the U.S. in the aggregate amounts of $4,242,000, $3,199,000 and $471,000 for the years ended December 31, 1998, 1997 and 1996, respectively. The Company does not have any assets located outside of the U.S. - -------------------------------------------------------------------------------- 4. Premises, Equipment and Leases: - -------------------------------------------------------------------------------- December 31, 1998 1997 - -------------------------------------------------------------------------------- (dollars in thousands) Buildings and leasehold improvements ............... $2,252 $1,590 Furniture, fixtures, and equipment ................. 4,544 3,408 ------ ------ 6,796 4,998 Less: Accumulated depreciation and amortization ................... 2,981 2,304 ------ ------ Premises and equipment, net ................ $3,815 $2,694 ====== ====== The Company leases its corporate offices in Hartford, Connecticut and other facilities for its U.S. representative offices. Each of the leases provide for minimum and contingent rentals and include renewal options. Total rental expense for the years ended December 31, 1998, 1997 and 1996 was $1,279,000, $833,000 and $636,000 respectively. Minimum future obligations for premises under noncancelable leases are as follows: - -------------------------------------------------------------------------------- Year End Operating Leases - -------------------------------------------------------------------------------- (dollars in thousands) 1999 $1,321 2000 1,554 2001 1,469 2002 1,433 2003 96 Thereafter 10 ------ $5,883 ====== - -------------------------------------------------------------------------------- 5. Deposits:
- --------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 -------------------- ------------------- ------------------- Weighted Weighted Weighted Average Average Average Amount Rate Amount Rate Amount Rate - --------------------------------------------------------------------------------------------------------------------- (dollars in thousands) Transaction Accounts: Non-interest bearing checking ............ $ 44,599 -% $ 38,236 -% $ 27,888 -% Interest bearing checking ................ 11,329 2.51 7,867 2.51 8,248 2.52 -------- ---- -------- ---- -------- ---- Total checking accounts .......... 55,928 0.51 46,103 0.43 36,136 0.58 Savings accounts ................................. 117,816 4.86 92,003 5.25 69,278 5.09 Time deposits under $100,000 ..................... 19,034 5.56 26,542 5.88 37,085 5.57 Time deposits $100,000 or more ................... 27,096 5.49 7,673 5.26 1,817 5.06 -------- ---- -------- ---- -------- ---- Total deposits ................... $219,874 3.89% $172,321 4.06% $144,316 4.08% ======== ==== ======== ==== ======== ====
32 - -------------------------------------------------------------------------------- December 31, Time Deposit Maturities 1998 1997 1996 - -------------------------------------------------------------------------------- (dollars in thousands) Time deposits maturing within: 1 year .................................. $43,872 $31,593 $35,712 2 years ................................. 1,390 1,984 2,350 3 years ................................. 294 245 290 4 years ................................. 115 219 259 5 years ................................. 459 174 206 More than 5 years ....................... -- -- 85 ------- ------- ------- Total time deposits ..................... $46,130 $34,215 $38,902 ======= ======= ======= - -------------------------------------------------------------------------------- Maturity Period of Time December 31, Deposits Over $100,000 1998 - -------------------------------------------------------------------------------- (dollars in thousands) Three months or less .............................. $23,338 Over three through six months ..................... 603 Over six through twelve months .................... 2,694 Over one year ..................................... 461 ------- Total time deposits over $100,000 ................. $27,096 ======= - -------------------------------------------------------------------------------- 6. Funding Sources: Warehouse Credit Lines: The Bank has a $75 million warehouse line of credit with Prudential Securities Credit Corporation ("Prudential") to fund commercial (non-government guaranteed) loan originations. The Bank also has a commitment from Prudential for a $50 million warehouse line of credit to fund the unguaranteed portion of SBA loans. Upon approval of the SBA and execution of closing documents this line will be available to the Company. Advances under each of the facilities will be at an interest rate of LIBOR plus 120 basis points and the advance rates are between 80% and 85% of the principal balance outstanding on the loans pledged to collateralize the facility. The term of each facility is one year. There were no outstanding advances at December 31, 1998 under the warehouse line of credit. Commercial Paper Conduit: The Bank has a $65 million commercial paper conduit facility with First Union Capital Markets to fund the purchase of revolving lines of credit and certain other commercial loans. At December 31, 1998, $21.4 million was sold under this facility. The facility is a three year committed facility that is renewable annually. Brokered Certificates of Deposit: The Bank has the ability to solicit wholesale certificates of deposit through established brokers. At December 31, 1998, the Bank had written agreements with five national brokers for the issuance of such deposits. As a well-capitalized institution (see Note 7) the Bank may utilize brokered certificates of deposit to the extent deemed appropriate by the Company. At December 31, 1998, the Bank had $20 million of such deposits outstanding which mature on March 24, 1999. Federal Home Loan Bank of Boston Advances: The Bank currently has the ability to borrow approximately $3.5 million from the FHLBB under a line of credit. Any outstanding advances from the FHLBB are collateralized mortgage loans on residential properties and certain U.S. Treasury and Agency-issued securities. Other Borrowings: The Bank also maintains lines of credit at various correspondent banks which are primarily used for the issuance or confirmation of letters of credit. At December 31, 1998, these lines aggregated $31 million of which $15 million is required to be collateralized upon usage. Letters of credit totaling $17 million were outstanding for the Bank's clients at December 31, 1998 under such lines. - -------------------------------------------------------------------------------- 7. Stockholders' Equity: Earnings Per Share Calculation: The table detailed below reconciles the number of shares used in the basic earnings per share ("EPS") calculation to the number of shares used in the diluted EPS calculation in accordance with SFAS 128 (see Note 1). There were no changes to net income available to common stockholders between the basic and diluted EPS calculations. - -------------------------------------------------------------------------------- Years Ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------------- (shares in thousands) Common shares outstanding for basic EPS ........ 7,909 6,330 5,763 Dilutive securities from stock option plans .... 291 237 72 ----- ----- ----- Common shares outstanding for diluted EPS ........................ 8,200 6,567 5,835 ===== ===== ===== 33 Options to purchase 227,000 shares of common stock at a weighted average price of $15.00 per share were outstanding at the end of 1998, but were not included in the computation of diluted EPS because the exercise price of the options exceeded the average market price of the common shares. Stockholder Note Receivable: In June 1994 the Board of Directors approved the issuance of 614,600 shares (as adjusted for the common stock split) of the Company's common stock to the Company's Chief Executive Officer at a price of $1.69 per share. The terms of the transaction provided for a cash down payment of $17,560 and a promissory note in the amount of $1,020,000 for the balance. The note is collateralized by the stock issued. Principal is due at maturity on December 31, 2000. Interest was to accrue at the rate of 7% and was due at maturity; however, upon completion of the public offering in September 1997, the accrued interest was forgiven and it was converted to a non-interest bearing note (See Note 1). The note was then discounted to yield a market rate of interest. The President is legally entitled to any cash dividends declared, although the promissory note provided that 75% of such cash dividends must be retained by the Company and applied to the note as a repayment of principal. This repayment provision was eliminated effective January 1, 1997. Although the stock is legally outstanding, since a note was accepted in exchange for a portion of the issue price, the note receivable is presented as a separate component of stockholders' equity. These shares are legally outstanding and are included in the earnings per share calculations as of the date of issuance. On January 27, 1999, the Company agreed to forgive the remaining principal balance of the stockholder note receivable and agreed to pay a bonus to the Company's Chief Executive Officer equal to the amount of his resulting tax liability. These transactions will be reflected in the results for the quarter ended March 31, 1999 through an increase in salaries expense. Repurchase and Retirement of Common Stock: The Board of Directors has authorized the Company's repurchase of up to 400,000 shares of common stock, subject to market conditions at any time through March 31, 1999. No shares have been repurchased since 1996. In 1996 the Company repurchased and retired 8,000 shares of the Company's common stock for an average purchase price of $2.78 per share. Preferred Stock: The Company has established a class of 2,000,000 shares of preferred stock. The Board of Directors was granted the power to establish and designate the different series and voting powers, designations, preferences and other rights, qualifications, limitations or restrictions to be placed upon any shares of preferred stock to be issued by the Company. Dividends: Dividends payable by First International Bancorp, Inc. are generally unrestricted (see below), although the ability of the Company to pay dividends may, from time to time, be dependent upon the dividends paid to it by the Bank. A national bank must obtain the approval of the Office of the Comptroller of the Currency (OCC) if the total of all dividends declared in any calendar year exceeds the bank's net profits, as defined, for that year combined with its retained net profits for the preceding two calendar years. Regulatory Capital Requirements: Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets (as defined in regulations). Management believes that, as of December 31, 1998 and 1997, the Bank meets all capital adequacy requirements to which it is subject and that, under the current regulations, the Bank will continue to meet its minimum capital requirements in the foreseeable future. As of December 31, 1998 and 1997, the most recent notifications from the Office of the Comptroller of the Currency categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum total and Tier I risk-based and Tier I leverage ratios as set forth in the table below. There are no conditions or events since the notification that management believes have changed the Bank's category. 34
- ----------------------------------------------------------------------------------------------------------------------------------- Amounts Amounts To be Well Capitalized For Capital Under Prompt Corrective Actual Amounts Adequacy Purposes Action Provisions Capital Ratio Capital Ratio Amount Ratio - ----------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) As of December 31, 1998: Total Capital/Risk Weighted Assets ................. $49,929 21.78% $18,343 8.00% $22,929 10.00% Tier I Capital/Risk Weighted Assets ................ $47,181 20.58% $ 9,171 4.00% $13,757 6.00% Tier I Capital/Average Assets ...................... $47,181 18.59% $10,151 4.00% $12,689 5.00% As of December 31, 1997: Total Capital/Risk Weighted Assets ................. $31,415 17.57% $14,348 8.00% $17,935 10.00% Tier I Capital/Risk Weighted Assets ................ $29,170 16.32% $ 7,174 4.00% $10,761 6.00% Tier I Capital/Average Assets ...................... $29,170 14.74% $ 8,258 4.00% $10,322 5.00% As of December 31, 1996: Total Capital/Risk Weighted Assets ................. $14,253 11.62% $ 9,811 8.00% $12,264 10.00% Tier I Capital/Risk Weighted Assets ................ $12,702 10.36% $ 4,906 4.00% $ 7,358 6.00% Tier I Capital/Average Assets ...................... $12,702 8.44% $ 6,017 4.00% $ 7,522 5.00%
- -------------------------------------------------------------------------------- 8. Stock Option Plans: The Company's 1994 Incentive Stock Option Plan allows for the award of options to officers which vest immediately. As of December 31, 1998, 45,064 shares were available for issuance under this plan. The Company's Amended and Restated 1996 Stock Option Plan provides for the issuance of options that may be granted to full time officers and directors. These options would generally vest ratably over a four-year period beginning one year after the grant date. A total of 970,106 shares have been authorized for issuance under this plan. At December 31, 1998 there were 328,509 shares available for issuance under the plan. Both plans provide that the options may be granted to purchase common stock at a price not less than the fair market price of the Company's stock at the date for the granting of such options, and unless otherwise provided, the options have a ten year term. The plans also provide that options granted and the related option price are adjusted to reflect changes in the shares outstanding due to stock splits and dividends, or other adjustments. The following tables detail the activity under the 1994 Incentive Stock Option Plan and 1996 Stock Option Plan: - -------------------------------------------------------------------------------- Average Option Option 1994 Incentive Stock Option Plan Shares Price - -------------------------------------------------------------------------------- Outstanding at January 1, 1996 ................ 304,500 $1.752 Granted ............................... 83,653 2.191 Exercised ............................. (21,000) 2.045 Canceled .............................. (37,538) 1.866 -------- ------ Outstanding at December 31, 1996 .............. 329,615 1.832 Exercised ............................. (144,325) 1.765 Canceled .............................. (5,513) 2.191 -------- ------ Outstanding at December 31, 1997 .............. 179,777 1.875 Exercised ............................. (57,013) 1.758 Canceled .............................. (263) 2.191 -------- ------ Outstanding at December 31, 1998 .............. 122,501 $1.929 ======== ====== 35 - -------------------------------------------------------------------------------- Average Option Option 1996 Stock Option Plan Shares Price - -------------------------------------------------------------------------------- Outstanding at January 1, 1996 ................. -- $ -- Granted ................................ 46,663 2,191 Canceled ............................... (1,568) 2,191 --------- ------- Outstanding at December 31, 1996 ............... 45,095 2,191 Granted ................................ 453,025 5,356 Exercised .............................. (1,025) 2,191 Canceled ............................... (44,240) 2,642 --------- ------- Outstanding at December 31, 1997 ............... 452,855 5,313 Granted ................................ 225,500 14,969 Exercised .............................. (13,889) 3,121 Canceled ............................... (37,783) 5,704 --------- ------- Outstanding at December 31, 1998 ............... 626,683 $ 8,913 ========= ======= In July 1997, the Company's Board of Directors approved the grant of options to purchase 5,000 shares of common stock to each non-employee director in recognition of their prior service at the price of $8.50 per share. A total of 40,000 options, which vested 180 days from the date of grant were awarded at that date. There are 25,000 options outstanding with a remaining contractual life of 8.60 years at December 31, 1998. Certain information with regard to options outstanding at December 31, 1998 is detailed below:
- ------------------------------------------------------------------------------------------------------------------------------ Weighted- Number of Average Weighted- Options Remaining Average Number Range of Outstanding at Contractual Life Exercise Exercisable at Exercise Price December 31, 1998 (years) Price December 31, 1998 - ------------------------------------------------------------------------------------------------------------------------------ 1994 Incentive Stock Option Plan: $1.689 to $2.191 122,501 6.30 $1.929 122,501 1996 Stock Option Plan: $2.191 to $2.631 218,417 8.00 $2.589 91,791 $6.875 1,000 9.80 $6.875 --- $8.50 174,566 8.60 $8.500 89,091 $9.875 5,000 9.90 $9.875 --- $13.5 to $14.375 79,000 9.40 $14.209 3,750 $15.375 to $16.3125 148,700 9.10 $15.432 4,198 --------- --------- --------- Total, Both Plans: 749,184 $7.687 311,331 ========= ========= =========
There is no compensation expense for any options granted prior to July 15, 1997, the date of the Company's initial filing with the Securities and Exchange Commission indicating its intent to complete a public stock offering (Note 1), based on the minimum value methodology assuming a four year expected life and annual dividends ranging from 4.6% to 6.2% of the exercise prices. In estimating the compensation which would be attributable to each option grant since July 15, 1997 if fair value accounting were to be utilized, the Company has used the Black Scholes option pricing model with the following weighted average assumptions for options granted in 1998 and 1997: dividend yield of 1.0% and 1.4%; expected volatility of 37.5% and 30%; risk free interest rate of 5.08% and 6.14%; and an expected life of 5 years. Had compensation been determined in accordance with the fair value provisions of SFAS No. 123, the Company's net income, basic earnings per share and diluted earnings per share would have been reduced to the pro forma amounts indicated below: - -------------------------------------------------------------------------------- December 31, 1998 1997 - -------------------------------------------------------------------------------- Net income (in thousands) As reported $ 7,033 $ 4,429 Pro forma $ 6,577 $ 4,336 Basic earnings per share As reported $ .89 $ .70 Pro forma $ .83 $ .69 Diluted earnings per share As reported $ .86 $ .67 Pro forma $ .80 $ .66 36 - -------------------------------------------------------------------------------- 9. Income Taxes: The components of the income tax provision (benefit) for the years ended December 31 are as follows: - -------------------------------------------------------------------------------- 1998 1997 1996 - -------------------------------------------------------------------------------- (dollars in thousands) Current Provision: Federal ........................... $3,346 $ 2,047 $ 1,883 State ............................. 953 727 719 ------ ------- ------- 4,299 2,774 2,602 ------ ------- ------- Deferred Provision (Benefit): Federal ........................... 135 87 (184) State ............................. 38 34 (65) ------ ------- ------- 173 121 (249) ------ ------- ------- Total provision for income taxes ...... $4,472 $ 2,895 $ 2,353 ====== ======= ======= The effective tax rates differ from the federal statutory rate due to state taxes, net of the federal benefit and a dividend received deduction. In 1998 the Company received a $34,000 State of Connecticut tax refund resulting from a statutory change relating to prior years. The State of Connecticut statutory tax rate has decreased in each of the last 3 years. The components of the net deferred tax asset (liability) at December 31 are as follows: - -------------------------------------------------------------------------------- 1998 1997 Federal State Federal State - -------------------------------------------------------------------------------- (dollars in thousands) Deferred tax assets: Allowance for possible loan losses .... $ 499 $ 136 $ 123 $ 38 Other ................................. 92 25 74 23 ----- ----- ----- ---- Total deferred tax assets ............... 591 161 197 61 ----- ----- ----- ---- Deferred tax liabilities: Investments mark-to-market ............ 222 61 7 2 Depreciation .......................... 74 20 88 27 Deferred loan costs ................... 167 46 32 10 Deferred gain on sale of loans ........ 404 109 -- -- Other ................................. 6 1 2 1 ----- ----- ----- ---- Total deferred tax liabilities .......... 873 237 129 40 ----- ----- ----- ---- Net deferred tax assets (liabilities) ... $(282) $ (76) $ 68 $ 21 ===== ===== ===== ==== The allocation of the deferred tax provision involving items charged to current year income and items charged directly to stockholders' equity for the year ended December 31, are as follows:
- ------------------------------------------------------------------------------------------------ 1998 1997 Federal State Federal State - ------------------------------------------------------------------------------------------------ (dollars in thousands) Deferred tax provision allocated to shareholders' equity $215 $59 $ 46 $16 Deferred tax provision allocated to income ............. 135 38 87 34 ------ ----- ----- ----- Total deferred tax provision ................... $350 $97 $133 $50 ====== ===== ===== =====
37 - -------------------------------------------------------------------------------- 10. Employee Benefit Plan: The Company maintains a contributory savings plan which qualifies under Section 401(k) of the Internal Revenue Code for employees meeting certain service requirements. Eligible employees may make contributions to the Plan based on specified percentages of their compensation. Beginning July 1, 1998, the Company matched 100% of employees' contribution, up to 6% of compensation. The matching contribution was 85% in prior periods. The Company's matching contributions totaled $290,000, $139,000 and $96,000 for the years ended December 31, 1998, 1997 and 1996, respectively. - -------------------------------------------------------------------------------- 11. Estimated Fair Values of Financial Instruments: Statement of Financial Accounting Standards No. 107 "Disclosures About Fair Value of Financial Instruments" (SFAS 107) requires the Company to disclose fair value information for certain of its financial instruments, including loans, securities, deposits, borrowings and other such instruments. Quoted market prices are not available for a significant portion of the Company's financial instruments and, as a result, the fair values presented may not be indicative of net realizable or liquidation values. Fair values are estimates derived using present value or other valuation techniques and are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics and other factors. In addition, fair value estimates are based on market conditions and information about the financial instrument at a specific point in time. Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Such items include loan servicing, core deposit intangibles and other customer relationships, premises and equipment, foreclosed real estate and income taxes. In addition, the tax ramifications relating to the realization of the unrealized gains and losses may have a significant effect on fair value estimates, and have not been considered in the estimates. The following is a summary of the methodologies and assumptions used to estimate the fair value of the Company's financial instruments pursuant to SFAS 107: Cash, cash equivalents and other: The fair value of cash and due from banks, federal funds sold, accrued interest receivable and accrued interest payable, is considered to approximate the book value due to their short-term nature and negligible credit losses. Securities: Securities classified as available-for-sale are carried at fair value. Fair value for securities available for sale and held to maturity was determined by secondary market and independent broker quotations where available, or by the Company's estimate of market value. Loans: The fair values for loans are estimated using discounted cash flow analyses, and interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loans held for sale: The fair values for loans held for sale are based on estimated sales prices derived from the current market conditions. Deposit liabilities: The fair value for demand and savings deposits is equal to the amount payable on demand at the balance sheet date which is equal to the carrying value. The fair value of certificates of deposit was estimated by discounting cash flows using rates currently offered by the Bank for deposits of similar remaining maturities. The fair value information of the Company's financial instruments required to be valued by SFAS No. 107 are as follows: - -------------------------------------------------------------------------------- December 31, 1998 December 31, 1997 - -------------------------------------------------------------------------------- Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value ----------------------------------------------- (dollars in thousands) Financial Assets Cash and due from banks ........... $ 13,405 $ 13,405 $ 10,944 $ 10,944 Federal funds sold ................ 44,930 44,930 6,450 6,450 Securities available for sale ..... 31,456 31,456 12,767 12,767 Securities held to maturity ....... 1,986 1,989 7,435 7,429 Loans ............................. 108,958 109,970 130,625 130,567 Loans held for sale ............... 8,577 8,630 9,070 9,207 Accrued interest receivable ....... 1,383 1,383 1,200 1,200 Financial Liabilities Deposits Checking .................. $ 55,928 55,928 $ 46,103 $ 46,103 Savings ................... 117,816 117,816 92,003 92,003 Time deposits ............. 46,130 46,349 34,215 34,402 U.S. Treasury demand note ......... 1,047 1,047 1,085 1,085 Accrued interest payable .......... 768 768 745 745 38 - -------------------------------------------------------------------------------- 12. Segment Information: The Company has determined that its reportable segments are its domestic Commercial Banking divisions, its International Banking division and its Loan Servicing business unit. The domestic Commercial Banking divisions are an aggregation of the Commercial Banking-East and Commercial Banking-West divisions, which included 6 and 8 business units, respectively, at December 31, 1998. The Commercial Banking divisions offer SBA, USDA and other commercial loans to small and medium size manufacturers in the U.S. Each Commercial division is headed by an Executive Vice President and the divisions offer the same products and services and have the same marketing approach. The International Banking division is comprised of two business units which market Ex-Im Bank guaranteed loans and privately insured loans to small and medium size manufacturers located in international emerging markets and the Company's Trade Finance business unit, which provides Ex-Im Bank guaranteed export working capital lines of credit to U.S. companies and import financing for U. S. companies. The Loan Servicing business unit is responsible for all loan operations functions, which include the preparation of loan documents, the maintenance of loans and the servicing of loans managed for others. The segment information prepared internally and utilized for decision-making includes only revenues from gain on loan sales and certain fees and only certain expenses. Gains on the sale of loans and loan related fee income are allocated to business units and aggregated for each division. As detailed in the reconciliation below, the gain on securitizations was not fully allocated to the business units in 1998. Direct expenses, principally personnel costs, and a limited amount of certain other expenses, such as supplies and indirect marketing are allocated to the business units. The Company does not allocate interest income or interest expense to business units, nor allocate the loan loss provision, corporate overhead expense or income taxes. Likewise, assets, including loans, are not allocated among business units and, therefore, are not disclosed below. The Company is currently evaluating the costs and benefits of making certain additional income, expense and asset allocations in the future. The accounting policies of the segments are the same as those described in Note 1. There are no intersegment revenues. Financial information for the Company's business segments is as follows: - -------------------------------------------------------------------------------- For the Years Ended December 31, Commercial Banking Division 1998 1997 1996 - -------------------------------------------------------------------------------- (dollars in thousands) Gains on the sale of loans ............... $ 11,560 $ 7,384 $ 4,396 Other loan-related income ................ 198 76 51 --------- --------- ---------- Total allocated revenues ......... 11,758 7,460 4,447 Allocated non-interest expense ........... 5,800 3,998 2,155 --------- --------- ---------- Direct net contribution .......... $ 5,958 $ 3,462 $ 2,292 ========= ========= ========== Number of business units at year end ..... 14 10 5 ========= ========= ========== Number of lending officers ............... 53 35 19 ========= ========= ========== - -------------------------------------------------------------------------------- For the Years Ended December 31, International Banking Division 1998 1997 1996 - -------------------------------------------------------------------------------- (dollars in thousands) Gains on the sale of loans ............... $ 2,814 $ 2,555 $ 541 Other loan-related income ................ 603 258 43 --------- --------- ---------- Total allocated revenues ......... 3,417 2,813 584 Allocated non-interest expense ........... 2,239 1,633 888 --------- --------- ---------- Direct net contribution .......... $ 1,178 $ 1,180 $ (304) ========= ========= ========== Number of business units at year end ..... 3 3 2 ========= ========= ========== Number of lending officers ............... 16 11 7 ========= ========= ========== - -------------------------------------------------------------------------------- For the Years Ended December 31, Loan Servicing Business Unit 1998 1997 1996 - -------------------------------------------------------------------------------- (dollars in thousands) Loan servicing income .................... $ 3,017 $ 2,119 $ 1,294 Allocated non-interest expense ........... 1,265 1,442 609 --------- --------- ---------- Direct net contribution .......... $ 1,752 $ 677 $ 685 ========= ========= ========== Loans under management at year end ....... $779,055 $573,545 $ 380,432 ========= ========= ========== 39 Detailed below are reconciliations of the amounts reported for each business segment to the amounts reported in the consolidated income statement:
- ---------------------------------------------------------------------------------------------------------------- Commercial International Loan Unallocated Consolidated For the Year Ended December 31, 1998 Banking Banking Servicing Amounts Totals - ---------------------------------------------------------------------------------------------------------------- (dollars in thousands) Total allocated revenues ....................... $11,758 $3,417 $3,017 $--- $18,192 Interest income ................................ 13,341 1,675 -- 3,072 18,088 Unallocated gain on the sale of commercial loan- backed securitizations ................. -- -- -- 2,598 2,598 Other fees and income .......................... -- -- -- 1,322 1,322 ------- -------- -------- ------- -------- Total revenues ......................... 25,099 5,092 3,017 6,992 40,200 ------- -------- -------- ------- -------- Non-interest expense ........................... 5,800 2,239 1,265 8,396 17,700 Interest expense ............................... -- -- -- 7,924 7,924 Provision for possible loan losses ............. -- -- -- 3,071 3,071 ------- -------- -------- ------- -------- Total expenses ......................... 5,800 2,239 1,265 19,391 28,695 ======= ======== ======== ======= ======== Income before income taxes ..... $19,299 $2,853 $1,752 $(12,399) $11,505 ======= ======== ======== ======= ======== - ---------------------------------------------------------------------------------------------------------------- Commercial International Loan Unallocated Consolidated For the Year Ended December 31, 1997 Banking Banking Servicing Amounts Totals - ---------------------------------------------------------------------------------------------------------------- (dollars in thousands) Total allocated revenues ....................... $7,460 $2,813 $2,119 $ -- $12,392 Interest income ................................ 12,082 671 -- 1,872 14,625 Unallocated gain on the sale of commercial loan- backed securitizations ................. -- -- -- 1,871 1,871 Other fees and income .......................... -- -- -- 847 847 ------- -------- -------- ------- -------- Total revenues ......................... 19,542 3,484 2,119 4,590 29,735 ------- -------- -------- ------- -------- Non-interest expense ........................... 3,998 1,633 1,442 6,728 13,801 Interest expense ............................... -- -- -- 6,371 6,371 Provision for possible loan losses ............. -- -- -- 2,239 2,239 ------- -------- -------- ------- -------- Total expenses ......................... 3,998 1,633 1,442 15,338 22,411 ------- -------- -------- ------- -------- Income before income taxes ..... $15,544 $1,851 $677 $(10,748) $7,324 ======= ======== ======== ======== ======== - ---------------------------------------------------------------------------------------------------------------- Commercial International Loan Unallocated Consolidated For the Year Ended December 31, 1996 Banking Banking Servicing Amounts Totals - ---------------------------------------------------------------------------------------------------------------- (dollars in thousands) Total allocated revenues ....................... $4,447 $584 $1,294 $-- $6,325 Interest income ................................ 11,841 186 -- 1,278 13,305 Unallocated gain on the sale of commercial loan- backed securitizations ................. -- -- -- 907 907 Other fees and income .......................... -- -- -- 2,713 2,713 ------- -------- -------- ------- -------- Total revenues ......................... 16,288 770 1,294 4,898 23,250 ------- -------- -------- ------- -------- Non-interest expense ........................... 2,155 888 609 4,773 8,425 ------- -------- -------- ------- -------- Interest expense ............................... -- -- -- 5,741 5,741 Provision for possible loan losses ............. -- -- -- 3,487 3,487 ------- -------- -------- ------- -------- Total expenses ......................... 2,155 888 609 14,001 17,653 ------- -------- -------- ------- -------- Income before income taxes ..... $14,133 $(118) $685 $(9,103) $5,597 ======= ======== ======== ======== ========
40 - -------------------------------------------------------------------------------- 13. Other Comprehensive Income: - --------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------- For the Years Ended December 31, 1998 1997 1996 - ---------------------------------------------------------------------------------------------- (dollars in thousands) Unrealized holding gains (losses) on investments available- for-sale arising during period ................... $690 $148 ($77) Tax expense (benefit) .................................... 274 62 (31) ----- ----- ------ Other comprehensive income net of tax ............. $416 $ 86 ($46) ===== ===== ======
- -------------------------------------------------------------------------------- 14. Parent Company Financial Information: First International Bancorp, Inc. is the parent company of First International Bank. There have been no loans extended from the Bank to First International Bancorp, Inc. since inception of the holding company.
- ---------------------------------------------------------------------------------------------- First International Bancorp, Inc. For the Years Ended December 31, Condensed Balance Sheets 1998 1997 - ---------------------------------------------------------------------------------------------- (dollars in thousands) Assets Cash on deposit with Bank subsidiary ....................... $267 $7,334 Investment securities: Available for sale, at fair value ...................... 19 85 Held to maturity, at amortized cost (fair value $4,000). -- 4,000 Investment in the Bank ..................................... 48,503 30,622 Other assets ............................................... 282 107 ------- ------- Total assets ....................................... $49,071 $42,148 ======= ======= Liabilities and Stockholders' Equity Stockholders' equity ....................................... $49,071 $42,148 ------- ------- Total liabilities and stockholders' equity ......... $49,071 $42,148 ======= =======
- ---------------------------------------------------------------------------------------------- First International Bancorp, Inc. For the Years Ended December 31, Condensed Statements of Income 1998 1997 1996 - ---------------------------------------------------------------------------------------------- (dollars in thousands) Dividends from Bank ............................ $650 $731 $415 Net interest income from investments ........... 116 102 -- Equity in undistributed net income of the Bank . 6,366 3,796 2,829 Non-interest expense, net ...................... (87) (284) -- ------- ------- ------- Income before income taxes ............. 7,045 4,345 3,244 Provision (benefit) for income taxes 12 (84) -- ------- ------- ------- Net income ............................. $7,033 $4,429 $3,244 ======= ======= =======
41
- ----------------------------------------------------------------------------------------------------------------------- First International Bancorp, Inc. For the Years Ended December 31, Condensed Statements of Cash Flows 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------- (dollars in thousands) Cash flow from operating activities Net income ................................................................. $7,033 $4,429 $3,244 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiary ................... (6,366) (3,796) (2,829) Decrease (increase) in other assets ................................ 40 (107) -- Stockholder note receivable discount ............................... -- 92 -- Stockholder note receivable accretion .............................. (64) (15) -- --------- -------- -------- Net cash provided by operations ............................ 643 603 415 ========= ======== ======== Cash flows from investing activities: Purchase of investment securities available for sale, net .......... (4,068) (4,085) -- Proceeds from maturities and sales of securities held to maturity and available for sale .................................... 8,135 -- -- Additional investment in Bank subsidiary ........................... (11,100) (12,545) -- --------- -------- -------- Net cash used in investing activities ...................... (7,033) (16,630) -- --------- -------- -------- Cash flows from financing activities: Proceeds from sale of common stock under option plan ............... 271 263 43 Proceeds from sale of common stock at public offering, net ......... -- 23,808 -- Repurchase of common stock ......................................... -- -- (22) Dividends paid ..................................................... (948) (731) (658) Principal payment on stockholder note receivable ................... -- -- 53 --------- -------- -------- Net cash provided by (used in) financing activities ........ (677) 23,340 (584) --------- -------- -------- Net increase (decrease) in cash and cash equivalents ....... (7,067) 7,313 (169) Cash and cash equivalents beginning of year ................................ 7,334 21 190 --------- -------- -------- Cash and cash equivalents end of year ...................................... $267 $7,334 $21 ========= ========= ========
- ------------------------------------------------------------------------------- 15. Selected Quarterly Consolidated Financial Information (unaudited): - -------------------------------------------------------------------------------
1998 Quarter Ended March 31 June 30 September 30 December 31 - ----------------------------------------------------------------------------------------------------------------- (dollars in thousands) Net interest income ................................................ $2,792 $2,481 $2,690 $2,201 Provision for possible loan losses ................................. 781 1,125 659 506 ------ ------ ------ ------ Net interest income after provision for possible loan losses 2,011 1,356 2,031 1,695 Gain on sale of loans .............................................. 2,822 5,537 2,543 6,057 Other non-interest income .......................................... 1,087 1,425 1,108 1,534 ------ ------ ------ ------ Total operating income ..................................... 5,920 8,318 5,682 9,286 Non-interest expense ....................................... 3,541 4,290 4,323 5,546 ------ ------ ------ ------ Income before income taxes ................................. 2,379 4,028 1,359 3,740 Provision for income taxes ......................................... 976 1,587 474 1,436 ------ ------ ------ ------ Net income ................................................. $1,403 $2,441 $885 $2,304 ------ ------ ------ ------ Basic earnings per share ........................................... $.18 $.31 $.11 $.29 ------ ------ ------ ------ Diluted earnings per share ......................................... $.17 $.30 $.11 $.28 ====== ====== ====== ====== - ----------------------------------------------------------------------------------------------------------------- 1997 Quarter Ended March 31 June 30 September 30 December 31 - ----------------------------------------------------------------------------------------------------------------- (dollars in thousands) Net interest income ................................................ $1,799 $1,812 $2,119 $2,523 Provision for possible loan losses ................................. 368 591 157 1,123 ------ ------ ------ ------ Net interest income after provision for possible loan losses 1,431 1,221 1,962 1,400 Gain on sale of loans .............................................. 2,222 3,256 1,739 4,593 Other non-interest income .......................................... 618 707 1,064 912 ------ ------ ------ ------ Total operating income ..................................... 4,271 5,184 4,765 6,905 Non-interest expense ....................................... 2,496 3,414 3,472 4,419 ------ ------ ------ ------ Income before income taxes ................................. 1,775 1,770 1,293 2,486 Provision for income taxes ......................................... 763 729 542 861 ------ ------ ------ ------ Net income ................................................. $1,012 $1,041 $751 $1,625 ====== ====== ====== ====== Basic earnings per share ........................................... $.17 $.18 $.13 $.22 ====== ====== ====== ====== Diluted earnings per share ......................................... $.17 $.18 $.12 $.20 ====== ====== ====== ======
42 - -------------------------------------------------------------------------------- 16. Agreement to Sell Branch and Deposits: On December 31, 1998, First International Bank entered into an Agreement for Purchase and Sale of Assets and Assumption of Liabilities (the "Deposit Sale Agreement") with Hudson United Bank. Pursuant to the Deposit Sale Agreement, the Bank will sell its single branch in Hartford and approximately $150 million in checking, savings and money market accounts to Hudson United Bank for a premium of 6% of such deposits. Following the sale of the branch, the Bank will continue to offer FDIC-insured depository accounts in the form of certificates of deposit. The Bank expects to fund its business with certificates of deposit, warehouse credit lines, a commercial paper conduit and loan securitizations and sales. The branch and deposit sale is expected to close by the end of the first quarter of 1999. - -------------------------------------------------------------------------------- Notes 43 Directors and Officers - --------------------------------------- First International Bank Board of Directors William J. Anderson * Michael R. Carter Carter Morse & Company Brian J. Charlebois Executive Vice President * Arnold Chase Chase Enterprises * Cheryl Chase Chase Enterprises Craig M. Cooper Fairbank Mortgage Company Leslie A. Galbraith President, Chief Operating Officer and Chief Financial Officer Dean Goodermote Process Software Corporation * Frank P. Longobardi, CPA Haggett, Longobardi & Company David G. Sandberg * Brett N. Silvers Chairman and Chief Executive Officer Kenneth R. Sonenclar Classics Interactive, Inc. Douglas K. Woods Liberty Precision Industries, Ltd. * Member of First International Bancorp, Inc. Board of Directors - --------------------------------------- First International Bancorp, Inc. Officers Brett N. Silvers Chairman, Chief Executive Officer and President Leslie A. Galbraith Executive Vice President, Secretary and Treasurer - --------------------------------------- First International Bank Officers Chairman and Chief Executive Officer Brett N. Silvers President, Chief Operating Officer and Chief Financial Officer Leslie A. Galbraith Executive Vice Presidents Richard W. Bradshaw Brian J. Charlebois David J. Etter Paul J. Falvey James G. Fortsch Frank P. La Monaca Senior Vice Presidents Charles E. Baker David M. Baroody Bradley C. Berryman Cynthia D. Bradley David B. Cook Tyler T. Foster Ira J. Gottlieb Stephen M. Greene Thomas G. Hollinger Theodore J. Horan Timothy Jones Keith D. Kelly Frank M. Mac Hugh Todd D. Maugans Gerald F. O'Loughlin Constance E. Perrine Charles E. Poehnert Richard M. Rabideau Leona M. Rapelye Michael J. Rister Matthew J. Roach Gerald R. Tavernier, Jr. Shaun P. Williams 44 General Information - -------------------------- Corporate Headquarters 280 Trumbull Street Hartford, CT 06103 (860) 727-0700 www.FirstInterBank.com NASDAQ: FNCE Transaction Counsel Updike, Kelly & Spellacy One State Street Hartford, CT 06123 Corporate Counsel Bingham Dana LLP 100 Pearl Street Hartford, CT 06103 Independent Accountants PricewaterhouseCoopers LLP 100 Pearl Street Hartford, CT 06103 Transfer Agent Requests for changes in the registration of stock certificates, replacement of lost or destroyed certificates, or undeliverable dividend checks should be referred to the Company's Transfer Agent: ChaseMellon Shareholder Services Securities Transfer Services 111 Founders Plaza, Suite 1100 East Hartford, CT 06108 1-800-288-9541 TDD Line 1-800-231-5469 From Outside U.S.: 201-329-8668 TDD Foreign Line: 201-329-8354 www.chasemellon.com Annual Meeting Tuesday, April 27, 1999, 4:00 p.m. The Hilton Hartford Hotel 315 Trumbull Street Hartford, CT 06103 Form 10-K A copy of First International Bancorp, Inc.'s annual report and Form 10-K as filed with the Securities and Exchange Commission is available upon request to the Company's Chief Financial Officer: Leslie Galbraith First International Bancorp, Inc. 280 Trumbull Street Hartford, CT 06103 860-241-2529 galbraithl@FirstInterBank.com. Investor Relations Media representatives, analysts and investors seeking information are invited to contact the Vice President of Corporate Communications: Katie Armstrong First International Bancorp, Inc. 280 Trumbull Street Hartford, CT 06103 860-241-4705 armstrongk@FirstInterBank.com Market for the Company's Common Stock and Related Stockholder Matters The Company's common stock was listed on The Nasdaq Stock Market(SM) under the symbol FNCE on September 23, 1997. The Company's initial public offering was paid at $13.50 per share. The following table sets forth the range of the high and low closing sales prices for the Company's common stock on the Nasdaq: 1998 High Low - ------------------------------------------------- Fourth Quarter $12 $6 7/8 Third Quarter $14 3/4 $9 1/2 Second Quarter $17 3/8 $14 3/8 First Quarter $17 3/4 $12 1/2 1997 High Low - ------------------------------------------------- Fourth Quarter $18 1/2 $11 1/4 Third Quarter (from 9/23/97) $18 1/2 $15 1/2 On March 5, 1999, the Company had approximately 181 stockholders of record. This number does not include beneficial owners holding shares through nominee or "street" names. The Company believes the number of beneficial stockholders is in excess of 1400. Holders of the common stock are entitled to receive dividends when, as, and if declared by the Board of Directors, out of funds legally available for such purpose. The Company has paid quarterly cash dividends to its stockholders since October 1995 equal to $.03 per share. The Company currently plans to continue to declare and pay quarterly cash dividends on approximately the same basis to the holders of the common stock. However, there can be no assurance that dividends will be declared and paid in the future. In determining whether and to what extent the Company should declare and pay dividends, the Company's Board of Directors will consider, among other factors, the Company's consolidated financial condition and results of operations, tax considerations, general economic conditions and capital requirements. Additionally, the Company's ability to declare and pay dividends may depend upon the receipt of dividends from its wholly owned subsidiary, First International Bank, N.A. which is restricted by the requirements of federal banking law. See Note 7 of the Consolidated Financial Statements. [LOGO OF FIRST INTERNATIONAL BANK APPEARS HERE] Financing manufacturers worldwide(R) Corporate Headquarters Hartford 280 Trumbull Street Hartford, CT 06103 (860) 727-0700 (860) 525-2083 (fax) www.FirstInterBank.com U. S. Representative Offices Boston, MA Cleveland, OH Detroit, MI Morristown, NJ Philadelphia, PA Pittsburgh, PA Providence, RI Rochester, NY Springfield, MA Washington, DC International Representatives Argentina Brazil Central America India Indonesia Korea Mexico Philippines Poland South Africa Turkey West Africa Member FDIC, Equal Housing Lender EX-21.1 10 SUBSIDIARIES OF REGISTRANT EXHIBIT 21.1 Subsidiaries of the Registrant The Registrant has the following subsidiaries: First International Bank, National Association; a national banking association First International Bank, N. A. has the following subsidiaries: FNBNE SBA Holdings, Inc., a Delaware corporation FNBNE Business Loans Holdings, Inc., a Delaware corporation FNBNE Funding Corp., a Delaware corporation EX-23.1 11 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS - ---------------------------------- We consent to the incorporation by reference in the registration statements of First International Bancorp, Inc. on Form S-8 (File Nos. 333-46149 and 333- 46151) of our report dated January 27, 1999, on our audits of the consolidated financial statements of First International Bancorp, Inc. as of December 31, 1998 and 1997, and for the years ended December 31, 1998, 1997 and 1996, which report is incorporated by reference in this Annual Report on Form 10-K. PricewaterhouseCoopers LLP Hartford, Connecticut March 29, 1999 EX-27.1 12 FINANCIAL DATA SCHEDULE
9 3-MOS 12-MOS DEC-31-1998 DEC-31-1998 OCT-01-1998 JAN-01-1998 DEC-31-1998 DEC-31-1998 13405 13405 0 0 44930 44930 0 0 31456 31456 34906 34906 35619 35619 112958 112958 4000 4000 273726 273726 219874 219874 1047 1047 3734 3734 0 0 0 0 0 0 795 795 48276 48276 273726 273726 3903 15522 264 1154 198 1412 4365 18088 2157 7896 2164 7924 2201 10164 506 3071 33 33 5546 17700 3740 11505 3740 11505 0 0 0 0 2304 7033 0.29 0.89 0.28 0.86 3.89 4.82 3104 3104 0 0 0 0 0 0 4200 3100 706 2324 0 153 4000 4000 4000 4000 0 0 578 578
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