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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From To
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Commission file number 333 - 38673
RB ASSET, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-5041680
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) identification No.)
645 Fifth Avenue Eight Floor, New York, New York 10022
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(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: (212) 848-0201
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Securities registered pursuant to Section 12(b) of the Act: None
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 of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter periods 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
of Regulation S-K is not contained herein, and will not be contained, to the
best of the company's knowledge, in a definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. /X/
As of September 27, 1999, there were 7,100,000 shares of Common Stock of the
registrant issued and outstanding, of which 2,774,550 shares were held by all
directors and principal officers as a group. Of the aggregate of 2,774,550
shares held by all directors and principal officers, Mr. Alvin Dworman, the
largest single holder of the registrant's Common Stock, held 2,768,400 shares at
September 27, 1999.
The Common Stock of the Company is traded in limited and sporadic transactions
in the inter-dealer over-the-counter market, and bid and ask price quotes are
periodically available from the NASD Bulletin Board. Available quotations
reflect inter-dealer prices, without retail mark-up, markdown or commission and
may not necessarily represent actual trading transactions and the availability
of quotations should not be considered an indication of the existence of an
established active and liquid market.
DOCUMENTS INCORPORATED BY REFERENCE
None
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<PAGE>
RB ASSET, INC.
ANNUAL REPORT ON FORM 10-K FOR
THE FISCAL YEAR ENDED JUNE 30, 1999
TABLE OF CONTENTS
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Page
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PART I
Item 1 Business ..................................................................... 3
Item 2 Properties.................................................................... 15
Item 3. Legal Proceedings............................................................. 16
Item 4. Submission of Matters to a Vote of Security Holders........................... 18
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......... 18
Item 6. Selected Financial Data....................................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................ 23
Item 7A Quantitative and Qualitative Disclosures about Market Risk.................... 42
Item 8. Financial Statements and Supplementary Data................................... 43
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..................................................... 43
PART III
Item 10. Directors and Executive Officers of the Registrant............................ 44
Item 11. Executive Compensation........................................................ 47
Item 12 Security Ownership of Certain Beneficial Owners and Management................ 49
Item 13 Certain Relationships and Related Transactions................................ 51
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............... 54
SIGNATURES................................................................................... 56
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................................... F-1
INDEX TO FINANCIAL STATEMENT SCHEDULES....................................................... F-34
EXHIBIT INDEX................................................................................ E-1
</TABLE>
2
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PART I
ITEM 1
BUSINESS
General
RB Asset, Inc. (the "Company") is a Delaware corporation whose principal
business is the management of its real estate assets, mortgage loans and
investment securities, under a business plan intended to maximize shareholder
value. As a result of the completion of reorganization steps (the
"Reorganization") in the prior fiscal year, the Company succeeded to the assets,
liabilities and business of River Bank America ("River Bank" or the "Predecessor
Bank"). Unless the context otherwise requires, references to the business,
assets and liabilities of the Company prior to May 22, 1998 include the
business, assets and liabilities of the Predecessor Bank. This report is for the
fiscal year ended June 30, 1999.
On May 22, 1998, under a plan that was approved by it's stockholders, River Bank
completed its Reorganization into a Delaware corporation named RB Asset, Inc.
Prior to the Reorganization, River Bank was a New York State chartered stock
savings bank and was regulated by the New York State Banking Department ("the
Banking Department" or the "NYSBD") and, until December 31, 1997, the Federal
Deposit Insurance Corporation (the "FDIC").
In connection with the Reorganization, on June 23, 1998, the Predecessor Bank
was dissolved and its legal existence terminated. Upon such dissolution, the
capital stock of River Bank was canceled and the stock transfer records of River
Bank were closed. On that date, common and preferred stockholders of River Bank
received shares of RB Asset, Inc. on a share-for-share basis so that RB Asset,
Inc. was owned by the same stockholders, in the same proportions, as owned by
the Predecessor Bank on the record date. The transfer of assets, liabilities and
business of River Bank to RB Asset, Inc. was expected to qualify as a tax-free
reorganization under the Internal Revenue Code and, as such, the Company expects
that certain tax attributes of the Predecessor Bank have been preserved.
On June 28, 1996, the Predecessor Bank had consummated the transactions (the
"Branch Sale") contemplated by the Purchase of Assets and Liability Assumption
Agreement (the "Branch Agreement") by and between the Predecessor Bank and HSBC
Bank USA ("HSBC"), a banking corporation formerly known as Marine Midland Bank.
Following consummation of the Branch Sale, all retail banking operations of the
Predecessor Bank ceased. Pursuant to the terms of the Branch Agreement, HSBC
assumed $1,159.6 million of deposit liabilities (the "Assumed Deposits") and
acquired assets with an aggregate carrying value of $1,066.6 million (the
"Transferred Assets"). The Transferred Assets consisted primarily of loans
secured by real estate, mortgage-backed and investment securities, and 11 bank
branch offices, inclusive of the name East River Savings Bank. Included in the
Transferred Assets was approximately $32.4 million of loans in which the
Predecessor Bank was granted subordinated participation interests. Also included
in the Transferred Assets were the proceeds of dispositions from five individual
asset sale transactions with parties other than HSBC, aggregating $60.4 million,
composed of real estate assets, loans and other receivables (the "Asset Sale
Transactions"). The Asset Sale Transactions were structured to include ongoing
recourse to, and participation by, the Predecessor Bank with respect to the
assets sold, based upon the net proceeds realized on disposition of assets by
the purchasers. See Note 11 to the Consolidated Financial Statements.
At June 30, 1996, the Predecessor Bank retained $285.5 million in assets,
including primarily real estate assets and non-performing loans. The balance of
the assets retained after the Branch Sale primarily consisted of performing
loans (including loans sold with recourse, subordinated participations, junior
subordinated participations, loans to facilitate the sale of real estate owned
and mortgage and other loans) and a modest amount of cash and investment
securities (collectively, the "Retained Assets"). Over the five year period
preceding the Branch Sale, the Bank's primary loan origination focus was
single-family (one-to-four units) and, to a lesser extent, multi-family (five or
more units) residential loans secured by properties in the New York City
metropolitan area. Primarily as a result of conditions imposed by the NYSBD and
the terms of the HSBC Facility, subsequent to June 28, 1996, the Predecessor
Bank and the Company have not originated a material amount of loans.
Following the Branch Sale, the Company engaged RB Management Company, LLC (the
"Management Company") to manage its operations on a day-to-day basis, including
developing and recommending strategies to the Company's Board of Directors
regarding the ongoing management of assets. The Management Company is a
privately-owned entity that was newly formed in June 1996 and is controlled by
Alvin Dworman, who owns 39.0% of the outstanding Common Stock of the Company.
See "Item 13. Certain Relationships and Related Transactions."
At the time of the closing of the Branch Sale, the Predecessor Bank obtained
from HSBC a loan facility (the "Facility" or the "HSBC Facility") consisting of
eleven independent mortgage loans with additional collateral, in an aggregate
amount of approximately $100.0 million. The Facility has been reduced by
repayment activity to $50.6 million at June 30, 1999.
3
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The Company has requested that HSBC reactivate the Facility to provide the
Company with access to fundings to be secured by assets from new lending and
real estate transactions. The Company has requested that HSBC provide
availability up to the initial amount of the HSBC Facility of approximately
$100.0 million, or approximately $50.0 million in availability under the HSBC
Facility. Availability under the HSBC Facility would be used, in combination
with the restricted and unrestricted cash of the Company to invest in new
lending, investment and real estate activities, subject to the prior approval of
HSBC pursuant to a business plan intended to improve the future earnings and
cash flow of the Company.
The Predecessor Bank had previously received notice that the approvals necessary
to declare or pay dividends on the Predecessor Bank's outstanding shares of 15%
noncumulative perpetual Preferred Stock, Series A, par value $1.00 per share
("Predecessor Preferred Stock") would not be provided. In June 1996, the
Predecessor Bank's Board of Directors declared a Predecessor Preferred Stock
dividend for the quarter ending June 30, 1996, payment of which was subject to
the receipt of required approvals from the FDIC and the NYSBD (the Predecessor
Bank's regulators at the time), as well as HSBC (the Predecessor Bank's and the
Company's principal lender). Primarily as a result of the above, neither the
Company's or the Predecessor Bank's Board of Directors have taken any action
regarding a quarterly dividend on the Predecessor Preferred Stock or the
Company's 15% noncumulative perpetual preferred stock, Series A, $1.00 par value
("Company Preferred Stock") for any of the quarterly periods ended from
September 30, 1996 through June 30, 1999. Although the Company is no longer
subject to the jurisdiction of either the FDIC or the NYSBD, declaration or
payment of future dividends on the Company Preferred Stock will continue to be
subject to the approval of HSBC for so long as the Facility remains outstanding.
The Company has received notice from HSBC that the approval necessary to declare
or pay dividends on the Company Preferred Stock will not be provided at this
time. There can be no assurance that the Board of Directors of the Company will
deem it appropriate to pay dividends on the Company Preferred Stock, even if
permitted to do so by HSBC.
The Company is subject to the information requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") as amended and is presently required
to file periodic reports and other information with the Securities Exchange
Commission (the "SEC").
During the fiscal year ended June 30, 1999, the Company reported net income
applicable to common shares of $605,000, or $0.09 per share. Significant factors
contributing to the Company's fiscal 1999 results include a net interest loss
(interest expense on borrowed funds in excess of interest income from loan
assets), after provision for possible credit losses, of $1.6 million, real
estate property and maintenance expenses of $10.5 million, other operating
expenses of $4.1 million, depreciation expenses of $2.3 million and provisions
for income taxes of $550,000, partially offset by rental income from real estate
operations of $14.9 million, realization of contingent participation interest
and gains on the sale of real estate of $1.0 million and $3.7 million,
respectively.
Real Estate Assets
At June 30, 1999, the Company held total real estate assets with a book value,
of $132.3 million, (net of applicable reserves), which represented approximately
75.7% of the Company's total assets on that date.
Categorization of Real Estate Assets. The Company accounts for its real estate
assets in accordance with Statement of Financial Accounting Standards No. 121
(SFAS-121), "Accounting for the Impairment of Long-Lived Assets to be Disposed
of," issued by the Financial Accounting Standards Board (the "FASB"). SFAS-121
requires that long-lived assets be reviewed for impairment whenever
circumstances and situations change such that there is an indication that the
carrying amount of the asset may not be recoverable. In addition, SFAS-121
requires that long-lived assets to be disposed of be carried at the lower of
carrying value or fair value less the cost to sell. Under SFAS-121, the Company
is required to categorize its real estate assets as either real estate held for
investment or real estate held for disposal.
Real Estate Held for Investment. This category is comprised of the following
types of real estate assets:
Assets to Be Held and Used. This category is represented by
assets which the Company intends to hold until such time as
the Company determines that such assets are held for
disposal. No aggressive marketing activities would be
commenced with respect to these assets until such time.
When, and if, the asset is marketed, it is expected that
the asset would be recategorized as real estate held for
disposal.
Assets to Be Developed. This category is represented by
assets which the Company intends to develop over an
extended period of time. Certain costs (such as interest
and overhead) will be capitalized until the project is
substantially complete. At the completion of the
development phase, the asset would normally will be
expected to be recategorized as real estate assets held for
disposal, or real estate held and used.
4
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Real Estate Held for Disposal. This category is represented by assets for which
marketing activities are underway with a goal of consummating a sale within one
year. Real estate held for disposal may include entire real estate properties
held for disposal or separately saleable portions of properties, generally
described as Assets Held for Inventory. The Assets Held for Inventory category
primarily consists of co-operative apartment shares and condominium units. The
Company intends to sell such assets on a unit-by-unit basis in as expedient a
manner as possible. Marketing and sales activities are underway for this
category of assets. The portion of such real estate asset expected to be sold
within one year have been categorized as real estate held for disposal at June
30, 1999.
These categories identify the Company's asset management strategy with respect
to each individual real estate asset. See "Disposition Strategy." See also "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Asset Quality." and "Financial Statement Schedules" for more
detailed information with respect to the Company's individual investments in
real estate.
Under generally accepted accounting principles ("GAAP"), the Company is required
to depreciate real estate held for investment over the estimated useful life of
the assets. The depreciable portion of assets categorized as real estate held
for investment includes the accumulated costs of acquisition and/or development
of building structures and leasehold improvements. No depreciation charges are
made for the portion of the asset's historical cost attributable to land.
Depreciation for real estate held for investment is generally calculated on a
straight-line basis over a 30 year period or over the remaining term of the
lease for leasehold improvements, whichever period is less.
Real Estate Assets Composition. Tables that set forth information concerning the
Company's real estate portfolio at the dates indicated are included in a
separate section of this annual report on Form 10-K. See "Financial Statement
Schedules" for more detailed information with respect to the Company's portfolio
of real estate loans.
Lending Activities and the Real Estate Loan Portfolio. Over the five year period
preceding the Branch Sale, the Bank's primary loan origination focus was
single-family (one-to-four units) and, to a lesser extent, multi-family (five or
more units) residential loans secured by properties in the New York City
metropolitan area. Primarily as a result of conditions imposed by the NYSBD and
the terms of the HSBC Facility, subsequent to June 28, 1996, the Predecessor
Bank and the Company have not originated a material amount of loans.
Loans Secured by Real Estate. At June 30, 1999, the Company's loans secured by
real estate primarily consist of performing and non-performing loans secured by
multi-family residential properties and commercial real estate. Commercial real
estate and multi-family residential loans may involve a substantial risk of loss
due to, among other things, the potentially negative effects of changes in
either property-specific or general economic conditions, which may result in
excessive vacancy rates, inadequate rental income levels and volatility in real
estate values.
The Company's multi-family residential loans consist primarily of loans secured
by rental apartment buildings, unsold condominium units, cooperative apartment
buildings and unsold shares secured by cooperative apartments. The Company's
commercial real estate loans consist primarily of loans secured by office
buildings, shopping centers, industrial warehouse buildings, hotels and other
income-producing properties.
The terms of the Company's multi-family residential and commercial real estate
loans are most commonly five to ten years. Certain of these loans have options
to extend the term of the loan at interest rates which may be fixed or adjusted
upward for one, or in certain instances two, additional five-year periods. These
loans include amortizing loans which require the monthly payment of interest and
principal. The amortization period for the payment of principal on such loans
generally is 20 to 30 years, with balloon payments of the remaining principal
amount due upon the maturity of the loan. The Company's commercial real estate
loans also were frequently made on an interest-only basis, with the payment of
the entire principal amount due at maturity. The multi-family residential and
commercial loans included in the Retained Assets are nearly all fixed interest
rate loans.
Performing Loans Secured by Real Estate. Performing loans secured by real estate
at June 30, 1999 consist of loans secured by multi-family residential,
commercial real estate and single-family residential loans which are
wholly-owned by the Company, as well as participation interests in multi-family
residential and commercial real estate loans pursuant to the Participation
Agreements with HSBC. Approximately $33.3 million or approximately 19.1% of the
Company's total assets are categorized as performing loans secured by real
estate as of June 30, 1999. Of the approximately $33.3 million of performing
loans included in this total, approximately $10.6 million, or approximately
31.8% of such loans, are subordinated loans. Subordinated loans, including
second mortgages and participation interests, generally involve more risk than
senior loans.
5
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Whole Loans. At June 30, 1999, the Company's assets include seven performing
loans (exclusive of participating loans) of approximately $39.5 million, all of
which are commercial real estate loans. All of such loans have been modified
since origination and are currently performing in accordance with their terms.
Approximately $1.0 million, or approximately 3.0%, of the Company's performing
loans (other than the participation loans) at June 30, 1999, are currently
interest-only loans, with the payment of the entire principal amount due at
maturity.
Subordinated Participation Interests. At June 30, 1999, performing loans secured
by real estate include a subordinated participation interest in six performing
loans in which the Company retained an interest in approximately $10.6 million
of principal amount on such loans. All of the performing loans have been
modified since origination and are currently performing in accordance with their
modified terms.
Junior Subordinated Participation Interests. The Retained Assets include a
junior subordinated participation interest in two non-performing loans in which
the Company retains an interest of approximately $2.4 million in principal
amount, which have been fully reserved (100%) for by the Company. All of such
loans have been modified since origination and are currently performing in
accordance with their terms.
Non-Performing Loans Secured by Real Estate. Non-performing loans consist of
multi-family residential, commercial real estate, commercial business loans and
student loans. Non-performing loans are those loans which have been placed on
non-accrual status. The Company generally places a loan which is delinquent 90
days or more on non-accrual status unless it is well secured and, in the opinion
of management, collection appears likely. In addition, the Company may place a
loan on non-accrual status even when it is not yet delinquent 90 days or more if
the Company makes a determination that such loan is not collectible. When loans
are placed on non-accrual status, any accrued but unpaid interest on the loan is
reversed and future interest income is recognized only if actually received by
the Company and collection of principal is not in doubt. Approximately $26.5
million, or approximately 15.1%, of the Company's assets, are comprised of loans
categorized as non-performing as of June 30, 1999 and are all currently on
non-accrual status.
Real Estate Loan Portfolio Composition. Tables that set forth information
concerning the Company's loans secured by real estate portfolio at the dates
indicated are included in a separate section of this annual report on Form 10-K.
See also "Financial Statement Schedules" for more detailed information with
respect to the Company's loans secured by real estate.
Origination and Repayment of Loans. During the fiscal years ended June 30, 1999,
1998 and 1997, the Company advanced funds only to fund continuing construction
involving a limited number of loans and investments in real estate. The
multi-family residential and commercial real estate loans originated by the
Company in recent periods have been primarily in connection with the
restructuring/refinancing of existing loans and loans to facilitate the sale of
investments in real estate. Originations and loan repurchases from HSBC were $0,
$471,000 and $0 in the years ended June 30, 1999, 1998 and 1997, respectively.
Repayments of loans were $5.5 million, $26.3 million and $7.7 million in the
years ended June 30, 1999, 1998 and 1997, respectively.
Concentrations of Loans Secured by Real Estate by Loan and by Borrower. At June
30, 1999, the Company's loans secured by real estate portfolio included two
loans aggregating $35.3 million with principal amounts greater than $10.0
million, one loan with a principal balance of $6.8 million and three loans
aggregating $6.6 million with principal amounts of $1.0 million to $5.0 million.
At the same date, the Company's five largest loans secured by real estate
borrowers (including their related entities) had $21.7 million, $13.7 million,
$6.8 million, $3.1 million and $1.8 million, respectively, of loans outstanding,
and the aggregate amount of loans to the Company's five and 10 largest real
estate borrowers (including related entities) amounted to $47.0 million and
$52.3 million, respectively. At June 30, 1999, $19.2 million (four loans) to the
Company's 10 largest borrowers were non-performing loans and $7.2 million had
been restructured and were performing according to their restructured terms.
Real Estate Projects Under Development. At June 30, 1999 and 1998, the Company
held three assets secured by multi-family residential projects currently under
development. These assets were carried at $14.0 million at June 30, 1999 and
were previously included in Loans Sold With Recourse at June 30, 1998. See also
" Consolidated Financial Statements- Note 11".
At June 30, 1999 the remaining significant remaining real estate projects under
development consisted of two adjacent parcels of land located in the Bronx, New
York (the "Bronx Projects"). On that date, the Company's remaining investment in
the Bronx Projects aggregated $13.5 million, including $9.5 million for one site
("Site One") and $4.0 million for a second site ("Site Two"). The Bronx Projects
represent ownership and development rights for each of the parcels of land and,
for Site One, the Company's investment in construction in process. At June 30,
1998, development of the first phase of Site One, involving the construction of
84 condominium units, was completed and all units were sold. Site Two was vacant
on June 30, 1998 and 1999 with no development yet commenced. At June 30, 1999,
the Company was evaluating various development and joint venture strategies with
respect to these properties. Such strategies would include, but not be limited
to, sales of one or both of the sites and various arrangements for a joint
venture to accommodate the development and sale of subparcels of the sites.
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The following table details activity with respect to these real estate projects
under development for the periods indicated (dollars in thousands).
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The Wayne, NJ The Bronx, NY The Bronx, NY
Project Project - Site One Project - Site Two Total
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Investment at June 30, 1997 $ 7,712 $ 13,172 $ 3,567 $ 24,451
Project fundings 1,647 1,538 195 3,380
Unit sales (6,310) (5,740) - (12,050)
Write downs - - - -
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Investment at June 30, 1998 3,049 8,970 3,762 15,781
Project fundings 561 581 266 1,408
Unit sales (1,705) (28) - (1,733)
Writedowns (1,497) - - (1,497)
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Investment at June 30, 1999 $ 408 $ 9,523 $ 4,028 $ 13,959
============ =============== =============== =============
</TABLE>
Joint Ventures. At June 30, 1999 and 1998, the Company held one investment in a
joint venture project, totaling $1.5 million. This joint venture project is a
shopping center located in Escondido, CA. Thirty-five percent of the joint
venture is owned by the Company. At June 30, 1999, the Company did not have any
material amounts left to be funded pursuant to legally binding commitments
relating to the joint venture, except certain ongoing operating expenses and
limited amounts of capital investment. Failure by the Company or its joint
venture partner to fund operating expenses, in the event that the underlying
property does not generate sufficient cash flow to meet its operating costs,
could result in the loss of the asset.
Other Assets
Cash, Due from Banks and Cash Equivalents. Included in cash, due from banks and
cash equivalents at June 30, 1999, are approximately $2.0 million in funds
maintained on deposit by wholly-owned subsidiaries and required to meet ongoing
cash flow requirements of those subsidiaries. At June 30, 1999, HSBC had
restricted a total of $13.4 million in funds, held on deposit with HSBC, in
accordance with the terms of the Branch Sale and the Facility agreements. At
June 30, 1998, HSBC had restricted a total of approximately $19.6 million.
Restricted funds held by HSBC are not available to the Company for the
settlement of any of the Company's current obligations. The restricted cash
reserves arose from the sale of assets which were pledged as primary or
additional collateral for the HSBC Facility. The restricted cash held by HSBC is
intended to serve as substitute collateral for the HSBC Facility until the
Company and HSBC negotiate the application or other use of the funds in
accordance with the Company's Asset Management Plan and the terms of the HSBC
Facility agreements. On October 1, 1998, a modification of the Company's loan
agreements with HSBC became effective. This loan modification effectively
reduced the rate of interest paid by the Company to HSBC by providing
compensating balance credits to the Company for funds it held on deposit with
HSBC. See "--Sources of Financing."
Investment Securities. The following table sets forth the Company's investment
securities portfolio at carrying value at the dates indicated.
<TABLE>
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June 30,
------------------------------------
1999 1998 1997
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(In Thousands)
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Securities:
Marketable Equity Securities $ 2,299 $ 2,299 $ 2,298
Valuation allowance -- -- --
Total (1,005) (926) (1,105)
----------- ----------- ------------
Marketable Equity Securities, net 1,294 1,373 1,193
Total Equity Securities, net -- -- 5,082
----------- ----------- ------------
Total Investment Securities, net (1) 1,294 1,373 6,275
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$ 1,294 $ 1,373 $ 6,275
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7
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(1) At June 30, 1999, 1998 and 1997, all of the Company's investment
securities were classified as available for sale and carried at
market value in accordance with SFAS-115. See Note 1 to the
Consolidated Financial Statements.
At June 30, 1999, the Company's investment in common stock was comprised of
investment in the common stock of one corporate issuer. The Company held no debt
securities as of June 30, 1998 and 1997. For additional information relating to
the Company's investment securities, see Note 7 to the Consolidated Financial
Statements.
Commercial Business and Consumer Loans. The Company has been collecting the
portfolio of commercial business and consumer loans, which consisted of $8.4
million of commercial business loans, net of provision for possible credit
losses, and $1.9 million of consumer loans at June 30, 1999. Of the $8.4 million
commercial business loans in the Company's portfolio at June 30, 1999, $8.4
million, or 100%, was classified as non-performing and maintained on non-accrual
status. Of the $1.9 million consumer loans in the Company's portfolio at June
30, 1999, $1.9 million or 100% were classified as non-performing.
The Company's commercial business loans previously consisted primarily of loans
which involved the buy out, acquisition or recapitalization of an existing
business (including management buy outs and corporate mergers and acquisitions).
Such loans involved a high degree of risk in their origination since such
transactions frequently resulted in a substantial increase in both the
borrower's liabilities and its liabilities-to-assets leverage ratio, thus
increasing the prospects for default. At June 30, 1999, all of the Company's
commercial business loans had fixed rates of interest and stated maturities
greater than five years.
Other assets. The Company held other assets equal to $3.1 million and $4.2
million at June 30, 1999 and 1998, respectively. At June 30, 1999, other assets
were primarily composed of accrued interest receivable, net of interest
reserves, and other prepaid assets. At June 30, 1998, other assets were
primarily composed of deposits securing asset sale recourse claims, accrued
interest receivable, net of interest reserves, and other prepaid assets.
The decrease in other assets of $1.1 million from June 30, 1998 to June 30, 1999
was primarily attributable to the recovery of deposits in the amount of $2.1
million made during 1999 related to asset sale transactions completed on June
28, 1996, partially offset by increases in prepaid pension and other assets
receivable. See Note 15 to the Consolidated Financial Statements.
Sources of Financing
Subsequent to the Branch Sale, the primary source of the Company's financing has
been secured financing provided by HSBC. The Company obtained from HSBC the
Facility, consisting of eleven independent mortgage loans with additional
collateral, in an aggregate amount not to exceed approximately $100.0 million.
Proceeds of the Facility were utilized by the Company to (i) refinance all or
part of the certain indebtedness secured by assets to be transferred to HSBC and
(ii) provide additional funds for the development and completion of two
individual real estate assets as part of the Company's operations subsequent to
the Branch Sale.
Each of the individual loans included in the Facility were structured as
three-year term loans with options to extend the initial term for two additional
one-year periods subject to the Company's achieving pre-agreed minimum repayment
amounts such that the remaining outstanding principal would be reduced to 60%
and 30% of the original aggregate amount of the Facility at June 30, 1999 and
2000, respectively, and subject to the Company remaining fully current on all
obligations and in compliance with all covenants. The Company has remained
current on all obligations and remains in compliance with all covenants related
to the Facility. Accordingly, the term of the Facility has been extended through
June 30, 2000.
The Facility was priced at 175 basis points over LIBOR for the initial six
months following June 28, 1996, automatically increasing by 25 basis points at
the beginning of each of the subsequent three six month periods and was priced
at 275 basis points over LIBOR for the third year of the Facility (the year
ended June 30, 1999). The Company has elected to exercise its option to extend
the initial term of the Facility and the Facility will be priced at 300 basis
points over LIBOR during the initial one year extension and 325 basis points
over LIBOR during the second one year extension. Following maturity or an event
of default, the Facility will accrue interest at a specified default rate.
On October 1, 1998, a modification of the loan agreement between HSBC and the
Company became effective. This modification effectively reduced the rate of
interest paid by the Company to HSBC by providing compensating balance credits
to the Company for funds it held on deposit with HSBC. As a result of this
modification and a decline in general interest rates in fiscal year 1999, as
compared with the previous year, the average annual rate of interest paid to
HSBC declined from approximately 8.20% in 1998 to 6.53% in 1999.
8
<PAGE>
The Facility was initially secured by first priority mortgage liens on eleven of
the Predecessor Bank's real estate assets approved by HSBC and collateral
assignments of first priority mortgages held by the Company (the "Primary
Collateral"). Each of the loans were cross defaulted with each other and cross
collateralized by all collateral for the Facility. As additional collateral for
the Facility, each loan is also secured by first priority mortgages (or, where
applicable, a collateral assignment of first priority mortgages held by the
Company), stock pledges and assignment of partnership interests and assignment
of miscellaneous interests on additional Bank assets (the "Additional
Collateral"). The Company collaterally assigned to HSBC all of the cash flow
from Primary Collateral and Additional Collateral. The Company retained the
right to prepay the Facility in whole or in part at any time without prepayment
penalty or premium (subject to customary LIBOR breakage provisions).
To the extent that the Company has elected to dispose of assets, other than the
Primary Collateral, the proceeds of such asset dispositions were and will be
required to be utilized in a manner approved by HSBC (which may include the
application of all or a percentage of such proceeds to the prepayment of the
Facility). Such proceeds, received during the years ended June 30, 1998 and
1999, were used to reduce the outstanding balance of the Facility by $10 million
during 1999. Additional proceeds, received during the year ended June 30, 1998
and 1999 are currently held by HSBC as restricted cash ($13.4 million at June
30, 1999) pending negotiations with HSBC as to the application of the proceeds.
The Company has requested that HSBC reactivate the Facility to provide the
Company with access to fundings to be secured by assets from new lending,
investment and real estate transactions. The Company has requested that HSBC
provide availability up to the initial amount of the HSBC Facility of
approximately $100.0 million, or approximately $50.0 million in availability
under the HSBC Facility. Availability under the HSBC Facility would be used by
the Company, in combination with the restricted and unrestricted cash of the
Company, to invest in new lending, investment and real estate activities,
subject to the prior approval of HSBC.
The Loan Agreement requires that while any amounts remain outstanding under the
Facility, the Company must receive HSBC's prior written consent to, among other
things, materially alter its charter or by-laws, incur additional corporate
indebtedness and liens, make any distributions to stockholders or repurchases or
redemptions of capital stock, acquire additional assets, exchange existing
assets with a third party or assume additional liabilities as a result of any
proposed merger transaction or terminate the management agreement with the
Management Company. See "Item 13. Certain Relationships and Related
Transactions."
Borrowed Funds. The following table sets forth certain information concerning
the Company's borrowed funds at the dates indicated (in thousands).
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
HSBC Facilities $ 50,557 $ 60,557 $ 66,066
Secured by Loans Sold with Recourse - 8,203 18,206
-------------- ---------------- --------------
Total $ 50,557 $ 68,760 $ 84,272
=============== ================ ===============
</TABLE>
For additional information relating to the Company's borrowed funds, see Notes
11 and 16 to the Consolidated Financial Statements.
Recent Developments
Preferred Stock Exchange Offer
Summary. On November 25, 1998, the Company offered, upon the terms and
conditions set forth in its Offering Circular and the related Letter of
Transmittal (which together constituted the "Exchange Offer"), to exchange
$25.94 principal amount of its Increasing Rate Junior Subordinated Notes due
2006 (the "Subordinated Notes") for each outstanding share of its Company
Preferred Stock, of which 1,400,000 shares were outstanding on that date.
Description of the Subordinated Notes. The following narrative describes the
Subordinated Notes, issued by the Company on December 30, 1998:
Issue - Increasing Rate Junior Subordinated Notes due 2006 issued under an
indenture (the "Indenture"), as amended on February 1, 1999, between the Company
and La Salle National Bank, as trustee.
Principal Amount - $11,988,000, plus such additional principal amount of
Subordinated Notes as may be issued in payment
9
<PAGE>
of interest on the Subordinated Notes from the date of their initial issuance
until the semi-annual interest period beginning January 16, 2002.
Interest Payment Dates - January 15 and July 15 of each year, commencing July
15, 1999.
Maturity - January 15, 2006.
Interest Rate - Interest will accrue from the issuance date (December 30, 1998)
at the initial rate of 8% per annum (the "Initial Rate") until the interest
period beginning January 16, 2002 (the "Interest Increase Date") and will be
payable, at the option of the Company, either in cash or by issuance of
additional Subordinated Notes. Thereafter, interest will be payable
semi-annually in cash at an annual rate increasing from the Initial rate by
0.50% per annum each semi-annual interest payment period commencing with the
interest payment period beginning on the Interest Increase Date up to a maximum
of 12% per annum. The Company's ability to pay in cash any installment of
interest on, or principal or premium (if any) of, the Subordinated Notes is
currently subject to the approval of HSBC under the terms of the Company's
Facility and its credit agreement, dated June 28, 1996 (the "Credit Agreement").
However, borrowings under the Credit Agreement mature on June 30, 1999, subject
to the right of the Company to extend for two successive one-year periods to
June 30, 2001, which date is prior to the dates on which cash payments of
interest and principal are required to be made on the Subordinated Notes. There
can be no assurance that HSBC will provide any such approval that may be
requested by the Company in the future for payment of cash of any installment of
interest or any prepayment of principal and premium, if any, prior to the dates
such cash payments are required to be made under the terms of the Subordinated
Notes.
Ranking - The Subordinated Notes constitute unsecured obligations of the Company
and will be subordinated in right of payment to all existing and future Senior
Indebtedness (as defined) of the Company. At June 30, 1999, the Company had
approximately $50.6 million of Senior Indebtedness outstanding. The Indenture
will not limit the amount of additional indebtedness which the Company can
create, incur, assume or guarantee, nor will the Indenture limit the amount of
indebtedness which any subsidiary of the Company can create, incur, assume or
guarantee.
Mandatory Redemption - The Company will be required to redeem 1/14th (7.14285%)
of the aggregate principal amount of the Subordinated Notes issued by the
Company (including any issued in payment of interest) semi-annually commencing
on July 15, 2002 and on each January 15, and July 15 thereafter to and including
July 15, 2005 at a price of 100% of the principal amount plus accrued and unpaid
interest plus, for redemptions effected after January 15, 2003, a premium as
noted below. The balance of the outstanding Subordinated Notes will mature on
January 15, 2006. All mandatory redemptions will be made on a pro rata basis.
Optional Redemption - The Subordinated Notes will be redeemable at the option of
the Company at any time in whole or in part, by lot or pro rata as determined by
the Company's Board of Directors (the "Board"), at the redemption price of 100%
of the principal amount plus accrued and unpaid interest plus, for redemptions
effected after January 15, 2003, a premium as noted below.
Premium - The redemption price for each redemption (mandatory or optional)
effected after January 15, 2003 and the payment at maturity will include a
premium based on the amount redeemed or paid. Such premium will consist of (i)
0.5% of the principal amount redeemed during the period from January 16, 2003
through and including July 15, 2003, (ii) 0.75% of the principal amount redeemed
during the period from July 16, 2003 through and including January 15, 2004 and
(iii) 1% of the principal amount redeemed during the period from January 16,
2004 through and including July 15, 2004, which premium will increase by 1% for
redemptions during each subsequent six month period beginning each July 16 and
January 16 thereafter until it reaches 4% of the principal amount for the period
from July 16, 2005 to January 15, 2006. Payments of a premium at maturity will
also be at the rate of 4% of the principal amount paid.
The following chart illustrates the amount of premium payable on each $1,000
principal amount of Subordinated Notes during the periods indicated:
<TABLE>
<CAPTION>
If redeemed during the six month period beginning Premium
------------------------------------------------- -------
<S> <C>
January 16, 2003.............................................. $ 5.00
July 16, 2003.................................................. $ 7.50
January 16, 2004.............................................. $ 10.00
July 16, 2004.................................................. $ 20.00
January 16, 2005.............................................. $ 30.00
July 16, 2005.................................................. $ 40.00
</TABLE>
Purposes of the Exchange Offer. In view of the changes in the nature of the
Company and its business as a result of the
10
<PAGE>
Reorganization described in Note 1, the Board of Directors effected the Exchange
Offer for the purpose of affording all holders of the Company Preferred Stock an
opportunity to exchange their shares of Company Preferred Stock for the
Subordinated Notes which may have been determined by them to be a more
attractive investment. As more fully described in the Offering Circular dated
November 25, 1998, the Exchange Offer provided holders of the Company Preferred
Stock with the opportunity to exchange perpetual preferred stock having a $25.00
per share liquidation value with non-cumulative dividend rights and no mandatory
redemption provisions for $25.94 principal amount of a debt instrument maturing
in seven years which requires (i) semi-annual payments of interest, payable in
kind or in cash, at the Company's option, for the first three years and
thereafter in cash, at rates increasing from an initial 8% per annum rate and
(ii) the repayment of principal in mandatory semi-annual installments commencing
after three years with increasing premiums on installments paid after four
years.
By letter, dated May 22, 1998, counsel for certain holders of shares of the
Company Preferred Stock advised the Company that such holders objected to the
Reorganization. Specifically, such counsel alleged that the Reorganization (i)
constituted a "liquidation" of River Bank America in violation of the terms of
the certificate of designations of the Predecessor Preferred Stock by failing to
provide for the payment to the holders of the Predecessor Preferred Stock of the
liquidating distribution required by the certificate of designations of $25.00
per share, plus all accrued, undeclared and unpaid dividends thereon, (ii) was
illegal under the New York Banking Law (the "NYBL") which provides, in the case
of a voluntary liquidation, that the liquidating corporation shall distribute
its remaining assets among its shareholders according to their respective rights
and interests, (iii) violated a commitment made in River Bank's proxy statement,
dated May 13, 1996, to retire the Predecessor Preferred Stock following approval
and finalization of the sale of certain of its branches and assets to HSBC and
(iv) constituted a breach of duty owed by River Bank's Board of Directors to the
holders of the Predecessor Preferred Stock.
The Company believes such allegations are without merit. However, in an effort
to resolve these claims on an amicable basis, representatives of the Company and
such holders discussed from time to time since the date of such letter, certain
proposals under which the Company would offer to exchange a new security for the
Company Preferred Stock. In October, 1998, the Company proposed to
representatives of such holders to effect an exchange offer upon substantially
the terms and conditions of the Exchange Offer. Such proposal was not acceptable
to such holders and, on October 27, 1998, 11 holders of Company Preferred Stock
who claim to beneficially own, in the aggregate, 849,000 shares (approximately
60.6% of the then outstanding shares) of Company Preferred Stock (the "Organized
Group") commenced a lawsuit entitled Strome Global Income Fund et al. v. River
Bank America et. al. ( the "Complaint" ) in Supreme Court of the State of New
York, County of New York, Index No. 605226198 (the "Action"), against the
Company, certain of its predecessors and certain of its directors (collectively,
the "Defendants"). The complaint in the Action alleged (the "Allegations"),
among other things, that (i) the Defendants breached the certificate of
designations relating to the Predecessor Preferred Stock by fraudulently
transferring assets of River Bank and by illegally amending the certificate of
designations, (ii) the Defendants fraudulently conveyed the assets of River
Bank, thereby depriving the holders of a liquidating distribution, (iii) the
Defendants violated the NYBL by liquidating River Bank without making the
liquidating distribution required by the NYBL and by denying holders appraisal
rights to which they were entitled by the NYBL, (iv) the Defendants breached
their fiduciary duty to holders by depriving them of their liquidating
distribution, (v) the Defendants breached their duty of disclosure by omitting
from the Proxy Statement dated March 27, 1998 material facts relating to the
holders' rights to receive a liquidating distribution, their appraisal rights
for their shares and the requirement that holders vote as a class with respect
to the amendment of the certificate of designations, (vi) the Defendants'
implementation of the liquidation of River Bank and the amendment of the
certificate of designations were ultra vires and should be declared void and
(vii) the intentionally tortious nature of the Defendants' conduct bars them
from seeking indemnification for their actions and, therefore, the Defendants
should be enjoined from seeking indemnification for damages or attorney's fees
relating to the Action.
The Company believes that the Allegations are without merit and intends to
vigorously oppose the Action. Consequently, the Company and the other defendants
responded to the Action by filing a motion to dismiss on December 21, 1998. The
motion was argued before the court on March 23, 1999 and the court reserved
decision. The motion remains pending before the court.
Release of Claims. Holders of Company Preferred Stock, including any of the
plaintiffs in the Action, whose shares were tendered and accepted by the Company
for exchange pursuant to the Exchange Offer have released the Company, its
predecessors and successors, and their respective parents, subsidiaries,
affiliates and assigns, and each of their respective officers, directors,
employees, partners, advisors, agents and representatives from all actions,
causes of action, claims, judgements, contracts, agreements or understandings
whether individual or derivative in nature, which such holders had with respect
to the shares of Company Preferred Stock exchanged pursuant to the Offering
Circular or any disclosures, rights or agreements relating thereto, including,
but not limited to, any claims made in the Action and any claims with respect to
the Reorganization and the transfer of assets from River Bank.
Waiver of Dividend. Each Holder (as defined in the Offering Circular) who
accepted the Exchange Offer was deemed to have waived all rights, with respect
to each share of Company Preferred Stock exchanged, to receive the $0.94 per
share quarterly dividend that was declared on shares of the Predecessor Bank
Preferred Stock for the quarter ended June 30, 1996 but which remains unpaid.
11
<PAGE>
Proposed Equity Rights Offering. If within one year after expiration of the
Exchange Offer, the Company effects an equity enhancement plan through either a
rights offering to the holders of its Common Stock or the distribution to such
holders of Warrants to purchase additional shares of Common Stock, each holder
of Company Preferred Stock whose shares were accepted by the Company for
exchange pursuant to the Exchange Offer will be entitled to participate in such
rights offering or distribution of Warrants on the basis of one subscription
right or Warrant for each share of Company Preferred Stock so exchanged for
Subordinated Notes. The Company's Board of Directors has authorized management
to develop a proposal for such a rights offering or distribution of Warrants,
provided that, under the terms thereof, Alvin Dworman, Odyssey Partners, L.P.
and East River Partnership B., who currently own an aggregate of 50.8% of the
outstanding shares of Common Stock, will have the ability to avoid dilution of
their aggregate percentage ownership of the Common Stock outstanding upon
consummation thereof. While the Company initially considered proposing such a
plan, there can be no assurance that such rights offering or distribution of
Warrants plan will be effected or as to the terms and conditions thereof.
Conditions of the Exchange Offer. The Company obtained the consent of HSBC to
effect the Exchange Offer and issue the Subordinated Notes. However, there can
be no assurance that HSBC will provide any approval that may be requested by the
Company in the future for the payment in cash of any installments of interest or
any prepayment of principal and premium, if any, prior to the dates such cash
payments are required to be made under the terms of the Subordinated Notes.
Acceptance Results of the Exchange Offer. On December 28, 1998, the Company
announced that it had completed its offer to exchange $25.94 principal amount of
its newly-authorized Subordinated Notes for each outstanding share of the
Company Preferred Stock properly tendered to, and accepted by, the Company in
accordance with the provisions of the Exchange Offer. At the expiration of the
Exchange Offer on December 24, 1998, 415,273 shares of the Company Preferred
Stock had been properly tendered and accepted by the Company for exchange.
Subsequent to the expiration of the Exchange Offer, the Company accepted private
requests for the exchange of Company Preferred Stock from individuals under
terms identical to those of the Exchange Offer. As a result, 32,950 shares of
the Company Preferred Stock were exchanged during the quarter ended March 31,
1999 and an additional 14,000 were exchanged during the quarter ended June 30,
1999.
As a result of these exchanges, the Company's total Stockholders' Equity and
other liabilities were reduced by $11.19 million and $432,000, respectively, and
its Subordinated Notes liability increased by $11.38 million. Following the
acceptance of the exchanges of the Company Preferred Stock, described above,
462,223 shares of the Company Preferred Stock (representing approximately 33.0%
of the 1,400,000 shares of Company Preferred Stock outstanding before the
commencement of the Exchange Offer) had been properly tendered and accepted by
the Company. No members of the Organized Group tendered any shares of the
Company Preferred Stock in the Exchange Offer.
Interest Expense. The Subordinated Notes carry an interest rate of 8%, which
will rise to 8.5% for the 37th to 42nd month following the issuance date and to
9.0% in the 43rd to 48th months following the issuance date. All interest will
be compounded semi-annually, following December 30, 1998, the date of
Subordinated Notes issuance. The Subordinated Notes were discounted at issuance,
on the Financial Statements of the Company, by $363,000 in order to provide a
level cost of funds for the Subordinated Notes of 9.0%. This rate is consistent
with debt instruments of similar credit quality and maturity structure at the
time the Subordinated Notes were issued. During the year ended December 31,
1999, accrued interest expense, in the amount of $524,000 (including accretion
expense for the effective yield discount and debt issuance costs of $69,000),
was recognized for the six month period from date of issuance of the
Subordinated Notes to the end of the fiscal year. See Note 26 to the
Consolidated Financial Statements.
Subsidiaries
A substantial amount of the Company's activities in subsidiaries consists of
holding investments in real estate not held directly by the Company. The Company
has established a number of subsidiaries for the sole purpose of holding and/or
disposing of a single real estate asset. Real estate assets located in New York
City are generally held by subsidiaries of Rivercity Realty Corp. ("RRC"), and
those located in the eastern United States including New York State are held by
subsidiaries of Riverbank Properties, Inc. ("RPI") and certain other
subsidiaries of the Company. RRC and RPI are New York corporations. The
Company's investments in real estate located in the western United States are
generally held by subsidiaries of Riverbank Financial Group ("RFG"), a
California corporation which had an office in San Francisco. RPI, RRC and RFG
were originally formed to engage in real estate development and lending
activities.
Employees
At June 30, 1999, the Company had two employees, the President and Chief
Executive Officer, and a second employee engaged in administrative duties. See
Note 14 to the Consolidated Financial Statements. See "Item 10. Directors and
Executive Officers of the Registrant."
12
<PAGE>
Taxation
Certain Tax Attributes. As of June 30, 1999, the Company had recorded a gross
deferred tax liability of approximately $26.3 million in its consolidated
financial statements. Also, as of June 30, 1999, the Company had recorded a
gross deferred tax asset of approximately $72.5 million, primarily attributable
to net operating loss carry forward attributes ("NOLs") of approximately $101.7
million, reserves for loan losses and real estate valuation allowances of
approximately $10.7 million and general business and alternative minimum tax
credits of approximately $6.8 million. The Company's ability to realize the
excess of the gross deferred tax asset over the gross deferred tax liability is
dependent upon its ability to earn taxable income in the future. As a result of
losses in recent fiscal years and other evidence, this realization is uncertain
and a valuation allowance has been established to reduce the deferred tax asset
to the amount that management of the Company believes will more likely than not
be realized. Accordingly, neither a net overall liability nor a net overall
asset was reflected in the Company's consolidated financial statements. The tax
attributes associated with the deferred tax assets have not been reviewed or
approved by the IRS. As described further below, the Equity Offering and related
transactions may have adversely affected the ability of the Company to realize
its deferred tax assets, with the effect that the Company would have an overall
net deferred tax liability and concomitant reduction to its stockholders'
equity. As a result, the Company could be subject to substantial increased
out-of-pocket tax expenditures.
Section 382 of the Code generally provides that if a corporation undergoes an
"ownership change," the amount of taxable income that the corporation may offset
after the date of the ownership change (the "Change Date") by NOLs (and certain
built-in losses, as described below) existing on the Change Date will be subject
to an annual limitation. In general, the annual limitation is equal to the
product obtained by multiplying (i) the fair market value of the corporation's
equity immediately prior to the Change Date (with certain adjustments, including
an exclusion of capital contributions made during the two years preceding the
Change Date), by (ii) the long-term tax-exempt bond rate determined for the
month in which the Change Date occurs, as published by the IRS. For "ownership
changes" occurring during June 1994, that rate is 6.01%. If an "ownership
change" of the Company took place during June 1994, the Company might be
permitted to use no more than approximately $865,000 of its NOLs annually to
offset taxable income realized after the Change Date, including income which
will be realized in connection with the Branch Sale. Accordingly, the Company's
ability to use its deferred tax assets may be reduced materially, resulting in
the recognition of additional tax expense and a reduction to its stockholders'
equity and the Company's liquidity.
Built-in losses, measured by the excess, if any, of the tax basis of each asset
of the corporation over its fair market value, also may be limited under Section
382, if, as is believed to be the case with respect to the Company, the
corporation had a net unrealized built-in loss in excess of the lesser of $10.0
million or 15% of the fair market value of its assets, and if the built-in
losses are recognized within five years after the Change Date. Certain
deductions that have accrued economically on the Change Date and would otherwise
have been taken after the Change Date (possibly including suspended passive
activity losses) may also be treated as built-in losses.
In general, an "ownership change" occurs with respect to a corporation if any of
its stockholders who own, directly or indirectly, five percent or more of the
stock of the corporation ("5-percent stockholders") increase their aggregate
percentage ownership of such stock by more than 50 percentage points over the
lowest percentage of stock owned by those stockholders at any time during a
three-year testing period. In applying Section 382, newly-issued stock generally
is considered to have been acquired by one or more 5-percent stockholders, even
if none of the persons acquiring that stock in fact owns (or owned) at least
five percent of the issuer's stock.
Based on current ownership information available to the Company, the Company is
of the view that no ownership change of the Company occurred within the three
years preceding and three years succeeding the Equity Offering. The Company
expects that the Equity Offering, when combined with prior changes in ownership
of stock of the Company and other contemplated transactions affecting ownership
of the capital stock of the Company occurring in connection with the Equity
Offering, did not result in an ownership change of the Company. However, the
application of Section 382 is in many respects uncertain. In assessing the
effects of prior transactions and of the Equity Offering under Section 382, the
Company has made certain legal judgments and certain factual assumptions. The
Company has not requested or received any rulings from the IRS with respect to
the application of Section 382 to the Equity Offering and the IRS could
challenge the Company's determinations.
Although it may not have caused an ownership change, the Equity Offering caused
a significant increase in the percentage ownership of stock of the Predecessor
Bank by one or more new 5-percent stockholders. Specifically, the Company
believes that the Equity Offering resulted in 5-percent stockholders increasing
their ownership for purposes of Section 382 of the Code by approximately 49
percentage points. Therefore, the Equity Offering significantly increased the
likelihood that relatively small future issuances of, or transactions in or
affecting the direct or indirect ownership of, shares of Common Stock would
result in an ownership change.
As part of its efforts to avoid any limitation under Section 382 of the Code on
the use of its NOLs and other tax attributes, each of Mr. Dworman, Odyssey
Partners, L.P. and East River Partnership B agreed to certain restrictions on
the transfer of the Common Stock
13
<PAGE>
and any other security of the Company which is deemed to be "stock" for purposes
of Section 382 of the Code and regulations promulgated thereunder for a
five-year period following consummation of the Equity Offering. These
restrictions on transfer are intended to reduce, but do not eliminate, the
possibility that there may be a future ownership change affecting the ability of
the Company to use its then-existing losses, loss carryovers and built-in
losses. Mr. Dworman, as the largest stockholder of the Company following the
Equity Offering, may continue to exert substantial influence over decisions made
by the Company's Board, including its decisions as to whether to approve a
transfer of stock of the Company that could result in an ownership change, with
the above-described consequences.
Section 269(a)(1) of the Code generally provides that, if one or more persons
acquire control of a corporation and the principal purpose of the acquisition is
to evade or avoid federal income tax by securing the benefit of a deduction,
credit or other allowance which those persons or the corporation would not
otherwise enjoy, then the IRS may disallow the corporation's deductions, credits
or other allowances. For this purpose, "control" means ownership of stock
possessing either at least 50% of the voting power or at least 50% of the total
value of all classes of stock of the corporation. Although the Company's Equity
Offering resulted in one or more persons acquiring control of the Company, the
Company understands that the principal purpose of the investors for
participating in the Equity Offering was not to avail themselves of any tax
benefits of the Company. It is possible, however, that the IRS may challenge
this view. If any such challenge were successful, the Company could lose its
future ability to use its losses, loss carryovers and built-in losses to offset
its future income.
Federal Taxation. For federal income tax purposes, the Company reports its
income and expenses using the accrual method of accounting. The Company and
certain of its subsidiaries file consolidated federal income tax returns on a
fiscal year basis and are subject to federal income tax under the rules of the
Internal Revenue Code ("Code") in the same manner as other corporations. The
currently effective maximum federal corporate income tax rate increased to 35%.
In addition to regular income taxes, corporations such as the Company are
subject to an alternative minimum tax which is generally equal to 20% of the
excess of alternative minimum taxable income (taxable income, increased by tax
preference items and adjusted for certain other tax items) over regular income
taxes. A portion of alternative minimum taxes paid can be credited against
regular taxes due in later years, subject to certain limitations.
As of June 30, 1999, the Company had four existing tax attributes which could be
used to reduce federal tax liabilities in the current and future years. These
are its passive activity loss carry forwards and credits, net operating loss
(NOL) carry forwards, and general business and alternative minimum tax credits,
each of which is discussed below and in Note 19 to the Consolidated Financial
Statements.
At June 30, 1999, the Company had suspended passive activity losses for federal
income tax purposes of approximately $277,000 and suspended passive activity
credits (consisting of rehabilitation tax credits) which it has not been able to
utilize in prior periods and are subject to substantially similar limitations,
of approximately $6.8 million. In addition, tax credits of $555,000, and
$784,000, were generated in 1995 and 1994, respectively, and are considered non
passive. This credit is primarily attributable to the Company's investment in
the rehabilitation of an historic multi-family residential project located in
Philadelphia, Pennsylvania. See Note 19 to the Consolidated Financial Statements
for additional information. The primary source of the Company's "passive" losses
has been from losses incurred by subsidiaries of the Company in real estate
joint ventures, and certain losses incurred by the Company in connection with
real estate acquired through foreclosure. "Passive" losses from these sources
may be deducted against the Company's "active income" other than its "portfolio
income." For tax years in which the Company is considered to be "closely held"
within the meaning of the Code, passive activity losses and credits in excess of
the amounts currently allowed are suspended and may be carried forward
indefinitely to offset taxable income and liabilities from passive activities or
from an active trade or business in future years, or will generally be fully
deductible (but not creditable) upon a complete disposition of the underlying
passive activity. These tax credits are only utilizable against tax liability
which would otherwise be incurred, and, accordingly, can not be used until after
the available deductible loss carry forwards have been utilized.
The passive activity loss limitations applied to the Company in prior years
because the Company was considered to be "closely held" within the meaning of
the passive activity loss limitation rules set forth in the Code. The Company
was previously considered to be "closely held" for this purpose because more
than 50% of the value of its outstanding stock was owned, directly or
indirectly, by or for not more than five individuals. The determination of stock
ownership for the purposes of the passive activity loss limitation rules differs
from the requirements of Section 382 of the Code with regard to the ownership of
certain preferred stock (see Note 18 to the Consolidated Financial Statements).
As a result of the Equity Offering, the Company believes that it is not "closely
held" for purposes of the passive activity loss rules following consummation of
the Offering notwithstanding the absence of the occurrence of an "ownership
change" for purposes of Section 382 of the Code. The passive activity loss
limitation rules will continue to apply to losses and credits from any preceding
period during which the Company was "closely held," but current losses and
credits are not subject to treatment as passive activity losses.
At June 30, 1999, the Company had NOL carry forwards for federal income tax
purposes of approximately $101.7 million. The Company's NOLs may be carried
forward 20 years and will expire in 2011 through 2019.
<PAGE>
14
The Company is subject to Federal income tax on its operations conducted after
the Branch Sale and will recognize gain or loss at the time of the disposition
of those of its assets not sold therein. Commencing with the taxable year of the
making of any liquidating distribution with regard to the Company Preferred
Stock, the Company will become subject to the passive activity loss limitation
rules and the "at-risk" rules of the Code and, if at least 60% of the Company's
"adjusted ordinary gross income" for any year is "personal holding company
income" (each as defined), the Company may be subject to a personal holding
company tax on its undistributed personal holding company income for such year.
The passive activity loss limitation and "at-risk" rules have not applied to the
Company during the period that the Series A Preferred Stock was outstanding
(although the Company has passive activity loss carryovers and credits arising
before that period) and the personal holding company rules have not applied to
the Company during the time that it has been a "Company" or a "domestic building
and loan association," each as defined in the relevant provisions of the Code.
At June 30, 1999, the Company had an alternative minimum tax credit carry
forward of approximately $2.5 million for federal income tax and financial
reporting purposes attributable to alternative minimum taxes paid in prior
periods. This tax credit is only utilizable against regular tax liabilities
which would otherwise be incurred, and, accordingly, can not be used until after
the available deductible loss carry forwards have been utilized.
The Company's federal income tax returns have been audited or closed without
audit by the IRS through its 1991 taxable year. For additional information
regarding Federal tax matters, see Note 19 to the Consolidated Financial
Statements.
State and Local Taxation. Prior to May 22, 1998, the Company was subject to the
New York State Franchise Tax on Banking Corporations and to the New York City
Banking Corporation Tax (collectively, the "Banking Tax" rules). The
reorganization on May 22, 1998, and the dissolution of the Predecessor Bank
under New York State Banking Law, resulted in the new organization becoming (on
that date) subject to the New York State and New York City Corporate tax rules,
as opposed to the Banking Tax rules. The Corporate tax rules impose a tax
calculated on the greater of either tax imposed on net income or capital tax
base, as defined in the regulations.
In addition to the foregoing, the New York State Tax Law also imposes a
Metropolitan Transportation Business Tax surcharge equal to 17% of the portion
of the net New York State franchise tax (after deduction of any allowable
credits against tax) otherwise payable which is attributable to the Company's
gross income within New York City and in several other New York counties in the
New York Metropolitan Area.
The Company files a combined New York State franchise tax return with several of
its currently active subsidiaries that do business in New York. The Company's
New York State tax returns have either been audited or closed without audit by
the New York State Department of Taxation and Finance through its 1984 taxable
year.
REGULATION
The references to laws and regulations which are applicable to the Company set
forth below and elsewhere herein do not purport to be complete and are qualified
in their entirety by reference to such laws and regulations.
The Company is a Delaware corporation that succeeded to the assets, liabilities
and business of River Bank as a result of a reorganization consummated on May
22, 1998. Prior to the Reorganization, the Predecessor Bank was a stock-form
savings bank chartered under the laws of the State of New York, and its
remaining non-retail deposit accounts and escrow accounts were insured up to
applicable limits by the Bank Insurance Fund administered by the FDIC. The
Predecessor Bank was therefore subject to extensive regulation, examination and
supervision by the Banking Department and by the FDIC. As a Delaware
corporation, no longer engaged in banking activities, the Company is no longer
subject to regulation by the Banking Department or the FDIC. The Company remains
subject to the information and reporting requirements of the Exchange Act, as
amended, administered by the SEC.
ITEM 2
PROPERTIES
During the year ended June 30, 1996 the Company terminated all remaining lease
obligations involving properties and executive offices. The Company is no longer
obligated under any material amounts of non-cancelable operating leases. During
1999, the Company paid rent in an aggregate amount that was not material to its
financial statements.
15
<PAGE>
ITEM 3
LEGAL PROCEEDINGS
Litigation. The Company is involved in various legal proceedings occurring in
the ordinary course of business. Management of the Company, based on discussions
with litigation counsel, believes that such proceedings will not have a material
adverse effect on the financial condition or operations of the Company. There
can be no assurance that any of the outstanding legal proceedings to which the
Company is a party will not be decided adversely to the Company's interests and
have a material adverse effect on the financial condition and operations of the
Company.
By letter, dated May 22, 1998, counsel for certain holders of shares of the
Company's Preferred Stock advised the Company that such holders objected to the
Reorganization. Specifically, such counsel alleged that the Reorganization (i)
constituted a "liquidation" of River Bank America in violation of the terms of
the certificate of designations of the Predecessor Preferred Stock by failing to
provide for the payment to the holders of the Predecessor Preferred Stock of the
liquidating distribution required by the certificate of designations of $25.00
per share, plus all accrued, undeclared and unpaid dividends thereon, (ii) was
illegal under the New York Banking Law (the "NYBL") which provides, in the case
of a voluntary liquidation, that the liquidating corporation shall distribute
its remaining assets among its shareholders according to their respective rights
and interests, (iii) violated a commitment made in River Bank's proxy statement,
dated May 13, 1996, to retire the Predecessor Preferred Stock following approval
and finalization of the sale of certain of its branches and assets to HSBC and
(iv) constituted a breach of duty owed by River Bank's Board of Directors to the
holders of the Predecessor Preferred Stock.
The Company believed such allegations were without merit. However, in an effort
to resolve these claims on an amicable basis, representatives of the Company and
such holders had discussed from time to time since the date of such letter,
certain proposals under which the Company would offer to exchange a new security
for the Company Preferred Stock. In October, 1998, the Company proposed to
representatives of such holders to effect an exchange offer upon substantially
the terms and conditions of the Exchange Offer. On October 27, 1998, 11 holders
of Company Preferred Stock who claimed to beneficially own, in the aggregate,
849,000 shares (approximately 60.6% of the outstanding shares) of Company
Preferred Stock (the "Organized Group") commenced a lawsuit entitled Strome
Global Income Fund et al. v. River Bank America et. al. ( the "Complaint" ) in
Supreme Court of the State of New York, County of New York, Index No. 605226198
(the "Action" ), against the Company, certain of its predecessors and certain of
its directors (collectively, the "Defendants"). The complaint in the Action
alleged (the "Allegations"), among other things, that (i) the Defendants
breached the certificate of designations relating to the Predecessor Preferred
Stock by fraudulently transferring assets of River Bank and by illegally
amending the certificate of designations, (ii) the Defendants fraudulently
conveyed the assets of River Bank, thereby depriving the holders of a
liquidating distribution, (iii) the Defendants violated the NYBL by liquidating
River Bank without making the liquidating distribution required by the NYBL and
by denying holders appraisal rights to which they were entitled by the NYBL,
(iv) the Defendants breached their fiduciary duty to holders by depriving them
of their liquidating distribution, (v) the defendants breached their duty of
disclosure by omitting from the Proxy Statement dated March 27, 1998 material
facts relating to the holders' rights to receive a liquidating distribution,
their appraisal rights for their shares and the requirement that holders vote as
a class with respect to the amendment of the certificate of designations, (vi)
the Defendants' implementation of the liquidation of River Bank and the
amendment of the certificate of designations were ultra vires and should be
declared void and (vii) the intentionally tortious nature of the Defendants'
conduct bars them from seeking indemnification for their actions and, therefore,
the Defendants should be enjoined from seeking indemnification for damages or
attorney's fees relating to the action.
The Company believes that the Allegations are without merit and intends to
vigorously oppose the Action. Consequently, the Company and the other defendants
responded to the Action by filing a motion to dismiss on December 21, 1998. The
motion was argued before the court on March 23, 1999 and the court reserved
decision. The motion remains pending before the court.
Environmental Matters. Under various federal, state and local laws, ordinances
and regulations, an owner, operator or manager of real property, including under
certain circumstances the directors and officers of such entities, may become
liable for the costs of removal or remediation of certain hazardous substances
and materials released on or in its property or as a result of the disposal of
such substances or materials on the owner's or another person's property. Such
loans can impose liability without regard to whether the owner or operator knew
of, or was responsible for, the release of such hazardous substances. The
presence of such substances, or the failure to properly remediate such
substances when released, may adversely affect the owner's ability to sell such
real estate or to borrow using such real estate as collateral. Under certain
circumstances secured lenders may become exposed to environmental liabilities
if, among other things, they take on an active management role with respect to
the real estate property that is the subject of their security interest. While
the Comprehensive Environmental Response, Compensation and Liability Act
provides certain exemptions from liability for secured lenders, the scope of
such exemptions are limited and may not be applicable to all the assets
currently or previously owned by the Company and its subsidiaries.
16
<PAGE>
The Company has not been notified by any governmental authority of any material
noncompliance, liability or other claim in connection with any of the real
estate properties currently owned or classified as in-substance foreclosures by
the Company or its subsidiaries, but it is aware of the presence of certain
hazardous substances and materials on certain of its properties (foreclosed and
in-substance foreclosed), which it has taken into account in connection with the
appraisals of such properties. The Company believes that the expected costs of
remediation of such conditions are not significant and would not materially
impair the Company's ability to sell such properties. It is the Company's
general practice to take title to a property only if a Phase I environmental
audit (which involves only limited procedures) does not reveal a risk of a
material environmental condition and to establish a separate subsidiary to hold
each newly-foreclosed property. There can be no assurance, however, that such
audits reveal all potential environmental liabilities that might exist with
respect to a foreclosed property, that no prior owner created any material
unknown environmental condition, that future uses or conditions (including,
without limitation, changes in applicable environmental laws and regulations)
will not result in imposition of environmental liability on the Company or its
subsidiaries, or that the establishment of separate subsidiaries for foreclosed
properties will insulate the Company against potential environmental liability
relating to such properties.
17
<PAGE>
ITEM 4
SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5
MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS
Common Stock - The Common Stock of the Company is traded in limited and sporadic
transactions in the inter-dealer over-the-counter market, and bid and ask price
quotes are periodically available from the NASD Bulletin Board. Available
quotations reflect inter-dealer prices, without retail mark-up, markdown or
commission and may not necessarily represent actual trading transactions and the
availability of quotations should not be considered an indication of the
existence of an established active and liquid market. Neither the Company nor
the Predecessor Bank have declared dividends on their respective common stock.
See "Consolidated Financial Statements - Note 18".
18
<PAGE>
ITEM 6
SELECTED FINANCIAL DATA
(Dollars in Thousands, Except Per Share Data)
The following table sets forth selected consolidated financial and other data of
the Company at the dates and for the periods indicated. The data at June 30,
1999, 1998, 1997, 1996 and 1995 and for the years ended June 30, 1999, 1998,
1997, 1996 and 1995, have been derived from audited consolidated financial
statements of the Company, including the audited Consolidated Financial
Statements and related Notes included elsewhere herein and other schedules
prepared for item 6 of this document. The selected consolidated financial and
other data set forth below should be read in conjunction with, and is qualified
in its entirety by, the more detailed information included in the Consolidated
Financial Statements and related Notes, included elsewhere herein.
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data (1):
Total assets $ 174,406 $ 190,910 $ 211,659 $ 285,478 $1,463,637
Real estate held for investment 92,438 82,835 84,102 -- --
Real estate held for disposal, net 2,000 3,650 13,247 -- --
Investments in real estate, net (3) -- -- -- 146,440 231,302
Loans receivable:
Single-family residential 1,229 1,306 3,924 4,557 234,386
Multi-family residential 21,519 24,638 26,092 31,336 249,252
Commercial real estate 30,949 33,062 50,077 51,090 463,760
Construction -- -- -- -- 5,301
Commercial business -- -- -- 12,984 36,695
Consumer -- -- -- 3,038 21,274
Less:
Deferred fees and unearned discount -- -- -- -- (2,220)
Allowance for credit losses -- (17,697) (25,787) (34,142) (33,985)
------------- ----------- ------------ ----------- -----------
Total loans receivable, net 37,882 41,309 54,306 68,863 974,463
Loans sold with recourse -- 15,781 24,451 29,914 --
------------- ---------- ----------- ----------- --------
Total loans, net and loans sold with recourse 37,882 57,090 78,757 98,777 974,463
Cash and due from banks and money
market instruments 28,135 32,087 14,036 17,129 108,540
Investment securities, net and investment
securities available for sale (2) 1,294 1,373 6,275 5,685 31,372
Commercial and consumer loans, net 7,974 8,091 9,894 -- --
Mortgage-backed and related securities
and mortgage-backed and related
securities available for sale (2) -- -- -- 187 72,643
Deposits -- -- -- 3,022 1,171,530
Increasing Rate Junior Subordinated Notes due 2006 11,375 -- -- -- --
Borrowed funds 50,557 68,760 84,272 115,786 179,061
------------ ---------- ----------- ---------- -----------
Stockholders' equity (6) $ 96,517 $ 107,183 $ 108,510 $ 138,520 $ 90,134
============ ========== ========== ========= ==========
Shares of Common Stock outstanding 7,100,000 7,100,000 7,100,000 7,100,000 7,100,000
Book value per common share (5) $ 10.30 $ 10.17 $ 10.35 $ 14.58 $ 7.77
============= ========== ========== ========== ===========
</TABLE>
(Footnotes on second following page)
19
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
-----------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Operations Data (1):
Rental revenue and operations:
Rental income and other property revenue $ 14,940 $ 13,779 $ 16,158 $ 18,530 $ --
Property operating and maintenance expense (10,521) (10,884) (12,827) (17,734) --
Depreciation - real estate held for investment (2,338) (383) (200) (208) --
--------- --------- ----------- ---------- -----------
Net rental operations 2,081 2,512 3,131 588 --
Other property income (expense):
Net gain (loss) on sale of real estate 3,694 1,998 (1,754) (3,499) --
(Recovery)/Write downs of investment in real estate 107 (1,106) (19,745) (1,889) (14,460)
--------- ---------- ----------- ----------- ----------
Total other property income (expense) 3,801 892 (21,499) (5,388) (14,460)
Other income:
Interest income:
Interest and dividend income 3,180 4,197 5,469 94,409 88,878
Provision for possible credit losses -- (1,500) (1,000) (5,250) (5,041)
--------- ---------- ---------- --------- ----------
Total interest income 3,180 2,697 4,469 89,159 83,837
Realization of contingent participation revenues 1,000 3,356 -- -- --
Income (loss) from other real estate owned, net -- -- -- -- 103
Other -- -- -- -- 1,228
--------- --------- ---------- ---------- ---------
Total other income 4,180 6,053 4,469 89,159 85,168
Total revenues 10,062 9,457 (13,899) 84,359 70,708
Interest expense 4,759 6,109 7,360 61,794 52,255
Other expenses:
Deposit insurance expenses -- -- -- 2,533 3,704
Foreclosure costs -- -- -- 225 1,105
Other 4,148 6,117 7,369 33,996 38,666
-------- --------- ---------- ---------- ----------
Total other expenses 4,148 6,117 7,369 36,754 43,475
Total expenses 8,907 12,226 14,729 98,548 95,730
Net income (loss) before other income (expense) and before
--------- ---------- ---------- ----------- ---------
provision for income taxes 1,155 (2,769) (28,628) (14,189) (25,022)
Other income (expense):
Banking fees, service charges and other net
income -- -- -- 3,996 2,320
Gains on sale of offices and branches of the
Predecessor Bank (6) -- -- -- 77,560 --
Net gains (losses) on sale of investment securities -- 1,697 (1,495) (605) 441
Provision for HSBC Branch Sale
contingencies (4) -- -- (3,300) -- --
--------- ---------- ---------- ----------- ---------
Total other income (expense) -- 1,697 (4,795) 80,951 2,761
--------- ---------- ---------- ----------- ---------
Income (loss) before income tax expense (benefit) 1,155 (1,072) (33,423) 66,762 (22,261)
Income tax expense (benefit) 550 434 (3,300) 11,749 2,113
--------- ---------- ---------- ----------- ---------
Income (loss) after income tax expense (benefit) 605 (1,506) (30,123) 55,013 (24,374)
Dividends declared on preferred stock -- -- -- 5,250 5,250
--------- ---------- ----------- ---------- ----------
Net income (loss) applicable to Common Shares $ 605 $ (1,506) $(30,123) $49,763 $(29,624)
========= ========== =========== ========== ==========
Basic and diluted net income (loss) per share (5) $ 0.09 (0.21) (4.24) 7.01 $ (4.17)
========= ========== =========== =========== ===========
Other Data (1) (7):
Average equity to average assets 53.81% 54.37% 50.97% 5.51% 7.18%
Equity to assets at period end (9) 55.34 56.14 51.35 48.52 6.16
Weighted average yield on interest earning assets (8) 3.33 4.21 4.90 7.42 7.11
Weighted average rate paid on interest-bearing
liabilities (8) 6.87 8.17 6.97 4.43 3.88
Interest rate spread (8) (3.54) (3.96) (2.07) 2.99 3.23
Net interest margin -n/a- -n/a- -n/a- -n/a- 2.93
Return on average assets (10) 0.32 (0.76) (1.27) 3.64 (1.65)
Return on stockholders' equity (10) 0.60 (1.40) (24.84) 66.12 (27.04)
</TABLE>
20
<PAGE>
(1) Reflects the sale, effective June 28, 1996, of the Company's remaining
eleven branch offices. As a result of such transaction, the Company's
total assets, loans receivable, net, and deposits decreased by $1,066.6
million, $1,034.9 million and $1,159.6 million, respectively, and the
Company recorded a pre-tax net gain of $77.6 million.
(2) At June 30, 1999, 1998, 1997, 1996, and 1995, all of the Company's
investment and mortgage backed securities, were classified as available
for sale in accordance with the Company's asset management plan and may
be sold in response to changes in interest rates, prepayment risk,
liquidity needs or similar factors in connection with the Predecessor
Bank's asset and liability management strategy.
(3) For years prior to June 30, 1997, investments in real estate consist of
in-substance foreclosures, real estate held for disposal and real
estate held for investment, net of related reserves.
(4) During the year ended June 30, 1997, the Company and HSBC undertook an
overall review of the closing of the Branch Sale. As a result of such
review, the Company established a reserve of $3.3 million for potential
closing settlement adjustments and claims which it believes may be
asserted by HSBC related to certain assets acquired by HSBC in the
Branch Sale. The establishment of this reserve is reflected on the 1997
Statement of Operations as provision for HSBC Branch Sale
contingencies. The Company believes that the reserve for closing
settlement adjustments adequately provides for claims which may be
asserted by HSBC.
(5) Per share information is based on the weighted average number of
outstanding shares of Common Stock during the period. The Company had
no securities outstanding that have a dilutive effect.
(6) Consists of a $77.6 million net pre-tax gain from the sale, in June
1996, of the Company's eleven branch offices, the 96th Street branch
office realty and related deposits.
(7) With the exception of end of period ratios, all ratios are based on
average daily balances during the indicated periods.
(8) Interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost
of interest-bearing liabilities (which do not include
non-interest-bearing demand accounts), and net interest margin
represents net interest income as a percent of average interest-earning
assets.
(9) Data is as of the end of the indicated periods.
(10) Net income for fiscal 1996 includes a $67.6 million after-tax net gain
from the Branch Sale in June 1996. Excluding this gain, return on
average assets and return on stockholders' equity for 1996 would have
been (0.83%) and (15.09%), respectively.
21
<PAGE>
The following table set forth selected data related to non-performing loans for
the periods indicated: (Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Non-performing Loans Data (1):
Non-performing loans (2):
Single-family residential (3) $ 1,229 $ 1,306 $ 3,924 $ 4,557 $ 7,496
Multi-family residential 13,718 14,724 16,790 19,658 --
Commercial real estate 5,500 6,611 11,557 3,113 38,685
Construction -- -- -- -- 4,941
Commercial business 8,459 8,458 12,806 6,817 6,263
Consumer 1,855 1,973 2,871 2,671 165
----------- --------- ---------- --------- ----------
Total non-performing loans $ 30,761 $ 33,072 $ 47,948 $ 36,816 $ 57,550
----------- --------- ---------- --------- ----------
Other asset Quality Data
Delinquent loans (4) -- -- -- -- 9,206
Restructured loans (5) 20,882 22,999 24,454 29,842 166,291
Loans to facilitate sale of real estate assets (6) -- -- -- -- 215,191
Allowance for potential credit losses 18,155 20,037 31,570 34,142 33,985
Ratios: Loan Quality
Non-performing loans as a percentage
of total assets 17.64% 17.52% 22.65% 12.90% 3.93%
Non-performing loans as a percentage
of total loans 48.06 47.63 50.07 35.74 5.71
Allowance for credit losses as a percentage
of non-performing loans 59.02 60.59 65.84 92.74 59.05
Net charge-offs as a percentage of
average loans during the period ended 2.85 14.41 3.59 1.03 0.90
</TABLE>
(1) Non-performing loans consist of loans for which the Company has ceased to
accrue interest income and has fully reserved against previously accrued
interest income.
(2) The Company's total non-performing loans decreased by $2.3 million or 7.0%
to $30.8 million at June 30, 1999, as compared to $33.1 million at June
30, 1998. Such net decreases were due primarily to the sales/satisfactions
of an aggregate of $1.3 million of non-performing loans and a writeoff of
$1.0 million.
(3) Prior to fiscal 1997, these loans primarily consisted of completed
single-family residential developments and lots for the development of
single-family residences. After June 30, 1996, such loans represent
non-accrual loans on 1-4 family residential properties for which interest
income is recognized only as received.
(4) Delinquent loans consist of loans which are 31 to 89 days overdue.
(5) Restructured loans consist of loans which have been restructured primarily
as a result of the financial condition of the property which secures the
loan and which are performing in accordance with their restructured terms.
(6) Loans to facilitate consist of loans to finance the sale of investments in
real estate.
22
<PAGE>
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Changes in Financial Condition
General. Total assets decreased by $16.5 million, or 8.6% during the year ended
June 30,1999, following a decrease of $20.7 million or 9.8% during the year
ended June 30, 1998. Total liabilities decreased by $5.8 million, or 7.0% during
the year ended June 30, 1999 following a decrease of $19.4 million or 18.8%
during the year ended June 30, 1998. Decreases in assets and liabilities in
recent periods have been generally comprised of decreases in most of the
principal categories of assets and liabilities.
The following table sets forth the principal categories of the Company's assets
and liabilities at the dates indicated.
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
----------------------
<S> <C> <C> <C>
Assets:
Investments in real estate, net $ 94,438 $ 86,485 $ 97,349
Real estate loans receivable, net 37,882 57,090 78,757
Cash due from banks and money market
instruments 28,135 32,087 14,036
Investment securities available for sale 1,294 1,373 6,275
Commercial and consumer loans, net 7,974 8,091 9,894
Total assets 174,406 190,910 211,659
Liabilities:
Increasing Rate Junior Subordinated Debt due 2006 11,375
Borrowed funds 50,557 68,760 84,272
Total liabilities 77,889 83,727 103,149
Stockholders' equity $ 96,517 $ 107,183 $ 108,510
</TABLE>
Investments in Real Estate, Net. Investments in real estate, which are comprised
of real estate held for investment and real estate held for disposal, net of
applicable fair market value reserves, increased by $8.0 million, or 9.2%, and
declined by $10.9 million, or 11.2%, during the years ended June 30, 1999 and
1998, respectively. The net increase in Investment in Real Estate in 1999
resulted primarily from the reclassification of two assets previously reported
as loans sold with recourse, net of disposals of investments in real estate
during fiscal 1999. All disposals in 1999 and 1998 were made in accordance with
the Company's asset management strategies.
During the year ended June 30, 1999, the Company disposed of two properties with
net book values totaling $2.6 million. In addition, investments in real estate,
excluding the reclassification into investments in real estate of $14.0 million
in loans sold with recourse, decreased, during the fiscal year ended June 30,
1999, as the result of sales of apartment units within the Company's two
multi-family residential developments totaling $1.7 million, and depreciation
affecting investments in real estate of $2.3 million. These disposals of
investments in real estate, totaling $6.6 million, were partially offset by
additional asset fundings in the amount of $655,000 which were made during the
year.
During the year ended June 30, 1998, the Company disposed of two properties
totaling $5.2 million. In addition, investments in real estate decreased, during
the fiscal year ended June 30, 1998, as the result of the sale/satisfaction of
$9.1 million in investments in real estate and depreciation affecting
investments in real estate of $383,000. These
23
<PAGE>
decreases in investments in real estate, totaling $14.7 million, were partially
offset by additional asset fundings in the amount of $3.8 million which were
made during the year. For detailed information concerning the Company's
investments in real estate, see "Real Estate Assets" and Notes 1, 12 and 13 to
the Consolidated Financial Statements.
Loans Secured by Real Estate. Total loans secured by real estate declined $19.2
million, or 33.6%, and $21.7 million, or 27.5%, during the fiscal years ended
June 30, 1999 and 1998, respectively. During the year ended June 30, 1999, three
loans were paid in full, totaling $2.8 million and $14.0 million in loans sold
with recourse were reclassified to Investment in Real Estate as described in
Investments in Real Estate, Net above. In addition, the Company received
principal reduction payments of $2.7 million. During the year ended June 30,
1998, the Company funded $162,000 related to loans secured by real estate.
During the year ended June 30, 1998, five loans were paid in full, totaling $6.3
million. In addition, the Company received principal reduction payments of $15.9
million. During the year ended June 30, 1998, the Company funded $1.1 million.
See Notes 1, 8, 10 and 11 to the Consolidated Financial Statements.
Cash and Due from Banks and Money Market Instruments. Cash and due from banks
and money market instruments decreased by $4.0 million or 12.3% during the year
ended June 30, 1999, following an increase of $18.1 million or 128.6% during the
year ended June 30, 1998. The increase in cash for the year ended June 30, 1998
was primarily due to the sales and/or repayment of investments in real estate
and loans receivable during the year. For additional information, see Note 5 to
the Consolidated Financial Statements.
At June 30, 1999, HSBC had restricted a total of $13.4 million in funds, held on
deposit with HSBC, in accordance with the terms of the Branch Sale and the HSBC
Facility agreements. At June 30, 1998, HSBC had restricted a total of
approximately $19.6 million. Restricted funds held by HSBC are not available to
the Company for the settlement of any of the Company's current obligations. The
restricted cash reserves at June 30, 1999 arose from the sale of assets which
had served as primary or supplemental collateral for the HSBC Facility. The
restricted cash held by HSBC is intended serve as substitute collateral for the
HSBC Facility, until such time as the HSBC Facility is reduced in accordance
with the Company's Asset Management Plan and the HSBC Facility agreements.
Investment Securities, Available for Sale. Total investment securities,
available for sale decreased $78,000, or 5.8%, during the year ended June 30,
1999, following an decrease of $4.9 million, or 78.1% during the year ended June
30, 1998. The $78,000 decrease in investment securities, available for sale at
June 30, 1999, as compared with June 30, 1998, was due to a decline in market
value of the securities during fiscal 1999.
During the year ended June 30, 1998, the Company liquidated its preferred stock
investment which had been carried on the books of the Company at June 30, 1997
at $5.0 million. The disposition proceeds received by the Company were $6.9
million, which included $54,000 in additional accrued preferred dividends.
Accordingly the Company recognized a gain in the amount of $1.8 million during
the 1998 fiscal year.
Commercial and Consumer Loans, Net. Total commercial and consumer loans
decreased $117,000, or 1.1%, and $5.2 million, or 39.3%, during the fiscal years
ended June 30, 1999 and 1998, respectively. The decline in total commercial and
consumer loans during the year ended June 30, 1999 was due to normal principal
repayments and loan amortization. During the year ended June 30, 1998, one loan
was paid in full, totaling $400,000 . In addition, the Company received
principal reduction payments of $1.0 million. During the year ended June 30,
1998, the Company also wrote off $3.8 million in commercial and consumer loans.
Borrowed Funds. The Company's borrowed funds decreased by $18.2 million or 26.5%
and $17.6 million or 20.9% during the years ended June 30, 1999 and 1998,
respectively. Borrowed funds decreased during fiscal 1999 and 1998 primarily as
the result of repayment transactions utilizing funds received from the
liquidation of certain assets.
Stockholders' Equity. Total stockholders' equity decreased by $10.7 million, or
10.0%, and $1.3 million, or 1.2% during the fiscal years ended June 30, 1999 and
1998, respectively. The decline in stockholder's equity during the year ended
June 30, 1999 was primarily due to the effects of the Preferred Stock Exchange
Offer. As a result of the exchanges of preferred stock made under the Exchange
Offer, total stockholder's equity and other liabilities were reduced by $11.51
million and $432,000, respectively, and its Subordinated Notes liability
increased by $11.94 million.
24
<PAGE>
Total stockholders' equity in fiscal 1998 was primarily a result of the
Company's reported operating loss of $1.5 million in that year. See "Preferred
Stock Exchange Offer" and Note 27 to the Consolidated Financial Statements.
At June 30, 1999 and 1998, an aggregate of $1.0 million and $926,000,
respectively, were deducted from the Company's stockholders' equity under
Statement of Financial Accounting Standards No. 115 (SFAS-115) "Accounting for
Marketable Equity Securities," reflecting net unrealized losses on investment
securities classified as available for sale. See the consolidated statements of
changes to stockholders' equity in the Consolidated Financial Statements and
Note 18 to the Consolidated Financial Statements.
The following table summarizes the calculation of the Company's book value per
share at June 30, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Total stockholders' equity $ 96,517 $ 107,183 $ 108,510
Less: liquidation value of preferred stock 23,444 35,000 35,000
------------ ------------ -------------
Net stockholders' equity $ 73,073 $ 72,183 $ 73,510
============ ============ ============
Total shares of Common Stock issued
and outstanding 7,100,000 7,100,000 7,100,000
Book value per common share $ 10.30 $ 10.17 $ 10.35
============ ============ ============
</TABLE>
Results of Operations - Fiscal year ended June 30, 1999 compared to fiscal year
ended June 30, 1998
General. The Company reported net income attributable to common shares of
$605,000, or $0.09 per share, for the year ended June 30, 1999, as compared with
a net loss applicable to Common Shares of $1.5 million, or ($0.21) per share,
for the fiscal year ended June 30, 1998. The primary reason for the increase in
the Company's net income for the fiscal year ended June 30, 1999, as compared to
the previous year, was the reduction in writeoffs of investments in real estate
from $1.1 million in fiscal 1998 to a recovery of $107,000 in fiscal 1999, a net
pre-tax reduction in such writeoffs of $1.2 million, or 109.6%. In addition, the
Company's net gains on the sale of real estate increased $1.7 million, or 84.9%,
to $3.7 million in fiscal 1999, as compared to $2.0 million in the previous
fiscal year. Interest income, after provision for loan losses, increased to $3.2
million during the year ended June 30, 1999, as compared to $2.7 million in the
previous year. Interest expense declined $1.4 million, or 22.1%, to $4.8 million
in the year ended June 30, 1999 from $6.1 million in the previous year. Other
operating expenses declined $2.0 million, or 22.1%, to $4.1 million during
fiscal 1999 as compared to $6.1 million in the previous fiscal year. Partially
offsetting these positive affects on net income in 1999, as compared to fiscal
1998, were a reduction in other income (expense) of $1.7 million, or 100.0%, and
a decline in net rental revenue of $431,000, or 17.2%, in the year ended June
30, 1999 as compared with the previous year.
Rental Income. For the year ended June 30, 1999, rental income was $14.9
million, an increase of $1.2 million, or 8.4%, from $13.8 million for the year
ended June 30, 1998. The increase in rental income in the year ended June 30,
1999, as compared with the previous fiscal year, was primarily attributable to
increases in rental income per unit at the Company's multi-family residential
real estate properties and, additionally, to slight increases in the overall
occupancy rates at those properties.
Property Operating and Maintenance Expenses. For the year ended June 30, 1999,
property operating and maintenance expenses ("property expenses") were $10.5
million, a decline of approximately $363,000, or 3.3%, from $10.9 million for
the year ended June 30, 1998. The decline in property expenses was primarily
attributable to reductions in overall operating costs associated with general
maintenance and repair expenses for the Company's real estate held for
investment.
25
<PAGE>
Interest Income. For the year ended June 30, 1999, total interest income, net of
provisions for possible credit losses, was $3.2 million, an increase of
$483,000, or 17.9%, from $2.7 million for the previous fiscal year. The increase
in total interest income in fiscal 1999, as compared with the previous year, was
primarily due to a decrease in the provision for possible credit losses of $1.5
million in fiscal 1999, as compared with the previous year.
Without regard to the effects of the provision for possible credit losses on
total interest income, total interest income declined $1.0 million, or 24.2%,
from $4.2 million during the year ended June 30, 1998, to $3.2 million during
the current fiscal year. The decline in total interest income was due to the
full satisfaction of $4.9 million and $16.4 million in performing loans during
the years ended June 30, 1999 and 1998, respectively.
For the year ended June 30, 1999, the Company's provision for possible credit
losses was $0, a decrease of $1.5 million from the $1.5 million provision taken
in the previous fiscal year. These provisions resulted from management's ongoing
evaluation of the adequacy of the allowance for credit losses in light of, among
other things, the amount of non-performing loans, the risks inherent in the
Company's loan portfolio and the markets for real estate and economic conditions
in the New York metropolitan area and other areas in which the Company had
engaged in lending activities. The provision for credit losses in the fiscal
1999 and 1998 periods reflect management's internal analysis of its loan assets.
See Note 10 to the Consolidated Financial Statements.
Depreciation - Real Estate Held for Investment. For the year ended June 30,
1999, depreciation charges associated with real estate held for investment were
$2.3 million, an increase of approximately $1.9 million, or 510.4%, as compared
with depreciation charges associated with real estate held for investment in the
previous year of $383,000. Under SFAS-121, the Company is required to depreciate
real estate held for investment over the estimated useful life of the assets. No
depreciation charges are made for the portion of the assets attributable to land
values. During the year ended June 30, 1999, the Company recorded a full year's
depreciation expense of approximately $2.1 million for five real estate assets,
within the Real Estate Held for Investment categorization. Depreciation expenses
for the same properties for which depreciation in the amount of $183,000 was
recorded during the previous year from the period May 22, 1998 to June 30, 1998.
The remaining $208,000 in depreciation charges recorded during the years ended
June 30, 1999 and 1998 were for the sixth property, consistent with depreciation
charges taken in prior periods for that property. On May 22, 1998, as a
consequence of the Reorganization, the Company was no longer subject to the
categorization and depreciation regulations for investments in real estate
previously imposed by the Predecessor Bank's regulators. Accordingly, on that
date, the Company began to record depreciation charges, as required by SFAS-121,
for all Real Estate Held For Investment, that had not been subject to
depreciation charges in prior periods. See Note 1 to the Consolidated Financial
Statements.
Recoveries/Write downs of Investments in Real Estate. During the year ended June
30, 1999, the Company recorded a recovery of $107,000, related to the receipt of
funds following the sale of certain joint venture assets in California. These
assets had been written down in the previous year. During the year ended June
30, 1998, the Company wrote down two investments in joint ventures, totaling
$1.1 million.
Interest Expense. During the year ended June 30, 1999, the Company recorded
interest expenses in the amount of $4.8 million, a decline of $1.4 million, or
22.1%, as compared with interest expenses of $6.1 million in the previous fiscal
year. Interest expenses declined in 1999, as compared with 1998, primarily as a
result of declines in the average amount borrowed by the Company in fiscal 1999
as compared with fiscal 1998. During 1999, the Company borrowed an average of
$65.1 million, a decline of $8.2 million, or 11.2%, as compared with average
borrowings of $73.3 million during the year ended June 30, 1998. The decline in
the average amount of borrowed funds was attributable to the repayment of
outstanding obligations which occurred in fiscal 1999 and 1998. In addition,
interest expense declined as a result of a decline in general interest rates and
as a result of the modification of the terms of the loan agreements between HSBC
and the Company which effectively reduced the rate of interest paid by the
Company to HSBC. This modification, which became effective on October 1, 1998,
provided compensating balance credits to the Company for funds it held on
deposit with HSBC. As a result of these factors, the average annual rate of
interest paid to HSBC declined from approximately 8.20% in 1998 to 6.53% in
1999.
Other Income. During the year ended June 30, 1999, other income was $4.7
million, a decrease of $660,000, as compared with income of $5.4 million in
fiscal 1998. Other income decreased during fiscal 1999, as compared with the
previous year, primarily as a result of the realization of contingent
participation revenues in the amount of $1.0 million in 1999, as compared with
$3.4 million in the previous year. This decline in contingent participation
revenues
26
<PAGE>
of $2.4 million, was partially offset by the recognition of a net gain from real
estate sales during fiscal 1999 of $3.7 million, an increase of $1.7 million as
compared with net income in the previous year of $2.0 million.
Contingent participation revenues were realized on one junior participation loan
and two junior participation loans, which were paid in full during fiscal 1999
and 1998, respectively. Each of the loans had been sold to HSBC on June 28, 1996
and were fully reserved for on the Company's books following the Branch Sale.
The Company retained a contingent interest in these two loans approximating $3.3
million in principal amount following the Branch Sale. At June 30, 1998, the
Company had a remaining contingent interest in two junior participation loans in
which the Company retains an interest of approximately $2.4 million in principal
amount, which are fully reserved for (100%) by the Company. All of such loans
have been modified since origination and are currently performing in accordance
with their terms.
During the year ended June 30, 1999, the Company sold a parking garage adjacent
to its real estate investment in Atlanta, GA and a portion of the residential
units within two multi-family housing properties in New York, NY, realizing a
net gain on sale of $3.7 million. During the previous fiscal year, the Company
sold two properties realizing a net gain of $2.0 million.
Other Expenses. Other expenses consist of the Company's general and
administrative expenses. Other expenses do not include direct real estate
operations expenses, which are included in "property operating and maintenance
expense," discussed above.
During the year ended June 30, 1999, the Company recorded other expenses in the
amount of $4.1 million, a decline of approximately $2.0 million, or 32.2%, as
compared with other expenses of $6.1 million in the previous fiscal year. Other
expenses declined in the year ended June 30, 1999, as compared with the previous
year, primarily as a result of declines in salaries and employee benefit
expenses, legal and professional fees, and other operating expenses in fiscal
1999 as compared with fiscal 1998. The following table sets forth the components
of the Company's other expenses during the periods indicated.
Fiscal Year ended June 30,
1999 1998
---- ----
(Dollars in Thousands)
Salaries and employee benefits $ 202 $ 900
Legal and professional fees 1,460 2,305
Management fees 2,426 2,562
Other operating expenses 60 350
---------- ----------
Total $ 4,148 $ 6,117
========== ==========
Legal and professional fees expense decreased from $2.3 million during the year
ended June 30, 1998 to $1.5 million in fiscal 1999 primarily as a result of a
reduction in expenses incurred in connection with the Bank's successful
reorganization from a New York State chartered savings bank to a Delaware
corporation, which occurred in fiscal 1998. The Company accrued and paid
$900,000 and $1.6 million, respectively, in the year ended June 30, 1998, for
legal and professional fees associated with this conversion.
The Company engaged RB Management Company, LLC (the "Management Company") to
manage the operations of the Company after the Branch Sale, including the
ongoing management of Company assets. The Management Company was a newly-formed,
privately-owned entity controlled by Alvin Dworman, who owns 39.0% of the
outstanding Common Stock of the Company. During the year ended June 30, 1999,
the Company accrued $2.6 million in fees payable to the Management Company, of
which $139,000 related to fees incurred upon disposition of assets (which were
accounted for as a reduction in the proceeds from sale of those assets). During
the year ended June 30, 1998, the Company accrued $3.0 million in fees payable
to the Management Company, of which $398,000 related to fees incurred upon
disposition of assets. At June 30, 1999, the Company had accrued fees payable to
the Management Company and its affiliate, Fintek, Inc., aggregating $223,000.
See "Item 13. Certain Relationships and Related Transactions".
27
<PAGE>
All other operating expenses declined $290,000, or 82.9%, to $60,000 for the
year ended June 30, 1999 as compared with the year ended June 30, 1998, in which
other operating expenses were $350,000. During the year ended June 30, 1999,the
Company received a settlement in the amount of $240,000, related to property
taxes previously paid on the Predecessor Bank's former headquarters facility.
These property tax expenses had been charged to other operating expenses in
prior periods.
Other Income (Expense). Other income and expense was $0 and $1.7 million during
the years ended June 30, 1999 and 1998, respectively. Other income (expense) in
the year ended June 30, 1998 was primarily due to the $1.8 million gain on the
sale of the Company's largest preferred stock holding, recorded during the
quarter ended September 31, 1997.
During the quarter ended December 31, 1996, the Company and HSBC undertook an
overall review of the closing of the Branch Sale. As a result of such review,
the Company established a reserve of $3.3 million for potential closing
settlement adjustments and claims which it believes may be asserted by HSBC
related to certain assets acquired by HSBC in the Branch Sale. The establishment
of this reserve is reflected on the Statement of Operations, for fiscal 1997, as
provision for HSBC Branch Sale contingencies. The Company believes that the
remaining reserve for closing settlement adjustments adequately provides for
claims which may be asserted by HSBC.
Provision for Income Taxes. Statement of Financial Accounting Standards No. 109
(SFAS-109), "Accounting for Income Taxes," requires the Company to recognize a
deferred tax asset relating to the unrecognized benefit for all temporary
differences that will result in future tax deductions and for all unused NOL and
tax credit carry forwards, subject to, in certain circumstances, reduction of
the asset by a valuation allowance. A valuation allowance is recorded if it is
more likely than not that some portion or all of the deferred tax asset will not
be realized based on a review of available evidence. Realization of tax benefits
for deductible temporary differences and unused NOL and tax credit carry
forwards may be based upon the future reversals of existing taxable temporary
differences, future taxable income exclusive of reversing temporary differences
and carry forwards, taxable income in prior carryback years and, if appropriate,
from tax planning strategies.
The high levels of loan charge-offs and other losses, which were largely
responsible for losses during the periods, effectively eliminated federal income
tax liability for fiscal 1998, fiscal 1997, and fiscal 1996. The Company's
income tax provision includes state and local taxes on the greater of combined
entire net income, combined alternative entire net income or combined taxable
assets. Certain subsidiaries provide for state and local taxes on a separate
company basis on income, capital, assets or an alternative minimum tax. For
additional information, see Note 19 to the Consolidated Financial Statements.
Under SFAS-109, at June 30, 1999, the Company recorded a net deferred tax asset
of approximately $26.3 million and deferred tax liabilities of $26.3 million.
The net deferred tax asset reflects gross deferred tax assets of $72.5 million
and a valuation allowance of $46.2 million. The net deferred tax asset
represents primarily the anticipated federal and state and local tax benefits
that could be realized in future years upon the utilization of existing tax
attributes. The deferred tax asset primarily relates to provisions for
anticipated credit losses recognized for financial statement purposes that have
not yet been realized for tax purposes, suspended passive activity losses and
credits, deferred income on venture investments and available NOL carry
forwards. Generally, the amount of a company's net deferred tax asset may serve
to increase its net worth under generally accepted accounting principles.
However, because of the net losses incurred by the Company in recent years, the
Company established a $46.2 million valuation allowance, resulting in a net
deferred tax asset of $26.3 million. The valuation allowance decreased by
approximately $3.3 million during the fiscal year ended June 30, 1999.
Realization of the net deferred tax asset is expected to occur upon reversal of
existing taxable temporary differences for which deferred tax liabilities of
$26.3 million have been recorded.
The provision for income taxes differs from the amount computed by applying the
statutory Federal income tax rate of 35% to the reported loss before provision
for income taxes primarily due to state and local income and franchise taxes and
limitations on the recognition of tax benefits of net operating losses. During
the year ended June 30, 1999, the Company recorded a net provision for income
taxes of $550,000, primarily to reflect the effects of operations and asset
dispositions on its current state and local income tax liability at June 30,
1999.
Results of Operations - Fiscal year ended June 30, 1998 compared to fiscal year
ended June 30, 1997
General. The Company reported net loss attributable to common shares of $1.5
million, or ($0.21) per share, for the years ended June 30, 1998, as compared
with a net loss applicable to Common Shares of $30.1 million, or ($4.24)
28
<PAGE>
per share, for the fiscal year ended June 30, 1997. The primary reason for the
decrease in the Company's net loss for the fiscal year ended June 30, 1998, as
compared to the previous year, was the reduction in writeoffs of investments in
real estate from $19.7 million in fiscal 1997 to $ $1.1. million in fiscal 1998,
a net pre-tax reduction in such writeoffs of $18.6 million, or 94.4%. In
addition, the Company's total revenues, excluding other income (expense),
increased to $21.8 million during the year ended June 30, 1998, as compared to
$18.8 million in the previous year. Total revenues increased during fiscal 1998,
as compared with the previous year, primarily as a result of the realization of
contingent participation revenues in the amount of $3.4 million in 1998, as
compared with zero in the previous year, and the recognition of a net gain from
real estate sales during 1998 of $2.0 million, as compared with a net loss in
the previous year of $1.8 million. Other operating expenses declined $1.3
million to $6.1 million during fiscal 1998 as compared to $7.4 million in the
previous fiscal year. In addition, other income (expense) was $1.7 million in
the year ended June 30, 1998, an increase of $6.5 million, as compared to a loss
of $4.8 million recorded as other income (expense) in the previous fiscal year.
Rental Income. For the year ended June 30, 1998, rental income was $13.8
million, a decline of $2.4 million, or 14.7%, from $16.2 million for the year
ended June 30, 1997. The decline in rental income was primarily attributable to
sales of properties and reductions in the number of rental units at some of the
Company's multi-family residential properties as units were converted to
condominiums and sold.
Interest Income. For the year ended June 30, 1998, total interest income, net of
provisions for possible credit losses, was $2.7 million, a decline of $1.8
million, or 39.7%, from $4.5 million for the previous fiscal year. The decline
in interest income in fiscal 1998, as compared with the previous year, was
primarily due to a decline in interest from loans and an increase in the
provision for possible credit losses in fiscal 1998 as compared with fiscal
1997.
For the year ended June 30, 1998, interest income from loans was $3.7 million, a
decline of $824,000, or 18.3%, from $4.5 million for the year ended June 30,
1997. The decline was primarily attributable to the repayment in full of a $10.2
million participation loan secured by real estate in the quarter ended September
30, 1997.
For the year ended June 30, 1998, income from investment securities was $55,000,
a decline of $519,000, or 90.4%, from $574,000 for the year ended June 30, 1997.
The decline was primarily attributable to the recovery of the Company's $5.0
million preferred stock investment during the quarter ended September 30, 1997.
Total proceeds from the recovery of this preferred stock investment were $6.8
million. Accordingly, a gain on the recovery was recognized in the amount of
$1.8 million during the year.
For the year ended June 30, 1998, the Company's provision for possible credit
losses was $1.5 million, an increase of $500,000, or 50%, from the $1.0
provision taken in the previous fiscal year. These provisions resulted from
management's ongoing evaluation of the adequacy of the allowance for credit
losses in light of, among other things, the amount of non-performing loans, the
risks inherent in the Company's loan portfolio and the markets for real estate
and economic conditions in the New York metropolitan area and other areas in
which the Company had engaged in lending activities. The provision for credit
losses in the fiscal 1998 and 1997 period reflects management's internal
analysis of its loan assets. See Note 10 to the Consolidated Financial
Statements.
Depreciation - Real Estate Held for Investment. For the year ended June 30,
1998, depreciation charges associated with real estate held for investment were
$383,000 an increase of $183,000, or 91.5%, as compared with depreciation
charges associated with real estate held for investment in fiscal 1997 of
$200,000. Under SFAS-121, the Company is required to depreciate Real Estate Held
for Investment over the estimated useful life of the assets. No depreciation
charges are made for the portion of the assets attributable to land values.
During the year ended June 30, 1998, the Company recorded depreciation charges
of approximately $383,000, of which $175,000 represents depreciation of the
capitalized costs of the Real Estate Held for Investment (less land value) for
five of the Company's six real estate assets from the period May 22, 1998 to
June 30, 1998. The remaining $208,000 in depreciation charges recorded during
the year ended June 30, 1998 were for the sixth property, consistent with
depreciation charges taken in prior periods for that property. On May 22, 1998,
as a consequence of the Reorganization, the Company was no longer subject to the
categorization and depreciation regulations for investments in real estate
previously imposed by the Predecessor Bank's regulators. Accordingly, on that
date, the Company began to record depreciation charges, as required by SFAS-121,
for all Real Estate Held For Investment, that had not been subject to
depreciation charges in prior periods. See Note 1 to the Consolidated Financial
Statements.
29
<PAGE>
Write downs of Investments in Real Estate. During the year ended June 30, 1998,
the Company wrote down investments in real estate in the amount of $1.1 million.
This amount represents a decrease in Write downs for investments in real estate
of $18.6 million, or 94.4%, as compared with Write downs taken in fiscal 1997,
totaling $19.7 million. During 1998, the Company wrote down two investments in
joint ventures, totaling $1.1 million.
During the quarter ended December 31, 1996, the Predecessor Bank determined that
it would not immediately undertake the rehabilitation and leasing of an Atlanta,
GA office property that had been leased by the Federal Government under a lease
with a term which ended during 1997. The Atlanta office property was acquired by
the Predecessor Bank in foreclosure and previously had a net book value of
approximately $25.3 million. At that time, as an alternative to undertaking the
major rehabilitation project and assuming the resultant risk of leasing the
building at a rate sufficient to recover the Company's substantially increased
investment subsequent to rehabilitation, the Predecessor Bank elected to explore
the sale of the property with expected net proceeds of approximately $14.0
million. As a result, the Predecessor Bank established a real estate valuation
reserve for this property in the amount of $11.3 million. At June 30, 1998, the
Company continues to explore strategic alternatives with respect to this
property other than its immediate sale and has, therefore, categorized the
property as real estate held for investment.
The Predecessor Bank also decided during the quarter ended December 31, 1996 to
dispose of four other real estate properties and one real estate joint venture
and has established aggregate real estate valuation reserves for these
properties in the amount of $3.4 million.
During the quarter ended September 30, 1996, the Bank also established a $4.0
million real estate valuation reserve providing for the anticipated sale of four
other real estate properties at net sale proceeds which are expected to be less
than the Bank's previously recorded net book value for those assets.
Other Income. During the year ended June 30, 1998, other income was $5.4
million, an increase of $7.2 million as compared with a loss of $1.8 million in
fiscal 1997. Other income increased during fiscal 1998, as compared with the
previous year, primarily as a result of the realization of contingent
participation revenues in the amount of $3.4 million in 1998, as compared with
zero in the previous year, and the recognition of a net gain from real estate
sales during 1998 of $2.0 million as compared with a net loss in the previous
year of $1.8 million.
Contingent participation revenues were realized on two junior participation
loans, which were paid in full during fiscal 1998. Each of the loans had been
sold to HSBC on June 28, 1996 and were fully reserved for on the Company's books
following the Branch Sale. The Company retained a contingent interest in these
two loans approximating $3.3 million in principal amount following the Branch
Sale. At June 30, 1998, the Company had a remaining contingent interest in three
junior participation loans in which the Company retains an interest of
approximately $2.9 million in principal amount, which are fully reserved for
(100%) by the Company. All of such loans have been modified since origination
and are currently performing in accordance with their terms.
During the year ended June 30, 1998, the Company sold two properties, realizing
a net gain on sale of $2.0 million. During the previous fiscal year, the Company
sold 13 properties realizing a net loss of $1.8 million.
Property Operating and Maintenance Expenses. For the year ended June 30, 1998,
property operating and maintenance expenses ("property expenses") were $10.9
million, a decline of $1.9 million, or 15.2%, from $12.8 million for the year
ended June 30, 1997. The decline in property expenses was primarily attributable
to reductions in operating costs associated with maintaining rental units at
certain multi-family residential properties, as these units were converted to
condominiums and sold.
Interest Expense. During the year ended June 30, 1998, the Company recorded
interest expenses in the amount of $6.1 million, a decline of $1.3 million, or
17.0%, as compared with interest expenses of $7.4 million in the previous fiscal
year. Interest expenses declined in 1998 as compared with 1997 primarily as a
result of declines in the average amount borrowed by the Company in fiscal 1998
as compared with fiscal 1997. During 1997, the Company borrowed an average of
$73.3 million, a decline of $19.9 million, or 21.4%, as compared with average
borrowings of $93.2 million during the year ended June 30, 1997. The decline in
the average amount of borrowed funds was attributable to the repayment of
outstanding obligations which occurred in fiscal 1998 as a result of asset
dispositions.
Other Expenses. Other expenses consist of the Company's general and
administrative expenses. Other expenses do not include direct real estate
operations expenses, which are included in "property operating and maintenance
expense."
30
<PAGE>
During the year ended June 30, 1998, the Company recorded other expenses in the
amount of $6.1 million, a decline of $1.3 million, or 17.0%, as compared with
other expenses of $7.4 million in the previous fiscal year. Other expenses
declined in 1998 as compared with the previous year due to the Company's
continuing efforts to reduce the expense of managing its operations.
The following table sets forth the components of the Company's other expenses
during the periods indicated.
Fiscal Year ended June 30,
1998 1997
---- ----
(Dollars in Thousands)
Depreciation - other $ -- $ 15
Salaries and employee benefits 900 1,170
Legal and professional fees 2,305 1,892
Management fees 2,562 2,942
Other operating expenses 350 1,350
------------ ------------
Total $ 6,117 $ 7,369
============ ============
Legal and professional fees expense increased from $1.9 million during the year
ended June 30, 1997 to $2.3 million during the same period in 1998, as a result
of expenses incurred in connection with the Bank's successful reorganization
from a New York State chartered savings bank to a Delaware corporation. The
Company initiated these corporate form conversion activities in the quarter
ended June 30, 1997. The Company accrued and paid $53,000 and $53,000,
respectively, in the year ended June 30, 1997, and the Company accrued and paid
$900,000 and $1.6 million, respectively, in the year ended June 30, 1998, for
legal and professional fees associated with this conversion.
The Company engaged RB Management Company, LLC (the "Management Company") to
manage the operations of the Company after the Branch Sale, including the
management of Company assets. The Management Company was a newly formed,
privately-owned entity controlled by Alvin Dworman, who owns 39.0% of the
outstanding Common Stock of the Company. During the year ended June 30, 1998,
the Company accrued $2.9 million in fees payable to the Management Company, of
which $360,000 related to fees incurred upon the disposition of assets. During
the year ended June 30, 1997, the Company accrued $3.7 million in fees payable
to the Management Company, of which $774,000 related to fees incurred upon the
disposition of assets. At June 30, 1998, the Company had accrued fees payable to
the Management Company and its affiliate, Fintek, Inc., aggregating $224,000.
See ""Item 13. Certain Relationships and Related Transactions".
All other operating expenses declined $1.0 million, or 74.1%, to $350,000 for
the year ended June 30, 1998 as compared with the year ended June 30, 1997, in
which other operating expenses were $1.35 million. These expenses declined in
1998, as compared with the previous year due to the Company's continuing efforts
to reduce the expense of managing its operations.
Other Income (Expense). Other income and expense was income of $1.7 million
during the year ended June 30, 1998, an increase of $6.5 million, as compared to
the year ended June 30, 1997 where other income (expense) was a loss of $4.8
million. Other income (expense) in the year ended June 30, 1998 was primarily
due to the $1.8 million recorded gain on sale of the Company's largest preferred
stock holding during the quarter ended September 31, 1997.
During the quarter ended December 31, 1996, the Company and HSBC undertook an
overall review of the closing of the Branch Sale. As a result of such review,
the Company established a reserve of $3.3 million for potential closing
settlement adjustments and claims which it believes may be asserted by HSBC
related to certain assets acquired by HSBC in the Branch Sale. The establishment
of this reserve is reflected on the Statement of Operations, for fiscal 1997, as
provision for HSBC Branch Sale contingencies. The Company believes that the
remaining reserve for closing settlement adjustments adequately provides for
claims which may be asserted by HSBC.
Provision for Income Taxes. Statement of Financial Accounting Standards No. 109
(SFAS-109), "Accounting for Income Taxes," requires the Company to recognize a
deferred tax asset relating to the unrecognized benefit for all temporary
differences that will result in future tax deductions and for all unused NOL and
tax credit carry forwards, subject to, in certain circumstances, reduction of
the asset by a valuation allowance. A valuation allowance is recorded
31
<PAGE>
if it is more likely than not that some portion or all of the deferred tax asset
will not be realized based on a review of available evidence. Realization of tax
benefits for deductible temporary differences and unused NOL and tax credit
carry forwards may be based upon the future reversals of existing taxable
temporary differences, future taxable income exclusive of reversing temporary
differences and carry forwards, taxable income in prior carryback years and, if
appropriate, from tax planning strategies.
The high levels of loan charge-offs and other losses, which were largely
responsible for losses during the periods, effectively eliminated federal income
tax liability for fiscal 1998, fiscal 1997, and fiscal 1996. The Company's
income tax provision includes state and local taxes on the greater of combined
entire net income, combined alternative entire net income or combined taxable
assets. Certain subsidiaries provide for state and local taxes on a separate
company basis on income, capital, assets or an alternative minimum tax. For
additional information, see Note 19 to the Consolidated Financial Statements.
Under SFAS-109, at June 30, 1998, the Company recorded a net deferred tax asset
of approximately $19.2 million and deferred tax liabilities of $19.2 million.
The net deferred tax asset reflects gross deferred tax assets of $68.6 million
and a valuation allowance of $49.4 million. The net deferred tax asset
represents primarily the anticipated federal and state and local tax benefits
that could be realized in future years upon the utilization of existing tax
attributes. The deferred tax asset primarily relates to provisions for
anticipated credit losses recognized for financial statement purposes that have
not yet been realized for tax purposes, suspended passive activity losses and
credits, deferred income on venture investments and available NOL carry
forwards. Generally, the amount of a company's net deferred tax asset may serve
to increase its net worth under generally accepted accounting principles.
However, because of the net losses incurred by the Company in recent years, the
Company established a $49.4 million valuation allowance, resulting in a net
deferred tax asset of $19.2 million. The valuation allowance decreased by
approximately $12.5 million during the fiscal year ended June 30, 1998.
Realization of the net deferred tax asset is expected to occur upon reversal of
existing taxable temporary differences for which deferred tax liabilities of
$19.2 million have been recorded.
The provision for income taxes differs from the amount computed by applying the
statutory Federal income tax rate of 35% to the reported loss before provision
for income taxes primarily due to state and local income and franchise taxes and
limitations on the recognition of tax benefits of net operating losses. During
the year ended June 30, 1998, the Company recorded a net provision for income
taxes of $434,000, primarily to reflect the effects of operations and asset
disposition on its current state and local income tax liability at June 30,
1998.
During the year ended June 30, 1997, the Company completed a review of its
potential current and deferred federal and state tax liability for the fiscal
year in light of the Branch Sale and its related effect. As a result of the
review of its potential current and deferred tax liabilities and the results of
operations for the twelve months ended June 30, 1997, the Company reduced its
provision (recorded a benefit from) for state and local income taxes by $3.3
million. Additionally, the Company reduced its estimated current state and local
income tax liability at June 30, 1997 to reflect the effect of the Branch Sale
and disposition transactions completed during the twelve months ended June 30,
1997.
Asset Quality
Loan Asset Portfolio Composition The high levels of the Company's non-performing
loan assets in recent years was primarily attributable to the Company's emphasis
during the mid-to-late 1980s on loans to joint ventures for the acquisition,
development and construction of real estate in which the Company or a subsidiary
had an equity interest, commercial business loans, commercial real estate loans
and multi-family residential loans. Primarily as a result of the restrictions
imposed by the NYSBD and HSBC, the Company did not originate any such loans
during the years ended June 30, 1999 and 1998.
Among various types of loans secured by real estate, commercial real estate,
construction and multi-family residential loans are generally considered to
involve more risk than single-family residential loans due to, among other
things, the higher principal amount of such loans and the effects of a downturn
in general economic conditions, which may result in excessive vacancy rates,
inadequate rental income levels and volatility in real estate values. At June
30, 1999, the Company's total loans secured by real estate portfolio of $53.7
million included $21.5 million or 40.1% of multi-family residential loans and
$30.9 million or 57.6% of commercial real estate loans. Since the early 1990's,
the Company continued to originate such loans, on a limited basis, in connection
with the sale of investments in real estate and other resolutions of
non-performing assets.
The Company discontinued construction lending and loans to joint ventures in
1991. Construction lending is considered to involve even more credit risk than
multi-family residential and commercial real estate lending. Construction loans
32
<PAGE>
generally require only interest payments prior to the ultimate sale or lease of
the completed project, which are funded by the lender and added to the
outstanding principal of the loan. To evaluate a construction loan prior to
completion, leasing and/or sale of the underlying property, the Company must
rely on estimates of anticipated completed cost and subjective assessments of
future demand for the completed project. Accurate assessments of these factors
have been (and continue to be) difficult to perform because of the weakness of
the local economies and the real estate markets in which the Company has engaged
in lending activities. Loans to joint ventures are subject to the same risks as
construction loans and may even be more susceptible to risks of uncertain costs
and changing economic conditions due to the broader scope and longer term of
some ventures and the Company's status in some ventures as an equity
participant.
Non-performing loans are those loans placed on non-accrual status and loans
which are on accrual status but delinquent 90 days or more. The Company
generally places a loan which is delinquent 90 days or more on non-accrual
status unless it is well secured and, in the opinion of management, collection
appears likely. In addition, the Company may place a loan on non-accrual status
even when it is not yet delinquent 90 days or more if the Company makes a
determination that such loan is not collectible. When loans are placed on
non-accrual status, any accrued but unpaid interest on the loan is reversed and
future interest income is recognized only if actually received by the Company
and collection of principal is not in doubt.
The commercial business lending activities emphasized by the Company during the
mid-to-late 1980s also involved a high degree of risk. These activities were
conducted primarily through Quest, a wholly-owned subsidiary of the Company
which was formed in 1986 to implement a program of secured and unsecured
commercial business lending. The loans, and in certain cases equity investments,
made by Quest generally involved the buy out, acquisition or recapitalization of
an existing business and included management buyouts and corporate mergers and
acquisitions. Such transactions frequently resulted in a substantial increase in
both the borrower's liabilities and its liabilities-to-assets leverage ratio,
thus increasing the prospects for default. The Company discontinued its new
commercial business lending activities in 1991 and, as a result, the Company's
gross commercial business loans remained constant at $8.5 million at June 30,
1999 and 1998. At June 30, 1999, the remaining investments made through Quest
consisted of $1.3 million of equity securities, net.
The following table summarizes the gross and net carrying values of the
Company's non-performing loan assets at June 30, 1999.
<TABLE>
<CAPTION>
Net Book Value
Write-downs/ as a percentage
Gross Specific of
Balance Reserves (1) Net Value Gross Balance
------- ------------ ---------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Non-performing loans:
Single-family residential $ 1,229 $ 194 $ 1,035 84.2%
Multi-family residential 13,718 6,485 7,233 52.7
Commercial real estate 5,500 3,400 2,100 38.2
------------ ------------- ------------- ---------
Total non-performing real
estate loans 20,447 10,079 10,368 50.7
Commercial business 8,458 2,290 6,168 72.9
Consumer 1,856 50 1,806 97.3
------------- --------------- ------------- ----------
Total non-performing
commercial business and
consumer loans 10,314 2,340 7,974 77.3
------------ ------------- -----------
Total non-performing loans $ 30,761 $ 12,419 $ 18,342 59.6%
=========== =========== =========== =========
</TABLE>
33
<PAGE>
Non-performing Loan Activity. The following tables set forth the activity in the
Company's non-performing loan assets during the periods indicated.
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Beginning balance $ 33,072 $ 47,948 $ 36,816
Additions 144 3,266 16,033
Transfers to REO -- -- (34)
Write-offs (97) (8,917) --
Moved to performing loans -- (2,165) --
Satisfaction/sales (2,358) (7,060) (4,867)
------------- ------------- ------------
Ending balance $ 30,761 $ 33,072 $ 47,948
============ ============ ============
</TABLE>
Non-performing loans decreased by $2.3 million or 7.0% during the year ended
June 30, 1999 following a decrease of $14.9 million or 31.0% during the fiscal
year ended June 30, 1998. The decrease in non-performing loans in fiscal 1999
and 1998 reflect continued efforts to liquidate assets.
Loans to Finance the Sale of Real Estate. The Company had previously financed
the sale of investments in real estate under appropriate circumstances. Such
financing was provided by the Company on what management of the Company
considered to be market terms, which generally were more flexible than the
Company's standard underwriting guidelines for multi-family residential and
commercial real estate loans. All loans to finance the sale of investments in
real estate were approved in advance by the Board of Directors of the Company
and involve an amount of borrower equity and other terms which result in the
transaction constituting a sale of the property under generally accepted
accounting principles. At June 30, 1999 and 1998, the Company did not retain any
loans which had been made to finance the sale of investments in real estate,
except those reflected in loans sold, with recourse, net. (See "Asset Sales" and
Notes 8, 9 and 11 to the Consolidated Financial Statements).
Restructured Loans. The Company's asset resolution efforts previously included
the restructuring of loans primarily as a result of the financial condition of
the property which secures the loan. The Company encourages restructure
agreements only when it is in the best interest of the Company and it is
practical for the borrower.
The Work-Out Group, and after the Branch Sale, the Management Company, is
responsible for promptly responding to problem loans to determine if a
restructuring is viable or to commence foreclosure proceedings. Many problem
loans are such due to market conditions (particularly vacancies or market-driven
rent reductions, either of which may result in an impairment of the economic
viability of the underlying property). Therefore, non-performing loans may be
restructured by an agreement which recognizes that the borrower's inability to
meet contractual terms may be remedied through a modification which both
protects the financial interests of the Company and is economically feasible for
the borrower.
At June 30, 1999, the Company had restructured loans which aggregated $20.9
million and were performing in accordance with their restructured terms. At the
same date, the Company's restructured loans had been outstanding for periods
which range from 29 months to approximately six years.
As a result of restructurings which reduced the initial interest rate on certain
loans, the Company's restructured loans had a weighted average rate of 7.0% at
June 30, 1999, as compared to an original weighted average rate of 10.2%. The
Company's restructured loans generally do not call for the payment of foregone
interest at a later date, although many of such loans provide for increases in
the interest rate over the life of the loan.
The Company's restructured loans may have been renegotiated to lower the
interest rate, to defer the payment of principal and/or interest or to effect
other concessions. Because restructured loans may include concessionary terms
34
<PAGE>
related to interest rates, payment terms, loan-to-value ratios and debt service
coverage, however, such loans have a higher degree of credit risk than the
remainder of the performing loans in the Company's loan portfolio.
The following table sets forth information regarding the Company's restructured
loans at the dates indicated.
<TABLE>
<CAPTION>
June 30,
1999 1998 1997
---------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Multi-family residential $ 20,522 $ 22,499 $ 23,954
Commercial real estate 360 500 500
------------- ----------- -----------
Total $ 20,882 $ 22,999 $ 24,454
============= =========== ===========
Total restructured loans as a
percentage of total loans 26.78% 27.47% 23.71%
Total restructured loans as a
percentage of total assets 11.97% 12.05% 11.55%
</TABLE>
Allowance for Credit Losses. Although the process of evaluating the adequacy of
the Company's reserves involves a high degree of management judgment, such
judgment is based, in part, on systematic procedures deemed helpful in assessing
the adequacy of the Company's reserves. The Company's reserve analysis is
prepared quarterly in conjunction with the Company's internal asset
classification system and is used by management in determining if an additional
provision is required to maintain the allowance for credit losses at an
appropriate level or additional write-downs of equity investments and
investments in real estate are needed to reduce the carrying values of such
assets in accordance with the requirements of generally accepted accounting
principles.
The Company's reserve analysis is a computation of reserve requirements based
upon the risks inherent in the various asset portfolios. The various categories
of loans are grouped separately to recognize the various degrees of risk
associated with them. Loan portfolios are further stratified by internal asset
classification categories to assign higher risk weighted reserve percentages or
include targeted reserve definitions. Aggregated computed reserve balances are
compared to recorded reserves to measure the adequacy of reserve levels.
The Company's provisions for credit losses and write-downs of investments in
real estate have been significant in recent years. Such provisions and
write-downs aggregated $0 (net recoveries of $107,000), $2.6 million and $20.7
million during the years ended June 30, 1999, 1998 and 1997 and contributed
significantly to the Company's recorded net losses during 1998 and 1997.
At June 30, 1999, the Company's allowance for credit losses amounted to $18.2
million or 23.3% of total loans and 59.0% of non-performing loans, as compared
to $20.0 million or 28.9% of total loans and 60.6% of non-performing loans at
June 30, 1998. The decrease in the Company's allowance for credit losses in 1999
reflects the continued decrease in the size of the Company's loan portfolio and
management's internal analysis of the composition of its non-performing assets.
Of the $18.2 million allowance for credit losses at June 30, 1999, $12.4
million, or 68.4%, were specific reserves relating to particular loans and $5.7
million, or 31.6%, were general reserves. See Note 10 to the Consolidated
Financial Statements.
Management of the Company, based on facts available to it, believes that the
Company's allowance for credit losses at June 30, 1999 was adequate and that the
net carrying value of the Company's investments in real estate equaled the lower
of cost or fair value minus estimated costs to sell. It is anticipated, however,
that the adverse effects of the high level of the Company's non-performing
assets, consisting of provisions for credit losses, net loan charge-offs, loss
of interest income on non-performing loans, write-downs of investments in real
estate and increased operating expenses as a result of the allocation of
resources to the collection and work-out of non-performing assets, will continue
to adversely affect the Company's operations. Because the nature and extent of
these adverse effects will be dependent on many factors outside the control of
the Company, including conditions in the relevant real estate markets and
prevailing interest rates, these adverse effects are not presently determinable
by the Company.
In establishing an appropriate level of loan loss reserves, the Company does not
attempt to predict whether or how much the real estate market and general
economy of its market area may decline in the future. However, the Company
continues to closely monitor the status of its loan portfolio in relation to the
economic and market conditions in the relevant area for any further signs of
weakening. If declining conditions in the relevant area continue, particularly
in
35
<PAGE>
the New York City metropolitan area, causing existing non-performing loan
situations to worsen and additional loans to be classified as non-performing,
significant additional provisions for credit losses may be required. The
following table sets forth information concerning the activity in the Company's
allowance for credit losses during the periods indicated.
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----- ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Average loans outstanding $ 65,979 $ 86,139 $ 99,403 $1,018,477 $1,007,333
=========== =========== =========== ========== ==========
Allowance at the beginning
of the period $ 20,037 $ 31,570 $ 34,142 $ 33,985 $ 41,076
Charge-offs:
Single-family residential
loans (149) (2,026) (3,523) (1,089) (1,302)
Multi-family residential
loans (1,498) (1,147) (1,287) (2,665) (850)
Commercial real estate
loans (500) (3,801) -- (6,795) (11,160)
Commercial business loans -- (3,773) (23) (21) (1,380)
Consumer loans and other (50) (2,827) -- -- (9)
------------ ----------- ------------ ------------ -------------
Total loans charged off (2,197) (13,574) (4,833) (10,570) (14,701)
------------ ----------- ----------- ----------- -------------
Recoveries:
Single-family residential
loans -- 204 98 40 10
Multi-family residential
loans 86 3 704 -- 1,424
Commercial real estate
loans 229 146 437 -- 1,135
Consumer loans and other -- 188 22 1 --
------------- ------------ ------------ -------------- -----------
Total loans recovered 315 541 1,261 41 2,569
Net charge-offs (1,882) (13,033) (3,572) (10,529) (12,132)
Additions charged to operating
expenses -- 1,500 1,000 5,250 5,041
Additions charged to non-
operating expenses -- -- -- 5,436 --
------------- ------------ ----------- ------------- -------------
Allowance at end of period (1) $ 18,155 $ 20,037 $ 31,570 $ 34,142 $ 33,985
=========== ============ =========== ============ =============
Ratio of net charge-offs to
average loans outstanding 2.85% 15.13% 3.59% 1.03% 1.20%
Ratio of allowance to total
loans at end of period (1) 29.54 28.86 32.96 33.15 3.36
Ratio of allowance to non-
performing loans at end of
period (1) 61.48 60.59 65.84 92.74 59.05
</TABLE>
(1) As noted above, the decrease in the Company's allowance for credit
losses in recent periods reflects the transfer of a substantial
amount of non-performing loans to investments in real estate and the
Company's loan restructuring activities, the continued decrease in
the size of the Company's loan portfolio and management's internal
analysis of the composition of its non-performing assets.
(2) Percentages for the six month period are computed on an annualized basis.
36
<PAGE>
The following table sets forth information concerning the allocation of the
Company's allowance for credit losses by loan categories at the dates indicated.
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
Percent Percent
Of Total Of Total
Loans by Loans by
Amount Category Amount Category
------- -------- -------- --------
<S> <C> <C> <C> <C>
Single-family residential $ 325 0.51% $ 328 0.47%
Multi-family residential 8,784 13.72 9,011 2.98
Commercial real estate 6,706 10.48 7,290 10.50
Construction -- -- -- 0.00
Commercial business 2,290 3.58 3,157 4.55
Consumer 50 0.08 251 0.36
---------- ---------- --------
$ 18,155 $ 20,037
========== ==========
</TABLE>
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996 June 30, 1995
Percent Percent Percent
Of Total Of Total Of Total
Loans by Loans by Loans by
Amount Category Amount Category Amount Category
-------- -------- ---------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Single-family residential $ 1,294 1.86% $ 1,410 2.03% $ 986 0.42%
Multi-family residential 8,553 12.32 12,359 17.80 2,969 1.19
Commercial real estate 16,543 23.82 10,822 15.59 21,302 4.59
Construction -- 0.00 -- 0.00 2,746 51.80
Commercial business 4,357 6.27 6,956 10.02 5,982 16.30
Consumer 823 1.19 2,595 3.74 -- 0.00
---------- ----------- ---------- ------- --------- --------
$ 31,570 $ 34,142 $33,985
========== ========= =========
</TABLE>
<PAGE>
Asset Carrying Values. Investments in real estate are recorded on the books of
the Company at the lower of the Company's historical cost, less applicable
depreciation for real estate held for investment, or the estimated fair value of
the property minus estimated costs to sell. Adjustments made to the value at
transfer are charged to the allowance for credit losses. See Notes 1, 10, 12 and
13 to the Consolidated Financial Statements.
The Company primarily utilizes two means of valuation in evaluating the carrying
value of its investments in real estate: (1) appraisals and (2) discounted cash
flows. The discounted cash flow ("DCF") is based on assumptions wherein the
forecasted future cash flow attributable to the benefits of ownership are
discounted, at a rate commensurate with the risk involved, to a present value.
The DCF is based on information from various sources, including: actual
operating results, recent appraisals, third party market information and current
investment parameters. The Company believes that the DCF approach generally is
the most accurate predictor of value of a real estate asset over time. This
approach is an accepted means of valuation under GAAP. Under GAAP, among other
things, the DCF method allows for adjustments when local markets are dominated
by forced or liquidation sales, or when properties have unusual characteristics,
so that value estimates can be based on rent levels and occupancy that are
reasonably estimated to be achieved over time. The Company utilizes management
judgement and does not generally make adjustments to appraisal assumptions using
worst case scenarios that are unlikely to occur, direct capitalization of
non-stabilized income flows or simple projections of current levels of operating
income if markets are depressed but can be expected over a reasonable period of
time to return to stabilized conditions. Generally, for purposes of the DCF
analysis, property cash flows will be extended until stabilization, as it is the
Company's intent is to sell investments in real estate as quickly as possible,
assuming a stabilized sales price can be achieved. Assumptions in the DCF model
are made to most accurately reflect the Company's asset management plan.
The Company's real estate loan appraisal policy generally requires that all
appraisals conform to the Uniform Standards of Professional Appraisal Practice
adopted by the Appraisal Standards Board of the Appraisal Foundation and
prepared by an appraiser who is either certified or licensed by the state in
which the property is located. Appraisals may be performed by an outside fee
appraiser or by a staff appraiser, provided that, among other things, such
appraiser is independent of the lending, investment and collection functions of
the Company.
The Company generally reviews the value of its investments in real estate on at
least a quarterly basis. In the event that such reviews indicate a decline in
the value of such investments, write-downs are recorded as appropriate.
Strategy. Following the Branch Sale, the Management Company assumed the duties
of the Predecessor Bank's former "Work-Out Group" which monitored the
Predecessor Bank's problem assets. The Management Company continues to monitor
the Company's problem assets and develop individual business plans, including
cash flow analysis, for each problem asset after inspections, analysis of
economic factors and meetings with the borrower and counsel. These plans are
then documented for approval of the Board of Directors of the Company. See
"Item 13. Certain Relationships and Related Transactions."
Loans which become delinquent are analyzed to determine the nature and extent of
the problem and whether a restructuring of the loan or some other method of
resolution is appropriate under the circumstances. Every effort is made by the
Company to work with borrowers who are cooperative with the Company to effect a
restructuring that is economically feasible for both parties. When the Company
concludes that a restructuring is not economically feasible or where the
borrower does not demonstrate a willingness to cooperate, the Company pursues
available legal remedies. In most cases, the Company's strategy in recent years
has been to aggressively pursue the foreclosure process when a restructuring or
other resolution of a non-performing loan does not appear to be feasible or
otherwise in the best interests of the Company. This strategy has been pursued
so that the Company can acquire control of the security property as soon as
possible, and thereby implement a strategy designed by the Company for
management and ultimate resolution of the asset.
Loans that go through the foreclosure process, particularly in New York, are
subject to extensive delays before the Company can gain title to the property.
Non-judicial foreclosure generally is unavailable in New York, and the
procedures mandated by New York law can result in time-consuming litigation in
order to foreclose a mortgage loan. Moreover, the federal and state courts in
New York are overburdened with litigation and, as a result, decisions are often
delayed. Further complications occur when bankruptcy proceedings are involved.
For all these reasons, it can take an extended period of time, often two to six
years, for a lender to obtain title to property that secures a loan which is in
default. Although the foreclosure process can be long and complicated, the
Company aggressively pursues foreclosures or negotiates with borrowers to
acquire properties which secure problem loans by deed-in-lieu of foreclosure.
38
<PAGE>
The Company's general approach once it has acquired an investment in real estate
has been to seek to minimize further losses to the Company through active
management of the properties while they are held by the Company and by
developing management strategies tailored to the individual properties and whose
ultimate objective is to sell each property.
The Company primarily utilizes two means of valuation in evaluating the carrying
value of its investments in real estate: (1) appraisals and (2) discounted cash
flows. The discounted cash flow ("DCF") is based on assumptions wherein the
forecasted future cash flow attributable to the benefits of ownership are
discounted, at a rate commensurate with the risk involved, to a present value.
The DCF is based on information from various sources, including: actual
operating results, recent appraisals, third party market information and current
investment parameters. The Company believes that the DCF approach generally is
the most accurate predictor of value of a real estate asset over time. This
approach is an accepted means of valuation under GAAP. Under GAAP, among other
things, the DCF method allows for adjustments when local markets are dominated
by forced or liquidation sales, or when properties have unusual characteristics,
so that value estimates can be based on rent levels and occupancy that are
reasonably estimated to be achieved over time. The Company utilizes management
judgement and does not generally make adjustments to appraisal assumptions using
worst case scenarios that are unlikely to occur, direct capitalization of
non-stabilized income flows or simple projections of current levels of operating
income if markets are depressed but can be expected over a reasonable period of
time to return to stabilized conditions. Generally, for purposes of the DCF
analysis, property cash flows will be extended until stabilization, as it is the
Company's intent is to sell investments in real estate as quickly as possible,
assuming a stabilized sales price can be achieved. Assumptions in the DCF model
are made to most accurately reflect the Company's asset management plan.
The Company's general approach once it has acquired an investment in real estate
has been to seek to minimize further losses to the Company through active
management of the properties while they are held by the Company and by
developing management strategies tailored to the individual properties and whose
ultimate objective is to sell each property at, or above, its net book value.
The Company generally pursues a specific management strategy for each investment
in real estate because it believes that the depressed levels of the real estate
markets in which the Company has engaged in lending activities will improve as
national and regional economies recover and that it has the requisite real
estate expertise to individually address and resolve each problem asset.
Although the Company has evaluated bulk sales of non-performing assets from time
to time, it has not elected to pursue this strategy to date because it believes
that the discounts which are sought by potential purchasers are excessive, that
individual management strategies have the most potential for maximum recovery
and return to the Company and that the Company did not have sufficient equity
capital prior to and following the Equity Offering to support such a strategy.
There can be no assurance, however, that the Company will be successful in its
management strategies.
The Company's approach with respect to a particular investment in real estate
generally falls into one of the following categories: (i) attempt to sell the
investment as soon as practicable, (ii) actively manage the property until the
cash flow and other relevant factors have been stabilized or (iii) develop the
property to facilitate sale. Each of these strategies generally involves some
investment by the Company to improve the property in order to make it more
saleable, which can range from minor fix-up costs to substantial costs to
develop the property. Each work-out strategy is reviewed and approved by the
Company's Board of Directors.
In most cases, the Company's strategy consists of an attempt to sell the
property as soon as practicable. The Company generally works closely with a real
estate brokerage firm in this regard, and frequently will specifically target
known investors which it believes may be interested in a particular property
which is owned by the Company. In addition, in a few cases during the year ended
December 31, 1993, the Company used the public auction process to offer for sale
certain investments in real estate. Such auctions can provide broader exposure
to potential purchasers than may be able to be obtained through listings by a
real estate brokerage firm in the area in which the property is located. Public
auctions involve the payment of fees to the auctioneer, which can vary based on,
among other things, whether the property is sold and on what terms.
In many cases it seeks to stabilize the cash flow from the property by investing
in necessary improvements and seeking to increase the occupancy of the property.
This approach increases the amount of time that the Company holds the property,
but may enhance the value of the property and be the best means of disposing of
the investment without further loss. In certain cases, the Company will have
made the investment and taken the actions necessary to stabilize the cash flow
from the property, but the real estate markets in the area in which the property
is located will not have stabilized or other factors will be present which
prevent the Company from selling the property at a price which is
39
<PAGE>
reflective of its estimated value. In some cases, the cash flow from the
property has been stabilized such that it is providing a yield above the
Company's cost of funds, thus effectively making it an earning asset. Although
such assets continue to be classified by the Company as investments in real
estate and, thus, non-performing assets, the yield provided by the properties
increases the Company's flexibility to maximize their value in connection with a
sale.
In a number of cases, the Company's strategy to dispose of an investment in real
estate has consisted of development of the property. Although this approach may
involve the best prospects for maximizing the return to the Company, it also may
involve more risk and, as a result, the Company generally does not pursue this
alternative unless other alternatives are clearly not preferable under the
circumstances. In most cases in which this alternative is pursued, development
previously has been initiated by the defaulted borrower prior to the Company's
acquisition of the property upon foreclosure or by deed-in-lieu thereof. On
occasion, however, the Company has commenced development of an investment in
real estate as a management strategy.
Liquidity and Capital Resources
The Company must maintain sufficient liquidity to meet its funding requirements
for debt repayments related to asset sales, operating expenses, development
costs related to certain real estate projects, and to satisfy the regulatory
requirements described below.
At June 30, 1999, the Company had $50.6 million in borrowed funds outstanding
under the Facility provided by HSBC Bank. All funds borrowed from third party
sources other than HSBC were repaid in full at June 30, 1999. The Company
actively monitors and manages its cash inflows and outflows in the management of
the Facility with HSBC and invests, to the extent possible, all available cash
balances.
The Company has requested that HSBC reactivate the Facility to provide the
Company with access to fundings to be secured by assets from new lending,
investment and real estate transactions. The Company has requested that HSBC
provide availability up to the initial amount of the HSBC Facility of
approximately $100.0 million, or approximately $50.0 million in availability
under the HSBC Facility. Availability under the HSBC Facility would be used, in
combination with the restricted and unrestricted cash of the Company to invest
in new lending, investment and real estate activities, subject to the prior
approval of HSBC.
The Company seeks to maintain liquidity within a range of 5% to 10% of total
assets. Liquidity for this purpose is defined as unrestricted cash. At June 30,
1999, the Company's liquidity ratio, as so defined, amounted to 8.4% which was
within the maintenance range.
Recent Accounting Developments
From time to time the Financial Accounting Standards Board ("FASB") adopts
accounting standards (generally referred to as Statements of Financial
Accounting Standards, or "SFASs") which set forth required generally accepted
accounting principles. Set forth below is a description of certain of the
accounting standards recently adopted by the FASB which are relevant to
financial institutions such as the Company.
SFAS No. 130. During June 1997, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income"
(SFAS-130), which is required to be adopted for fiscal years beginning after
December 15, 1997. SFAS No. 130 establishes standards for reporting
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS No. 130 requires that all components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. The adoption of this standard did not
have a material impact on the Company's financial position or results of
operations.
SFAS No. 132. Effective July 1, 1998 the Company adopted SFAS No. 132,
"Employer's Disclosures about Pensions and Other Postretirement Benefits"
(SFAS-132). SFAS-132 became effective for all fiscal years beginning after
December 15, 1997. The provisions of SFAS-132 revise employer's disclosures for
pension and other post retirement benefit plans. SFAS-132 does not change the
measurement or recognition of assets, obligations or periodic expenses related
to these plans as the Statement was promulgated to standardize the disclosure
requirements for pensions and other post retirement benefits to the extent
practicable. Accordingly, the adoption of this standard did not have a material
impact on the Company's financial position or results of operations.
40
<PAGE>
SFAS No. 133. On June 15, 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS-133). SFAS-133 is effective
for all fiscal quarters of all fiscal years beginning after June 15, 2000.
SFAS-133 requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction and, if it is,
the type of hedge transaction. Management of the Company anticipates that, due
to the Company's limited use of derivative instruments, the adoption of SFAS-133
will not have a significant effect on the Company's results of operations or its
financial condition.
Impact of Inflation
The consolidated financial statements and related consolidated data presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial positions and operating
results in terms of historical dollars without considering the changes in the
relative purchasing power of dollars over time due to inflation. The primary
impact of inflation on the operations of the Company is reflected in increased
operating costs and, generally, increases in interest rates paid on borrowed
funds. Over any given term, however, interest rates do not necessarily move in
the same direction or in the same magnitude as changes in prices for goods and
services.
Impact of Year 2000
General Description of the Year 2000 Issue and the Nature and Effects of the
Year 2000 on Information Technology (IT) and Non-IT Systems. The Year 2000 issue
is the result of computer programs being written using two digits rather than
four digits to define the applicable year. Any of the Company's computer
programs or hardware that have date-sensitive software or embedded computer chip
technology may recognize a date using "00" as the year 1900 rather than the Year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or engage in similar normal business activities.
The Company believes that modifications to existing software and conversions to
new software, the Year 2000 issue will not pose significant operational problems
for its computer systems. Further, due to the limited number of assets managed
by the Company and the limited scope of the Company's continuing operations,
which could be managed and accounted for by methods not relying on the computer
systems currently employed by the Company, if such modifications are not made,
or if such modifications and conversions are not completed in a timely manner,
the Year 2000 issue is unlikely to have a material impact on the operations,
liquidity or capital resources of the Company. In addition, the Company believes
that the implementation of modifications to components of the building systems,
affecting the operations of its properties held as investments in real estate,
is unlikely to have a material affect on the operations, liquidity or capital
resources of the Company.
Status of Progress in Becoming Year 2000 Compliant, Including Timetable for
Completion of Each Remaining Phase. The Company's plan to resolve the Year 2000
issue involves four phases: assessment, and where necessary, remediation,
testing and implementation
To date, the Company has completed the assessment, remediation, testing and
implementation of all internal systems that could be significantly affected by
the Year 2000. The Company's costs have been minimal, since all accounting
software use by the Company is maintained and supported by a third party.
In addition, the Company has completed the assessment of all systems related to
the operations of its properties held as investments in real estate. Such
assessments were performed to ensure that remediation of building equipment
(such as security systems and elevators) could be completed and tested prior to
the year 2000. The Company's completed assessment indicated the need to modify
or replace portions of its buildings' systems so that these systems will
function properly with respect to dates in the year 2000 and thereafter. All
necessary remediation is expected to be completed as an integral part of
regularly scheduled building maintenance and repair activities. As a result, the
cost of such remediation is expected to be immaterial to the operations,
liquidity or capital resources of the Company.
Nature and Level of Third Parties and their Exposure to the Year 2000 Issue. The
Company has queried its significant suppliers and subcontractors that provide
accounting or information processing services to the Company (external agents).
To date, the Company is not aware of any external agent with a Year 2000 issue
that would materially
41
<PAGE>
impact the Company's results of operations, liquidity or capital resources.
However, the Company has no means of absolutely ensuring that external agents
will be Year 2000 ready. Due to the limited number of assets managed by the
Company and the limited scope of the Company's continuing operations, which
could be managed and accounted for by methods not relying on the computer
systems and services currently provided by external agents employed by the
Company, if such modifications are not made, or if such modifications and
conversions are not completed in a timely manner, the Year 2000 issue is
unlikely to have a material impact on the operations, liquidity or capital
resources of the Company.
Contingency Plans. The Company has contingency plans for all critical
applications and systems. These contingency plans involve, among other planned
actions, the use of alternative manual procedures, the temporary use of
increased or alternative third party services and adjusting staffing strategies.
Risks Associated with Forward-Looking Statements
This Form 10-K, together with other statements and information publicly
disseminated by the Company, contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements involve known and unknown risk, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company or industry results to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following,
which are discussed in greater detail in the "Risk Factors" section of the
Company's Registration Statement on Form S-4 (File No. 333-386730 and File No.
333-386730-01) filed with the Securities and Exchange Commission ("SEC"),
general economic conditions, which will among other things, affect demand for
commercial and residential properties, availability and credit worthiness of
prospective tenants, lease rents and the availability of financing: difficulty
of locating suitable investments; competition; risks of real estate acquisition,
development, construction and renovation; vacancies at existing commercial
properties; dependence on rental income from real property; adverse consequences
of debt financing; risks of investments in debt instruments, including possible
payment defaults and reductions in the value of collateral; illiquidity of real
estate investments; lack of prior operating history; and other risks listed from
time to time in the Company's reports filed with the SEC. Therefore, actual
results could differ materially from those projected in such statements.
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary market risk facing the company is interest rate risk on its borrowed
funds, mortgage notes and notes receivable. The Company does not hedge interest
rate risk using financial instruments nor is the Company subject to foreign
currency risk.
The company has assessed the market risk for its variable rate debt and believes
that a 1% increase in interest rates (as measured by changes in the LIBOR rate)
would result in an approximate $506,000 increase in interest expense based on
approximately $50.6 million outstanding at June 30, 1999. See Note 16, "Borrowed
Funds," contained within the Consolidated Financial Statements.
In addition, The Company has issued $11.88 million in Increasing Rate Junior
Subordinated Notes due 2006. The Subordinated Notes provide for a steadily
increasing interest cost after December 15, 2001. A substantial increase in
general interest rates would potentially prevent the Company from refinancing
the Subordinated Notes at a rate favorable to the Company. See Note 26,
"Preferred Stock Exchange Offer," contained within the Consolidated Financial
Statements.
The fair value of the Company's long term debt, mortgage notes, notes receivable
and other financial assets is estimated based on discounting future cash flows
at interest rates that management believes reflect the risks associated with
long term debt, mortgage notes, notes receivable and other financial assets of
similar risk and duration. See Note 24, "Fair Value of Financial Instruments,"
within the Consolidated Financial Statements.
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<PAGE>
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item and the reports of the
independent accountants thereon required by Item 14 (a) (2) are included on
pages F-1 to F-40. See accompanying "Index to Consolidated Financial Statements"
on page F-1.
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
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<PAGE>
PART III
ITEM 10
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Subsequent to the closing of the Branch Sale, although the Company has executive
officers under SEC requirements and New York Banking Law, which was formerly
applicable to the Predecessor Bank, the Company no longer maintains any
significant staff of employees to manage the Company's affairs. Rather, the
day-to-day management responsibilities of the Company are vested with the
Management Company, a newly formed management company affiliated with Mr.
Dworman. A significant amount of services, necessary to manage and dispose of
the Company's assets, have been and will be provided by the Management Company
or third party subcontractors who will not have any continuing fiduciary
obligations to the Company or the stockholders. The selection of third party
subcontractors to provide various services to the Company will be made by the
Management Company, subject to the ratification by committees of the Board of
Directors but without stockholder approval. The Company's success in maximizing
returns from the management of its assets will depend on the efforts of the
Management Company and third party contractors retained to provide services to
the Company.
Directors of the Company
The Company's Board of Directors is divided into three classes of directors,
serving staggered three-year terms. At the 1998 annual meeting of stockholders
of the Company, the holders of the Company Preferred Stock elected two directors
to serve for a term of one year. The right of holders of Company Preferred Stock
to elect such two directors continues until dividends on the Company Preferred
Stock have been paid for four consecutive quarterly dividend periods at which
time such voting rights will terminate.
The name, age as of September 21, 1999, position with the Company, if any, term
of office and period of service as a director, of each of the Company's
directors are as follows:
<TABLE>
<CAPTION>
Name Class Term Director
Name Age Position Expires Since(1)
---- --- -------- ------- ---------
<S> <C> <C> <C> <C>
Robin Chandler Duke................. 75 Director, Vice President and 1999(6) 1977
Secretary (2)
Alvin Dworman....................... 73 Director (3) 2001 1998
William D. Hassett.................. 63 Director (3) (4) 2000 1976
James J. Houlihan................... 47 Director (4) 2001 1998
David J. Liptak..................... 41 Director (5) --- 1998
Jerome R. McDougal.................. 71 Director and Chairman of the 2000 1991
Board (3)
Edward V. Regan..................... 69 Director (2) 2001 1995
David A. Shapiro.................... 48 Director (2)(4) 1999(6) 1998
Jeffrey E. Susskind................. 46 Director (5) --- 1998
</TABLE>
(1) Includes tenure with the Predecessor Bank.
(2) Member of the audit committee.
(3) Member of the executive committee.
(4) Member of the asset management committee.
(5) Elected by holders of Company Preferred Stock for a term of one year or
until their successors are elected.
(6) The Company intends to nominate this Director for re-election at its next
annual meeting of stockholders.
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<PAGE>
The principal occupation for the last five years and selected biographical
information of each of the directors is set forth below.
Robin Chandler Duke. Ms. Duke is National Chairman of Population Action
International, and she serves as a director of International Flavors and
Fragrances and American Home Products Corporation. Ms. Duke has served in an
unsalaried capacity as Vice President and Secretary of the Company and the
Predecessor Bank since July 1996.
Alvin Dworman. Mr. Dworman is the founder and chairman of The ADCO Group, a
financial services, merchant banking and real estate company established in
1981. Mr. Dworman also has been a director of the Sequa Corporation since 1987
and has been serving as a member of the New York State Real Estate Advisory
Committee since 1985.
William D. Hassett. Mr. Hassett, a real estate investor and managing member of
Hassett-Belfer Senior Housing L.L.C. is also owner of W.D. Hassett, Inc., a real
estate management company. Mr. Hassett, formerly a director of Olympia & York
Holdings (USA), was the Chairman of the New York State Urban Development
Corporation from 1977 to 1981, Chairman of the Battery Park City Authority from
1979 to 1981, Chairman of the Board of the New York State Dormitory Authority
from 1985 to 1994 and is a former New York State Commerce Commissioner. He
presently serves as a member of the Real Estate Advisory Committee to the New
York State Common Retirement Fund.
James J. Houlihan. Mr. Houlihan has been a partner of Houlihan-Parnes Realtors,
LLC, a commercial real estate firm for more than the past five years. Mr.
Houlihan is president of JHP Realty Advisors, Inc., a real estate advisory firm
and a partner in each of Kislev Management Corp., a commercial real estate
management firm, and Real Estate Servicing, Inc. and C.C. Capital Servicing,
Inc., both mortgage servicing firms.
David J. Liptak. Mr. Liptak has been the President of West Broadway Partners,
Inc., which is the General Partner of West Broadway Partners, L.P. and the
investment manager of AIG International West Broadway Fund, Ltd for more than
the past five years. Mr. Liptak was previously a Senior Vice President at
Oppenheimer & Co., Inc.
Jerome R. McDougal. Mr. McDougal served as Chief Executive Officer of the
Company and the Predecessor Bank from April 1995 and as President from July 1997
until he retired from such positions in June 1998. Mr. McDougal served as
President and Chief Executive Officer of the Predecessor Bank from March 1991 to
April 1995, at which time he became Chairman of the Board and Chief Executive
Officer. Prior to joining the Company, Mr. McDougal was Chairman and Chief
Executive Officer of the Apple Bank for Savings for four years. Prior to joining
Apple Bank, Mr. McDougal held various positions, including management positions
in a manufacturing concern, operating a consulting company, and running one of
the largest automotive retail chains in the New York metropolitan area.
Edward V. Regan. Mr. Regan is Chairman of the Municipal Assistance Corporation
and Policy Advisor for the Jerome Levy Economics Institute. Mr. Regan previously
served as the New York State Comptroller from 1979 to 1993.
David A. Shapiro. Mr. Shapiro has been a portfolio manager for Seneca Capital
Management LLC, an investment management firm since May 1995. Mr. Shapiro
founded Asset Holdings Group, a privately held originator of senior and
mezzanine commercial real estate loans formed in 1993. From 1991 to 1993, Mr.
Shapiro also served as an advisor to the Predecessor Bank in connection with the
restructuring and management of a portion of its commercial real state
portfolio.
Jeffrey E. Susskind. Mr. Susskind was a principal of Strome, Susskind Investment
Management, L.P., an investment management company located in Santa Monica,
California. Mr. Susskind has been, since January 1, 1999, engaged in personal
investments and has been an investment consultant for the five years prior to
1999.
Board of Directors and Committees
The Company is managed by a nine-member Board of Directors. The Board of
Directors has three standing committees, an executive committee, an asset
management committee and an audit committee.
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<PAGE>
Executive Committee. The executive committee is comprised of Messrs. Dworman,
Hassett and McDougal. The executive committee oversees the management of the
day-to-day business and affairs of the Company and the implementation of the
management of the Company's assets.
Audit Committee. The audit committee is comprised of Messrs. Regan and Shapiro
and Ms. Duke. The audit committee reviews and provides recommendations to the
Board of Directors with respect to the engagement of the Company's independent
auditors, financial reporting practices and internal accounting and financial
controls and procedures of the Company and monitors the Company's compliance
with its policies and procedures. In addition, the audit committee also
administers and reviews all compensation policies and will provide
recommendations to the Board of Directors with respect thereto.
Asset Management Committee. The asset management committee is comprised of
Messrs. Hasset, Houlihan and Shapiro. The asset management committee oversees
the performance of the asset portfolio of the Company.
During fiscal year 1999, the Board of Directors held six meetings, including
telephonic meetings. The audit committee held three meeting during the fiscal
year. The asset management committee held four meetings. The executive committee
held four meetings. During fiscal year 1999, each director (other than Mr.
Hassett and Mr. Liptak, each of whom were absent for one meeting) attended 100%
of the total number of meetings of the Board of Directors and each director
attended 100% percent of the total number of meetings of committees on which he
or she served.
The Company's Board of Directors may, from time to time, establish certain other
committees of the Board to facilitate the management of the Company. Directors
will be elected in a manner consistent with, and shall serve for a term, as
provided in the Company's Charter and Bylaws.
Executive Officers: Inasmuch as the Predecessor Bank had disposed of its
depository banking operations in connection with the sale of its branches and
transfer of its deposits to HSBC Midland Bank in June 1996 (the "Branch Sale"),
the Company as successor does not require a large staff of officers or employees
to manage the business and affairs of the Company. Certain day-to-day management
functions are performed by RB Management Company LLC pursuant to the terms of a
management agreement. See "--Certain Relationships and Related Transactions".
The Company's officers are Nelson L. Stephenson, who serves as president and
chief executive officer of the Company and Robin Chandler Duke, who serves
without compensation as the vice president and secretary of the Company. Set
forth below is certain biographical information for Mr. Stephenson.
Nelson L. Stephenson. Mr. Stephenson was elected to the offices of president and
chief executive officer of the Company in July 1998. For more than the past five
years, Mr. Stephenson has been President of Fintek Inc., a privately held
financial advisory firm that provides services to the Company and the
Predecessor Bank. Mr. Stephenson is also President and a Director of
Coast-To-Coast Financial Corporation, a unitary savings and loan holding company
which owns Fintek, Inc. and Superior Bank FSB as well as other subsidiaries
engaged in consumer finance.
46
<PAGE>
ITEM 11
EXECUTIVE COMPENSATION
Remuneration of Executive Officers - Summary Compensation Table: The following
table discloses compensation received by the Company's chief executive officer
for the years indicated. The cash compensation amounts below reflect
compensation received from the Company and its subsidiaries. There were no other
executive officers who received compensation in 1999 from the Company (other
than director fees).
<TABLE>
<CAPTION>
Annual Compensation
- --------------------------------------------------------------------------------------------------------
All Other
Name and Principal Position Year Salary Bonus Other Compensation Compensation
- --------------------------- ---- ------ ----- ------------------ ------------
<S> <C> <C> <C> <C> <C>
Nelson L. Stephenson 1999 $ 12,000 $ -- $ -- $ --
President and Chief
Executive Officer
Jerome R. McDougal 1999 $ 150,000 -- $ 176,269 (1) $ 14,853 (3)
Chairman of the Board 1998 300,000 -- 63,214 (2) 123,110 (3)
1997 300,000 -- 66,990 (2) 117,296 (3)
</TABLE>
- -------------------
(1) - Consists of severance pay following Mr. McDougal's retirement from the
offices of President and Chief Executive Officer in June 1998, in the amount of
$150,000 and a housing allowance, club dues, automobile, driver expenses and
health insurance premiums aggregating $26,269. Mr. McDougal will receive
severance payments in equal biweekly installments through June 30, 2000.
(2) - Consists of a housing allowance, club dues, automobile and driver expenses
(aggregating $21,548 and $25,324 for the 1998 and 1997 periods presented,
respectively), certain tax expense reimbursements and health insurance premiums.
(3) - Consists of contributions of $9,000, $9,000 and $9,500 made by the Company
to its 401(k) Tax Deferred Savings Plan, accruals of and earnings on deferred
compensation in the amounts of $0, $110,053 and $103,739 and payments of $5,853,
$4,057 and $4,057 for life and personal liability insurance premiums for the
1999, 1998 and 1997 periods presented, respectively.
Employment Arrangement: Jerome R. McDougal, was compensated pursuant to an
arrangement with the Predecessor Bank reached in 1991. The terms of Mr.
McDougal's employment were memorialized in the minutes of the Predecessor Bank's
January 22, 1991 Board of Directors meeting, which provided for an annual salary
of $375,000 and customary employee benefits commensurate with Mr. McDougal's
position at the Company. $75,000 of Mr. McDougal's annual salary was in the form
of deferred compensation. Mr. McDougal's annual deferred compensation accrues
quarterly in equal amounts and earns a variable rate of interest on the
cumulative balance. Prior to the Branch Sale, interest was compounded quarterly
at the highest rate offered on the predecessor's customer deposits each quarter
and was thereafter compounded at the prime rate. Mr. McDougal received
additional compensation in the form of a housing allowance, an automobile and
payment of club membership dues. The Company also reimbursed Mr. McDougal for
the amount of personal income taxes incurred as a result of the additional
benefits.
Mr. McDougal retired from his offices of president and chief executive officer,
effective July 1, 1998, at which time he was granted severance equal to two
years of his $375,000 annual salary. As part of his severance package, the
Company funds his health insurance premiums for a two year severance period and
funded his automobile allowance until the lease term of his current vehicle
expired in November 1998. Mr. McDougal also elected to withdraw his deferred
compensation in the amount of $689,728 during the quarter ended June 30, 1998. A
payment in this amount was made to Mr. McDougal on July 10, 1998.
Mr. Stephenson is compensated pursuant to an informal arrangement with the
Company that provides for compensation of $2,000 per month.
47
<PAGE>
Board of Directors Compensation: Effective July 1, 1998, directors of the
Company will receive directors fees of $2,500 for each regular Board meeting
attended, $750 for each telephonic Board meeting attended and $1500 for each
committee meeting attended.
Compensation Committee Interlocks and Insider Participation: Determinations
regarding compensation of the Company's employees were previously made by the
Compensation and Benefits Committee of the Board of Directors prior to the
Branch Sale. Mr. McDougal was a member of the Compensation and Benefits
Committee. Subsequent to the Branch Sale such determinations will be made by the
Audit Committee.
Retirement Plan: Effective April 30, 1992, the Company determined to suspend the
Company's Retirement Plan. As of the date of suspension, there have been no new
enrollments in the Retirement Plan and no further benefit accruals. As of June
30, 1998, Mr. McDougal was entitled to an accrued benefit of less than $5,000
pursuant to the terms of the Retirement Plan.
Indebtedness of Management: The Company's current policy is not to make loans to
its directors, executive officers or members of their immediate families,
although it did so from time to time in the past. All loans to directors and
executive officers and all other loans to the Company's employees were made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons, and do
not involve more than the normal risk of collection or present other unfavorable
features. All such loans were transferred to HSBC as Transferred Assets in
connection with the Branch Sale.
48
<PAGE>
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth certain information with respect to beneficial
ownership of Common Stock and Preferred Stock by (i) each person known by the
Company to own beneficially or of record more than 5% of Common Stock or
Preferred Stock, (ii) each director, nominee for director and executive officer
of the Company, and (iii) all directors and executive officers as a group. The
Company's Common Stock is not registered under Section 12 of The Securities
Exchange Act of 1934, as amended, and therefore stockholders holding 5% or more
of the Company's Common Stock are not required to file identifying and
beneficial ownership information with the SEC. Other than with respect to the
stockholders listed in the table below, the Company does not have access to
information deemed reliable as to the beneficial ownership of its Common Stock.
Unless otherwise indicated, each stockholder listed in the table has sole voting
and investment powers as of September 28, 1999 with respect to the shares owned
beneficially or of record by such person.
<TABLE>
<CAPTION>
Name and Address Amount and Nature of
of Beneficial Owner Beneficial Ownership Percent of Common Stock
- ------------------- -------------------- -----------------------
<S> <C> <C>
Mr. Alvin Dworman 2,768,400 39.0%
645 Fifth Avenue
New York, New York 10022
East River Partnership B(1) 415,800 5.9%
Madison Plaza
200 West Madison Street
Suite 3800
Chicago, Illinois 60606
Odyssey Partners, L.P.(2) 415,800 5.9%
31 West 52nd Street
New York, New York 10019
Ms. Robin Chandler Duke -- --
Mr. William D. Hassett 2,150 *
James J. Houlihan -- --
David J. Liptak -- --
Mr. Jerome R. McDougal 4,000 *
Mr. Edward V. Regan -- --
David A. Shapiro -- --
Nelson L. Stephenson -- --
Jeffrey E. Susskind -- --
All directors and executive officers as a group 2,774,550 39.1%
(10 persons)
</TABLE>
- ----------------
* Less than .1%.
(1) - East River Partnership B is an Illinois general partnership, the general
partners of which are: (1) JAP Grandchildren Trust # 1, the co-trustees of which
are Marshall E. Eisenberg and Jay A. Pritzker; (2) Don Trust #25, the
co-trustees of which are Marshall E. Eisenberg and Thomas J. Pritzker; and (3)
R.A. Trust #25, the co-trustees of which are Marshall E. Eisenberg and Thomas J.
Pritzker.
49
<PAGE>
(2) - Odyssey Partners, L.P. is a Delaware limited partnership having six
general partners: Stephen Berger, Leon Levy, Jack Nash, Joshua Nash, Brian
Wruble and Nash Family Partnership, L.P. The general partners of Odyssey
Partners, excluding Nash Family Partnership, L.P., share voting and dispositive
power over all owned shares.
50
<PAGE>
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Management Company; The Management Agreement: The Company has engaged the
Management Company under a management agreement (the "Management Agreement") to
provide Company Management Services and Asset Management Services (each as
defined below). The responsibilities of the Management Company include, but are
not limited to, development and recommendation to the Company's Board of
Directors of strategies intended to maximize stockholder value. The Management
Company is responsible for developing, recommending and maintaining business
plans and operating budgets, individual asset and liability strategies and
decisions relating to sales and retentions of assets. The Management Company
reports to the Company's Board of Directors or its Asset Management Committee.
The Management Company was newly formed in 1996 and is controlled by Alvin
Dworman, who serves as its Managing Member. Mr. Dworman also owns 39.0% of the
outstanding Common Stock of the Company.
The Management Company has access to the expertise, resources and business
relationships accumulated by Mr. Dworman over 35 years in a wide variety of
general business activities. Mr. Dworman currently serves as a member of the
Real Estate Advisory Committee of the New York State Employee Retirement System
and is a member of the Board of Trustees of the New York Law School. As an
individual and as Chairman and Chief Executive Officer of the ADCO Financial
Group, Mr. Dworman maintains investments in a number of financial services,
banking and real estate entities. During his career, Mr. Dworman has founded,
developed, owned and managed a wide variety of entities throughout the United
States. Mr. Dworman, Odyssey Partners, L.P. and East River Partnership B hold in
the aggregate 50.8% of the Common Stock. In connection with the equity
recapitalization offering in June 1994, Mr. Dworman, Odyssey Partners, L.P. and
East River Partnership B agreed not to sell their Common Stock for a period of
three years. In addition, such agreement provided that, for an additional two
years, they would not sell their Common Stock without the approval of the Board
of Directors of the Company under certain circumstances.
The terms of the Loan Agreement with HSBC include a requirement that, while any
amount remains outstanding under the Facility, Mr. Dworman retain his 39% common
stock interest in the Company and remain actively involved in the day-to-day
management of the affairs of the Company and its assets.
The Management Company also employs certain individuals previously employed by
River Bank who were directly involved in managing the Company's real estate
portfolio.
Transactions With Affiliates: The Company previously obtained certain services
from Fintek. Effective October 31, 1991, substantially all of the employees of
the Company's then-existing capital markets group became employees of Fintek, a
newly-formed corporation. At the same time, Nelson L. Stephenson, a Senior
Executive Vice President of the Company at the time, resigned as an officer of
the Company and became the President and Chief Executive Officer of Fintek, as
well as a director of Fintek. Fintek may be deemed to be under common control
with the Company as a result of interests of Mr. Dworman, and, in addition, an
adult child of Mr. Dworman's is a director of Fintek. Fintek, pursuant to a
written agreement approved by the Company's Board of Directors, provided certain
financial consulting, strategic planning and advisory services to the Company,
including providing advice and consulting services with regard to the Company's
treasury functions. The Company had the right to terminate the agreement (which
was for a term of one year with automatic annual renewals) by giving Fintek 180
days' notice of such termination. In addition, the Company had the right to
terminate the agreement by giving Fintek thirty days' notice prior to any
renewal.
At June 30, 1996, the Company had an accrued aggregate liability to Fintek in
the amount of $1,516,000 for services performed prior to that date. The services
performed by Fintek on behalf of the Company prior to June 30, 1996 were
primarily in connection with the Branch Sale. During fiscal years 1999 and 1998
the Company made aggregate cash payments to Fintek in the amount of $132,000 and
$706,000. At June 30, 1999, the Company had a remaining aggregate liability to
Fintek in the amount of $112,000.
The Fintek Agreement was terminated by mutual consent of the Company and Fintek
on June 28, 1996. Fintek has been engaged by the Management Company (at the
Management Company's expense) to provide similar services to the Company and the
Company subsequent to the Branch Sale. See "Item 13. Certain Relationships and
Related Transactions."
51
<PAGE>
"Company Management Services" includes the management of the general business
affairs of the Company, including:
1. Developing and recommending policies and procedures appropriate for
continuing the orderly management of the Company's assets and
implementation of all policies and procedures approved by the
Company's Board of Directors or the Asset Management Committee of
the Board.
2. Providing quarterly and annual financial and operating reports and
such other information to the Company's Board of Directors and the
Asset Management Committee and Audit Committee as may be necessary
and reasonably requested by the Company's Board of Directors or
such committee.
3. Analyzing the Company's performance, including progress in
continuing the orderly management of the Company's assets and
preparation of financial forecasts and periodic variance analyses
of actual performance relative to plan.
4. Overseeing provision of all accounting and financial reporting
services, including maintenance and control of a general ledger,
controlling accounts payable and processing services and payroll
processing services, preparation of financial reports and
regulatory compliance reports and preparation and filing of tax
returns, and establishing and maintaining management information
systems.
5. Providing treasury services and control functions, including:
- implementing cost and disbursement controls.
- cash management and investment of short-term funds.
- debt management, corporate finance and development and
implementation of alternative financing arrangement.
6. Overseeing legal and accounting services required by the Company.
7. Using best efforts to ensure compliance with any conditions imposed
by the Banking Department on the Company as a predicate to its
approval of the Branch Sale, including but not limited to, the
preparation and submission to the Banking Department of required
reports.
"Asset Management Services" entails management of all of the Company's assets on
a day-to-day basis and include the following:
1. Maintaining and implementing individual business plans for each
asset of the Company, as modified from time to time to reflect
changes in conditions and circumstances.
2. Development, marketing, negotiation and execution of transactions
necessary to continue to effect the Company's asset management
plans, subject to the ongoing approval of the Banking Department.
3. Obtaining and overseeing marketing and brokerage activities
relating to real estate managements and property leasing.
4. Managing real estate activities, including retention and oversight
of third-party property managers.
5. Obtaining and overseeing third-party loan servicing, including
ordinary course monthly payment collections and pay-offs.
6. Providing loan administration services, including delinquency
monitoring and response and enforcement of rights under loan
agreements.
7. Overseeing loan servicing activities for subordinated
participations in loans acquired by HSBC in connection with the
Branch Sale.
8. Administration of joint ventures and oversight of the business
activities of the joint ventures.
The Management Company obtains and oversees the provision, on an outsourced
basis, of those services not provided directly by the Management Company. All
outsourcing arrangements is subject to prior review and recommendation as to
compensation terms by the Audit Committee and as to the other terms of the
engagement subject to prior approval by the Asset Management Committee of the
Company's Board of Directors. The cost of approved outsourced arrangements is
borne by the Company. The Management Company offers similar services to entities
not affiliated with Mr. Dworman, and also renders services to affiliates of Mr.
Dworman.
The Management Company is paid an annual base fee for Company Management
Services in an amount not to exceed $1.25 million. The annual base fee is
reviewed no less frequently than annually by the Audit Committee of the Company
and adjusted based upon the costs expected to be incurred by the Management
Company to provide the Company Management Services. In addition, the Management
Company also receives an annual fee for Asset Management Services of 0.75% of
the average month-end book value of the Company's assets and a Success Fee of
0.75% of the proceeds from the sale or collection of any asset sold by the
Company.
52
<PAGE>
During the year ended June 30, 1999, the Company accrued expenses for services
provided by the Management Company in the amount of $1,250,000 for the Base Fee
payable to the Management Company, $1,176,000 for the Asset Service Fee, and
$139,000 for Asset Disposition Fees in accordance with the fee schedule outlined
above. During 1999, the Company paid the Management Company an aggregate amount
of $2,239,000. At June 30, 1999, the Company had no amounts payable to the
Management Company.
The Kenneth Leventhal Real Estate Group of Ernst & Young LLP, which was engaged
for this purpose by the Special Transactions Committee of the Predecessor Bank's
Board of Directors, reviewed the form and amount of the fees payable to the
Management Company and advised upon the comparability of the fees and terms to
similar arrangements negotiated on an arm's-length basis.
The Management Agreement has an initial term of three years, which will be
extended for up to two additional one-year terms if the HSBC senior debt is so
extended. The Management Agreement is terminable by either party at any time on
180 days' notice with the consent of HSBC or other senior lenders, as
applicable. In addition, the Company's Board of Directors, subject to the
consent of HSBC, may terminate the Management Agreement without notice for
"Cause." "Cause" is defined as a material breach of the Management Agreement
and/or willful act or omission by the Management Company that is materially
detrimental to the best interests of the Company. In addition, the Management
Agreement may be terminated by the Company's Board of Directors during the last
year of any term 60 days after the sale of the last asset of the Company.
Upon any termination of the Management Agreement, the fees payable to the
Management Company will be pro rated for such year to the date of termination.
If the Management Agreement is terminated prior to the expiration of any term,
the Company also reimburses the Management Company for the reasonable costs
incurred by the Management Company in terminating its services to the Company
including, but not limited to, reasonable termination or severance payments made
to service providers or employees terminated by the Management Company as a
result of such termination.
Other Service Providers: In addition to retaining the Management Company to
provide the Company with the services described above, the Company, subject to
regulatory approval, terminated most of its employees and retained third parties
(including Fintek, Inc. and other entities controlled by Mr. Dworman) to provide
much of the administrative and non-real estate operating functions of the
Company's operations.
The Management Company has engaged Fintek, Inc. ("Fintek"), a firm 50%
beneficially owned by Mr. Dworman which has previously provided certain advisory
services to the Company, to continue to provide such services to the Company.
All fees paid to Fintek for such advisory services were the obligation of the
Management Company and were paid out of the fees received by the Management
Company from the Company. On June 28, 1996, Fintek and the Company mutually
agreed to the termination of the previous contract between Fintek and the
Company.
Persons or entities engaged by the Board of Directors, the Asset Management
Committee or by the Management Company on behalf of the Company entered into a
service contract with the Company and are compensated in accordance with market
rates for similar services. The terms of these contracts, including
compensation, were reviewed prior to execution by the Audit Committee of the
Board of Directors, and the Board of Directors engaged the Kenneth Leventhal
Real Estate Group of Ernst & Young LLP to review each service contract and to
advise the Audit Committee on the terms of the contracts and the comparability
to similar arrangements for similar services.
53
<PAGE>
PART IV
ITEM 14
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements and Financial Statement Schedules
The following financial statements financial schedules of the Company are
included elsewhere in this Form 10-K at the pages indicated and are incorporated
by reference:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditor F-2
Consolidated Statements of Financial Condition
June 30, 1999 and 1998 F-3
Consolidated Statements of Operations
Years ended June 30, 1999, 1998, and 1997
Consolidated Statements of Changes in Stockholders' Equity
Years ended June 30, 1999, 1998, and 1997 F-5
Consolidated Statements of Cash Flows
Years ended June 30, 1999, 1998, and 1997 F-6
Notes to Consolidated Financial Statements F-8
Financial Statement Schedules F-34
</TABLE>
Certain financial statement schedules are omitted due to inapplicability or
because the required financial information is shown in the Consolidated
Financial Statements or Notes thereto.
(b) Reports on Form 8-K filed during the last quarter of the period covered by
this report:
None
(c) Exhibits:
2.1 * Agreement and Plan of Merger, dated as of October 9, 1997, by
and between River Asset Sub, Inc. and River Distribution Sub, Inc.
2.1b ** Amendment No. 1, dated as of May 15, 1998, to Agreement and
Plan of Merger, October 9, 1997, by and between River Asset Sub,
Inc. and River Distribution Sub, Inc.
2.2 * Petition for a Closing Order, made by River Bank America to the
New York State Supreme Court, dated October 15, 1997.
2.2b* Notice of Settlement of Closing Order, made by River Bank America
to the New York State Supreme Court, dated December 8, 1997.
2.2c * Closing Order, signed by the New York State Supreme Court on
January 9, 1998 and entered on January 14, 1998.
2.3 * Assignment and Assumption Agreement, dated as of May 11, 1998,
by and between River Bank America and River Asset Sub, Inc.
3.1 *** Certificate of Merger, dated May 18, 1998, of River Asset Sub,
Inc. and River Distribution Sub, Inc.
54
<PAGE>
3.2 *** Certificate of Incorporation of the Company.
3.3 *** Certificate of Designation of the 15% Noncumulative Perpetual
Preferred Stock, Series A, $1.00 par value, of the Company.
3.4 *** By-Laws of the Company.
4.0 + Indenture, dated as of December 30, 1998, by and between the
Company and LaSalle National Bank, as Trustee (the "Indenture").
4.2 ++ First Supplemental Indenture, dated as of February 1, 1999 to the
indenture.
10.1 * Credit Agreement dated as of June 28, 1996 among River Bank
America and other borrowers and HSBC Midland Bank and related loan
documents.
10.1b * Consent of HSBC Midland Bank to River Bank America's
Reorganization dated October 30, 1997.
10.2.* Management Agreement dated as of June 28, 1996, by and between
River Bank America and RB Management Company LLC.
21.1. Subsidiaries of the Company.
27.1 Financial Data Schedule.
- -------------------
* Incorporated by reference to the Company's Registration Statement on
Form S-4 filed on March 26, 1998.
** Incorporated by reference to the Company's Registration Statement on
Form S-4 filed on February 28, 1998
*** Incorporated by reference to the Company's Annual Report on Form
10-K/A filed on September 28, 1998
+ Incorporated by reference to the Company's Schedule 13-E4/A Issuer
Tender Offer Statement filed on December 31, 1998
++ Incorporated by reference to the Company's Quarterly Report on Form
10-Q filed on February 12, 1999
Supplemental Information to Be Furnished with Reports Filed Pursuant to Section
15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to
Section 12 of the Act.
The Company has not mailed any proxy materials to its stockholders in connection
with the Company's 1999 annual meeting of stockholders nor its 1999 annual
report to stockholders. The Company intends to prepare and mail such documents
as soon as practicable following the record date for the annual meeting which
has been set at the close of business on September 24, 1999.
55
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RB ASSET, INC.
(Registrant)
Date: September 29, 1999 By: /s/Nelson L. Stephenson
------------------------- ------------------------
Nelson L. Stephenson
President and Chief Executive Officer
(principal executive and principal
financial officer)
Pursuant to the requirements of the Securities Exchange 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.
/s/Robin Chandler Duke
---------------------
Date: September 29, 1999 Robin Chandler Duke
Director
/s/Alvin Dworman
---------------------
Date: September 29, 1999 Alvin Dworman
Director
/s/William D. Hassett
---------------------
Date: September 29, 1999 William D. Hassett
Director
/s/Jerome R. McDougal
---------------------
Date: September 29, 1999 Jerome R. McDougal
Director
/s/Edward V. Regan
---------------------
Date: September 29, 1999 Edward V. Regan
Director
56
<PAGE>
INDEX TO FINANCIAL STATEMENTS
RB ASSET, INC.
Index to Consolidated Financial Statements
Page
----
Report of Independent Auditor F-2
Consolidated Statements of Financial Condition
June 30, 1999 and 1998 F-3
Consolidated Statements of Operations
Years ended June 30, 1999, 1998, and 1997 F-4
Consolidated Statements of Changes in Stockholders' Equity
Years ended June 30, 1999, 1998, and 1997 F-5
Consolidated Statements of Cash Flows
Years ended June 30, 1999, 1998, and 1997 F-6
Notes to Consolidated Financial Statements F-8
Schedule II - Valuation and Qualifying Accounts F-35
Schedule III - Real Estate and Accumulated Depreciation F-36
Schedule IV - Investments in Real Estate F-38
F-1
<PAGE>
Report of Independent Auditors
The Board of Directors
RB Asset, Inc.
We have audited the consolidated statements of financial condition of RB Asset,
Inc. (the "Company"), successor to River Bank America (see Note 1), as of June
30, 1999 and 1998 and the related consolidated statements of operations, changes
in stockholders' equity, and cash flows for each of the three years in the
period ended June 30, 1999. We have also audited the financial statement
schedules listed in the Index to Financial Statements included in the Form 10-K.
These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
missstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company at
June 30, 1999 and 1998 and the consolidated results of its operations and its
cash flows for each of the three years in the period ended June 30, 1999 in
conformity with generally accepted accounting principles. Also, in our opinion,
the financial statement schedules referred to above, when considered in relation
to the basic financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
As discussed in Note 1 to the financial statements, the Company has adopted, as
of July 1, 1997, Statement of Financial Accounting Standard No. 130, "Reporting
Comprehensive Income," and as of July 1, 1998, Statement of Financial Accounting
Standard No. 132, "Employer's Disclosure about Pensions and Other Post
Retirement Benefits."
/s/ Ernst & Young LLP
New York, New York
July 16, 1998
F-2
<PAGE>
RB ASSET, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1999 and 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
Assets
June 30, June 30,
1999 1998
---- ----
<S> <C> <C>
Real estate assets:
Real estate held for investment, net of accumulated
depreciation of $3,264 and $583, respectively (note 12) $ 92,438 $ 82,835
Real estate held for disposal (note 13) 2,040 5,013
Allowance for fair market value reserve
Under SFAS-121 (note 13) (40) (1,363)
---------------- -----------
Total real estate held for disposal, net 2,000 3,650
Loans receivable:
Secured by real estate (note 8) 53,697 59,006
Loans sold with recourse, net (note 11) - 15,781
Allowance for possible credit losses (note 10) (15,815) (17,697)
------------- -----------
Total loans receivable, net 37,882 57,090
Investments in joint ventures 1,536 1,536
-------------- -----------
Total real estate assets 133,856 145,111
------------ -----------
Cash, due from banks and cash equivalents (note 6) 14,780 12,532
Cash, due from banks - restricted cash (note 6) 13,355 19,555
Investment securities available for sale (note 7) 1,294 1,373
Commercial and consumer loans (note 9) 10,314 10,431
Allowance for possible credit losses (note 10) (2,340) (2,340)
------------- -----------
Commercial and consumer loans, net 7,974 8,091
Other assets (note 15) 3,147 4,248
------------- -----------
Total Assets $ 174,406 $ 190,910
=========== ===========
Liabilities and Stockholders' Equity
Increasing Rate Junior Subordinated Notes due 2006 (note 26) $ 11,375 $ -
Borrowed funds (note 16) 50,557 68,760
Other liabilities (note 17) 15,957 14,967
------------ -----------
Total Liabilities 77,889 83,727
------------ -----------
Commitments and contingencies - -
Stockholders' equity
15% non-cumulative perpetual preferred stock, Series A, par value $1,
liquidation value $25 (1,400,000 shares authorized, 937,777 shares issued and
outstanding at June 30, 1999, 1,400,000 shares authorized, issued and
outstanding at June 30, 1998) 938 1,400
Common stock, par value $1 (30,000,000 shares authorized,
7,100,000 shares issued and outstanding at June 30, 1999 and 1998) 7,100 7,100
Additional paid-in capital 100,439 111,170
Accumulated deficit (note 18) (10,956) (11,561)
Securities valuation account (notes 1 and 7) (1,004) (926)
-------------- -----------
Total stockholders' equity 96,517 107,183
------------- -----------
Total liabilities and stockholders' equity $ 174,406 $ 190,910
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
RB ASSET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended June 30, 1999, 1998, and 1997
(Dollars in Thousands, except per share data)
<TABLE>
<CAPTION>
Year ended June 30,
-------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
REVENUE:
Rental revenue and operations:
Rental income and other property revenue $ 14,940 $ 13,779 $ 16,158
Property operating and maintenance expense (10,521) (10,884) (12,827)
Depreciation - real estate held for investment ( 2,338) (383) (200)
----------- ----------- ------------
Net rental operations 2,081 2,512 3,131
Other property income (expense):
Net gain/(loss) on sale of real estate 3,694 1,998 (1,754)
Writedown of investments in real estate 107 (1,106) (19,745)
---------- ----------- ----------
Total other property income/(expense) 3,801 892 (21,499)
Other income:
Interest income:
Loans receivable 2,551 3,680 4,504
Investment securities -- 55 574
Money market investments and other 629 462 391
Provision for possible credit losses -- (1,500) (1,000)
---------- ----------- ------------
Total interest income 3,180 2,697 4,469
Realization of contingent participation revenues 1,000 3,356 --
---------- ---------- -----------
Total other income 4,180 6,053 4,469
Total revenues 10,062 9,457 (13,899)
---------- ----------- -----------
EXPENSES:
Interest expense:
Increasing Rate Junior Subordinated Notes due 2006 524 -- --
Borrowed funds 4,173 6,026 7,132
Other 62 83 228
---------- ----------- -------------
Total interest expense 4,759 6,109 7,360
Other expenses:
Salaries and employee benefits 202 900 1,170
Legal and professional fees 1,460 2,305 1,892
Management fees 2,426 2,562 2,942
Other 60 350 1,365
---------- ----------- -------------
Total other expenses 4,148 6,117 7,369
---------- ---------- ------------
Total expenses 8,907 12,226 14,729
---------- ---------- ------------
Income (loss) before other income (expense) and before ---------- ---------- ------------
provision for income taxes 1,155 (2,769) (28,628)
Other income (expense):
Net gains (losses) on sales of investment securities -- 1,697 (1,495)
Provision for HSBC Branch Sale contingencies -- -- (3,300)
---------- ---------- -------------
Total other income (expense) -- 1,697 (4,795)
Income/(loss) after other income (expense) and before ---------- ---------- ------------
provision for income taxes 1,155 (1,072) (33,423)
---------- ---------- ------------
Provision for (benefit from) income taxes 550 434 (3,300)
Net income/(loss) 605 (1,506) (30,123)
Dividends declared on preferred stock -- -- --
Net income/(loss) applicable to common stock $ 605 $ (1,506) $ (30,123)
========== =========== ============
Basic and diluted loss per common share $ 0.09 $ (0.21) $ (4.24)
========== =========== ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
RB ASSET, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended June 30, 1999, 1998, and 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
Series A
Non-
cumulative
Perpetual Additional Retained Total
Preferred Common Paid-in Earnings Securities Stockholders'
Stock Stock Capital (deficit) Valuation Equity
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1996 $ 1,400 $ 7,100 $ 111,170 $ 20,068 $ (1,218) $ 138,520
Net loss for the year ended
June 30, 1997 -- -- -- (30,123) -- (30,123)
Preferred Stock dividends -- -- -- -- -- --
Change in comprehensive income resulting
from changes in unrealized loss on
securities available-for-sale -- -- -- -- 113 113
-------- ------- -------- --------- -------- -----------
Balances at June 30, 1997 1,400 7,100 111,170 (10,055) (1,105) 108,510
Net loss for the year ended
June 30, 1998 -- -- -- (1,506) -- (1,506)
Preferred stock dividends -- -- -- -- -- --
Change in comprehensive income resulting
from changes in unrealized loss on
securities available-for-sale -- -- -- -- 179 179
------- -------- -------- -------- -------- --------
Balances at June 30, 1998 1,400 7,100 111,170 (11,561) (926) 107,183
Net income for the year ended
June 30, 1999 -- -- -- 605 -- 605
Preferred stock dividends -- -- -- -- -- --
Reduction in Stockholders' Equity
resulting from the Preferred Stock
Exchange Offer (Note 26) (462) -- (10,731) -- -- (11,193)
Change in comprehensive income resulting
from changes in unrealized loss on
securities available-for-sale -- -- -- -- (78) (78)
--------- --------- --------- -------- --------- --------
Balances at June 30, 1999 $ 938 $ 7,100 $100,439 $(10,956) $ (1,004) $ 96,517
========= ========= ========= ======== ========= ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
RB ASSET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 1999, 1998, and 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended
June 30,
--------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Operating Activities
Cash Flows Provided by (Used in) Operating Activities:
Net (loss)/income $ 605 $ (1,506) $ (30,123)
Adjustments to reconcile net (loss)/income to cash
used in operating activities
Provision for possible credit losses -- 1,500 1,000
(Recovery)/Write downs of real estate assets (106) 1,106 19,745
Depreciation and amortization 2,338 383 215
Net (gain)/loss on sale of investments in real estate (3,694) (2,542) 1,754
Net (gain)/loss on sales of loans, other investments
and investment securities -- (5,241) 3,249
Change in operating assets and liabilities:
Net decrease/(increase) in accrued interest and
preferred stock dividend receivable 40 405 (326)
Net (decrease)/increase in accrued interest payable 275 (486) 964
Net increase/(decrease) in accrued income taxes 503 16 (5,019)
Net (decrease)/increase in accrued expenses
and other liabilities 674 (3,439) (4,947)
Net (increase)/decrease in prepaid expenses and other assets (1,046) (1,672) 1,195
Cash effect of increases/(decreases) in allowance for
possible credit losses 352 372 (23)
Other -- 172 (143)
---------- --------- --------------
Net cash (used in)/provided by operating activities (59) (10,932) (12,459)
---------- ---------- ------------
Investing Activities:
Cash Flows Provided by (Used in) Investing Activities
Proceeds from sales and maturities of investment
securities, available for sale -- 6,871 --
Net repayment/(origination) of loans secured by real estate, net __ 18,812 4,252
Net (reacquisition)/repayment of commercial and consumer loans 69 (1,579) 345
Net originations of commercial and consumer loans -- -- --
Net decrease/(increase) in loans sold with recourse -- 8,667 3,463
Redemption of FHLB Stock -- -- 8,976
Proceeds from sales of real estate held 13,077 16,583 41,407
Additional fundings on real estate held (655) (5,069) (14,270)
---------- ---------- -----------
Net cash provided by investing activities $ 12,491 $ 44,285 $ 44,173
---------- ---------- ------------
</TABLE>
(Continued on following page)
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
RB ASSET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended
June 30, 1999, 1998, and 1997
(Dollars in Thousands)
(Continued from previous page)
<TABLE>
<CAPTION>
Year Ended
June 30,
--------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Financing Activities:
Cash Flows Provided by (used in) Financing Activities:
Decrease/(increase) in restricted cash $ 6,200 $ (14,459) $ (5,096)
Net decrease in deposit accounts -- -- (3,022)
Capitalization of issuance costs - Increasing Rate Junior
Subordinated Notes (319) -- --
Amortization of capitalized issuance costs - Increasing Rate Junior
Subordinated Notes 32 -- --
Proceeds from borrowed funds -- -- 4,459
Repayment of borrowed funds (10,000) (5,509) (30,179)
Increase/(decrease) in borrowed funds secured by loans
sold with recourse, net of construction advances (6,097) (9,793) (5,794)
Net increase/(decrease) in escrow deposits -- -- (271)
----------- ------------ -----------
Net cash used in financing activities (10,184) (29,761) (39,903)
------------ ------------- -----------
Net increase/(decrease) in cash and money market investments 2,248 3,592 (8,189)
Beginning cash 12,532 8,940 17,129
----------- ------------ -----------
Ending cash $ 14,780 $ 12,532 $ 8,940
=========== ============ ===========
Supplemental Disclosure of Cash Flow Information
Cash paid for:
Interest $ 4,449 $ 6,594 $ 7,682
Federal, state and local taxes 548 433 1,952
Non-cash transaction:
Transfer of loans sold with recourse to real estate held
for investment (See Note 11) 13,959 - -
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30,
1999, 1998, and 1997
(Dollars in thousands, except per share data)
1. Organization, summary of significant accounting policies and accounting
changes
RB Asset, Inc. (the "Company") is a Delaware corporation whose principal
business is the management of its real estate assets, mortgage loans and
investment securities, under a business plan intended to maximize shareholder
value. As a result of the completion of reorganization steps (the
"Reorganization"), which were finalized on May 22, 1998, the Company succeeded
to the assets, liabilities and business of River Bank America ("River Bank" or
the "Predecessor Bank"). Prior to the Reorganization, River Bank was a New York
State chartered stock savings bank and was regulated by the New York State
Banking Department ("the Banking Department" or the "NYSBD") and, until December
31, 1997, the Federal Deposit Insurance Corporation (the "FDIC").
In connection with the Reorganization, on June 23, 1998 the Predecessor Bank was
dissolved and its legal existence terminated. Upon such dissolution, the capital
stock of River Bank was canceled and the stock transfer records of River Bank
were closed. On that date, common and preferred shareholders of River Bank
received shares of the Company on a share-for-share basis so that the Company
was owned by the same stockholders, in the same proportions, as owned by the
Predecessor Bank on the record date.
On June 28, 1996, the Predecessor Bank sold its remaining eleven branches ("the
Branch Sale") to HSBC Bank USA ("HSBC"), formerly known as Marine Midland Bank.
See Note 3 to the Consolidated Financial Statements. Following consummation of
the Branch Sale, all retail banking operations of the Predecessor Bank ceased.
Basis of presentation: The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. Intercompany balances
and transactions have been eliminated in consolidation. Due to the anticipated
short-term nature of such investments, investments in unconsolidated real estate
partnerships are generally carried at cost, which results do not differ
materially from generally accepted accounting principles, subject to periodic
assessment of net realizable value. Gains on sales or dispositions of such
investments are recognized dependent upon the terms of the transaction. Losses
on sales or dispositions and any adjustments related to redetermination of net
realizable value are charged to operations of the current period.
For the purpose of the statements of cash flows, cash equivalents are defined as
those amounts included in cash and due from banks and money market investments.
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to the current year's presentation.
Use of estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Money market investments: Money market investments are carried at cost, which
approximates market value.
Investment and mortgage-backed securities: In accordance with Statement of
Financial Accounting Standards No. 115 (SFAS-115), "Accounting for Certain
Investments in Debt and Equity Securities," at June 30, 1999, the balance of
stockholders' equity included a $1.05 million unrealized loss on securities
classified as available for sale.
Management determines the appropriate classification of debt and equity
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. Available for sale securities are stated at estimated fair
value, with unrealized gains and losses, net of tax, reported in a separate
component of stockholders' equity. The cost of debt and equity securities
classified as available for sale is adjusted for amortization of premiums and
accretion of discounts to maturity, or in the case of mortgage-backed
securities, over the estimated life of the security using a method approximating
the level yield method. Such amortization is included in interest income from
these investments. Interest and dividends are included in interest income from
the respective investments. Realized gains and losses, and declines
F-8
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30,
1999, 1998, and 1997
(Dollars in thousands, except per share data)
in value judged to be other-than-temporary, are included in net securities gains
and losses. The cost of securities sold is based on the specific identification
method.
Loans receivable, interest, and loan origination fees and costs: Loans
receivable are stated at principal balances, net of deferred fees and costs.
Interest on loans is accrued based on principal amounts outstanding. Loans are
placed on non-accrual status when they become 90 days past due or at any time
collection of principal or interest is doubtful unless, in the opinion of
management, collection appears likely. Accrued but unpaid interest on such loans
is reversed and interest income is subsequently recognized only to the extent
that payments are received and when no doubt exists as to the collectibility of
the remaining book balance of the asset. Interest is subsequently accrued when
such loans return to full current status and have had a period of performance in
accordance with a loan's terms.
Loan origination fees and certain loan origination direct costs are deferred,
and the net fee or cost is recognized as an adjustment to interest income over
the approximate lives of the related loans, adjusted for estimated prepayments
as appropriate to provide a level interest yield.
Allowance for possible credit losses: The allowance for possible credit losses
is provided by charges to operations. Credit losses, net of recoveries, are
charged directly to the allowance for possible credit losses. Additions to the
allowance are based on management's periodic review and evaluation of the
Company's assets, the potential for loss in light of the current composition of
the Company's assets, and economic conditions.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the consolidated statements of financial
condition and operations for the period. Material estimates that are
particularly susceptible to significant change in the near-term relate to the
determination of the allowance for possible credit losses and the valuation of
real estate held for investment. A substantial portion of the Company's loans
are collateralized by real estate and, accordingly, the performance of such
loans may be affected by market conditions for real estate. As of June 30, 1999,
most of the Company's real estate held for investment is located in New York.
The Company has 64% of its total assets in five real estate properties and
loans. Accordingly, the ultimate collectibility of these assets collateralized
by real estate is particularly susceptible to changes in local market
conditions. Management believes that the allowance for possible credit losses is
adequate and that real estate held for investment is properly recorded.
Real estate: The Company accounts for its real estate assets in accordance with
Statement of Accounting Standard No. 121 (SFAS-121), "Accounting for the
Impairment of Long Lived Assets to be Disposed Of," issued by the Financial
Accounting Standards Board (the "FASB"). SFAS-121 requires that a loss is
recorded for assets held for investment when events and circumstances indicate
impairment and the undiscounted future cash flow generated by the investment in
real estate is less than the related carrying amount. When the carrying amount
of the asset may not be recoverable, the asset balance must be directly written
down as part of the recorded loss. In addition, SFAS-121 requires long-lived
assets held for sale to be carried at the lower of carrying value or fair value
less the costs to sell. Fair value is defined in SFAS-121 as the amount at which
an asset could be bought or sold in a current transaction between willing
parties, that is, other than in a forced or liquidation sale.
Depreciation: Under generally accepted accounting principals ("GAAP"), SFAS-121,
the Company is required to depreciate real estate held for investment over the
estimated useful life of the assets. The depreciable portion of assets
categorized as real estate held for investment includes the accumulated costs of
acquisition and/or development of building structures and leasehold
improvements. No depreciation charges are made for the portion of the asset's
historical cost attributable to land. Depreciation for real estate held for
investment is generally calculated on a straight-line basis over a 30 year
period or over the remaining term of the lease for leasehold improvements,
whichever period is less. On May 22, 1998, as a consequence of the
Reorganization, the Company was no longer subject to the categorization and
depreciation regulations for investments in real estate previously imposed by
the Predecessor Bank's regulators. Accordingly, as of that date, the Company
began to record depreciation charges, as required by GAAP, for all real estate
held for investment, that had not been subject to depreciation charges in prior
periods.
F-9
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30,
1999, 1998, and 1997
(Dollars in thousands, except per share data)
Retirement plan: The Company has a contributory 401(k) plan and a
non-contributory pension plan (the "Plan") covering substantially all of its
employees. During 1992, the Company adopted an amendment to the Plan which
ceased the accrual of benefits under the Plan ("Plan suspension") effective
April 30, 1992. The Plan was further amended to exclude employees hired on or
after April 30, 1992 from participating in the Plan.
Income taxes: For federal income tax purposes, the Company files a consolidated
tax return with its subsidiaries on a calendar year basis. The Company files
combined New York State and New York City income tax returns with various
subsidiaries. In addition, certain subsidiaries file on a separate basis in New
York and the Company and certain subsidiaries file income and franchise tax
returns in various other states.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. To the extent that current available evidence about the future raises
doubt about the realization of deferred tax assets, a valuation allowance must
be established. Deferred tax assets and liabilities are measured using enacted
tax rates which are expected to be applicable to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Recent Accounting Pronouncements:
SFAS No. 130. During June 1997, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income"
(SFAS-130), which is required to be adopted for fiscal years beginning after
December 15, 1997. SFAS No. 130 establishes standards for reporting
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS No. 130 requires that all components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. The adoption of this standard did not
have a material impact on the Company's financial position or results of
operations.
SFAS No. 132. Effective July 1, 1998 the Company adopted SFAS No. 132,
"Employer's Disclosures about Pensions and Other Postretirement Benefits"
(SFAS-132). SFAS-132 became effective for all fiscal years beginning after
December 15, 1997. The provisions of SFAS-132 revise employer's disclosures for
pension and other post retirement benefit plans. SFAS-132 does not change the
measurement or recognition of assets, obligations or periodic expenses related
to these plans as the Statement was promulgated to standardize the disclosure
requirements for pensions and other post retirement benefits to the extent
practicable. Accordingly, the adoption of this standard did not have a material
impact on the Company's financial position or results of operations.
SFAS No. 133. On June 15, 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS-133). SFAS-133 is effective
for all fiscal quarters of all fiscal years beginning after June 15, 2000.
SFAS-133 requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction and, if it is,
the type of hedge transaction. Management of the Company anticipates that, due
to the Company's limited use of derivative instruments, the adoption of SFAS-133
will not have a significant effect on the Company's results of operations or its
financial condition.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates.
F-10
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30,
1999, 1998, and 1997
(Dollars in thousands, except per share data)
2. Reorganization
On May 22, 1998, River Bank completed its Reorganization into a Delaware
corporation named RB Asset, Inc., under a plan that was approved by the
stockholders of River Bank. Prior to the Reorganization, River Bank was a New
York State chartered stock savings bank and was regulated by the New York State
Banking Department ("the Banking Department" or the "NYSBD") and, until December
31, 1997, the Federal Deposit Insurance Corporation (the "FDIC"). Prior to the
Reorganization, the Predecessor Bank was therefore subject to extensive
regulation, examination and supervision by the Banking Department and by the
FDIC. As a Delaware corporation, no longer engaged in banking activities, the
Company is no longer subject to regulation by the Banking Department or the
FDIC.
In connection with the Reorganization, on June 23, 1998 the Predecessor Bank was
dissolved and its legal existence terminated. Upon such dissolution, the capital
stock of River Bank was canceled and the stock transfer records of River Bank
were closed. On that date, common and preferred shareholders of River Bank
received shares of RB Asset, Inc. on a share-for-share basis so that RB Asset,
Inc. was owned by the same stockholders, in the same proportions, as owned the
Predecessor Bank on the record date. The transfer of assets, liabilities and
business of River Bank to RB Asset, Inc. was expected to qualify as a tax-free
reorganization under the Internal Revenue Code and, as such, the Company expects
that certain of the Predecessor Bank's tax attributes have been preserved.
3. Purchase of Assets and Liability Assumption Agreement
On June 28, 1996, the Predecessor Bank had consummated the transactions (the
"Branch Sale") contemplated by the Purchase of Assets and Liability Assumption
Agreement (the "Branch Agreement") by and between the Predecessor Bank and HSBC
Bank USA ("HSBC"), a banking corporation formerly known as Marine Midland Bank.
Following consummation of the Branch Sale, all retail banking operations of the
Predecessor Bank ceased. Pursuant to the terms of the Branch Agreement, HSBC
assumed $1,159.6 million of deposit liabilities (the "Assumed Deposits") and
acquired assets with an aggregate carrying value of $1,066.6 million (the
"Transferred Assets"). The Transferred Assets consisted primarily of loans
secured by real estate, mortgage-backed and investment securities, and 11 bank
branch offices, inclusive of the name East River Savings Bank. Included in the
Transferred Assets was approximately $32.4 million of loans in which the
Predecessor Bank was granted subordinated participation interests. Also included
in the Transferred Assets were the proceeds of dispositions from five individual
asset sale transactions with parties other than HSBC, aggregating $60.4 million,
composed of real estate assets, loans and other receivables (the "Asset Sale
Transactions"). The Asset Sale Transactions were structured to include ongoing
recourse to, and participation by, the Predecessor Bank with respect to the
assets sold, based upon the net proceeds realized on disposition of assets by
the purchasers. See Note 11 to the Consolidated Financial Statements.
At June 30, 1996, the Predecessor Bank retained $285.5 million in assets,
including primarily real estate assets and non-performing loans. The balance of
the assets retained after the Branch Sale primarily consisted of performing
loans (including loans sold with recourse, subordinated participations, junior
subordinated participations, loans to facilitate the sale of real estate owned
and mortgage and other loans) and a modest amount of cash and investment
securities (collectively, the "Retained Assets"). Over the five year period
preceding the Branch Sale, the Bank's primary loan origination focus was
single-family (one-to-four units) and, to a lesser extent, multi-family (five or
more units) residential loans secured by properties in the New York City
metropolitan area. Primarily as a result of conditions imposed by the NYSBD and
the terms of the HSBC Facility, subsequent to June 28, 1996, the Predecessor
Bank and the Company have not originated a material amount of loans.
4. Regulatory capital requirements
Subsequent to the termination of the Predecessor Bank's status as an insured
nonmember bank by the FDIC and the reorganization of the Predecessor Bank into a
Delaware corporation, the Company is no longer subject to the regulatory capital
requirements of either the FDIC or the Banking Department.
F-11
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30,
1999, 1998, and 1997
(Dollars in thousands, except per share data)
5. Earnings per share
Earnings per share were based upon 7,100,000 weighted average shares of Common
Stock outstanding during the years ended June 30, 1999, 1998, and 1997,
respectively. The Company had no securities outstanding that were convertible to
common stock at June 30, 1999, 1998 and 1997.
6. Cash due from banks and cash equivalents
Included in Cash, due from banks and cash equivalents at June 30, 1999, are
approximately $2.0 million in Funds maintained on deposit by wholly-owned
subsidiaries and required to meet ongoing cash flow requirements of those
subsidiaries. At June 30, 1999, HSBC had restricted a total of $13.4 million in
funds, held on deposit with HSBC, in accordance with the terms of the Branch
Sale and the HSBC Facility agreements. At June 30, 1998, HSBC had restricted a
total of approximately $19.6 million. Restricted funds held by HSBC are not
available to the Company for the settlement of any of the Company's current
obligations. The restricted cash reserves arose from the sale of assets which
had served as primary collateral for the HSBC Facility. The restricted cash held
by HSBC is intended to serve as substitute collateral for the HSBC Facility,
until such time as the HSBC Facility is reduced in accordance with the Company's
Asset Management Plan and the HSBC Facility agreements.
7. Investment securities available for sale, net
The amortized cost of investment securities available for sale and their
estimated fair values at June 30, 1999 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Equity securities $ 2,299 $ -- $ (1,005) $ 1,294
============ ============ =========== ===========
</TABLE>
The amortized cost of investment securities available for sale and their
estimated fair values at June 30, 1998 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Equity securities $ 2,299 $ -- $ (926) $ 1,373
============ ============ ============ ============
</TABLE>
8. Loans receivable, secured by real estate
Loans secured by real estate at June 30, 1999 and 1998 consist of the following:
June 30, June 30,
1999 1998
-------- --------
One-to-four family residential $ 1,229 $ 1,306
Multi-family residential 21,519 24,638
Commercial 30,949 33,062
----------- ------------
$ 53,697 $ 59,006
=========== ===========
F-12
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30,
1999, 1998, and 1997
(Dollars in thousands, except per share data)
In accordance with SFAS No. 114 (SFAS-114), "Accounting by Creditors for
Impairment of a Loan," the Company considers a loan impaired if, based on
current information and events, it is probable that all amounts due under the
loan agreement are not collectable. Impairment is measured based upon the fair
value of the underlying collateral.
At June 30, 1999 and 1998, the recorded investment in loans that are considered
to be impaired under SFAS-114 were $18,047 and $19,130, respectively (of which
$16,191 and $19,130 were on a non-accrual basis). The related allowance for
credit losses is $7,679 and $7,679. The average investment in impaired loans
during the years ended June 30, 1999 and June 30, 1998, were $18,589 and
$22,952, respectively. For the years ended June 30, 1999 and June 30, 1998 the
Company recognized interest income on those impaired loans of $84 and $41,
respectively, using the cash basis of income recognition.
At June 30, 1999 and 1998, the Company had restructured 3 and 5 loans,
respectively, secured by real estate which aggregated $20,882 and $22,999,
respectively. The gross interest income that would have been recorded if those
loans had been current in accordance with their original terms and had been
outstanding throughout the years ended June 30, 1999 and 1998 is $2,188 and
$2,411 respectively. The amount of interest on these loans that was included in
interest income for the year ended June 30, 1999, and 1998 is $501 and $604.
9. Commercial and consumer Loans
Commercial and consumer loans at June 30, 1999 and 1998 consist of the
following:
June 30, June 30,
1999 1998
-------- --------
Commercial loans:
Secured $ 2,520 $ 2,520
Unsecured 5,939 5,939
--------- ----------
8,459 8,459
Consumer loans:
Student education loans 1,855 1,972
--------- ----------
Total commercial and consumer loans $ 10,314 $ 10,431
========= ==========
10. Allowance for possible credit losses
The following is an analysis of the allowance for possible credit losses for the
years ended June 30, 1999 and 1998:
1999 1998
---- ----
Balance at July 1, 1998 and 1997 $ 20,037 $ 31,570
Provision charged to operations - 1,500
Charge-offs, net of recoveries (1,882) (13,033)
---------- ---------
Balance at June 30, 1999 and 1998 $ 18,155 $ 20,037
========== ==========
Charge-offs, net of recoveries, relate to losses incurred and recoveries
realized in the sale or liquidation of assets.
F-13
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30,
1999, 1998, and 1997
(Dollars in thousands, except per share data)
At June 30, 1999, the total provisions for possible credit losses were allocated
to real estate loans in the amount of $15,815 and to commercial and consumer
loans in the amount of $2,340. At June 30, 1998, the total provisions for
possible credit losses were allocated to real estate loans in the amount of
$17,697 and to commercial and consumer loans in the amount of $2,340.
11. Loans sold with recourse, net.
At June 30, 1998 Loans sold with recourse, were carried at $15,781, net of
valuation allowances of $4,901 and consisted of loans and contracts of sale
related to three multi-family residential developments, including a parcel of
undeveloped land.
In connection with, and to facilitate the closing of, the Branch Sale, the
Company consummated $60.4 million of Asset Sale Transactions. The Asset Sale
Transactions, which were arranged by RB Management Company LLC, were structured
to include ongoing recourse to, and participation by, the Company with respect
to the assets sold, based upon the proceeds realized by the purchasers. The
assets included within each pool of assets sold and the nature of related
recourse provisions are described below.
The Asset Sale Transactions were entered into with five entities, each of which
was independent of the Company and Alvin Dworman, who owns 39% of the common
stock of the Company. In connection with the Asset Sale Transactions, entities
controlled by Mr. Dworman loaned $12.8 million to the five entities on a
non-recourse basis.
The Company made representations and warranties ( the "Recourse Provisions")
with respect to the assets sold which included, among other things, the present
condition of each asset, the nature of disposition arrangements which had been
entered into by the Company prior to June 28, 1996 and that each of the assets
was free of any liens or encumbrances. The Recourse Provisions also included
representations with respect to certain of the assets that the Company had taken
all actions to effect specific proposed dispositions or had made arrangements
with third parties to complete actions required to effect such dispositions. The
Company believes that it made adequate provision at June 30, 1998 for all
recourse amounts expected to result from the sale of loans with recourse.
At June 30, 1996, loans sold with recourse were composed of a mortgage loan in
the amount of $13.0 million secured by land and construction in process related
to a single family condominium project in Wayne, New Jersey (the "Wayne
Project") and included contracts of sale, in the amount of $11.0 million for two
adjacent parcels of land located in the Bronx, New York (the "Bronx Projects").
The Company's aggregate investment in the Wayne Project prior to the Asset Sale
Transactions approximated $13 million. The Company's investment in the Bronx
Projects prior to the Asset Sale Transactions aggregated $17.7 million,
including $12.1 million for one site ("Site One") and $5.6 million for a second
site ("Site Two"). The sale contract for the Bronx Projects represented the sale
of ownership and development rights for each of the parcels of land and, for
Site One, the Company's investment at June 28, 1996 in construction in process.
At June 30, 1999, the Wayne Project is in the final phase of a three phase
development and all units have been sold (with the exception of one unit being
temporarily retained by the Company for use as an on-site project administration
facility). The Company believes that the Wayne Project will be fully completed
and the remaining unit sold prior to June 30, 2000. The Company's remaining
investment in the Wayne Project, net of applicable reserves, was $408,000 at
June 30, 1999.
At June 30, 1999, the Company's remaining investment in the Bronx Projects
aggregated $13.5 million, including $9.5 million for Site One and $4.0 million
for Site Two. At June 30, 1998, development of the first phase of Site One,
involving the construction of 84 condominium units, was completed and all units
were sold. Site Two was vacant on June 30, 1999 with no development yet
commenced. At June 30, 1999, the Company was evaluating various
F-14
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30,
1999, 1998, and 1997
(Dollars in thousands, except per share data)
development and distribution strategies with respect to these properties. Such
strategies would include, but not be limited to, sales of one or both of the
Sites and various arrangements for the sale and development of subparcels of the
Sites.
Payments made to reduce the remaining recourse claims related to the Bronx
projects made from Bronx Project condominium unit sales proceeds to HSBC and to
a third party lender aggregating $6.1 million and $2.1 million, respectively, in
the year ended June 30, 1999 and $2.2 million and $2.1 million, respectively, in
the year ended June 30, 1998. Such payments reduced the outstanding amount
payable to HSBC and the third party lender to $0 and $0, respectively, at June
30, 1999 and to $6.1 million and $2.1 million, respectively, at June 30, 1998.
Subsequent to the funding of the remaining recourse amounts the remaining assets
were transferred at June 30, 1999 to real estate held for investment and
constitute real estate held for development for financial reporting purposes.
12. Real estate held for investment
Real estate held for investment at June 30, 1999 and 1998, respectively,
consists of the following:
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
------------- -------------
Number of Number of
Properties Amount Properties Amount
---------- ------ ---------- -------
<S> <C> <C> <C>
Land Held for Development 3 $ 13,959 - $ -
Multi-family 2 60,142 2 62,426
Commercial real estate:
Office buildings 2 17,577 2 17,616
Shopping centers - - 1 1,966
Other 1 760 1 827
--- ---------- --- ----------
8 $ 92,438 6 $ 82,835
=== ========== === ==========
</TABLE>
See Note 11 for a description of the assets reclassified to Real Estate Held for
Development at June 30, 1999
At June 30, 1999, the Company's principal real estate held for investment
properties consists of a multi-family apartment complex located in Philadelphia,
PA, an office building complex in Atlanta, GA and co-operative apartment shares
in New York, NY. The book values of the three properties are $54.4 million,
$12.6 million and $5.7 million, respectively.
The Company has used currently available information to establish valuations for
real estate held for investment at June 30, 1999. Future writedowns of real
estate held for investment may be necessary based on changes in economic
conditions, the receipt of newly-available information involving specific
properties, or changes in management strategies.
F-15
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30,
1999, 1998, and 1997
(Dollars in thousands, except per share data)
13. Real estate held for disposal
Real estate held for disposal, net of $40 and $1,363 valuation allowance at June
30, 1999 and 1998, respectively, consists of the following (dollars in
thousands):
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
------------- -------------
Number of Number of
Properties Amount Properties Amount
---------- ------ ---------- ------
<S> <C> <C> <C> <C>
Multi-family residential 1 $ 2,000 1 $ 2,000
Office buildings - - 1 1,650
---------- ----------- --------- -----------
1 $ 2,000 2 $ 3,650
========== =========== ========== ==========
</TABLE>
Activity in the valuation allowance for real estate held for disposal for the
years ended June 30, 1999 and 1998 is as follows:
June 30, June 30,
1999 1998
------ -----
Beginning balance - July 1, 1998 and 1997 $ 1,363 $ 1,849
Provisions charged to operations - -
Charge-offs (1,323) (486)
----------- -----------
Ending balance - June 30, 1999 and 1998 $ 40 $ 1,363
=========== ===========
At June 30, 1999, the Company's principal real estate held for disposal
properties consisted of co-operative apartment shares in New York, NY, from
which only minimal rental income was derived. At June 30, 1998, the Company's
principal real estate held for disposal properties consisted of a parking garage
adjacent to an office building complex in Atlanta, GA and co-operative apartment
shares in New York, NY. Net rental income from investments in real estate held
for sale were $66 and $77 for the years ended June 30, 1999 and 1998,
respectively.
Management believes that the allowance for possible losses is adequate and that
real estate held for disposal is properly valued. The Company has used currently
available information to establish reserves and resultant net valuations for
real estate held for disposal at June 30, 1999.
14. Salaries and Employee Benefits
Due to the general cessation of all loan origination activities in anticipation
of and subsequent to the Branch sale, salaries and employee benefits were not
reduced by any capitalized direct loan origination costs in the years ended June
30, 1999, 1998, and 1997.
F-16
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30,
1999, 1998, and 1997
(Dollars in thousands, except per share data)
15. Other assets
Other assets at June 30, 1999 and 1998 consist of the following:
<TABLE>
<CAPTION>
June 30, June 30,
1999 1998
---- ----
<S> <C> <C>
Accrued interest receivable $ 348 $ 388
Deposit against asset sale recourse claims - 2,107
Prepaid pension expenses and other assets 2,799 1,753
----------- ---------
$ 3,147 $ 4,248
=========== =========
</TABLE>
16. Borrowed funds
Borrowed funds and weighted average year-end interest rates at June 30, 1999 and
1998 consist of the following:
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
Weighted Weighted
Year-end Average Year-end Average
Amount Rate Amount Rate
<S> <C> <C> <C> <C>
Initial facilities (HSBC) $ 50,557 6.53% $ 60,557 8.20%
Borrowed funds secured by loans
sold with recourse (Note 11) -- - 8,203 8.00
----------- -------- ----------- --------
$ 50,557 $ 68,760
=========== ===========
Average cost of funds during
the year ended 6.62% 8.17%
===== =====
</TABLE>
Borrowed funds secured by loans sold with recourse: In June 1996, the Company
financed the sale of loans, in the amount of $24,000, in connection with and to
facilitate the closing of the Branch Sale. These loans were sold to third
parties, with recourse. Borrowed funds secured by loans sold with recourse bear
interest at the prime rate (or, at the Company's option, a LIBOR based rate).
See Note 11 for more information concerning the three properties previously
securing these borrowed funds.
Initial Facility with HSBC: The closing of the Branch Sale was conditioned upon
the Company's obtaining financing with terms and in an amount reasonably
acceptable to the Company and determined to be reasonably adequate to permit
consummation of the Branch Sale. The Company obtained from HSBC the Facility,
consisting of eleven independent mortgage loans with additional collateral, in
an aggregate amount not to exceed approximately $100.0 million. As of June 30,
1999, HSBC had extended $50.6 million under the Facility to the Company.
Proceeds of the Facility were utilized by the Company to (i) refinance all or
part of the certain indebtedness secured by assets to be transferred to HSBC,
including all or a substantial part of the outstanding advances from the Federal
Home Loan Bank ("FHLB") and (ii) provide additional funds for the development
and completion of two individual real estate assets as part of the Company's
operations subsequent to the Branch Sale.
Each of the individual loans included in the Facility were structured as
three-year term loans with options to extend the initial term for two additional
one-year periods subject to the Company's achieving pre-agreed minimum repayment
amounts which are equal to 60% and 30% of the original aggregate amount of the
Facility and remaining fully current on all obligations and in compliance with
all covenants. The Company has remained current on all obligations and
F-17
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30,
1999, 1998, and 1997
(Dollars in thousands, except per share data)
remains in compliance with all covenants related to the Facility, accordingly,
the agreement has been extended through June 30, 2000.
The Facility was priced at 175 basis points over LIBOR for the initial six
months following June 28, 1996, automatically increasing by 25 basis points at
the beginning of each of the subsequent three six month periods and will be
priced at 275 basis points over LIBOR for the third year of the Facility. In the
event that the Company elects to exercise its option to extend the initial term
of the Facility, the Facility will be priced at 300 basis points over LIBOR
during the initial one year extension and 325 basis points over LIBOR during the
second one year extension. Following maturity or an event of default, the
Facility will accrue interest at a specified default rate.
On October 1, 1998, a modification of the loan agreement between HSBC and the
Company became effective. This modification effectively reduced the rate of
interest paid by the Company to HSBC by providing compensating balance credits
to the Company for funds it held on deposit with HSBC. As a result of this
modification and a decline in general interest rates in fiscal 1999, as compared
with the previous year, the average annual rate of interest paid to HSBC
declined from approximately 8.20% in 1998 to 6.53% in 1999.
The Facility is secured by first priority mortgage liens on eleven of River
Bank's real estate assets approved by HSBC and collateral assignments of first
priority mortgages held by River Bank (the "Primary Collateral"). Each of the
loans is cross defaulted with each other and cross collateralized by all
collateral for the Facility. As additional collateral for the Facility, each
loan is also secured by first priority mortgages (or, where applicable, a
collateral assignment of first priority mortgages held by the Company), stock
pledges and assignment of partnership interests and assignment of miscellaneous
interests on additional Bank assets (the "Additional Collateral"). The Company
collaterally assigned to HSBC all of the cash flow from the Primary Collateral
and the Additional Collateral. All of the net cash flow from the Primary
Collateral and Additional Collateral will be applied to the prepayment of the
Facility. In addition, all net proceeds from the sale of any Primary Collateral,
and the proceeds from the sale of any Additional Collateral, shall be applied to
the prepayment of the Facility subject to the Company's right to establish
reserves for its operating needs. The Company will be permitted to prepay the
Facility in whole or in part at any time without prepayment penalty or premium
(subject to customary LIBOR breakage provisions).
The Loan Agreement requires that while any amounts remain outstanding under the
Facility, the Company must receive HSBC's prior written consent to, among other
things, materially alter its charter or by-laws, incur additional corporate
indebtedness and liens, make any distributions to stockholders or repurchases or
redemptions of capital stock, acquire additional assets, exchange existing
assets with a third party or assume additional liabilities as a result of any
proposed merger transaction.
The Company has requested that HSBC reactivate the Facility to provide the
Company with access to fundings to be secured by assets from new lending,
investment and real estate transactions. The Company has requested that HSBC
provide availability up to the initial amount of the HSBC Facility of $100
million, or approximately $50 million in availability under the HSBC Facility.
Availability under the HSBC Facility would be used, in combination with the
restricted and unrestricted cash of the Company to invest in new lending,
investment and real estate activities, subject to the prior approval of HSBC.
F-18
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30,
1999, 1998, and 1997
(Dollars in thousands, except per share data)
17. Other liabilities
Other liabilities at June 30, 1999 and 1998 consist of the following:
June 30, June 30,
1999 1998
------ -----
Accrued interest payable $ 754 $ 479
Accrued income taxes 6,290 5,787
Accounts payable and accrued expenses 4,120 3,036
Postretirement benefits obligation 3,914 4,352
Preferred Stock dividend, declared and unpaid 879 1,313
---------- ---------
$ 15,957 $ 14,967
========== =========
18. Stockholders' equity
On June 30, 1994, the Predecessor Bank consummated the placement ("Offering") of
5,500,000 shares of its common stock, par value $1.00 per share ("Predecessor
Common Stock"), and 1,400,000 shares of 15% noncumulative perpetual preferred
stock, series A, par value $1.00 per share ("Predecessor Preferred Stock") which
resulted in net proceeds to the Predecessor Bank of $78,200. The issuance price
of the offered stock was $9 per share for the Predecessor Common Stock and $25
per share for the Predecessor Preferred Stock. The Predecessor Bank's Restated
Organization Certificate was amended prior to consummation of the Offering in
order to authorize the issuance of up to 30,000,000 shares of Predecessor Common
Stock and 10,000,000 shares of Predecessor Preferred Stock. Prior to the
offering, the Predecessor Bank had 1,000,000 shares of Predecessor Common Stock
issued and outstanding, plus warrants to purchase an additional 690,000 shares
of Predecessor Common Stock. The Predecessor Bank also had 200,000 shares of 3%
Noncumulative Senior Preferred Stock and 130,000 shares of 4% Noncumulative
Preferred Stock issued and outstanding (each of which series of preferred stock
had a liquidation value of $100 per share). Substantially concurrently with the
Offering these shares were exchanged for 600,000 shares of Predecessor Common
Stock and outstanding warrants to purchase Predecessor Common Stock were
canceled. The Predecessor Bank had 7,100,000 shares of its Predecessor Common
Stock and 1,400,000 shares of its Predecessor Preferred Stock outstanding at
June 30, 1997.
In connection with the Reorganization (See Note 2), the stockholders of the
Predecessor Bank received substantially identical capital stock of the Company
(with substantially identical rights and privileges) on a share for share basis
and as a result the Company had 7,100,000 shares of its common stock, $1.00 par
value Company Common Stock, and 1,400,000 shares of its 15% non-cumulative
perpetual preferred stock, series A, $1.00 par value ("Company Preferred
Stock"), outstanding at June 30, 1998. Mr. Alvin Dworman, continues to be the
largest stockholder of the Company with 2,768,400 shares or 39% of the Company
Common Stock outstanding.
The Company's certificate of incorporation authorizes the issuance of up to
30,000,000 shares of Company Common Stock and 10,000,000 shares of preferred
stock, of which 1,400,000 have been designated and issued as the Company
Preferred Stock pursuant to the certificate of designation with respect thereto.
The Company Preferred Stock is perpetual and is not subject to any sinking fund
or other obligation of the Company to redeem or retire it.
The board of directors of the Company has the power from time to time to issue
additional shares of Company Common Stock or perpetual preferred stock
authorized by its certification of incorporation without obtaining approval of
the Company's stockholders. The board of directors has the power to fix various
terms with respect to additional shares of preferred stock, including voting
powers, designations, preferences, price, dividend rate, conversion and exchange
provisions, redemption provisions and the amounts that holders are entitled to
receive upon any dissolution, liquidation or winding up of the Company.
F-19
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30,
1999, 1998, and 1997
(Dollars in thousands, except per share data)
The Company may pay dividends on common stock as declared from time to time by
the Board of Directors out of funds legally available therefor. Except as
provided with respect to any series of Preferred Stock, the holders of Common
Stock possess exclusive voting rights in the Company. Each holder of Common
Stock is entitled to one vote for each share held on all matters voted upon by
stockholders. Stockholders are not permitted to cumulate votes in elections of
directors. Subject to the prior rights of the holders of any shares of Preferred
Stock that may be outstanding, in the event of any liquidation, dissolution or
winding up of the Company, the holders of the Common Stock would be entitled to
receive, after payment of all debts and liabilities of the Company (including
all deposit accounts and accrued interest thereon) and, after distribution of
the balance, if any, in the liquidation account maintained for certain
depositors of the Company at the time of the Conversion, all assets of the
Company available for distribution.
The Company had 937,777, 1,400,000, and 1,400,000 shares of its Preferred Stock,
which were issued in connection with the Offering, outstanding at June 30, 1999,
1998, and 1997. During the year ended June 30, 1999, 462,223 shares of the
Company's Preferred Stock were exchanged for Increasing Rate Junior Subordinated
Notes due 2006 under the terms of the Company's Preferred Stock Exchange Offer.
See Note 26, below.
The Company's Preferred Stock is perpetual and is not subject to any sinking
fund or other obligation of the Company to redeem or retire it. The par value of
the Preferred Stock is $1.00 per share. This stock ranks prior to the Common
Stock with respect to dividend rights and rights upon the voluntary or
involuntary dissolution, liquidation or winding up of the Company, and to all
other classes and series of equity securities of the Company hereafter issued,
other than any class or series of equity securities of the Company expressly
designated as being on a parity with or senior to the Preferred Stock with
respect to dividend rights or rights upon any such dissolution, liquidation or
winding up. The Common Stock and any other classes or series of equity
securities of the Company not expressly designated as being on a parity with or
senior to the Preferred Stock are referred to hereafter as "Junior Stock." The
rights of holders of shares of Preferred Stock are subordinate to the rights of
the Company's creditors, including its depositors. The Company may not issue any
capital stock that ranks senior to the Preferred Stock without the approval of
holders of at least 66% of the outstanding shares of Preferred Stock, voting as
a class.
Holders of Company's Preferred Stock will be entitled to receive, when, as and
if declared by the Board of Directors of the Company, out of funds legally
available therefor, noncumulative cash dividends at the rate of 15% per annum.
The right of holders of Preferred Stock to receive dividends is noncumulative.
Accordingly, if the Board does not declare a dividend payable in respect of any
quarterly dividend period (a "Dividend Period"), then holders of Preferred Stock
will have no right to receive, and the Company will have no obligation to pay, a
dividend in respect of such Dividend Period, whether or not dividends are
declared payable in respect of any future Dividend Period. No full dividends may
be declared or paid or set aside for payment as dividends on any class or series
of equity securities ranking, as to dividends, on a parity with the Preferred
Stock for any Dividend Period unless full dividends on the Preferred Stock for
such Dividend Period shall have been paid or declared and set aside for payment.
Dividends on the Preferred Stock will not be declared and paid if payment of
such dividends is then restricted by (i) laws, rules, regulations or regulatory
conditions applicable to the Company or (ii) orders, judgments, injunctions or
decrees issued by, or agreements with, federal or state authorities with respect
to the Company. The Company is not permitted to declare or pay dividends
(whether in cash, stock or otherwise) on its common or preferred stock without
the prior written consent of HSBC.
The Predecessor Bank had previously received notice that the approvals necessary
to declare or pay dividends on the Predecessor Bank's outstanding shares of
River Bank Predecessor Preferred Stock would not be provided. In June 1996, the
Predecessor Bank's Board of Directors declared a Predecessor Preferred Stock
dividend for the quarter ending June 30, 1996, payment of which was subject to
the receipt of required approvals from the FDIC and the NYSBD (the Predecessor
Bank's regulators at the time), as well as HSBC (the Predecessor Bank's and the
Company's principal lender). Primarily as a result of the above, neither the
Company's nor the Predecessor Bank's Board of Directors have
F-20
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30,
1999, 1998, and 1997
(Dollars in thousands, except per share data)
taken any action regarding a quarterly dividend on the Company's Predecessor or
Company Preferred for any of the quarterly periods ended from September 30, 1996
through June 30, 1999. Although the Company is no longer subject to the
jurisdiction of either the FDIC or the NYSBD, declaration or payment of future
dividends on the Company's Preferred Stock will continue to be subject to the
approval of HSBC for as long as the Facility remains outstanding. The Company
has received notice from HSBC that the approval necessary to declare or pay
dividends on the Company's Preferred Stock will not be provided at this time.
There can be no assurance that the Board of Directors of the Company will deem
it appropriate to pay dividends on the Company preferred Stock, even if
permitted to do so by HSBC.
Holders of the Preferred Stock will not be entitled to vote upon the election of
members of the Board or other matters in general. Holders of the Preferred
Stock, however, will be entitled to elect two members of the Company's Board to
fill two newly-created directorships upon the occurrence of a "Voting Event." A
Voting Event occurs if the Company fails to pay full dividends on the Preferred
Stock (or to declare such full dividends and set apart a sum sufficient for
payment thereof) with respect to each of any six Dividend Periods, whether
consecutive or not. Two members of the Company's Board of Directors were elected
to represent the holders of the Company's preferred stock on September 16, 1998
at the Company's annual meeting.
The Preferred Stock is perpetual and is not redeemable prior to July 1, 2004.
The Preferred Stock is redeemable by the Company at its option at any time on or
after July 1, 2004, in whole or in part, at the per share redemption prices set
forth below in cash, plus in each case an amount in cash equal to accrued but
unpaid dividends for the then-current Dividend Period up to, but excluding, the
date fixed for redemption (the "Redemption Date") without the accumulation of
unpaid dividends for prior Dividend Periods:
July 1, 2004 to June 30, 2005 $27.50
July 1, 2005 to June 30, 2006 27.25
July 1, 2006 to June 30, 2007 27.00
July 1, 2007 to June 30, 2008 26.75
July 1, 2008 to June 30, 2009 26.50
July 1, 2009 to June 30, 2010 26.25
July 1, 2010 to June 30, 2011 26.00
July 1, 2011 to June 30, 2012 25.75
July 1, 2012 to June 30, 2013 25.50
July 1, 2013 to June 30, 2014 25.25
July 1, 2014 and thereafter 25.00
If fewer than all the outstanding shares of Preferred Stock are to be redeemed,
the shares to be redeemed shall be selected pro rata or by lot or by such other
method as the Board of Directors of the Company, in its sole discretion,
determines to be equitable.
In the event of a change of control, the acquirer ("Note Issuer") may, at its
option, exchange (the "Note Exchange") all or part of the outstanding Preferred
Stock for subordinated notes (the "Notes") of the Note Issuer, provided that any
such Note Issuer is an insured depository institution within the meaning of the
FDIC. Pursuant to a Note Exchange, each $1,000 in liquidation value of the
shares of Preferred Stock covered thereby will be exchangeable for $1,000
principal amount of Notes. Such Notes shall have the terms, covenants and
conditions set forth under "Description of Notes" below. The rate of interest on
the Notes shall be 15%, the maximum principal amount of the Notes shall be 100%
of the aggregate liquidation preference of the Preferred Stock to be exchanged
and the principal of such Notes shall not be payable prior to July 1, 2004.
Subject to the FDIC approval of the Notes as Tier 2 capital of the Note Issuer,
the Note Issuer may elect to consummate the Note Exchange at any time following
a change of control and prior to July 1, 2014.
F-21
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30,
1999, 1998, and 1997
(Dollars in thousands, except per share data)
As a result of the capital stock distribution steps described in Note 2 to the
Consolidated Financial Statements, all of the capital stock of an interim
predecessor of the Company was distributed to stockholders of the Predecessor
Bank on a share-for-share basis such that following consummation of the
Reorganization each holder of the capital stock of the Predecessor Bank is now
the holder of corresponding capital stock of the Company. The capital stock of
the Company has rights and privileges substantially identical to those of the
capital stock of the Predecessor Bank.
19. Income taxes
At June 30, 1999, the Company had a net operating loss ("NOL") carryforward for
federal income tax purposes of approximately $101.7 million attributable to
tax-basis operating losses incurred in 1991 through 1999. The Company's NOL's
may be carried forward 20 years and will expire in years 2011 through 2019.
For income tax purposes, certain deductions of "closely held" corporations from
"passive activities" are generally deductible only against either income from
passive activities or net income from an active trade or business. Passive
activity losses in excess of the amounts currently allowed are suspended and may
be carried forward indefinitely to offset taxable income from passive activities
or from an active trade or business in future years, or will generally be fully
deductible upon a complete disposition of the underlying passive activity. At
June 30, 1999, the Company had suspended passive activity losses for federal
income tax purposes of approximately $277, suspended passive activity credits,
which are subject to similar limitations, of approximately $6.8 million and
additional non-passive credits of $555 and $784 which were generated in 1995 and
1994, respectively, and will expire in the years 2009 to 2012 if not used.
Alternative minimum tax payments of $2.5 million may be carried forward as a
credit to offset regular federal tax liabilities in future years, subject to
certain limitations.
The Reorganization was structured and implemented in a manner intended to
constitute a tax-free "reorganization" for Federal income tax purposes, within
the meaning of section 368 of the Code. Consequently, the Reorganization was
reasonably characterized as a tax-free "reorganization." However, the ability of
the Reorganization to qualify as a tax-free reorganization turns on certain
unresolved and complex issues of tax law as to which there are no clearly
established legal precedents and for which the Company has not requested a
ruling from the IRS. As a result, the IRS or a court could determine that the
Reorganization did not constitute a tax-free reorganization. If such a
determination were made and sustained, certain of the tax consequences described
above would not apply. In particular, the Predecessor Bank's stockholders would
be required to recognize gain upon the deemed exchanges of River Bank capital
stock for RB Asset Common Stock and RB Asset Preferred Stock to the extent that
the fair market value of any RB Asset capital stock received exceeded the basis
of the River Bank capital stock deemed exchanged therefor, and their holding
period would begin on the date of the exchange. Recognition of loss on such
deemed exchanges might not be allowed until the stockholders dispose of some or
all of their RB Asset, Inc. Capital Stock. Moreover, the Predecessor Bank would
be required to recognize gain on its disposition and distribution of property in
connection with the Reorganization and any loss on such disposition and
distribution may be required to be deferred until RB Asset, Inc. were to sell
the assets to an unrelated third party; and, to the extent its tax attributes
were not used to offset any gain, RB Asset, Inc. would not succeed to them.
Under current tax law, the Company's ability to utilize certain tax benefits in
the future may be limited in the event of an "ownership change," as defined by
the Internal Revenue Code Section 382 and the regulations thereunder. In the
event that the Offering discussed in Note 18 is deemed to result in an ownership
change, the subsequent utilization of net operating loss carryforwards,
suspended passive activity losses and credits, alternative minimum tax credit
carryforwards and certain other built-in losses would be subject to an annual
limitation as prescribed by current regulations. The application of this
limitation could have a material effect on the Company's ability to realize its
deferred tax assets. The Company is of the view that no ownership change of the
Company has occurred as a result of the Offering. The Company believes that the
Offering, when combined with prior changes in ownership of stock of the Company
and other transactions affecting ownership of the capital stock of the Company
which occurred in connection with the Offering, also
F-22
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30,
1999, 1998, and 1997
(Dollars in thousands, except per share data)
did not result in an ownership change of the Company. However, the application
of Section 382 is in many respects uncertain. In assessing the effects of prior
transactions and of the Offering under Section 382, the Company made certain
legal judgments and certain factual assumptions. The Company has not requested
nor received any rulings from the IRS with respect to the application of Section
382 to the Offering and the IRS could challenge the Company's determinations.
The significant components of the net tax effects of temporary differences and
carryforwards that give rise to the deferred tax assets and liabilities at June
30, 1999, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
June 30, June 30, June 30,
1999 1998 1997
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 35,604 $ 31,136 $ 35,074
Allowance for credit losses and valuation allowances 10,703 12,213 4,718
Suspended passive activity losses 277 277 277
Suspended passive activity credit carryforward 6,791 8,236 5,391
Non-passive activity credit carryforward -- -- 2,015
Interest accrued on non-performing loans 12,817 9,854 758
Alternative minimum tax credit carryforward 2,500 2,500 2,500
Non-deductible reserves and contingencies 3,485 4,129 5,197
Other 310 341 514
------------- ------------- --------------
Total gross deferred tax assets 72,487 68,686 56,444
Less: Valuation allowance 46,179 49,456 36,874
------------ ------------ ------------
Net deferred tax assets $ 26,308 $ 19,230 $ 19,570
=========== =========== ===========
Deferred tax liabilities:
Tax losses on partnership ventures $ 26,013 $ 18,863 $ 18,184
Tax over book depreciation 295 367 1,386
-------------- -------------- -------------
Total deferred tax liabilities $ 26,308 $ 19,230 $ 19,570
=========== =========== ===========
</TABLE>
The Company's ability to realize the excess of the gross deferred tax asset over
the gross deferred tax liability is dependent upon its ability to earn taxable
income in the future. As a result of recent losses and other evidence, this
realization is uncertain and a valuation allowance has been established to
reduce the deferred tax asset to the amount that management of the Company
believes will more likely than not be realized. The valuation allowance
decreased during the fiscal year ended June 30, 1999 by $3.3 million. This
decrease relates to the decrease in the excess of the gross deferred tax assets
over the gross deferred tax liability.
The components of the provision for income taxes for the fiscal years ended June
30, 1999, 1998 and 1997 are as follows:
June 30, June 30, June 30,
1999 1998 1997
---- ---- ----
Current:
Federal $ -- $ -- $ --
State and local(benefit) 550 434 (3,300)
Deferred -- -- --
---------- ---------- ----------
$ 550 $ 434 $ (3,300)
========== ======== ========
F-23
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30,
1999, 1998, and 1997
(Dollars in thousands, except per share data)
The provision for state income taxes for the year ended June 30, 1997 includes a
current tax benefit in the amount of $3.3 million. The credit is the result of
the Company's redetermination of its state income tax liability at June 30,
1997.
During the year ended June 30, 1997, the Company completed a review of its
potential current and deferred federal and state tax liability in light of the
Branch Sale and its related tax effects. As a result of the review of its
potential current and deferred tax liabilities and the results of operations for
the year ended June 30, 1997, the Company reduced its provision for state and
local income taxes by $3.3 million. Additionally, the Company reduced its
estimated current state and local income tax liability at June 30, 1997 to
reflect the effect of the Branch Sale and subsequent transactions completed
during the fiscal year.
The table below presents a reconciliation between the expected tax expense
(benefit) and the recorded tax provision for the fiscal years ended June 30,
1999, 1998 and 1997 which have been computed by applying the statutory federal
income tax rate (35%) to loss before provision for income taxes.
<TABLE>
<CAPTION>
June 30, June 30, June 30,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal income tax expense (benefit at statutory rates) $ 211 $ (528) $ (10,543)
Increases/(reductions) in tax resulting from:
State and local income taxes (benefit), net of federal
income tax effect 358 283 (2,145)
Effect of net operating loss currently utilized -- -- --
Effect of net operating loss not currently
recognized (569) 245 12,688
Other, net -- -- --
$ -- $ -- $ --
=========== =========== ===========
</TABLE>
20. Leases
The Company is not obligated for any material amounts under the terms of any
non-cancelable operating leases.
21. Other operating expenses
During the year ended June 30, 1999, the Company accrued expenses for services
provided by RB Management, LLC in the amount of $1,250 for Bank Management
Services, $1,176 for Asset Management Services, and $139 for Asset Disposition
Fees in accordance with a fee schedule agreement between the two entities.
During 1999, the Company paid RB Management, LLC an aggregate $2,238. At June
30, 1999, the Company had no remaining payable balance due to RB Management,
LLC.
22. Retirement and other employee benefits
The Company maintains a noncontributory defined benefit retirement plan (the
"Plan") in which substantially all employees participated. The Plan provides
benefits based on the participant's years of service and compensation.
F-24
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30,
1999, 1998, and 1997
(Dollars in thousands, except per share data)
The following tables provide a reconciliation of the changes in the Plan's
benefit obligations and fair value of assets for the years ended June 30, 1999,
1998 and 1997 and a statement of the funded status of the Plans as of June 30,
1999, 1998 and 1997:
<TABLE>
<CAPTION>
June 30, June 30, June 30,
1999 1998 1997
------ ------ -----
<S> <C> <C> <C>
Reconciliation of the benefit obligation
Obligation at July 1 $ 5,691 $ 5,481 $ 5,402
Service cost - - -
Interest cost 413 397 381
Plan amendments - - -
Actuarial (gain) loss 193 165 11
Benefit payments (375) (352) (313)
Obligation at June 30 $ 5,922 $ 5,691 $ 5,481
============ ============ ============
Reconciliation of fair value of plan assets
Fair value of plan assets at July 1 $ 5,800 $ 5,872 $ 5,749
Actual return on plan assets (net of expenses) 407 280 436
Employer contributions - - -
Benefit payments (375) (352) (313)
Fair value of plan assets at June 30 $ 5,832 $ 5,800 $ 5,872
============ ============ ============
Funded status
Funded status at June 30 $(90) $ 109 $ 391
Unrecognized transition (asset) obligation - - -
Unrecognized prior service cost - - -
- - -
Unrecognized (gain) loss 1,347 1,180 908
Net amount recognized $ 1,257 $ 1,289 $ 1,299
============ ============ ============
</TABLE>
The following table provides the amounts recognized in the statement of
financial condition as of June 30, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
June 30, June 30, June 30,
1999 1998 1997
------ ------ -----
<S> <C> <C> <C>
Prepaid benefit cost $ 1,257 $ 1,289 $ 1,299
Accrued benefit liability - - -
Intangible asset - - -
------------ ------------ ----------
Net periodic pension benefit $ 1,257 $ 1,289 $ 1,299
============ ============ ==========
</TABLE>
F-25
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30,
1999, 1998, and 1997
(Dollars in thousands, except per share data)
The following table provides the components of the net periodic benefit cost for
the Plan for the years ended June 30, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
June 30, June 30, June 30,
1999 1998 1997
------ ------ -----
<S> <C> <C> <C>
Service cost $ - $ - $ -
Interest cost on projected benefit obligation 413 397 381
Expected return on plan assets (407) (413) (406)
Amortization of transition (asset) obligation - - -
Amortization of prior service cost - - -
Amortization of net (gain) loss 25 27 3
-------------- ------------ ---------
Net periodic pension cost/(credit) $ 31 $ 11 $ (22)
============= ============ ==========
</TABLE>
The weighted average assumptions used in the measurement of the Company's
benefit obligations at June 30, 1999, 1998 and 1997 are provided in the
following table:
<TABLE>
<CAPTION>
June 30, June 30, June 30,
1999 1998 1997
------ ------ -----
<S> <C> <C> <C>
Weighted average discount rates 7.25% 7.25% 7.25%
Expected weighted average long-term rate of return on assets 7.25% 7.25% 7.25%
</TABLE>
In connection with contractual termination agreements, certain former officers
of the Company have been granted additional retirement benefits, net of amounts
provided by the Plan, based in part on additional years of service and early
retirement subsidies. These retirement benefits are accounted for as deferred
compensation arrangements. The liability for these retirement benefits at June
30, 1999, 1998 and 1997 aggregated $722, $746 and $554, respectively. The
related expense for the years ended June 30, 1999, 1998, and 1997 was $192, $192
and $58, respectively.
Retirement benefits are also provided through a 401(k) plan which, through
December 1993, allowed participants to contribute up to 6% of their compensation
to the plan. The Company matched 100% of employee contributions. In January
1994, the 401(k) plan was amended to allow "non-highly compensated" participants
to contribute up to 15% of their compensation to the Plan with the Company
matching 100% of the contributions up to 6% of their compensation. In addition,
the Company provides for the cost of administering the 401(k) plan. The costs of
providing such benefits are not material to the results of operations.
In addition to providing retirement benefits, the Company provides various
health care and life insurance benefits for retired employees. These benefits
are provided through insurance companies and health care organizations and are
primarily funded by contributions from the Company and its employees. Subsequent
to December 31, 1993, the Company amended its retiree health care which became
effective April 1, 1994 to require contributions from retirees including
deductibles, co-insurance and reimbursement limitations.
23. Postretirement benefits other than pensions
The Company sponsors a voluntary, unfunded defined benefit postretirement
medical and a funded postretirement life insurance plan to all full time
employees who retired from the Company prior to July 1, 1991. In addition, full
time active employees with ten years of service as of July 1, 1991 and who
retire early with at least twenty years of service, or retire on or after age 65
are eligible to participate.
F-26
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30,
1999, 1998, and 1997
(Dollars in thousands, except per share data)
The Company adopted SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" as of July 1, 1994.
The funded status of the Company's Plan at June 30, 1999, 1998, and 1997 is as
follows:
<TABLE>
<CAPTION>
June 30, June 30, June 30,
1999 1998 1997
------ ------ -----
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retired employees $ (3,170) $ (3,784) $ (3,968)
Fully eligible plan participants -- -- --
Other active plan participants -- -- --
------------ ----------- -----------
Unfunded postretirement benefit obligation (3,170) (3,784) (3,968)
Unrecognized net (gains) / losses (744) (568) (760)
Unrecognized transition obligation -- -- --
Accrued postretirement benefit liability $ (3,914) $ (4,352) $ (4,728)
=========== =========== ===========
</TABLE>
The net periodic postretirement benefit cost of the Company's Plan for the years
ended June 30, 1999, 1998, and 1997 include the following components:
<TABLE>
<CAPTION>
June 30, June 30, June 30,
1999 1998 1997
------ ------ -----
<S> <C> <C> <C>
Service cost $ -- $ -- $ --
Interest cost 210 207 302
Amortization of transition obligation -- (13) (29)
-------- ---------- ----------
Net periodic postretirement benefit cost $ 210 $ 194 $ 273
========== ========== ==========
</TABLE>
For measurement purposes, an 8.0% annual increase in the per capita cost of
covered health care benefits was assumed for fiscal 1999 and 1998. The health
care cost trend rate assumption has a significant effect on the amounts
reported. To illustrate, increasing the assumed health care cost trend rate by
one percentage point in each year would increase the accumulated postretirement
benefit obligation as of June 30, 1999 by $313 and the aggregate of the service
and interest cost components of the net periodic postretirement benefit cost for
fiscal 1999 by $21.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% for the years ended June 30, 1999
and 1998. As the plan is unfunded, no assumption was needed as to the long term
rate of return of assets.
F-27
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30,
1999, 1998, and 1997
(Dollars in thousands, except per share data)
24. Fair value of financial instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
the Company to disclose estimated fair values for its financial instruments.
SFAS No. 107 defines fair value of financial instruments as the amount at which
the instrument could be exchanged in a current transaction between willing
parties other than in a forced or liquidation sale. SFAS No. 107 uses the same
definition for a financial instrument as SFAS No. 105, "Disclosure of
Information about Financial Instruments with Off-Balance Sheet Risk and
Financial Instruments with Concentrations of Credit Risk". SFAS No. 105 defines
a financial instrument as cash, evidence of ownership interest in an entity, or
a contract that imposes on an entity a contractual obligation to deliver cash or
another financial instrument to a second entity or to exchange other financial
instruments on potentially favorable terms with the second entity and conveys to
that second entity a contractual right to receive cash or another financial
instrument from the first entity or to exchange other financial instruments on
potentially favorable terms with the first entity.
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. Because no ready market exists for a significant portion of the
Company's financial instruments, fair value estimates are based on judgments
regarding future expected net cash flows, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
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. Significant assets and liabilities that are not
considered financial assets or liabilities include the deferred tax amounts and
office premises and equipment. In addition, there are intangible assets that
SFAS No. 107 does not recognize, such as the value of "core deposits", the
Company's branch network and other items generally referred to as "goodwill."
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at June 30, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998 June 30, 1997
------------- ------------- -------------
Carrying Estimated Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value Amount Fair Value
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Cash and due from banks $ 28,135 $ 28,135 $ 32,087 $ 32,087 $ 14,036 $ 14,036
Investment securities available for sale, net 1,294 1,294 1,373 1,373 6,275 6,275
Accrued interest receivable 348 348 388 388 2,047 2,047
Gross loans receivable:
Secured by real estate 53,697 53,696 59,006 59,006 80,093 80,093
Consumer 1,855 1,855 1,972 1,972 2,871 2,871
Loans sold with recourse, net 13,959 13,959 15,781 15,781 24,451 24,451
Borrowed funds 50,557 50,557 68,760 68,760 84,272 84,272
Accrued interest payable 754 754 479 479 964 964
</TABLE>
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Short term instruments: For short term financial instruments, defined as
those with remaining maturities of 90 days or less, the carrying amount was
considered to be a reasonable estimate of fair value. The following
instruments were predominately short term: cash and due from banks, money
market investments, U.S. Treasury obligations, demand deposits, accrued
interest receivable and payable, mortgage escrow deposits and other
financial liabilities.
F-28
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30,
1999, 1998, and 1997
(Dollars in thousands, except per share data)
Debt and equity securities: Estimated fair values for securities are based
on quoted market prices, if available. If quoted market prices are not
available, fair values are estimated using discounted cash flow analyses,
using interest rates currently being offered for investments with similar
terms and credit quality.
Loans receivable: Fair values of performing loans receivable, secured by
real estate, is calculated by discounting the contractual cash flows
adjusted for prepayment estimates using discount rates based on secondary
market sources adjusted to reflect the credit risk inherent in the loans.
Fair values of non-performing loans, secured by real estate, are based on
recent appraisals of the underlying real estate or discounted cash flow
analyses. The fair value of consumer loans is based on a third party offer.
Approximately $8,459, $8,459 and $12,806, of the Company's $64,012, $65,181
and $95,770 total loans receivable relate to commercial loans at June 30,
1999, 1998 and 1997, respectively. The Company believes that dollar amounts
relating to commercial loans are relatively small in comparison to total
loans receivable at June 30, 1999, 1998 and 1997, and that an estimate of
fair value of commercial loans cannot be made without incurring excessive
costs. Therefore, the Company concludes that it is not practicable to
estimate the fair value of its commercial loan portfolio.
The Company's estimates of impairment due to collectibility concerns
related to these loans are included in the allowance for possible credit
losses. The weighted average of the effective interest rates and the
weighted average maturity dates of commercial loans are 8.22% and 1.09
years, 8.22% and 2.09 years and 9.32% and 3.09 years at June 30, 1999, 1998
and 1997, respectively.
Borrowed funds: Fair values of borrowed funds are based on the discounted
values of contractual cash flows. The discount rate is estimated using the
rates currently offered for borrowed funds of similar remaining maturities.
25. Commitments and contingencies
In the normal course of the Company's business, there are outstanding various
claims, commitments and contingent liabilities. The Company also is involved in
various other legal proceedings which have occurred in the ordinary course of
business. Management, based on discussions with legal counsel, believes that the
Company will not be materially affected by the actions of such legal
proceedings. However, there can be no assurance that any outstanding legal
proceedings will not be decided adversely to the Company and have a material
adverse effect on the financial condition and the results of operations of the
Company.
26. Preferred Stock Exchange Offer
Summary. On November 25, 1998, the Company offered upon the terms and conditions
set forth in its Offering Circular and the related Letter of Transmittal (which
together constituted the "Exchange Offer"), to exchange $25.94 principal amount
of its Increasing Rate Junior Subordinated Notes due 2006 (the "Subordinated
Notes") for each outstanding share of its 15% Non-Cumulative Preferred Perpetual
Stock, Series A, par value $1.00 (the "Company Preferred Stock"), of which
1,400,000 shares were outstanding on that date.
Description of the Subordinated Notes. The following narrative describes the
Subordinated Notes, issued by the Company on December 30, 1998:
Issue - Increasing Rate Junior Subordinated Notes due 2006 issued under an
indenture (the "Indenture"), as amended on February 1, 1999, between the Company
and La Salle National Bank, as trustee.
F-29
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30,
1999, 1998, and 1997
(Dollars in thousands, except per share data)
Principal Amount - $11,988,000, plus such additional principal amount of
Subordinated Notes as may be issued in payment of interest on the Subordinated
Notes from the date of their initial issuance until the semi-annual interest
period beginning January 16, 2002.
Interest Payment Dates - January 15 and July 15 of each year, commencing July
15, 1999.
Maturity - January 15, 2006.
Interest Rate - Interest will accrue from the issuance date (December 30, 1998)
at the initial rate of 8% per annum (the "Initial Rate") until the interest
period beginning January 16, 2002 (the "Interest Increase Date") and will be
payable, at the option of the Company, either in cash or by issuance of
additional Subordinated Notes. Thereafter, interest will be payable
semi-annually in cash at an annual rate increasing from the Initial rate by
0.50% per annum each semi-annual interest payment period commencing with the
interest payment period beginning on the Interest Increase Date up to a maximum
of 12% per annum. The Company's ability to pay in cash any installment of
interest on, or principal or premium (if any) of, the Subordinated Notes is
currently subject to the approval of HSBC under the terms of the Facility and
its Credit Agreement, dated June 28, 1996 (the "Credit Agreement"). However,
borrowings under the Credit Agreement mature on June 30, 1999, subject to the
right of the Company to extend for two successive one-year periods to June 30,
2001, which date is prior to the dates on which cash payments of interest and
principal are required to be made on the Subordinated Notes. There can be no
assurance that HSBC will provide any such approval that may be requested by the
Company in the future for payment of cash for any installment of interest or any
prepayment of principal and premium, if any, prior to the dates such cash
payments are required to be made under the terms of the Subordinated Notes.
Ranking - The Subordinated Notes constitute unsecured obligations of the Company
and will be subordinated in right of payment to all existing and future Senior
Indebtedness (as defined) of the Company. At June 30, 1999, the Company had
approximately $50.6 million of Senior Indebtedness outstanding. The Indenture
will not limit the amount of additional indebtedness which the Company can
create, incur, assume or guarantee, nor will the Indenture limit the amount of
indebtedness which any subsidiary of the Company can create incur, assume or
guarantee.
Mandatory Redemption - The Company will be required to redeem 1/14th (7.14285%)
of the aggregate principal amount of the Subordinated Notes issued by the
Company (including any issued in payment of interest) semi-annually commencing
on July 15, 2002 and on each January 15, and July 15 thereafter to and including
July 15, 2005 at a price of 100% of the principal amount plus accrued and unpaid
interest plus, for redemptions effected after January 15, 2003, a premium as
noted below. The balance of the outstanding Subordinated Notes will mature on
January 15, 2006. All mandatory redemptions will be made on a pro rata basis.
Optional Redemption - The Subordinated Notes will be redeemable at the option of
the Company at any time in whole or in part, by lot or pro rata as determined by
the Company's Board of Directors (the "Board"), at the redemption price of 100%
of the principal amount plus accrued and unpaid interest plus, for redemptions
effected after January 15, 2003, a premium as noted below.
Premium - The redemption price for each redemption (mandatory or optional)
effected after January 15, 2003 and the payment at maturity will include a
premium based on the amount redeemed or paid. Such premium will consist of (i)
0.5% of the principal amount redeemed during the period from January 16, 2003
through and including July 15, 2003, (ii) 0.75% of the principal amount redeemed
during the period from July 16, 2003 through and including January 15, 2004 and
(iii) 1% of the principal amount redeemed during the period from January 16,
2004 through and including July 15, 2004, which premium will increase by 1% for
redemptions during each subsequent six month period beginning each July 16 and
January 16 thereafter until it reaches 4% of the principal amount for the period
from July 16, 2005 to January 15, 2006. Payments of a premium at maturity will
also be at the rate of 4% of the principal amount paid.
F-30
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30,
1999, 1998, and 1997
(Dollars in thousands, except per share data)
The following chart illustrates the amount of premium payable on each $1,000
principal amount of Subordinated Notes during the periods indicated:
If redeemed during the six month period beginning Premium
January 16, 2003 ................................... $ 5.00
July 16, 2003 ...................................... $ 7.50
January 16, 2004 ................................... $ 10.00
July 16, 2004 ...................................... $ 20.00
January 16, 2005 ................................... $ 30.00
July 16, 2005 ...................................... $ 40.00
Purposes of the Exchange Offer. In view of the changes in the nature of the
Company and its business as a result of the Reorganization described in Note 1,
the Board of Directors effected the Exchange Offer for the purpose of affording
all holders of the Company Preferred Stock an opportunity to exchange their
shares of Company Preferred Stock for the Subordinated Notes which may have been
determined by them to be a more attractive investment. As more fully described
in the Offering Circular dated November 25, 1998, the Exchange Offer provided
holders of the Company Preferred Stock with the opportunity to exchange
perpetual preferred stock having a $25.00 per share liquidation value with
non-cumulative dividend rights and no mandatory redemption provisions for $25.94
principal amount of a debt instrument maturing in seven years which requires (i)
semi-annual payments of interest, payable in kind or in cash, at the Company's
option, for the first three years and thereafter in cash, at rates increasing
from an initial 8% per annum rate and (ii) the repayment of principal in
mandatory semi-annual installments commencing after three years with increasing
premiums on installments paid after four years.
By letter, dated May 22, 1998, counsel for certain holders of shares of the
Company Preferred Stock advised the Company that such holders objected to the
Reorganization. Specifically, such counsel alleged that the Reorganization (i)
constituted a "liquidation" of River Bank America in violation of the terms of
the certificate of designations of the Predecessor Preferred Stock by failing to
provide for the payment to the holders of the Predecessor Preferred Stock of the
liquidating distribution required by the certificate of designations of $25.00
per share, plus all accrued, undeclared and unpaid dividends thereon, (ii) was
illegal under the New York Banking Law (the "NYBL") which provides, in the case
of a voluntary liquidation, that the liquidating corporation shall distribute
its remaining assets among its shareholders according to their respective rights
and interests, (iii) violated a commitment made in River Bank's proxy statement,
dated May 13, 1996, to retire the Predecessor Preferred Stock following approval
and finalization of the sale of certain of its branches and assets to HSBC and
(iv) constituted a breach of duty owed by River Bank's Board of Directors to the
holders of the Predecessor Preferred Stock.
The Company believed such allegations were without merit. However, in an effort
to resolve these claims on an amicable basis, representatives of the Company and
such holders discussed from time to time since the date of such letter, certain
proposals under which the Company would offer to exchange a new security for the
Company Preferred Stock. In October, 1998, the Company proposed to
representatives of such holders to effect an exchange offer upon substantially
the terms and conditions of the Exchange Offer. Such proposal was not acceptable
to such holders and, on October 27, 1998, 11 holders of Company Preferred Stock
who claimed to beneficially own, in the aggregate, 849,000 shares (approximately
60.6% of the then outstanding shares) of Company Preferred Stock (the "Organized
Group") commenced a lawsuit entitled Strome Global Income Fund et al. v. River
Bank America et. al. ( the "Complaint" ) in Supreme Court of the State of New
York, County of New York, Index No. 605226198 (the "Action" ), against the
Company, certain of its predecessors and certain of its directors (collectively,
the "Defendants"). The complaint in the Action alleged (the "Allegations"),
among other things, that (i) the Defendants breached the certificate of
designations relating to the
F-31
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30,
1999, 1998, and 1997
(Dollars in thousands, except per share data)
Predecessor Preferred Stock by fraudulently transferring assets of River Bank
and by illegally amending the certificate of designations, (ii) the Defendants
fraudulently conveyed the assets of River Bank, thereby depriving the holders of
a liquidating distribution, (iii) the Defendants violated the NYBL by
liquidating River Bank without making the liquidating distribution required by
the NYBL and by denying holders appraisal rights to which they were entitled by
the NYBL, (iv) the Defendants breached their fiduciary duty to holders by
depriving them of their liquidating distribution, (v) the Defendants breached
their duty of disclosure by omitting from the Proxy Statement dated March 27,
1998 material facts relating to the holders' rights to receive a liquidating
distribution, their appraisal rights for their shares and the requirement that
holders vote as a class with respect to the amendment of the certificate of
designations, (vi) the Defendants' implementation of the liquidation of River
Bank and the amendment of the certificate of designations were ultra vires and
should be declared void and (vii) the intentionally tortious nature of the
Defendants' conduct bars them from seeking indemnification for their actions
and, therefore, the Defendants should be enjoined from seeking indemnification
for damages or attorney's fees relating to the Action.
The Company believes that the Allegations are without merit and intends to
vigorously oppose the Action. Consequently, the Company and the other defendants
responded to the Action by filing a motion to dismiss on December 21, 1998. The
motion was argued before the court on February 23, 1999 and the court reserved
judgement. The motion remains pending before the court.
Release of Claims. Holders of Company Preferred Stock, including any of the
plaintiffs in the Action, whose shares were tendered and accepted by the Company
for exchange pursuant to the Exchange Offer have released the Company, its
predecessors and successors, and their respective parents, subsidiaries,
affiliates and assigns, and each of their respective officers, directors,
employees, partners, advisors, agents and representatives from all actions,
causes of action, claims, judgements, contracts, agreements or understandings
whether individual or derivative in nature, which such holders had with respect
to the shares of Company Preferred Stock exchanged pursuant to the Offering
Circular or any disclosures, rights or agreements relating thereto, including,
but not limited to, any claims made in the Action and any claims with respect to
the Reorganization and the transfer of assets from River Bank.
Waiver of Dividend. Each Holder (as defined in the Offering Circular) who
accepted the Exchange Offer was deemed to have waived all rights, with respect
to each share of Company Preferred Stock exchanged, to receive the $0.94 per
share quarterly dividend that was declared on shares of Series A Preferred Stock
for the quarter ended June 30, 1996 but which remains unpaid.
Proposed Equity Rights Offering. If within one year after expiration of the
Exchange Offer, the Company effects an equity enhancement plan through either a
rights offering to the holders of its Common Stock or the distribution to such
holders of Warrants to purchase additional shares of Common Stock, each holder
of Series A Preferred Stock whose shares were accepted by the Company for
exchange pursuant to the Exchange Offer will be entitled to participate in such
rights offering or distribution of Warrants on the basis of one subscription
right or Warrant for each share of Series A Preferred Stock so exchanged for
Subordinated Notes. The Company's Board of Directors has authorized management
to develop a proposal for such a rights offering or distribution of Warrants,
provided that, under the terms thereof, Alvin Dworman, Odyssey Partners, L.P.
and East River Partnership B., who currently own an aggregate of 50.8% of the
outstanding shares of Common Stock, will have the ability to avoid dilution of
their aggregate percentage ownership of the Common Stock outstanding upon
consummation thereof. While the Company presently intends to effect such a plan,
there can be no assurance that such rights offering or distribution of Warrants
plan will be effected or as to the terms and conditions thereof.
Conditions of the Exchange Offer. The Company obtained the consent of HSBC to
effect the Exchange Offer and issue the Subordinated Notes. However, there can
be no assurance that HSBC will provide any approval that may be requested by the
Company in the future for the payment in cash of any installments of interest or
any prepayment of principal and premium, if any, prior to the dates such cash
payments are required to be made under the terms of the Subordinated Notes.
F-32
<PAGE>
RB ASSET, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Years ended June 30,
1999, 1998, and 1997
(Dollars in thousands, except per share data)
Acceptance Results of the Exchange Offer. On December 28, 1998, the Company
announced that it had completed its offer to exchange $25.94 principal amount of
its newly-authorized Subordinated Notes for each outstanding share of its Series
A Preferred Stock properly tendered to, and accepted by, the Company in
accordance with the provisions of the Exchange Offer. At the expiration of the
Exchange Offer on December 24, 1998, 415,273 shares of the Series A Preferred
Stock had been properly tendered and accepted by the Company for exchange.
Subsequent to the expiration of the Exchange Offer, the Company accepted private
requests for the exchange of its Series A Preferred Stock from individuals under
terms identical to those of the Exchange Offer. As a result, 32,950 shares of
the Company's Series A Preferred Stock were exchanged during the quarter ended
March 31, 1999 and an additional 14,000 were exchanged during the quarter ended
June 30, 1999.
As a result of these exchanges, the Company's total Stockholder's Equity and
other liabilities were reduced by $11.19 million and $432,000, respectively, and
its Subordinated Notes liability increased by $11.38 million. Following the
acceptance of the exchanges of the Preferred Stock, described above, 462,223
shares of the Series A Preferred Stock (representing approximately 33.0% of the
1,400,000 shares of Series A Preferred Stock outstanding before the commencement
of the Exchange Offer) had been properly tendered and accepted by the Company.
No members of the Organized Group tendered any shares of the Series A Preferred
Stock in the Exchange Offer. The Company does not believe that there will be any
additional exchanges of Preferred Stock for Subordinated Notes subsequent to
June 30, 1999.
Interest Expense. The Subordinated Notes carry an interest rate of 8%, which
will rise to 8.5% for the 37th to 42nd month following the issuance date and to
9.0% in the 43rd to 48th months following the issuance date. All interest will
be compounded semi-annually, following December 30, 1998, the date of
Subordinated Notes issuance. The Subordinated Notes were discounted at issuance,
on the Financial Statements of the Company, by $363 in order to provide a level
cost of funds for the Subordinated Notes of 9.0%. This rate is consistent with
debt instruments of similar credit quality and maturity structure at the time
the Subordinated Notes were issued. During the year ended June 30, 1999, accrued
interest expense, in the amount of $524, (including accretion expense for the
effective yield discount and debt issuance costs of $69) was recognized for the
six month period from date of issuance of the Subordinated Notes to the end of
the fiscal year.
F-33
<PAGE>
INDEX TO FINANCIAL SCHEDULES
RB ASSET, INC.
June 30, 1999
Index to Consolidated Financial Schedules
Page
----
Valuation and Qualifying Accounts (Schedule II)
Year ended June 30, 1999 F-35
Real Estate and Accumulated Depreciation (Schedule III) F-36
Year ended June 30, 1999
Investments in Real Estate Assets (Schedule IV) F-38
Year ended June 30, 1999
F-34
<PAGE>
RB ASSET, INC.
FORM 10-K
VALUATION AND QUALIFYING ACCOUNTS (SCHEDULE II)
JUNE 30, 1999
(dollars in thousands)
<TABLE>
<CAPTION>
Additions - Additions - Charged
Balance at Charged to Costs to Other Balance at
Description Beginning of and Expenses Accounts Deductions End of Period
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Year Ended June 30, 1999
Deducted from assets accounts:
Allowance for possible credit losses -
loans secured by real estate $17,697 $ - $ - $ 1,882 [3] $ 15,815
Allowance for possible credit losses -
commercial and consumer loans 2,340 - - - 2,340
Securities valuation account 926 - 78 [1] - 1,004
------- -------- -------- -------- ----------
$20,963 $ - $ 78 $ 1,882 $ 19,159
======= ======== ======== ======== ==========
Year Ended June 30, 1998
Deducted from assets accounts:
Allowance for possible credit losses -
loans secured by real estate $25,787 $ 1,500 $ - 9,590 [3] $ 17,697
Allowance for possible credit losses -
commercial and consumer loans 5,783 - - 3,443 [3] 2,340
Securities valuation account 1,105 - - 179 [2] 926
------- -------- ------------ -------- ----------
$32,675 $ 1,500 $ - $ 13,212 $ 20,963
======= ======== ============ =========== ==========
Year Ended June 30, 1997
Deducted from assets accounts:
Allowance for possible credit losses -
loans secured by real estate $28,359 $ 1,000 $ - $ 3,572 [3] $ 25,787
Allowance for possible credit losses -
commercial and consumer loans 5,783 - - - 5,783
Securities valuation account 1,218 - - 113 [2] 1,105
------- ---------- ------------- ------------ -----------
$35,360 $ 1,000 $ - $ 3,685 $ 32,675
======= ========= ============== ========== ===========
</TABLE>
Notes to Valuation and Qualifying Accounts Schedule:
- ---------------------------------------------------
Note 1 - Addition to valuation reserve for marketable equity securities charged
to Stockholder's Equity in accordance with Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities."
Note 2 - Reduction in valuation reserve for marketable equity securities added
to Stockholder's Equity in accordance with Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities."
Note 3 - Uncollectible loan assets written off, net of recoveries.
F-35
<PAGE>
RB ASSET, INC.
FORM 10-K
REAL ESTATE AND ACCUMULATED DEPRECIATION (SCHEDULE III)
JUNE 30, 1999
(dollars in thousands)
<TABLE>
<CAPTION>
Cost capitalized subsequent
Initial cost to complete to acquisition
---------------------------------------------------------------
Buildings and
Description Encumbrances Land improvements Improvements Deductions Description
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Alden Park $ 42,339 $ 11,220 $ 39,769 $ 5,113 $ -- (3)
Multi-family apartment bldg.
Philadelphia, PA
Royal York 7,792 1,479 20,099 3,723 17,415 Unit sales (2)
Multi-family apartment bldg.
New York, NY
260 W. Sunrise 2,775 370 5,616 -- -- Unit sales
Office complex
North Woodmere, NY
86 West -- 166 1,100 166 650 Sales (3)
Condominium
New York, NY
Kingston Atlanta -- 2,488 22,901 -- 12,402 --
Mixed use commercial
Atlanta, GA
Shorehaven/Castle Hill -- 13,959 -- -- -- --
Land held for development
New York, NY
Totals $ 52,906 $29,682 $89,485 $9,002 $30,467
</TABLE>
<TABLE>
<CAPTION>
Gross amount at which carried
at close of period, June 30, 1999
-----------------------------
Life on which
Buildings Date of depreciation in latest
and Accumulated Construction of income statement is
Description Land Improvements Total Depreciation Acquisition computed (year)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Alden Park $ 11,220 $ 44,882 $ 56,102 $ 1,621 (1) 30
Multi-family apartment bldg.
Philadelphia, PA
Royal York 1,479 6,407 7,886 225 (1) 30
Multi-family apartment bldg.
New York, NY
260 W. Sunrise 370 5,616 5,986 989 (1) 25
Office complex
North Woodmere, NY
86 West 166 616 782 22 (1) 30
Condominium
New York, NY
Kingston Atlanta 2,488 10,499 12,987 407 (1) 30
Mixed use commercial
Atlanta, GA
Shorehaven/Castle Hill -- 13,959 13,959 -- (1) n/a
Land held for development
New York, NY
Totals $ 15,723 $ 81,979 $ 97,702 $ 3,264
</TABLE>
The aggregate cost for Federal income tax purposes was approximately $109.4
million at June 30, 1999.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
The changes in real estate for each of
the three years ended June 30, 1999 are July 1, 1998 to June July 1,1997 to June July 1, 1996 to June
as follows: 30, 1999 1998 30, 1997
Balance at beginning of period $ 86,485 $ 97,349 $ 146,440
Improvements 655 3,366 9,838
Re-acquired assets - 2,095 --
Sales/Write downs (6,661) (16,325) (58,929)
Transfered from Loans Sold with
Recourse (Note 4) 13,959 -- --
------------- ------------- ----------
Balance at end of period $ 94,438 $ 86,485 $ 97,349
------------- ------------- ----------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
The changes in accumulated real estate
depreciation for the three years ended June July 1, 1998 to July 1, 1997 to July 1, 1996 to
30, 1999 are as follows: June 30, 1999 June 30, 1998 June 1, 1997
Balance at beginning of period $ 956 $ 573 $ 373
Depreciation for the period 2,338 383 200
Disposals, including write-off
of fully depreciated building
improvements (30) -- --
------------- --------------- ---------------
Balance at end of period $ 3,264 $ 956 $ 573
------------- --------------- ---------------
</TABLE>
F-36
<PAGE>
RB ASSET, INC.
FORM 10-K
REAL ESTATE AND ACCUMULATED DEPRECIATION (SCHEDULE III)
JUNE 30, 1999
(dollars in thousands)
Notes to Real Estate and Accumulated Depreciation Schedule (previous page)
Note 1 - Property acquired, in substantially completed form, through foreclosure
or transfer and satisfaction of obligations of borrowers prior to 1996.
Note 2 - Improvements totaling $3,913 were made to refurbish individual units in
preparation for sale during the three year period ended June 30, 1999. Proceeds
of unit sales during the same three year period, after selling costs other than
refurbishment costs, were $6,401. Accordingly, net proceeds of unit sales, after
selling and refurbishment costs, were $2,678 during the three year period ended
June 30, 1999.
Note 3 - For additional information related to this write down of the asset's
carrying value, see "Management Discussion and Analysis - Results of Operations"
contained within the RB Asset, Inc. annual report on Form 10-K, dated June 30,
1999.
Note 4 - During the year ended June 30, 1999 the Company transferred $13,959 of
loans sold with recourse to real estate held for investment as a result of the
funding of the remaining recourse amounts on these loans.
See Note 11 to the Consolidated Financial Statements.
F-37
<PAGE>
RB ASSET, INC.
FORM 10-K
INVESTMENTS IN REAL ESTATE ASSETS (SCHEDULE IV)
JUNE 30, 1999
(dollars in thousands)
<TABLE>
<CAPTION>
Final Periodic
Interest Maturity payment Prior
Description rate Date terms Liens
<S> <C> <C> <C> <C>
Residential 1-4 family and other real
estate loans Amortizing over 15-30
New York, NY 7%-10% 5/1/99 years
Anita Terrace
Co-op Interest only, balloon
Rego Park, NY 7.00% 5/1/09 payment at maturity
Anita Terrace
Co-op Interest only, balloon Subordinated
Rego Park, NY 7.00% 5/1/09 payment at maturity participation
7402 Bay Ridge Parkway
Multi-family apartment Loan repaid in full Interest only, balloon
NY 10.25% on 8/11/99 payment at maturity
Washington Group
Office complex Loan repaid in full Amortizing over 30 years,
NY 7.67% on 7/30/99 balloon payment at maturity
Lohmaier Lane
Office complex Non-accrual loan, principal
NY 7.50% 9/1/98 and interest
not being received
333 West 39th Street
Office complex Principal and interest
New York, NY 8.50% 1/1/00 contingently receivable - Junior subordinated
loan is fully reserved participation
589 8th Avenue
Office complex Principal and interest
New York, NY 8.50% 1/1/00 contingently receivable - Junior subordinated
loan is fully reserved participation
</TABLE>
<TABLE>
<CAPTION>
Face amount Carrying Principal amount of loans subject to
of amount of delinquent principal or interest
Description Mortgages mortgages
<S> <C> <C> <C>
Residential 1-4 family and other real
estate loans
New York, NY $ 1,260 $1,066 $ 443 (1)
Anita Terrace
Co-op
Rego Park, NY 13,718 7,233 13,718 (2)
Anita Terrace
Co-op
Rego Park, NY 6,804 6,804 -
7402 Bay Ridge Parkway
Multi-family apartment
NY 997 997 -
Washington Group
Office complex
NY 21,626 21,626 -
Lohmaier Lane
Office complex
NY 3,100 2,100 3,100
333 West 39th Street
Office complex
New York, NY 1,700 - (3) -
589 8th Avenue
Office complex
New York, NY 700 - (3) -
</TABLE>
(continued on next page)
F-38
<PAGE>
RB ASSET, INC.
FORM 10-K
INVESTMENTS IN REAL ESTATE ASSETS (SCHEDULE IV)
JUNE 30, 1999
(dollars in thousands)
(continued from previous page)
<TABLE>
<CAPTION>
Final Periodic
Interest Maturity payment Prior
Description rate Date terms liens
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Camarillo
Shopping Center Interest only, balloon Subordinated
CA 7.50% 3/22/05 payment at maturity participation
5619 Broadway
Shopping Center Loan repaid in full Interest only, balloon Subordinated
New York, NY 8.50% on 7/28/99 payment at maturity participation
Crossroads
Shopping Center Interest only, balloon Subordinated
CA 8.50% 12/22/98 payment at maturity participation
Flotilla Street
Industrial Complex Interest only, balloon Subordinated
CA 6.89% 12/31/98 payment at maturity participation
Cromwell-Louisville
Garage Interest only, balloon Subordinated
Louisville, KY 6.18% 6/30/09 payment at maturity participation
- -----------------------------------------------------------------------------------------------------------------------
Totals
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face amount Carrying Principal amount of loans subject
of amount of to delinquent
Description Mortgages mortgages principal or interest
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Camarillo -
Shopping Center
CA 625 625
-
5619 Broadway
Shopping Center
New York, NY 620 620 -
Crossroads
Shopping Center -
CA 399 399
Flotilla Street -
Industrial Complex
CA 360 360
-
Cromwell-Louisville
Garage
Louisville, KY 1,788 1,788 -
- -----------------------------------------------------------------------------------------------------------------------
Totals $ 53,697 $ 43,618 $ 17,261
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Reconciliation of mortgages July 1,1998 to July 1, 1997 to July 1, 1996 to
receivable at their carrying values: June 30, 1999 June 30, 1998 June 30, 1997
<S> <C> <C> <C>
Balance at beginning of period $ 48,427 $ 65,499 $ 69,522
Advances made 162 649 1,910
Capitalization of interest/expense -- -- --
Collections of principal (4,922) (16,413) (4,933)
Transfers of foreclosed properties -- -- --
Charged to provision for credit losses (49) (1,308) (1,000)
----------- ---------- --------------
Balance at end of period $ 43,618 48,427 $ 65,499
=========== ========== ==============
</TABLE>
See notes to this schedule on the following page.
F-39
<PAGE>
RB ASSET, INC.
FORM 10-K
REAL ESTATE AND ACCUMULATED DEPRECIATION (SCHEDULE IV)
JUNE 30, 1999
(dollars in thousands)
Notes to Investments in Real Estate Assets Schedule (previous page)
Note 1 - The Company's 1-4 family residential loans are carried as non-accrual
assets, whereby interest income is recognized only when received. At June 30,
1999 there were loans aggregating $210 in outstanding principal balance that
were delinquent 60 days or longer.
Note 2 - This loan asset has been categorized as a non-accrual loan. Accrued
interest related to this loan has been fully reserved for at June 30, 1999. Loan
principal continues to be repaid from the proceeds of apartment unit sales of
the property serving as collateral for this loan.
Note 3 - The loan is fully reserved for by the Company at June 30, 1999,
although the loan continues to perform in accordance with its contractual terms.
Principal and interest related to these loans is contingently receivable,
following the satisfaction of all other lien holder's positions.
F-40
<PAGE>
EXHIBIT INDEX
21.1 Subsidiaries of the Company
27.1 Financial Data Schedule
E-1
Exhibit 21.1
RB Asset, Inc.
Subsidiary List
June 30, 1999
260 West Sunrise Corp.
26970 Hayward, Inc.
46 West Corp.
5327 Jacuzzi Street, Inc.
66 East Corp.
81 Jackson Corp.
86 West Corp.
Acacias-Murrieta Inc.
Bay Landing Corp.
Berry Boulevard, Inc.
Castle Hill Realty Holdings, Inc.
Citispire Apartments, Inc.
Cora Apple Inc.
Cupertino Property Inc.
Del Rio Escondido, Inc.
Drake Brick Kiln, Inc.
East River Financial Group Inc.
Hampton Ponds Realty Corp.
Harbor Lights Property Corp.
Hester Property Corp.
Kew Gardens Properties Inc.
Kirkham Stowe, Inc.
Laguna Canyon, Inc.
Middletown Property Corp.
Nostrand Properties I, Inc.
Nostrand Properties II, Inc.
Nostrand Properties Inc.
Old Crow Canyon Offices, Inc.
Orange White Acres, Inc.
Parc Vendome Realty Holding Corp.
Pershing Acquisition Corp.
Pershing Properties, Inc.
Pinnacle Properties Corp.
Princeton Park Office Realty Corp.
Quest Equities Corp.
Quest Holding Company
Quest Realty Corp.
<PAGE>
RB Alden Corp.
RB Bowie Corp.
RB Camarillo, Inc.
RB Cicero Corp.
RB Columbus Corp.
RB Lockbourne Corp.
Richmond Hill Properties Inc.
Riverbank Antelope, Inc.
Riverbank Financial Group
Riverbank Properties, Inc. (NY)
Riverbank Raley Inc.
Riverbank Realty Enterprises, Inc.
Riverbridge Realty Corp.
Rivercity Realty Corp.
Rivercity Realty Management Corp.
Rochelle Park One Nine Four, Inc.
Royal York Properties, Inc.
RR Hicksville Corp.
RR Irvington Co., Limited
RR Irvington Development Corp.
Saxon Glen Corp.
Shorehaven Property Inc.
Southhampton Land & Realty Corp.
Watervliet Properties Corp.
Wayne Properties Inc.
Willow Lake, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL EXTRACTED FROM THE FINANCIAL STATEMENTS
OF RB ASSET, INC. FOR THE YEAR ENDED JUNE 30, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 28,135
<SECURITIES> 1,294
<RECEIVABLES> 64,011
<ALLOWANCES> 18,155
<INVENTORY> 0
<CURRENT-ASSETS> 31,429
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 174,406
<CURRENT-LIABILITIES> 0
<BONDS> 11,375
0
938
<COMMON> 7,100
<OTHER-SE> 88,479
<TOTAL-LIABILITY-AND-EQUITY> 174,406
<SALES> 0
<TOTAL-REVENUES> 22,921
<CGS> 0
<TOTAL-COSTS> 12,859
<OTHER-EXPENSES> 4,148
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,758
<INCOME-PRETAX> 1,155
<INCOME-TAX> 550
<INCOME-CONTINUING> 605
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 605
<EPS-BASIC> 0.09
<EPS-DILUTED> 0.09
</TABLE>
