<PAGE>
PROSPECTUS
$125,000,000
[LOGO]
OCWEN FINANCIAL CORPORATION
11 7/8% NOTES DUE 2003
Ocwen Financial Corporation (the "Company") is offering hereby (the "Notes
Offering") $125 million principal amount of its 11 7/8% Notes due 2003 (the
"Notes"). Interest on the Notes will be payable semiannually on April 1 and
October 1 of each year, commencing April 1, 1997. On and after October 1, 2001,
the Notes will be redeemable at any time at the option of the Company, in whole
or in part, at the redemption prices set forth herein. The Notes are not
otherwise redeemable prior to October 1, 2001, except that until October 1,
1999, the Company may redeem, at its option, up to 35% of the original aggregate
principal amount of the Notes at a redemption price equal to 111.875% of the
principal amount thereof, plus accrued and unpaid interest to the redemption
date, from the net proceeds of one or more private or public sales of Qualified
Capital Stock (as defined herein) if at least 65% of the original aggregate
principal amount of the Notes remains outstanding after such redemption. Upon
the occurrence of a Change of Control Event (as defined herein), holders of the
Notes will have the right to require the Company to repurchase their Notes, in
whole or in part, at a purchase price equal to 101% of the aggregate principal
amount thereof, plus accrued and unpaid interest, if any, to the repurchase
date. See "Description of Notes."
Concurrently with the Notes Offering by the Company, certain stockholders of
the Company are offering 2,000,000 shares of common stock, par value $0.01 per
share ("Common Stock"), of the Company (the "Common Stock Offering"). The
Company will not receive any of the proceeds from the Common Stock Offering. The
Notes being offered hereby and the shares of Common Stock offered in the Common
Stock Offering are being offered separately and not as units, and neither
offering is conditioned on completion of the other offering.
THE NOTES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 10 HEREOF FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED CAREFULLY BY PROSPECTIVE PURCHASERS OF THE NOTES OFFERED HEREBY.
------------------
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR SAVINGS
DEPOSITS AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, ANY OTHER GOVERNMENTAL AGENCY OR
OTHERWISE.
--------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(3)
<S> <C> <C> <C>
Per Note......................................... 100.00% 3.875% 96.125%
Total(4)......................................... $125,000,000 $4,843,750 $120,156,250
</TABLE>
(1) Plus accrued interest, if any, from the date of issuance.
(2) The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $562,000.
(4) The Company has granted the Underwriter a 30-day option to purchase up to
$18.75 million additional principal amount of Notes to cover
over-allotments. If all of such Notes are purchased, the total Price to
Public, Underwriting Discount and Proceeds to Company will be $143,750,000,
$5,570,313 and $138,179,687, respectively. See "Underwriting."
The Notes are offered by the Underwriter, subject to receipt and acceptance
by the Underwriter, approval of certain legal matters by counsel for the
Underwriter and certain other conditions. The Underwriter reserves the right to
withdraw, cancel or modify such offers and to reject orders in whole or in part.
It is expected that delivery of the Notes will be made through the facilities of
The Depository Trust Company on or about September 30, 1996.
--------------------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
The date of this Prospectus is September 25, 1996
<PAGE>
IN CONNECTION WITH THE NOTES OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
FOR CALIFORNIA INVESTORS: THESE SECURITIES MAY BE OFFERED AND SOLD ONLY TO
"INSTITUTIONAL INVESTORS" AS DEFINED UNDER THE CALIFORNIA CORPORATE SECURITIES
LAW OF 1968, AND TO MEMBERS OF THE PUBLIC WHO QUALIFY AS "ACCREDITED INVESTORS"
AS DEFINED UNDER RULE 501(A) UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), a Registration Statement on Form S-1 under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the Common Stock
Offering and the Notes Offering. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Common Stock and the Notes, reference is hereby made to such Registration
Statement and the exhibits and schedules thereto. The Registration Statement,
including exhibits thereto, may be inspected and copied at the public reference
facilities maintained by the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549 and at the Commission's Regional Offices
located at Suite 1400, 500 West Madison Street, Chicago, Illinois 60661 and
Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of such
materials may be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The
Commission maintains a World Wide Web site on the Internet that contains
reports, proxy and information statements and other information regarding
registrants such as the Company that file electronically with the Commission.
The address of such site is: http://www.sec.gov.
In connection with the Common Stock Offering, the Company will register the
Common Stock pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Upon such registration, the Company will be subject to the
informational requirements of the Exchange Act and, in accordance therewith,
will file reports, proxy statements and other information with the Commission.
Such reports, proxy statements and other information can be inspected and copied
at the addresses set forth above. In addition, as long as the Common Stock is
quoted on the Nasdaq National Market, reports, proxy statements and other
information covering the Company also will be available for inspection at the
National Association of Securities Dealers, Inc. ("NASD"), 1735 K Street, N.W.,
Washington, D.C. 20006.
The Company intends to furnish to holders of Notes annual reports containing
financial statements of the Company audited by its independent accountants and
quarterly reports containing unaudited condensed financial statements for each
of the first three quarters of each fiscal year.
2
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SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION
AND CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN
THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL SHARE DATA CONTAINED IN THIS
PROSPECTUS RELATING TO THE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING ASSUMES
NO EXERCISE OF OUTSTANDING EMPLOYEE STOCK OPTIONS TO PURCHASE AN AGGREGATE OF
282,340 SHARES OF COMMON STOCK AS OF THE DATE HEREOF AND DOES NOT GIVE EFFECT TO
THE ISSUANCE OF 2,928,200 SHARES OF COMMON STOCK UPON THE EXERCISE OF STOCK
OPTIONS BETWEEN JUNE 30, 1996 AND THE DATE HEREOF. THE SHARE DATA CONTAINED
HEREIN GIVES RETROACTIVE EFFECT TO A TEN-FOR-ONE SPLIT OF THE OUTSTANDING SHARES
OF COMMON STOCK AS OF JULY 31, 1996.
THE COMPANY
GENERAL
The Company is a financial services company which is primarily engaged in
the acquisition and resolution of troubled loans and in diverse mortgage lending
activities. The activities of the Company are primarily conducted through
Berkeley Federal Bank & Trust FSB (the "Bank"), a federally-chartered savings
bank and a wholly-owned subsidiary of the Company, which is in the process of
being renamed "Ocwen Federal Bank FSB." At June 30, 1996, the Company had $1.9
billion of total assets and stockholders' equity of $154.7 million.
The Company's business strategy focuses on the identification and
development of selected business lines that provide the highest return
consistent with prudent risk management. Exclusive of gains from the sale of
branch offices and related income taxes and profit sharing expense, the
Company's income from continuing operations before extraordinary gain and
cumulative effect of a change in accounting principle resulted in returns on
average assets of 1.56%, 2.00%, 1.40% and 2.37% during the six months ended June
30, 1996 and the years ended December 31, 1995, 1994 and 1993, respectively, and
returns on average equity of 20.67%, 25.02%, 20.06% and 27.89% during the same
respective periods. Although the Company has experienced significant
profitability, because the Company operates in areas which involve more
uncertainties and risks than the single-family residential lending activities
historically emphasized by savings institutions, there can be no assurance that
its profitability will continue at historical levels or that there will not be
significant inter-period variations in the profitability of the Company's
operations in future periods.
BUSINESS ACTIVITIES
DISCOUNTED LOAN ACQUISITION AND RESOLUTION ACTIVITIES. The Company has
established a core expertise in the acquisition and resolution of non-performing
or underperforming single-family residential, multi-family residential and
commercial real estate loans, which generally are purchased at a discount to
both the unpaid principal amount of the loan and the estimated value of the
security property ("discounted loans"). The Company acquires discounted loans
from a wide variety of sources, which in recent years have been primarily
private sector sellers and, to a lesser extent, governmental agencies. The
Company believes that its experience in the acquisition and resolution of
discounted loans, its investment in a state-of-the-art computer infrastructure
and related technology which is utilized in this business and its national
reputation in this area make it one of the leaders in this relatively new and
evolving business. Between commencing these activities in mid-1991 and June 30,
1996, the Company acquired over $2.4 billion of gross principal amount of
discounted loans, including $161.8 million, $791.2 million and $826.4 million
during the six months ended June 30, 1996 and the years ended December 31, 1995
and 1994, respectively. In addition, the Company recently acquired a 50%
interest in a newly-formed joint venture that acquired discounted single-family
residential loans having an aggregate unpaid principal balance at acquisition of
$741.2 million from the Federal Housing Administration ("FHA") of the U.S.
Department of Housing and Urban Development ("HUD"). At June 30, 1996, the
Company's discounted loan acquisition and resolution activities included its
discounted loan portfolio, which amounted to $594.6 million (net of $226.2
million of unaccreted discount and a $9.5 million allowance for loan losses),
$132.0 million of related real estate owned and a $63.4 million investment in
the above-referenced joint venture, which in the aggregate amounted to $790.0
million or 41.6% of the Company's total assets. Inclusive of the Company's pro
rata interest in the discounted loans
3
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held by the joint venture, at June 30, 1996 the Company's discounted loans, net
would amount to $874.3 million and its total assets related to discounted loan
acquisition and resolution activities would amount to $1.0 billion.
Recent discounted loan activity of the Company includes the acquisition in
July and August 1996 of an aggregate of $410.0 million of discounted loans,
which consist primarily of multi-family residential and commercial real estate
loans, and the receipt in September 1996 of a notification from HUD that the
Company and a co-investor were the successful bidder to purchase single-family
residential loans with an aggregate unpaid principal balance of $258.8 million
auctioned by HUD, which will result in the Company's acquisition of $113.3
million of such loans and the right to service all of such loans upon closing of
this transaction in late September 1996. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Changes in Financial
Condition--Discounted Loan Portfolio, Net."
MULTI-FAMILY RESIDENTIAL AND COMMERCIAL REAL ESTATE LENDING ACTIVITIES. The
Company's lending activities emphasize loans secured by multi-family residential
and commercial real estate located nationwide. In conducting these activities,
the Company generally seeks to emphasize types of loans and/or lending in
geographic areas which, for various reasons, may not be currently emphasized by
other lenders and which thus offer attractive returns to the Company relative to
other investments. The loans currently emphasized by the Company include loans
secured by hotels and office buildings. The Company has developed expertise in
the securitization of assets, which, among other benefits, enhances the
liquidity of the Company's assets. The Company securitized multi-family
residential loans with an aggregate principal amount of $83.9 million, $346.6
million and $67.1 million during 1995, 1994 and 1993, respectively, and
subsequently sold substantially all of the securities backed by these loans. At
June 30, 1996, the Company's multi-family residential and commercial real estate
loans (including construction loans) available for sale and held for investment
aggregated $265.4 million, net, or 14.0% of the Company's total assets. The
Company also utilizes its multi-family residential lending and other expertise
to make investments in low-income housing tax credit partnerships which own
projects which have been allocated tax credits under the Internal Revenue Code
of 1986, as amended (the "Code"). Such investments amounted to $92.3 million or
4.9% of the Company's total assets at June 30, 1996.
SINGLE-FAMILY RESIDENTIAL LENDING ACTIVITIES. During 1995, the Company
established a program which focuses on the origination or purchase on a
nationwide basis of single-family residential loans made to borrowers who have
substantial equity in the properties which secure the loans but who, because of
prior credit problems, the absence of a credit history or other factors, are
unable or unwilling to qualify as borrowers from traditional sources. The
Company utilizes the expertise, technology and other resources which it has
developed in connection with the acquisition and resolution of discounted loans
in conducting these activities, and believes that the higher risk of default
generally associated with these loans, as compared to loans which conform to the
requirements established by federal agencies, is more than offset by the higher
yields on these loans and the higher amount of equity which the borrowers have
in the properties which secure these loans. The Company purchased or originated
$132.4 million of single-family residential loans to non-conforming borrowers
during the six months ended June 30, 1996 and $240.3 million of such loans
during 1995, $158.6 million of which was acquired during the last half of the
year. The Company classifies its single-family residential loans to
non-conforming borrowers as available for sale because, subject to market
conditions, it generally intends to sell such loans or to securitize such loans
and sell substantially all of the securities backed by such loans. During the
six months ended June 30, 1996, the Company sold $285.2 million of such loans
for a pre-tax gain of $6.8 million. At June 30, 1996, the Company's
single-family residential loans to non-conforming borrowers amounted to $40.9
million or 2.2% of the Company's total assets.
OTHER INVESTMENT ACTIVITIES. The Company invests in a wide variety of
mortgage-related securities based on its capital position, interest rate risk
profile, the market for such securities and other factors. At June 30, 1996, the
carrying value of the Company's mortgage-related securities, all of which were
classified as available for sale, amounted to $263.2 million or 13.9% of the
Company's total assets.
4
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THE NOTES OFFERING
<TABLE>
<S> <C>
Amount offered.................... $125 million aggregate principal amount (plus up to an
additional $18.75 million principal amount of Notes
pursuant to the Note underwriter's over-allotment
option).
Maturity date..................... October 1, 2003.
Interest payment dates............ April 1 and October 1 of each year, commencing April 1,
1997.
Optional redemption............... The Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after
October 1, 2001 at the redemption prices set forth
herein, plus accrued and unpaid interest, if any, to the
redemption date. The Notes are not otherwise redeemable
prior to October 1, 2001, other than as described
directly below.
Capital stock redemption.......... Until October 1, 1999, the Company may redeem, at its
option, up to 35% of the original aggregate principal
amount of the Notes at 111.875% of the principal amount
thereof, plus accrued and unpaid interest, if any, to
the redemption date, from the net proceeds of one or
more public or private sales of Qualified Capital Stock
(as defined herein) if at least 65% of the original
aggregate principal amount of the Notes remains
outstanding after such redemption and if such redemption
occurs within 60 days after the closing of any such
public or private sale. See "Description of
Notes--Optional Redemption."
Mandatory redemption.............. None.
Ranking........................... The Notes will be general unsecured obligations of the
Company. Because the Company is a holding company that
currently conducts substantially all of its operations
through its subsidiaries, including the Bank, the right
of the Company (and therefore the right of the Company's
creditors and stockholders) to participate in any
distribution of the assets or earnings of any subsidiary
is subject to the prior claims of creditors of such
subsidiaries, including any claims of the Company as a
creditor to the extent such claims may be recognized. As
a result, the Notes will be effectively subordinate to
the claims of creditors of the Company's subsidiaries.
Change of control................. Upon a Change of Control Event (as defined herein),
holders of the Notes will have the option to require the
Company to repurchase all outstanding Notes at 101% of
their principal amount, plus accrued interest to the
date of repurchase. A "Change of Control Event," as
defined in the Indenture pursuant to which the Notes
will be issued, includes the following events, among
others: the acquisition by any person or group (other
than the Existing Principal Stockholders (as defined) of
the Company) of more than 40% of the Company's voting
stock; a merger, consolidation or other business
combination between the Company and another person in
which more than 40% of the voting stock of the surviving
or transferee company is owned by persons other than the
Existing Principal Stockholders of the Company; a change
in a majority of the directors on the Board of Directors
of the Company within a two-year period which is not
approved by the incumbent directors; or the sale or
other disposition of any Significant Subsidiary of the
Company (as defined).
</TABLE>
5
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<TABLE>
<S> <C>
There can be no assurance that the Company will have the
funds available to repurchase the Notes in the event of
a Change of Control Event.
Certain covenants................. The Indenture pursuant to which the Notes will be issued
will contain certain covenants that, among other things,
limit the ability of the Company and its subsidiaries to
incur certain indebtedness, pay dividends or make other
distributions, engage in transactions with affiliates,
dispose of subsidiaries, create certain liens and
guarantees with respect to pari passu or junior indebt-
edness and enter into any arrangement that would impose
certain restrictions on the ability of subsidiaries to
make dividend and other payments to the Company. The
Indenture also will restrict the Company's and the
Bank's ability to merge, consolidate or sell all the
assets of the Company or the Bank. See "Description of
Notes--Certain Covenants."
Use of proceeds................... Approximately $50 million of the net proceeds from the
Notes Offering will be contributed by the Company to the
capital of the Bank to support future growth. The
remaining portion of such net proceeds (estimated to be
approximately $69.6 million after deducting the
underwriting discount and estimated offering expenses,
and assuming no exercise of the Note underwriter's over-
allotment option) will be retained by the Company and be
available for general corporate purposes. Although the
Company does not have any specific plans for the
investment of the net proceeds to be retained by it at
this time, such net proceeds will give the Company
increased flexibility in conducting the businesses in
which it is engaged, particularly the acquisition and
resolution of discounted loans and the acquisition of
single-family residential loans to non-conforming
borrowers.
The net proceeds from the Notes Offering available to
the Company and the Bank also could be used to acquire
other businesses, such as a financial institution or a
mortgage banking company, which the Company evaluates
from time to time as a means of enhancing its ability to
acquire loans and otherwise expand and enhance its
operations. Currently, there are no agreements, ar-
rangements or understandings with regard to any such
transaction.
</TABLE>
THE COMMON STOCK OFFERING
Concurrently with the Notes Offering, certain stockholders of the Company
are separately offering an aggregate of 2,000,000 shares of Common Stock (plus
up to 300,000 shares pursuant to the Common Stock underwriters' over-allotment
option) in the Common Stock Offering. The Company will not receive any of the
net proceeds from the Common Stock Offering. The Notes offered hereby and the
shares of Common Stock offered in the Common Stock Offering are being offered
separately and not as units, and neither offering is conditioned on the
completion of the other.
In connection with the Common Stock Offering, the Common Stock has been
approved for listing on the Nasdaq National Market under the symbol "OCWN."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered carefully by prospective purchasers of Notes.
6
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following tables present selected consolidated financial and other data
of the Company at the dates and for the periods indicated. The historical
operations and balance sheet data at and for the years ended December 31, 1995,
1994, 1993, 1992 and 1991 have been derived from financial statements audited by
Price Waterhouse LLP, independent certified public accountants. The historical
operations and balance sheet data at and for the six months ended June 30, 1996
and 1995 have been derived from unaudited consolidated financial statements and
include all adjustments, consisting only of normal recurring accruals, which the
Company considers necessary for a fair presentation of the Company's results of
operations for these periods. Operating results for the six months ended June
30, 1996 are not necessarily indicative of the results that may be expected for
any other interim period or the entire year ending December 31, 1996. The
selected consolidated financial and other data should be read in conjunction
with, and is qualified in its entirety by reference to, the information in the
Consolidated Financial Statements and related notes set forth elsewhere herein.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
--------------------- ------------------------------------------------
1996 1995 1995(1) 1994(1) 1993(2) 1992 1991
----------- ------- -------- -------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS DATA:
Interest income.............................. $99,457 $59,870 $137,275 $131,458 $ 78,923 $71,723 $54,036
Interest expense............................. 55,036 34,680 84,060 62,598 35,306 28,148 32,858
----------- ------- -------- -------- --------- ------- -------
Net interest income before provision for
loan losses............................... 44,421 25,190 53,215 68,860 43,617 43,575 21,178
Provision for loan losses.................... 14,370(3) -- 1,121 -- -- -- --
----------- ------- -------- -------- --------- ------- -------
Net interest income after provision for
loan losses............................... 30,051 25,190 52,094 68,860 43,617 43,575 21,178
----------- ------- -------- -------- --------- ------- -------
Gains on sales of interest-earning assets,
net......................................... 9,601 3,356 6,955 5,727 8,386 8,842 2,108
Gain from sale of branch offices(1).......... -- -- 5,430 62,600 -- -- --
Income (loss) on real estate owned, net...... (1,028)(3) 2,558 9,540 5,995 (1,158) 1,050 --
Fees on financing transactions(4)............ -- -- -- -- 15,340 6,760 8,486
Other non-interest income.................... 2,783 3,013 9,255 7,253 13,304 8,130 14,638
----------- ------- -------- -------- --------- ------- -------
Total non-interest income.................. 11,356 8,927 31,180 81,575 35,872 24,782 25,232
----------- ------- -------- -------- --------- ------- -------
Non-interest expense......................... 25,549 21,892 45,573 68,858 41,859 32,468 20,986
----------- ------- -------- -------- --------- ------- -------
Equity in earnings of investment in joint
venture(5).................................. 1,078 -- -- -- -- -- --
----------- ------- -------- -------- --------- ------- -------
Income tax expense........................... 1,910 760 4,562 29,724 10,325 11,552 7,002
----------- ------- -------- -------- --------- ------- -------
Income from continuing operations............ 15,026 11,465 33,139 51,853 27,305 24,337 18,422
Discontinued operations, net of tax.......... -- (3,136) (7,672) (4,514) (2,270) (1,946) (1,699)
Extraordinary gains.......................... -- -- -- -- 1,538 2,963 10,824
Cumulative effect of a change in accounting
principle................................... -- -- -- -- (1,341) -- --
----------- ------- -------- -------- --------- ------- -------
Net income................................... $15,026 $ 8,329 $ 25,467 $ 47,339 $ 25,232 $25,354 $27,547
----------- ------- -------- -------- --------- ------- -------
----------- ------- -------- -------- --------- ------- -------
Income per share from continuing
operations.................................. $ 0.57 $ 0.39 $ 1.19 $ 1.52 $ 0.80 $ 0.68 $ 0.54
Net income per share......................... $ 0.57 0.28 0.91 1.39 0.73 0.71 0.80
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, -----------------------------------------------------
1996 1995 1994 1993 1992 1991
----------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
LOAN ACQUISITION DATA:
Discounted Loans(6):
Single-family residential..................... $ 6,065 $ 272,800 $ 395,882 $ 291,198 $ 297,169 $ 49,996
Multi-family residential...................... 32,911 141,159 315,454 -- -- --
Commercial real estate........................ 122,835 377,236 115,055 3,161 -- --
Other Loans(6):
Single-family residential..................... 139,970 284,896 7,119 477,908 70,239 85,123
Multi-family residential...................... 55,705 83,530 378,400 290,702 -- --
Commercial real estate and other.............. 52,916 214,875 22,486 19,575 1,014 --
Consumer...................................... -- 2,173 -- 31,175 130 --
</TABLE>
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<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ----------------------------------------------------------
1996 1995(1) 1994(1) 1993(2) 1992 1991
-------------- ------------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets................................. $1,899,308 $1,973,590 $1,226,403 $1,396,677 $833,117 $623,854
Securities available for sale(7)............. 263,199 337,480 187,717 527,183 340,404 65,124
Loans available for sale(6)(7)............... 84,078 251,790 102,293 101,066 754 2,058
Investment securities, net................... 8,902 18,665 17,011 32,568 30,510 9,100
Mortgage-related securities held for
investment, net............................. -- -- 91,917 121,550 114,046 343,911
Loan portfolio, net(6)....................... 312,576 295,605 57,045 88,288 41,015 49,260
Discounted loan portfolio(6):
Total loans................................ 830,321 943,529 785,434 433,516 310,464 47,619
Unaccreted discount........................ (226,217) (273,758) (255,974) (129,882) (97,426) (21,908)
Allowance for loan losses.................. (9,470) -- -- -- -- --
-------------- ------------- ---------- ---------- -------- --------
Discounted loans, net.................... 594,634 669,771 529,460 303,634 213,038 25,711
Investments in low-income housing tax credit
interests................................... 92,273 81,362 49,442 16,203 -- --
Real estate owned(8)......................... 133,604 166,556 96,667 33,497 4,710 528
Investment in joint venture(5)............... 63,404 -- -- -- -- --
Excess of cost over net assets acquired,
net......................................... -- -- -- 10,467 11,825 13,189
Deposits..................................... 1,502,175 1,501,646 1,023,268 871,879 339,622 292,263
Borrowings and other interest-bearing
obligations................................. 186,102 272,214 25,510 373,792 361,799 209,615
Stockholders' equity......................... 154,738 139,547(9) 153,383 111,831 94,396 68,998
Book value per common share.................. 6.50(10) 5.86 4.76 3.47 2.71 1.99
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE
SIX MONTHS ENDED JUNE AT OR FOR THE
30, YEAR ENDED DECEMBER 31,
------------------------ -------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA(11):
Average assets.................. $1,924,701 $1,344,117 $1,521,368 $1,714,953 $1,152,655 $ 712,542 $ 573,857
Average equity.................. 145,399 139,602 121,291 119,500 97,895 82,460 54,876
Return on average assets(12):
Income from continuing
operations................... 1.56% 1.71% 2.18% 3.02% 2.37% 3.42% 3.21%
Net income.................... 1.56 1.24 1.67 2.76 2.19 3.56 4.80
Return on average equity(12):
Income from continuing
operations................... 20.67 16.43 27.32 43.39 27.89 29.51 33.57
Net income.................... 20.67 11.93 21.00 39.61 25.77 30.75 50.20
Average equity to average
assets......................... 7.55 10.39 7.97 6.97 8.49 11.57 9.56
Net interest spread............. 6.16 5.36 5.25 4.86 4.05 4.66 1.43
Net interest margin............. 5.65 4.83 4.54 4.75 4.30 6.06 3.60
Efficiency ratio(13)............ 45.81 64.17 56.34 64.14 52.66 47.50 45.22
Ratio of earnings to fixed
charges(14):
Including interest on
deposits..................... 1.31 1.35 1.45 2.28 2.04 2.25 1.77
Excluding interest on
deposits..................... 2.71 4.82 3.95 5.40 3.22 3.88 2.41
Non-performing loans to loans at
end of period(15).............. 0.77 2.33 1.27 4.35 3.71 8.32 7.39
Allowance for loan losses to
loans at end of period(6)...... 0.91 0.69 0.65 1.84 0.99 1.80 1.86
Allowance for loan losses to
discounted loans at end of
period(6)...................... 1.57 -- -- -- -- -- --
Bank regulatory capital ratios
at end of period:
Tangible...................... 6.74 7.59 6.52 11.28 5.25 6.94 6.09
Core (leverage)................. 6.74 7.59 6.52 11.28 6.00 7.94 7.59
Risk-based...................... 13.61 18.85 11.80 14.74 13.31 21.29 26.67
Number of full-service offices
at end of period(1)............ 1 3 1 3 28 15 11
</TABLE>
- ------------------------------
(1) Financial data at December 31, 1995 reflects the Company's sale of two
branch offices and $111.7 million of related deposits effective November 17,
1995, and financial data at December 31, 1994 reflects the sale of 23 branch
offices and $909.3 million of related deposits effective December 31, 1994.
Operations data for 1995 and 1994 reflects the gains from these
transactions. Exclusive of gains from the sale of branch offices in 1995 and
1994 and related income taxes and profit sharing expense, the Company's
income from continuing operations amounted to $30.3 million and $24.0
million during 1995 and 1994, respectively.
8
<PAGE>
(2) Balance sheet data at December 31, 1993 reflects the merger of Berkeley
Federal Savings Bank ("Old Berkeley") into the Bank on June 3, 1993, upon
which the Bank changed its name to "Berkeley Federal Bank & Trust FSB," and
operations data for the year ended December 31, 1993 reflects the operations
of Old Berkeley from the date of merger. This transaction was accounted for
using the purchase method of accounting.
(3) The provision for loan losses consists primarily of $9.5 million related to
the Company's discounted loan portfolio, which was provided pursuant to a
change in methodology which was adopted January 1, 1996 as a result of
discussions between the Bank and the Office of Thrift Supervision ("OTS")
following an examination of the Bank by the OTS. As a result of these
discussions, the Company also increased its provision for losses in fair
value on real estate owned by approximately $3.8 million during the six
months ended June 30, 1996. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-- Results of
Operations--Provision for Loan Losses" and "--Non-Interest Income."
(4) Represents a portion of the amounts paid to the Company in connection with
the Company's acquisition of certain mortgage-related securities which
generate taxable income in the first several years of the instrument's life
and tax losses of an equal amount thereafter, but have minimal or no cash
flows. Commencing in 1994, such amounts are deferred and recognized in
interest income on a level yield basis over the expected life of that
portion of the deferred tax asset which relates to tax residuals. See Note
19 to the Consolidated Financial Statements.
(5) Relates to the Company's 50% interest in a newly-formed company which
acquired discounted single-family residential loans from HUD in April 1996.
At June 30, 1996, the net discounted loans held by such company amounted to
$559.4 million. See "Business-- Investment in Joint Venture."
(6) The discounted loan portfolio consists of mortgage loans which were
non-performing or under-performing at the date of acquisition and purchased
at a discount. The loan portfolio and loans available for sale consist of
other loans which were originated or purchased by the Company for investment
or for potential sale, respectively. See "Business--Lending Activities" and
"--Discounted Loan Acquisition and Resolution Activities," respectively.
Data related to discounted loans does not include discounted loans held by
the above-referenced joint venture.
(7) Securities available for sale were carried at market value at June 30, 1996
and at December 31, 1995, 1994 and 1993, and such securities were carried at
amortized cost at December 31, 1992 and 1991. Loans available for sale are
carried at the lower of cost or market value.
(8) Real estate owned is primarily attributable to the Company's discounted
loan acquisition and resolution business.
(9) Reflects the Company's repurchase of 8,815,060 shares of Common Stock
during 1995 for an aggregate of $42.0 million.
(10) On a fully-diluted basis, book value per common share amounted to $6.27 at
June 30, 1996.
(11) Ratios for periods subsequent to 1992 are based on average daily balances
during the periods and ratios for 1991 and 1992 are based on month-end
balances during the periods. Ratios are annualized where appropriate.
(12) Exclusive of gains from the sale of branch offices in 1995 and 1994 and
related income taxes and profit sharing expense, (i) return on average
assets on income from continuing operations amounted to 2.00% and 1.40%
during 1995 and 1994, respectively, and (ii) return on average equity on
income from continuing operations amounted to 25.02% and 20.06% during 1995
and 1994, respectively.
(13) The efficiency ratio represents non-interest expense divided by the sum of
net interest income before provision for loan losses and non-interest
income. Non-interest income and non-interest expense for this purpose
exclude gains from the sale of branches and related profit-sharing expense,
respectively.
(14) The ratios of earnings to fixed charges were computed by dividing (x)
income from continuing operations before income taxes, extraordinary gains
and cumulative effect of a change in accounting principle plus fixed charges
by (y) fixed charges. Fixed charges represent total interest expense,
including and excluding interest on deposits, as applicable, as well as the
interest component of rental expense.
(15) Non-performing loans do not include loans in the Company's discounted loan
portfolio or loans available for sale.
9
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS, AS
WELL AS THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, BEFORE DECIDING TO
MAKE AN INVESTMENT IN NOTES. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF THE SECURITIES ACT AND THE EXCHANGE ACT. THE COMPANY'S
RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING
STATEMENTS AS A RESULT OF FACTORS DESCRIBED BELOW AND ELSEWHERE IN THIS
PROSPECTUS.
NO ASSURANCES AS TO CONSISTENCY OF EARNINGS OR FUTURE GROWTH; CHANGING NATURE OF
RISKS
GENERAL. The Company's corporate strategy emphasizes the identification,
development and management of specialized businesses which the Company believes
are not accurately evaluated and priced by the marketplace due to market,
economic and competitive conditions. This strategy can result in the entry into
or development of businesses and investment in assets which produce substantial
initial returns, which generally can be expected to decrease as markets become
more efficient in the evaluation and pricing of such businesses and assets. In
recent years these businesses have included the Company's discounted loan
acquisition and resolution business and investment in various types of
mortgage-related securities. The consistency of the operating results of certain
of the Company's businesses also can be significantly affected by inter-period
variations in the amount of assets acquired, as well as, in the case of the
Company's discounted loan acquisition activities, variations in the amount of
loan resolutions from period to period, particularly in the case of large
multi-family residential and commercial real estate loans. In addition, many of
the Company's businesses are relatively young and still evolving and involve
greater uncertainties and risks of loss than the activities traditionally
conducted by savings institutions. As a result, there can be no assurance that
there will not be significant inter-period variations in the profitability of
the Company's operations.
FLUCTUATIONS IN NON-INTEREST INCOME. In recent years the Company's
operating results have been significantly affected by certain non-recurring
items of non-interest income. In addition to $5.4 million and $62.6 million of
gains from sales of branch offices in 1995 and 1994, respectively, in recent
periods the Company has earned significant non-interest income from gains on
sales of interest-earning assets and real estate owned. Gains on sales of
interest-earning assets amounted to $9.6 million, $3.4 million, $7.0 million,
$5.7 million and $8.4 million during the six months ended June 30, 1996 and 1995
and the years ended December 31, 1995, 1994 and 1993, respectively, and gains on
the sale of real estate owned, which are a component of income (loss) on real
estate owned, net, amounted to $7.8 million, $9.1 million, $19.0 million $21.3
million and $2.5 million during the same respective periods. Gains on sales of
interest-earning assets and real estate owned generally are dependent on various
factors which are not within the control of the Company, including market and
economic conditions. As a result, there can be no assurance that the level of
gains on sales of interest-earning assets and real estate owned reported by the
Company in prior periods will be repeated in future periods or that there will
not be substantial inter-period variations in the results from such activities.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Non-Interest Income."
NO ASSURANCES OF EXPANSION. A substantial amount of the net proceeds from
the Notes Offering will be invested by the Company in the Bank to support future
expansion and growth of its discounted loan acquisition and resolution
activities and its lending activities. The Company also may use a significant
portion of the net proceeds retained by it for similar purposes. There can be no
assurance that the Bank or the Company will be able to increase these activities
in a manner which is consistent with management's business goals and objectives
or otherwise successfully expand their operations.
CHANGING NATURE OF RISKS. The nature of the risks associated with the
Company's operations have changed and are likely to continue to change over time
due to a corporate strategy which emphasizes the entry into and exit from
business lines based on market, economic or competitive conditions. As a result,
there can be no assurance that the risks associated with an investment in the
Company described herein will not materially change in the future or that there
will not be additional risks associated with the Company's future operations not
described herein.
10
<PAGE>
RISKS RELATED TO NON-TRADITIONAL OPERATING ACTIVITIES
As discussed below, the Company is engaged in a variety of businesses which
generally involve more uncertainties and risks than the single-family
residential lending activities historically emphasized by savings institutions.
In addition, many of the Company's business activities, including its lending
activities, are conducted on a nationwide basis, which reduces the risks
associated with concentration in any one particular market area but involves
other risks because, among other things, the Company may not be as familiar with
market conditions and other relevant factors as it would be in the case of
activities which are conducted in the market areas in which its executive
offices and branch office are located.
DISCOUNTED LOAN ACQUISITION AND RESOLUTION ACTIVITIES. The Company's
lending activities include the acquisition and resolution of non-performing or
underperforming single-family (one to four units) residential loans,
multi-family (over four units) residential loans and commercial real estate
loans which are purchased at a discount. At June 30, 1996, the Company's
discounted loan portfolio amounted to $594.6 million (net of $226.2 million of
unaccreted discount and a $9.5 million allowance for loan losses) or 31.3% of
the Company's total assets and the $830.3 million gross principal amount of
discounted loans consisted of $262.5 million, $145.3 million, $421.1 million and
$1.4 million gross principal amount of single-family residential loans,
multi-family residential loans, commercial real estate loans and other loans,
respectively. In addition, at the same date the Company had a $63.4 million
investment in a joint venture that recently acquired a portfolio of discounted
single-family residential loans, which amounted to $559.4 million, net at June
30, 1996. Commencing in June 1991, the Company began purchasing at a discount
non-performing single-family residential loans from the Federal Deposit
Insurance Corporation ("FDIC") and the Resolution Trust Corporation ("RTC"),
which acquired such loans primarily as a result of the unprecedented number of
failed savings institutions and failed banks during the early 1990s, as well as
from private sector sellers. During the early 1990s, the Company benefited from
the availability of discounted single-family residential loans as a result of
the large number of failed and troubled financial institutions. Due to the
general improvement in the financial condition of the savings industry in recent
years (reflected in part by the RTC's cessation of operations) and the
increasingly competitive nature of the market for discounted single-family
residential loans, the Company expanded into the acquisition and resolution of
discounted non-performing and underperforming multi-family residential and
commercial real estate loans in mid-1994 and has developed various sources for
the acquisition of all types of discounted loans in the private sector (which
represent approximately 92.4% of the Company's total discounted loan portfolio
at June 30, 1996). Although the Company has been actively involved in the
acquisition and resolution of discounted non-performing or underperforming
single-family residential loans since mid-1991 and discounted multi-family
residential and commercial real estate loans since early 1994, this business
involves certain uncertainties and risks, including without limitation the risk
that the discount on the loans acquired by the Company may not be sufficient in
order for the Company to resolve the loans as profitably as in prior periods and
the risk that the Company may not be able to acquire the desired amount and type
of discounted loans in future periods. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Changes in Financial
Condition--Discounted Loan Portfolio," "Business--Discounted Loan Acquisition
and Resolution Activities" and "Business--Investment in Joint Venture."
MULTI-FAMILY RESIDENTIAL, COMMERCIAL REAL ESTATE AND CONSTRUCTION LENDING
ACTIVITIES. The Company's lending activities currently include nationwide loans
secured by existing commercial real estate, particularly hotels and office
buildings, and, to a lesser extent, existing multi-family residential real
estate. In addition, from time to time the Company originates loans for the
construction of multi-family residential real estate and land acquisition and
development loans. At June 30, 1996, multi-family residential, commercial real
estate and construction loans (including land acquisition and development loans)
available for sale and held for investment aggregated $265.4 million, net, or
14.0% of the Company's total assets. Multi-family residential, commercial real
estate and construction lending generally is considered to involve a higher
degree of risk than single-family residential lending due to a variety of
factors, including generally larger loan balances, the dependency on successful
completion or operation of the project for repayment, the difficulties in
estimating construction costs and loan terms which often do not require full
amortization of the loan over its
11
<PAGE>
term and, instead, provide for a balloon payment at stated maturity. There can
be no assurance that the Company's multi-family residential, commercial real
estate and construction lending activities will not be adversely affected by
these and the other risks related to such activities. See "Business--Lending
Activities."
NON-CONFORMING BORROWER AND REDUCED DOCUMENTATION LENDING ACTIVITIES. The
Company's lending activities also currently emphasize the origination or
purchase on a nationwide basis of single-family residential loans made to
borrowers who have substantial equity in the properties which secure the loans
but who, because of prior credit problems, the absence of a credit history or
other factors, are unable or unwilling to qualify as borrowers under federal
agency guidelines ("non-conforming borrowers"). At June 30, 1996, the Company's
loans to non-conforming borrowers aggregated $40.9 million or 2.2% of the
Company's total assets. These loans are offered pursuant to various programs,
including programs which provide for reduced or no documentation for verifying a
borrower's income and employment. Loans to non-conforming borrowers present a
higher level of risk of default than conforming loans because of the increased
potential for default by borrowers who may have had previous credit problems or
who do not have any credit history, and may not be as saleable as loans which
conform to the guidelines established by various federal agencies.
INVESTMENTS IN LOW-INCOME HOUSING TAX CREDIT INTERESTS. The Company invests
in low-income housing tax credit interests (generally limited partnerships) in
order to obtain federal income tax credits which are allocated pursuant to
Section 42 of the Code. At June 30, 1996, the Company's investments in such
interests amounted to $92.3 million or 4.9% of total assets. There are many
uncertainties and risks associated with an investment in low-income housing tax
credit interests, including the risks involved in the construction, lease-up and
operation of multi-family residential real estate, the investor's ability to
earn sufficient income to utilize the tax credits resulting from such
investments in accordance with the requirements of the Code and the possibility
of required recapture of previously-earned tax credits. In addition, there are
numerous tax risks associated with tax credits resulting from potential changes
to the Code. See "Business--Investment Activities--Investment in Low-Income
Housing Tax Credit Interests."
INVESTMENTS IN MORTGAGE-RELATED SECURITIES. From time to time the Company
invests in a variety of mortgage-related securities, such as senior and
subordinate regular interests and residual interests in collateralized mortgage
obligations ("CMOs"), including CMOs which have qualified as Real Estate
Mortgage Investment Conduits ("REMICs"). These investments include so-called
stripped mortgage-related securities, in which interest coupons may be stripped
from a mortgage security to create an interest-only ("IO") strip, where the
investor receives all of the interest cash flows and none of the principal, and
a principal-only ("PO") strip, where the investor receives all of the principal
cash flows and none of the interest. At June 30, 1996, the Company's
mortgage-related securities available for sale amounted to $263.2 million or
13.9% of the Company's total assets and included $106.8 million and $6.9 million
of IO strips and PO strips, respectively, all of which were either issued by the
Federal Home Loan Mortgage Corporation ("FHLMC") or the Federal National
Mortgage Association ("FNMA") or rated AAA by national rating agencies, as well
as $52.5 million of subordinate interests in mortgage-related securities. Some
mortgage-related securities, such as IO strips and PO strips, exhibit
considerably more price volatility than mortgages or ordinary mortgage
pass-through securities, due in part to the uncertain cash flows that result
from changes in the prepayment rates of the underlying mortgages. Other
mortgage-related securities, such as subordinated interests, also involve
substantially more credit risk than other securities. The Company has sought to
offset the risk of changing interest rate environments on certain of its
mortgage-related securities by selling U.S. Treasury futures contracts and other
hedging techniques, and believes that the resulting interest-rate sensitivity
profile compliments the Company's overall exposure to changes in interest rates.
See "--Economic Conditions" below. Although generally intended to reduce the
effects of changing interest rate environments on the Company, investments in
certain mortgage-related securities and hedging transactions could cause the
Company to recognize losses depending on the terms of the instrument and the
interest rate environment. See "Business--Investment Activities."
12
<PAGE>
RISKS RELATED TO REAL ESTATE OWNED
At June 30, 1996, the Company's real estate owned, net amounted to $133.6
million or 7.0% of total assets and consisted almost entirely of single-family
residential real estate and multi-family residential and commercial real estate
acquired by foreclosure or deed-in-lieu thereof on loans in the Company's
discounted loan portfolio. The growth in the Company's real estate owned in
recent years reflects the expansion of the Company's discounted loan acquisition
and resolution activities. Real estate owned properties generally are
non-earning assets, although multi-family residential and commercial real estate
owned may provide some operating income to the Company depending on the
circumstances. Moreover, the value of real estate owned properties can be
significantly affected by the economies and markets for real estate in which
they are located and require the establishment of provisions for losses to
ensure that they are carried at the lower of cost or fair value, less estimated
costs to dispose of the properties. Real estate owned also require increased
allocation of resources and expense to the management and work out of the asset,
which also can adversely affect operations. Although the Company's real estate
owned, net decreased by $33.0 million or 19.8% during the six months ended June
30, 1996, there can be no assurance that the amount of the Company's real estate
owned will not increase in the future as a result of the Company's discounted
loan acquisition and resolution activities and the Company's single-family
residential, multi-family residential, commercial real estate and construction
lending activities. In addition, there can be no assurance that in the future
the Company's real estate owned will not have environmental problems which could
materially adversely affect the Company's financial condition or operations. See
"Business--Asset Quality--Real Estate Owned."
RISK OF FUTURE ADJUSTMENTS TO ALLOWANCES FOR LOSSES
The Company believes that it has established adequate allowances for losses
for each of its loan portfolio and discounted loan portfolio in accordance with
generally accepted accounting principles. Future additions to these allowances,
in the form of provisions for losses on loans and discounted loans, may be
necessary, however, due to changes in economic conditions, increases in loans
and discounted loans and the performance of the Company's loan and discounted
loan portfolios. In addition, the OTS, as an integral part of its examination
process, periodically reviews the Company's allowances for losses and the
carrying value of its assets. During the six months ended June 30, 1996, the
Company established $9.5 million of provisions for losses on discounted loans,
which were established pursuant to a change in methodology which was adopted
beginning in 1996 as a result of discussions between the Bank and the OTS
following an examination of the Bank (which also resulted in an increase in the
Company's provision for losses in fair value on real estate owned by
approximately $3.8 million during this period). There can be no assurance that
the OTS, which continues to evaluate the adequacy of the Company's allowances
for losses, will not request the Company to further increase its allowances for
losses on loans and discounted loans or adjust the carrying value of its real
estate owned or other assets. Based on the types of lending activities currently
emphasized by the Company and its recent decision to maintain an allowance for
losses in connection with its discounted loan portfolio, the Company anticipates
that in the future it will establish provisions for losses on its loan
portfolios on a quarterly basis. Increases in the Company's provisions for
losses on loans would adversely affect the Company's results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations."
RISK OF FUTURE ADJUSTMENTS TO CARRYING VALUE OF MORTGAGE SERVICING RIGHTS
From time to time the Company acquires rights to service mortgage loans for
other investors in order to increase its non-interest income. In addition,
mortgage servicing rights can provide a hedge against increases in interest
rates because such assets generally increase in market value as interest rates
increase, which can offset decreases in the market values of certain
interest-earning assets, such as fixed-rate loans and securities, which decline
in value in an increasing interest rate environment. In accordance with
Statement of Financial Accounting Standards ("SFAS") No. 122, "Accounting for
Mortgage Servicing Rights," which was adopted by the Company on January 1, 1996,
the Company amortizes mortgage servicing rights on an accelerated method over
the estimated weighted average life of the loans and periodically evaluates its
capitalized mortgage servicing rights for impairment based on the fair value of
those rights, which is recognized through a valuation allowance. Mortgage
servicing rights generally are adversely affected by accelerated prepayments of
loans resulting from decreasing interest rates, which affect the estimated
13
<PAGE>
average life of the loans serviced for others. During the six months ended June
30, 1996, accelerated prepayments of loans resulted in a $928,000 valuation
adjustment to the Company's mortgage servicing rights, which amounted to $2.7
million, net, at the end of such period. There can be no assurance that loan
prepayments, as a result of decreases in interest rates or otherwise, will not
adversely affect the carrying value of the Company's existing mortgage servicing
rights or mortgage servicing rights which may be acquired by it in the future.
RISKS RELATED TO RELIANCE ON BROKERED AND OTHER WHOLESALE DEPOSITS
The Company currently utilizes as a primary source of funds certificates of
deposit obtained through national investment banking firms which obtain funds
from their customers for deposit with the Company ("brokered deposits") and, to
a lesser extent, certificates of deposit obtained from customers of regional and
local investment banking firms and direct solicitation efforts by the Company of
institutional investors and high net worth individuals. At June 30, 1996,
certificates of deposit obtained through national investment banking firms which
solicit deposits for the Company from their customers amounted to $1.02 billion
or 67.9% of total deposits, certificates of deposit obtained through regional
and local investment banking firms amounted to $267.7 million or 17.8% of total
deposits and certificates of deposits obtained from the Company's direct
solicitation of institutional investors and high net worth individuals amounted
to $109.2 million or 7.3% of total deposits. The Company believes that the
effective cost of brokered and other wholesale deposits, as well as other
non-branch dependent sources of funds, such as securities sold under agreements
to repurchase ("reverse repurchase agreements") and advances from the Federal
Home Loan Bank ("FHLB") of New York, generally is more attractive to the Company
than deposits obtained through branch offices after the general and
administrative costs associated with operating a branch office network are taken
into account. However, such funding sources, when compared to retail deposits
attracted through a branch network, are generally more sensitive to changes in
interest rates and volatility in the capital markets and are more likely to be
compared by the investor to competing investments. In addition, such funding
sources may be more sensitive to significant changes in the financial condition
of the Company. There are also regulatory limitations on an insured
institution's ability to solicit and obtain brokered deposits in certain
circumstances, which currently are not applicable to the Bank because of its
status as a "well capitalized" institution under applicable laws and
regulations. See "Regulation--The Bank--Brokered Deposits." As a result of the
Company's reliance on brokered and other wholesale deposits, significant changes
in the prevailing interest rate environment, in the availability of alternative
investments for individual and institutional investors or in the Company's
financial condition, among other factors, could affect the Company's liquidity
and results of operations much more significantly than might be the case with an
institution that obtained a greater portion of its funds from retail or core
deposits attracted through a branch network.
RISKS RELATED TO CHANGING ECONOMIC CONDITIONS
GENERAL. The success of the Company is dependent to a certain extent upon
the general economic conditions in the geographic areas in which it conducts
substantial business activities. Adverse changes in national economic conditions
or in the economic conditions of regions in which the Company conducts
substantial business likely would impair the ability of the Company to collect
loans and would otherwise have an adverse effect on its business, including the
demand for new loans, the ability of customers to repay loans and the value of
both the collateral pledged to the Company to secure its loans and its real
estate owned. Moreover, earthquakes and other natural disasters could have
similar effects. Although such disasters have not significantly adversely
affected the Company to date, the availability of insurance for such disasters
in California, in which the Company conducts substantial business activities, is
severely limited. At June 30, 1996, the Company had loans with an unpaid
principal balance aggregating $448.5 million (including loans available for
sale) secured by properties located in California and $73.2 million of the
Company's real estate owned was located in California.
EFFECTS OF CHANGES IN INTEREST RATES. The Company's operating results
depend to a large extent on its net interest income, which is the difference
between the interest income earned on interest-earning assets and the interest
expense incurred in connection with its interest-bearing liabilities. Changes in
the general level of interest rates can affect the Company's net interest income
by affecting the spread between the
14
<PAGE>
Company's interest-earning assets and interest-bearing liabilities, as well as,
among other things, the ability of the Company to originate loans; the value of
the Company's interest-earning assets and its ability to realize gains from the
sale of such assets; the average life of the Company's interest-earning assets;
the value of the Company's mortgage servicing rights; and the Company's ability
to obtain deposits in competition with other available investment alternatives.
Interest rates are highly sensitive to many factors, including governmental
monetary policies, domestic and international economic and political conditions
and other factors beyond the control of the Company. The Company actively
monitors its assets and liabilities and employs a hedging strategy which seeks
to limit the effects of changes in interest rates on its operations. Although
management believes that the maturities of the Company's assets currently are
well balanced in relation to its liabilities (which involves various estimates
as to how changes in the general level of interest rates will impact its assets
and liabilities), there can be no assurance that the profitability of the
Company would not be adversely affected during any period of changes in interest
rates. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Asset and Liability Management" and Note 18 to the
Consolidated Financial Statements.
RISKS RELATED TO RECAPITALIZATION OF SAIF
The deposits of the Bank are insured by the Savings Association Insurance
Fund ("SAIF") administered by the FDIC, which, due to the large number of
savings institutions which failed in the late 1980s and early 1990s, has been
unable to attain a statutorily-required reserve ratio of 1.25% of insured
deposits. The Balanced Budget Act of 1995 provided that all SAIF member
institutions would pay a special one-time assessment on their deposits as of
March 31, 1995 in an amount which in the aggregate would be sufficient to bring
the reserve ratio in the SAIF to the required level, as well as for an eventual
merger of the SAIF and the Bank Insurance Fund ("BIF") administered by the FDIC,
which insures the deposits of commercial banks and has attained the reserve
ratio required by law. Based on the level of reserves of the SAIF at June 30,
1996, the FDIC recently estimated that the amount of the special assessment
required to recapitalize the SAIF is approximately 68 basis points of
SAIF-assessable deposits at March 31, 1995. Although the Balanced Budget Act of
1995 was vetoed by the President of the United States in December 1995 for
reasons which were unrelated to the recapitalization of SAIF, legislative
proposals containing similar provisions to recapitalize the SAIF continue to be
made. Based on the Bank's deposits as of March 31, 1995, a one-time special
assessment of 68 basis points would result in the Bank incurring a pre-tax
charge of approximately $7.4 million ($4.7 million on an after-tax basis), which
management believes would not affect the Bank's status as a "well-capitalized"
institution under applicable laws and regulations. See "Regulation--The
Bank--Regulatory Capital Requirements." Management of the Company currently is
unable to predict whether there will be legislation to recapitalize the SAIF
and, if so, whether and to what extent the Bank may be assessed in order to
recapitalize the SAIF.
Unless and until the SAIF is recapitalized and the insurance premiums of
SAIF-insured institutions are reduced to levels which are comparable to those
currently being assessed members of the BIF, SAIF-insured institutions will have
a significant competitive disadvantage to BIF-insured institutions with respect
to the pricing of loans and deposits and the ability to achieve lower operating
costs. In order to reduce this competitive advantage, a number of SAIF-insured
institutions have established or are seeking to establish affiliated BIF-insured
institutions, which could attract deposits formerly maintained at the related
SAIF-insured institution, thus reducing the institutions' overall effective rate
for deposit insurance. The transfer of insured deposits from SAIF-insured
institutions to BIF-insured institutions could materially reduce the deposits at
SAIF-insured institutions, which could reduce the insurance assessments obtained
by the SAIF and, thus, adversely affect the ability of the SAIF to resolve
troubled savings institutions and to meet its other obligations. Such reduction
in the assessable deposit base of SAIF could result in an increase in the amount
of any one-time assessment of SAIF-insured institutions which may be imposed in
order to recapitalize the SAIF. See "Regulation--The Bank--Insurance of
Accounts."
POSSIBLE ELIMINATION OF THE THRIFT CHARTER AND RECENT ELIMINATION OF RELATED TAX
BENEFITS
In recent periods there have been various legislative proposals in the U.S.
Congress to eliminate the thrift charter. If enacted, such legislation would
require the Bank, as a federally-chartered savings bank, to convert to a bank
charter, which likely would be regulated by the Office of the Comptroller of the
Currency
15
<PAGE>
("OCC") and not the OTS, which would go out of existence, and likely would
require the Company to register as a bank holding company under the Bank Holding
Company Act of 1956, as amended ("BHCA") and be subject to regulation by the
Board of Governors of the Federal Reserve System (the "Federal Reserve Board").
Management currently does not believe that such regulation would have a material
adverse effect on the Company or the Bank, although there can be no assurance
that this would be the case. See "Regulation."
In anticipation of the possible elimination of the thrift charter through
future legislation, the U.S. Congress recently enacted legislation which
provides for the repeal of a provision of the Code which permits thrift
institutions, such as the Bank, which meet certain definitional tests to
establish a tax reserve for bad debts and to make annual additions thereto based
on a percentage of net income rather than actual loss experience. See
"Taxation--Federal." It is anticipated that this legislation will not have a
material adverse effect on the Company's financial condition or operations.
REGULATION
Each of the Company, as a registered savings and loan holding company, and
the Bank, as a federally-chartered savings association, is subject to extensive
governmental supervision and regulation, which is intended primarily for the
protection of depositors. In addition, each of the Company and the Bank is
subject to changes in federal and state laws, including changes in tax laws
which could materially affect the real estate industry, such as repeal of the
federal mortgage interest deduction and the federal affordable housing tax
credit program, as well as changes in regulations, governmental policies and
accounting principles. Recently enacted, proposed and future legislation and
regulations have had and will continue to have significant impact on the
financial services industry. Some of the legislative and regulatory changes may
benefit the Company and the Bank; other changes, however, may increase their
costs of doing business and assist competitors of the Company and the Bank.
COMPETITION
Although there currently is no single competitor which competes directly
with the Company in all aspects of its business activities, the businesses in
which the Company is engaged generally are highly competitive. The acquisition
of discounted loans is particularly competitive, as acquisitions of such loans
are often based on competitive bidding. In addition, competitors of the Company
may seek to establish relationships with the correspondent mortgage banking
firms which currently are a primary source of the Company's loans to
non-conforming borrowers and, from time to time, other loans, and which
generally are not obligated to continue to do business with the Company. The
Company also encounters significant competition in connection with its other
lending activities, its investment activities and in its deposit-gathering
activities. Many of the Company's competitors are significantly larger than the
Company and have access to greater capital and other resources. In addition,
many of the Company's competitors are not subject to the same extensive federal
regulation that govern federally-insured institutions such as the Bank and their
holding companies. As a result, many of the Company's competitors have
advantages over the Company in conducting certain businesses and providing
certain services.
IMPORTANCE OF THE CHIEF EXECUTIVE OFFICER
William C. Erbey, Chairman, President and Chief Executive Officer of the
Company, has had, and will continue to have, a significant role in the
development and management of the Company's business. The loss of his services
could have an adverse effect on the Company. The Company currently does not
maintain key man life insurance relating to Mr. Erbey or any of its other
officers. See "Business--Management."
LIMITED SOURCES FOR PAYMENTS ON NOTES
As a holding company, the ability of the Company to make payments of
interest and principal on the Notes will depend primarily on the receipt of
dividends or other distributions from the Bank, as well as any cash reserves and
other liquid assets held by the Company and any proceeds from any subsequent
securities offering or bank financing. There are various regulatory restrictions
on the ability of the Bank to pay dividends or make other distributions to the
Company. See "Regulation--The Bank--Restrictions on Capital Distributions" and
"--Affiliate Transactions." In addition, there are certain contractual
restrictions
16
<PAGE>
on the Bank's ability to pay dividends set forth in the Indenture, dated as of
June 12, 1995, between the Bank and the Bank of New York, as trustee, relating
to the Bank's issuance of $100 million of 12% Subordinated Debentures due 2005
(the "Debentures") in June 1995. In light of the foregoing, there can be no
assurance that the Company would have sufficient funds available to repurchase
any Notes that Noteholders may elect to tender upon the occurrence of a Change
of Control Event, or to repay the principal and accrued interest of the Notes if
the maturity of the Notes were to be accelerated upon the occurrence of an Event
of Default under the Indenture.
ABSENCE OF A MARKET FOR THE NOTES
The Company does not intend to apply for listing of the Notes on any
national securities exchange or for quotation of the Notes through Nasdaq.
Although the Underwriter for the Notes Offering has indicated its intention to
make a market in the Notes following consummation of the Notes Offering, it is
not obligated to do so and any market-making activities with respect to the
Notes may be discontinued at any time without prior notice. There can be no
assurance as to the liquidity of the trading markets for the Notes or as to the
prices at which the Notes may trade in such market or that an active public
market for the Notes will develop or be maintained.
THE COMPANY
The Company is a financial services holding company which conducts business
primarily through the Bank and subsidiaries of the Bank. Unless the context
otherwise requires, the "Company" refers to the Company and its subsidiaries on
a consolidated basis.
The Company is a Florida corporation which was organized in February 1988 in
connection with its acquisition of the Bank. During the early 1990s, the Company
sought to take advantage of the general decline in asset quality of financial
institutions in many areas of the country and the large number of failed savings
institutions during this period by establishing its discounted loan acquisition
and resolution program. This program commenced with the acquisition of
discounted single-family residential loans for resolution in mid-1991 and was
expanded to cover the acquisition and resolution of discounted multi-family
residential and commercial real estate loans in 1994.
During the early 1990s, the Company also acquired assets and liabilities of
three failed savings institutions and merged Old Berkeley, a troubled financial
institution, into the Bank. The Company subsequently sold substantially all of
the assets and liabilities acquired in connection with these acquisitions at
substantial gains.
The Company is a registered savings and loan holding company subject to
regulation by the OTS. The Bank is subject to regulation by the OTS, as its
chartering authority, and by the FDIC as a result of its membership in the SAIF,
which insures the Bank's deposits up to the maximum extent permitted by law. The
Bank also is subject to certain regulation by the Federal Reserve Board and
currently is a member of the FHLB of New York, one of the 12 regional banks
which comprise the FHLB System.
The Company's executive offices are located at 1675 Palm Beach Lakes
Boulevard, West Palm Beach, Florida 33401, and the telephone number of its
executive offices is (561) 681-8000.
17
<PAGE>
USE OF PROCEEDS
Net proceeds from the Notes Offering currently are estimated to be
approximately $119.6 million, after deducting the underwriting discount and
estimated offering expenses payable by the Company (and assuming no exercise of
the Note underwriter's over-allotment option). The Company will not receive any
of the proceeds from the Common Stock Offering.
The Company plans to contribute approximately $50 million of the net
proceeds from the Notes Offering to the capital of the Bank to support future
growth. Such proceeds will be available for use by the Bank for general
corporate purposes, including without limitation acquisitions of discounted and
other loans. The net proceeds from the Notes Offering retained by the Company
will be available for general corporate purposes. Although the Company does not
have any specific plans for the investment of the net proceeds to be retained by
it at this time, such net proceeds will give the Company increased flexibility
in conducting the businesses in which it is engaged, particularly the
acquisition and resolution of discounted loans and the acquisition of
single-family residential loans to non-conforming borrowers.
The net proceeds from the Notes Offering available to the Company and the
Bank also could be used to acquire other businesses, such as a financial
institution or a mortgage banking company, which the Company evaluates from time
to time as a means of enhancing its ability to acquire loans and otherwise
expand and enhance its operations. Currently, there are no agreements,
arrangements or understandings with regard to any such transaction.
18
<PAGE>
CAPITALIZATION
The following table presents the consolidated capitalization of the Company
and the regulatory capital ratios of the Bank at June 30, 1996, and as adjusted
to give effect to the issuance of the Notes offered in the Notes Offering
(assuming no exercise of the Note underwriter's over-allotment option) and the
contribution by the Company to the capital of the Bank of a portion of the
estimated net proceeds therefrom, respectively, as set forth under "Use of
Proceeds."
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------------
ACTUAL AS ADJUSTED
-------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deposits......................................................................... $ 1,502,175 $ 1,502,175
-------------- --------------
-------------- --------------
Borrowings and other interest-bearing obligations:
The Company:
11 7/8% Notes due 2003....................................................... $ -- $ 125,000
Short-term notes............................................................. 7,365 7,365
The Bank:
FHLB advances 70,399 70,399
Subordinated debentures...................................................... 100,000 100,000
Other subsidiaries:
Hotel mortgages payable...................................................... 8,338 8,338
-------------- --------------
Total borrowings and other interest-bearing obligations.................... $ 186,102 $ 311,102
-------------- --------------
-------------- --------------
Stockholders' equity:
Preferred Stock, $0.01 par value: 20,000,000 shares authorized; none
outstanding.................................................................. $ -- $ --
Common Stock, $0.01 par value: 200,000,000 shares authorized; 23,812,900 shares
outstanding(1)(2)............................................................ 238 238
Additional paid-in capital..................................................... 10,275 10,275
Retained earnings.............................................................. 145,301 145,301
Unrealized loss on securities available for sale, net of taxes................. (1,076) (1,076)
-------------- --------------
Total stockholders' equity................................................. $ 154,738(2) $ 154,738(2)
-------------- --------------
-------------- --------------
Regulatory capital ratios of the Bank(3):
Tangible capital............................................................... 6.74% 8.92%
Core (leverage) capital........................................................ 6.74 8.92
Risk-based capital............................................................. 13.61 15.93
</TABLE>
- --------------------
(1) Does not include 6,388,550 additional shares of Common Stock reserved for
issuance as of the date hereof upon the exercise of options granted or which
may be granted pursuant to the Company's Stock Option Plan. See
"Management--Stock Option Plan."
(2) Does not reflect 2,928,200 shares of Common Stock issued upon the exercise
of stock options subsequent to June 30, 1996, which increased total
stockholders' equity by $6.4 million, net. Inclusive of the exercise of such
stock options, total stockholders' equity, as adjusted, would amount to
$161.1 million. See "Management--Stock Option Plan" and "--Transactions with
Affiliates."
(3) The calculations assume that $50 million of the estimated net proceeds from
the Notes Offering is contributed by the Company to the capital of the Bank.
The calculation of the risk-based regulatory capital ratio, as adjusted,
assumes that 25% of the estimated net proceeds from the Notes Offering which
are contributed to the capital of the Bank by the Company are invested in
loans with a risk-weight of 50%, that the remainder of such proceeds are
invested in loans with a risk weight of 100% and that such net proceeds had
been received and so applied at June 30, 1996.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE COMPANY'S CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS AND CAPITAL RESOURCES AND LIQUIDITY SHOULD BE READ IN
CONJUNCTION WITH SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA AND THE
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE HEREIN.
PROSPECTIVE INVESTORS ARE URGED TO CAREFULLY CONSIDER THIS RELATED INFORMATION
IN CONNECTION WITH A REVIEW OF THE FOLLOWING DISCUSSION.
RESULTS OF OPERATIONS
GENERAL. In recent years, the Company has emphasized discounted loan
acquisition and resolution activities and a variety of other mortgage lending
activities, which generally reflect the Company's opportunistic approach to new
business lines which offer the potential for significant returns. As a result of
the Company's business strategy, the average balance of the Company's discounted
loan portfolio increased from $193.7 million or 16.8% of total average assets
during 1993 to $483.2 million or 31.8% of total average assets during 1995 and
to $616.4 million or 32.0% of total average assets during the six months ended
June 30, 1996, and the average balance of the Company's other loans, including
loans available for sale, increased from $119.6 million or 10.4% of total
average assets to $297.9 million or 19.6% of total average assets and to $539.3
million or 28.0% of total average assets during the same respective periods. The
growth in the Company's lending activities, particularly its discounted loan
acquisition and resolution activities, has substantially contributed to the
Company's profitability in recent periods.
As a result of the historical and expected future growth in the discounted
loan portfolio, particularly in the commercial component, and as requested by
the OTS, the Company modified its methodology for valuing discounted loans in
the first quarter of 1996. This methodology resulted in provisions for losses
which modified the Company's practice of adjusting discounted loans to the lower
of the recorded investment or net present value of expected cash flow discounted
at the effective yield through direct charges to interest income. The Company
established an aggregate of $9.5 million of provisions for losses on discounted
loans during the first half of 1996 pursuant to this change in methodology.
During this period, the Company also increased its provision for losses in fair
value on real estate owned by $3.8 million as a result of discussions between
the Bank and the OTS following an examination of the Bank.
The Company's operating results in recent periods also have been
significantly affected by the acquisition of Old Berkeley in mid-1993 and the
effects of the sale of branch offices at the end of 1994 and 1995, which
resulted in $62.6 million and $5.4 million of gains (excluding related income
taxes and profit sharing expense) during these respective periods. As a result
of these sales, the Company's average assets decreased during 1995 and the
Company's principal source of deposits is brokered and other wholesale deposits.
The Company's operating results in recent periods also have been affected by
losses from discontinued operations, which, net of applicable tax effect,
amounted to $3.1 million, $7.7 million, $4.5 million and $2.3 million during the
six months ended June 30, 1995 and the years ended December 31, 1995, 1994 and
1993, respectively.
The Company's income from continuing operations amounted to $15.0 million or
$0.57 per share and $11.5 million or $0.39 per share during the six months ended
June 30, 1996 and 1995, respectively. Exclusive of gains from the sale of branch
offices and related profit sharing expense, the Company's income from continuing
operations amounted to $30.3 million, $24.0 million and $27.3 million during
1995, 1994 and 1993, respectively. These amounts represented returns on average
assets of 1.56% and 1.71% during the six months ended June 30, 1996 and 1995,
respectively, and 2.00%, 1.40% and 2.37% during 1995, 1994 and 1993,
respectively, and returns on average equity of 20.67% and 16.43% during the six
months ended June 30, 1996 and 1995, respectively, and 25.02%, 20.06% and 27.89%
during 1995, 1994 and 1993, respectively.
NET INTEREST INCOME. The operations of the Company are substantially
dependent on its net interest income, which is the difference between the
interest income received from its interest-earning assets and the interest
expense paid on its interest-bearing liabilities. Net interest income is
determined by an institution's net interest spread (i.e., the difference between
the yield earned on its interest-earning assets and the rates
20
<PAGE>
paid on its interest-bearing liabilities), the relative amount of
interest-earning assets and interest-bearing liabilities and the degree of
mismatch in the maturity and repricing characteristics of its interest-earning
assets and interest-bearing liabilities.
The following tables set forth, for the periods indicated, information
regarding the total amount of income from interest-earning assets and the
resultant average yields, the interest expense associated with interest-bearing
liabilities, expressed in dollars and rates, and the net interest spread and net
interest margin. Information is based on daily balances during the indicated
periods.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------------------------
1996 1995
------------------------------------ ------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE(1) BALANCE INTEREST YIELD/RATE(1)
---------- -------- ------------- ---------- -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AVERAGE ASSETS:
Federal funds sold and repurchase
agreements.................................. $ 72,875 $ 2,098 5.76% $ 61,108 $ 1,748 5.72%
Securities available for sale(2)............. 299,487 14,064 9.39 169,639 6,943 8.19
Loans available for sale(3).................. 240,009 11,484 9.57 142,069 7,154 10.07
Mortgage-related securities held for
investment.................................. -- -- -- 99,295 2,342 4.72
Loan portfolio(3)............................ 299,243 17,773 11.88 77,303 3,944 10.20
Discounted loan portfolio.................... 616,350 52,058 16.89 460,741 36,474 15.83
Investment securities and other(4)........... 44,457 1,980 8.91 33,369 1,265 7.58
---------- -------- ---------- --------
Total interest-earning assets, interest
income.................................. 1,572,421 99,457 12.65 1,043,524 59,870 11.47
-------- --------
Non-interest earning cash.................... 6,549 23,767
Allowance for loan losses.................... (7,307) (1,196)
Investments in low-income housing tax credit
interests................................... 94,825 60,113
Other assets(2).............................. 258,213 217,909
---------- ----------
Total assets............................. $1,924,701 $1,344,117
---------- ----------
---------- ----------
AVERAGE LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing demand deposits............. $ 23,668 360 3.04 $ 49,722 477 1.92
Savings deposits............................. 3,434 40 2.33 21,975 255 2.32
Certificates of deposit...................... 1,450,536 44,955 6.20 1,000,383 31,058 6.21
---------- -------- ---------- --------
Total interest-bearing deposits.......... 1,477,638 45,355 6.14 1,072,080 31,790 5.93
Reverse repurchase agreements................ 23,793 685 5.76 6,680 199 5.96
Securities sold but not yet purchased........ -- -- -- 18,834 638 6.77
FHLB advances................................ 70,399 2,032 5.77 5,399 257 9.52
Subordinated debentures and other
interest-bearing obligations................ 123,726 6,964 11.26 31,858 1,796 11.28
---------- -------- ---------- --------
Total interest-bearing liabilities,
interest expense........................ 1,695,556 55,036 6.49 1,134,851 34,680 6.11
-------- --------
Non-interest bearing deposits................ 4,039 17,077
Escrow deposits.............................. 38,773 10,178
Other liabilities(2)......................... 40,934 42,409
---------- ----------
Total liabilities........................ 1,779,302 1,204,515
Stockholders' equity(2)...................... 145,399 139,602
---------- ----------
Total liabilities and stockholders'
equity.................................. $1,924,701 $1,344,117
---------- ----------
---------- ----------
Net interest income.......................... $44,421 $25,190
-------- --------
-------- --------
Net interest spread.......................... 6.16% 5.36%
----- -----
----- -----
Net interest margin.......................... 5.65% 4.83%
----- -----
----- -----
Ratio of interest-earning assets to
interest-bearing liabilities................ 93% 92%
---------- ----------
---------- ----------
</TABLE>
- ------------------------------
(1) Presented on an annualized basis.
(2) Excludes effect of unrealized gains or losses on securities available for
sale, net of taxes.
(3) The average balances of loans available for sale and the loan portfolio
include non-performing loans, interest on which is recognized on a cash
basis.
(4) Interest income from investment securities and other includes interest
income attributable to that portion of the Company's deferred tax asset
which relates to tax residuals. If the average balance of the deferred tax
asset related to tax residuals was included in the average balance of
investment securities and other, the weighted average yield would have been
6.87% and 4.62% during the six months ended June 30, 1996 and 1995,
respectively. See "--Non-interest Income" below, "Taxation--Federal
Taxation--Tax Residuals" and Note 19 to the Consolidated Financial
Statements.
21
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------------
1995 1994 1993
-------------------------------- -------------------------------- ---------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
---------- -------- ---------- ---------- -------- ---------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AVERAGE ASSETS:
Federal funds sold and
repurchase agreements... $ 55,256 $ 3,502 6.34% $ 166,592 $ 8,861 5.32% $ 24,333 $ 873 3.59%
Securities available for
sale(1)................. 211,559 18,391 8.69 449,654 27,988 6.22 435,541 19,714 4.53
Loans available for
sale(2)................. 167,011 15,608 9.35 179,962 19,353 10.75 45,757 5,376 11.75
Mortgage-related
securities held for
investment.............. 77,257 4,313 5.58 140,321 6,930 4.94 192,052 9,379 4.88
Loan portfolio(2)........ 130,901 15,430 11.79 81,070 5,924 7.31 73,854 6,232 8.44
Discounted loan
portfolio............... 483,204 75,998 15.73 352,633 52,560 14.91 193,652 31,036 16.03
Investment securities and
other(3)................ 46,440 4,033 8.68 79,895 9,842 12.32 48,255 6,313 13.08
---------- -------- ---------- -------- ---------- --------
Total
interest-earning
assets, interest
income.............. 1,171,628 137,275 11.72 1,450,127 131,458 9.07 1,013,444 78,923 7.79
-------- -------- --------
Non-interest earning
cash.................... 17,715 27,717 22,146
Allowance for loan
losses.................. (1,180) (2,689) (1,050)
Investments in low-income
housing tax credit
interests............... 63,925 39,135 10,693
Other assets(1).......... 269,280 200,663 107,422
---------- ---------- ----------
Total assets......... $1,521,368 $1,714,953 $1,152,655
---------- ---------- ----------
---------- ---------- ----------
AVERAGE LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest-bearing demand
deposits................ $ 31,373 1,031 3.29 $ 77,433 1,396 1.80 $ 99,201 1,056 1.06
Savings deposits......... 20,370 451 2.21 138,434 2,602 1.88 142,053 1,982 1.40
Certificates of
deposit................. 1,119,836 70,371 6.28 928,209 40,963 4.41 416,658 16,001 3.84
---------- -------- ---------- -------- ---------- --------
Total
interest-bearing
deposits............ 1,171,579 71,853 6.13 1,144,076 44,961 3.93 657,912 19,039 2.89
Reverse repurchase
agreements.............. 16,754 951 5.68 254,457 10,416 4.09 195,745 9,340 4.77
Securities sold but not
yet purchased........... 17,149 1,142 6.66 39,526 2,780 7.03 -- -- --
FHLB advances............ 14,866 1,126 7.57 26,476 1,232 4.65 64,130 2,834 4.42
Subordinated debentures
and other
interest-bearing
obligations............. 78,718 8,988 11.42 25,041 3,209 12.81 26,572 4,093 15.40
---------- -------- ---------- -------- ---------- --------
Total
interest-bearing
liabilities,
interest expense.... 1,299,066 84,060 6.47 1,489,576 62,598 4.20 944,359 35,306 3.74
-------- -------- --------
Non-interest bearing
deposits................ 19,960 69,276 30,181
Escrow deposits.......... 4,073 2,430 4,007
Other liabilities(1)..... 76,978 34,171 76,213
---------- ---------- ----------
Total liabilities.... 1,400,077 1,595,453 1,054,760
Stockholders'
equity(1)............... 121,291 119,500 97,895
---------- ---------- ----------
Total liabilities and
stockholders'
equity.............. $1,521,368 $1,714,953 $1,152,655
---------- ---------- ----------
---------- ---------- ----------
Net interest income...... $ 53,215 $ 68,860 $43,617
-------- -------- --------
-------- -------- --------
Net interest spread...... 5.25% 4.86% 4.05%
----- ----- -----
----- ----- -----
Net interest margin...... 4.54% 4.75% 4.30%
----- ----- -----
----- ----- -----
Ratio of interest-earning
assets to
interest-bearing
liabilities............. 90% 97% 107%
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ------------------------------
(1) Excludes effect of unrealized gains or losses on securities available for
sale, net of taxes.
(2) The average balances of loans available for sale and the loan portfolio
include non-performing loans, interest on which is recognized on a cash
basis.
(3) Interest income from investment securities and other includes interest
income attributable to that portion of the Company's deferred tax asset
which relates to tax residuals. See "--Non-interest Income" below,
"Taxation--Federal Taxation--Tax Residuals" and Note 19 to the Consolidated
Financial Statements. If the average balance of the deferred tax asset
related to tax residuals was included in the average balance of investment
securities and other, the weighted average yield would have been 6.16%,
11.48% and 10.67% during 1995, 1994 and 1993, respectively.
22
<PAGE>
The following table describes the extent to which changes in interest rates
and changes in volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and expense during the
periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (change in volume multiplied by prior rate), (ii) changes
in rate (change in rate multiplied by prior volume) and (iii) total change in
rate and volume. Changes attributable to both volume and rate have been
allocated proportionately to the change due to volume and the change due to
rate.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996 YEAR ENDED DECEMBER 31,
-----------------------------------------------------
VS. SIX MONTHS ENDED JUNE 30,
1995 1995 VS. 1994 1994 VS. 1993
------------------------------- ------------------------------- --------------------
INCREASE (DECREASE) INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO DUE TO
-------------------- -------------------- --------------------
RATE VOLUME TOTAL RATE VOLUME TOTAL RATE VOLUME
--------- --------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Federal funds sold and repurchase
agreements....................... $ 11 $ 339 $ 350 $ 1,445 $ (6,804) $ (5,359) $ 609 $ 7,379
Securities available for sale..... 1,150 5,971 7,121 8,584 (18,181) (9,597) 7,616 658
Loans available for sale.......... (1,037) 5,367 4,330 (2,417) (1,328) (3,745) (493) 14,470
Mortgage-related securities held
for investment................... (1,171) (1,171) (2,342) 812 (3,429) (2,617) 105 (2,554)
Loan portfolio.................... 748 13,081 13,829 4,747 4,759 9,506 (882) 574
Discounted loan portfolio......... 2,577 13,007 15,584 3,041 20,397 23,438 (2,312) 23,836
Investment securities and other... 247 468 715 (2,401) (3,408) (5,809) (388) 3,917
--------- --------- --------- --------- --------- --------- --------- ---------
Total interest-earning
assets....................... 2,525 37,062 39,587 13,811 (7,994) 5,817 4,255 48,280
--------- --------- --------- --------- --------- --------- --------- ---------
Interest-Bearing Liabilities:
Interest-bearing demand
deposits......................... 466 (583) (117) 752 (1,117) (365) 610 (270)
Savings deposits.................. 3 (218) (215) 395 (2,546) (2,151) 672 (52)
Certificates of deposit........... (162) 14,059 13,897 19,777 9,631 29,408 2,704 22,258
--------- --------- --------- --------- --------- --------- --------- ---------
Total interest-bearing
deposits..................... 307 13,258 13,565 20,924 5,968 26,892 3,986 21,936
Reverse repurchase agreements..... (20) 506 486 2,926 (12,391) (9,465) (1,455) 2,531
Securities sold but not yet
purchased........................ (319) (319) (638) (141) (1,497) (1,638) -- 2,780
FHLB advances..................... (336) 2,111 1,775 574 (680) (106) 143 (1,745)
Subordinated debentures and other
interest-bearing obligations..... (9) 5,177 5,168 (386) 6,165 5,779 (658) (226)
--------- --------- --------- --------- --------- --------- --------- ---------
Total interest-bearing
liabilities.................. (377) 20,733 20,356 23,897 (2,435) 21,462 2,016 25,276
--------- --------- --------- --------- --------- --------- --------- ---------
Increase (decrease) in net
interest income.................. $ 2,902 $ 16,329 $ 19,231 $ (10,086) $ (5,559) $ (15,645) $ 2,239 $ 23,004
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
TOTAL
---------
<S> <C>
Interest-Earning Assets:
Federal funds sold and repurchase
agreements....................... $ 7,988
Securities available for sale..... 8,274
Loans available for sale.......... 13,977
Mortgage-related securities held
for investment................... (2,449)
Loan portfolio.................... (308)
Discounted loan portfolio......... 21,524
Investment securities and other... 3,529
---------
Total interest-earning
assets....................... 52,535
---------
Interest-Bearing Liabilities:
Interest-bearing demand
deposits......................... 340
Savings deposits.................. 620
Certificates of deposit........... 24,962
---------
Total interest-bearing
deposits..................... 25,922
Reverse repurchase agreements..... 1,076
Securities sold but not yet
purchased........................ 2,780
FHLB advances..................... (1,602)
Subordinated debentures and other
interest-bearing obligations..... (884)
---------
Total interest-bearing
liabilities.................. 27,292
---------
Increase (decrease) in net
interest income.................. $ 25,243
---------
---------
</TABLE>
SIX MONTHS ENDED JUNE 30, 1996 VERSUS SIX MONTHS ENDED JUNE 30, 1995
The Company's net interest income increased by $19.2 million or 76.3% during
the six months ended June 30, 1996, as compared to the comparable period in the
prior year. This increase resulted from a $39.6 million or 66.1% increase in
interest income due to a $528.9 million or 50.7% increase in average
interest-earning assets from period to period and, to a lesser extent, a 118
basis point increase in the weighted average yield on such assets. The increase
in interest income was offset in part by a $20.4 million or 58.7% increase in
interest expense due to a $560.7 million or 49.4% increase in average
interest-bearing liabilities, primarily certificates of deposit and subordinated
debentures, and, to a lesser extent, a 38 basis point increase in the weighted
average rate paid on interest-bearing liabilities.
The increase in interest income during the six months ended June 30, 1996,
as compared to the comparable period in the prior year, reflects substantial
increases in the average balances of the discounted loan portfolio and the loan
portfolio as a result of the Company's increased emphasis on multi-family
residential and commercial real estate loans in recent periods, as well as an
increase in the average balance of loans available for sale as a result of the
Company's recent emphasis on single-family residential loans to non-conforming
borrowers. The Company's increased emphasis on multi-family residential and
commercial real estate loans also was a significant factor in the increase in
the weighted average yields on the discounted loan portfolio and the loan
portfolio during the six months ended June 30, 1996, as compared to the
23
<PAGE>
comparable period in the prior year, which in the case of the loan portfolio was
enhanced during 1996 by $2.1 million of fees earned in connection with the
repayment of hotel loans. See "Business--Lending Activities."
The average balance of the Company's interest-bearing liabilities increased
substantially during the six months ended June 30, 1996, as compared to the
comparable period in the prior year, as a result of a $450.2 million or 45.0%
increase in the average balance of certificates of deposit and a $91.9 million
or
288.4% increase in the average balance of subordinated debentures and other
interest-bearing obligations, which reflect the Company's continued reliance on
brokered and other wholesale certificates of deposit as a source of funds and
the Bank's issuance of the Debentures in mid-1995, respectively.
1995 VERSUS 1994
The Company's net interest income decreased by $15.6 million or 22.7% during
1995 as a result of a $21.5 million or 34.3% increase in interest expense, which
was primarily attributable to the Company's use of brokered and other wholesale
deposits as a principal source of funds following the branch sale in 1994. The
Company believes that the increase in interest expense in 1995 was substantially
offset by the decrease in non-interest expense during this period as a result of
the branch sales at the end of 1995 and 1994. The Company's interest income
increased by $5.8 million or 4.4% during 1995, but was adversely affected by a
decrease in the average balance of interest-earning assets during the period as
a result of the branch sales. The Company's net interest margin decreased from
4.75% during 1994 to 4.54% during 1995.
The weighted average yield on interest-earning assets increased from 9.07%
in 1994 to 11.72% in 1995 primarily as a result of an increase in the weighted
average yield on the Company's loan portfolio and discounted loan portfolio. The
weighted average yield on the Company's loan portfolios increased during 1995
because commercial real estate loans, which have higher interest rates than
single-family residential loans, comprised a significantly larger proportion of
such portfolios during this period. Average interest-earning assets decreased by
$278.5 million or 19.2% during 1995 as increases in the outstanding balances of
the Company's loan portfolios were more than offset by decreases in the average
balances of all other categories of interest-earning assets as a result of the
sales of branch offices at the end of 1995 and 1994.
The weighted average rate paid on interest-bearing liabilities increased
from 4.20% in 1994 to 6.47% in 1995 as a result of the Company's increased
utilization of brokered and other wholesale deposits, as noted above. Average
interest-bearing liabilities decreased by $190.5 million or 12.8% in 1995 as
increases in the average balances of certificates of deposit and subordinated
debentures and other interest-bearing obligations, due to the Bank's issuance of
$100 million principal amount of Debentures in June 1995, were offset by
decreases in the average balances of all other categories of interest-bearing
liabilities.
1994 VERSUS 1993
The Company's net interest income increased by $25.2 million or 57.9% during
1994 as a result of a $52.5 million or 66.6% increase in interest income, which
was primarily attributable to substantial growth in the Company's discounted
loan portfolio and the Company's multi-family residential lending activities.
The Company's net interest margin increased from 4.30% in 1993 to 4.75% in 1994.
The weighted average yield on the Company's interest-earning assets
increased to 9.07% in 1994 from 7.79% in 1993 as a result of several factors,
including a higher interest rate environment, the commencement of the
acquisition of discounted multi-family residential and commercial real estate
loans and substantial multi-family residential lending activities, the effects
of the latter of which were reflected in interest income on loans available for
sale and, as a result of the Company's securitization of its multi-family
residential loans, interest income on securities available for sale. The
weighted average yield on the Company's interest-earning assets also increased
in 1994 because, effective January 1, 1994, the Company ceased recognizing a
portion of the fees received in connection with the acquisition of tax residuals
immediately into non-interest income and began to recognize all fees received on
a level-yield basis as interest income over the expected life of that portion of
the deferred tax asset which relates to tax residuals. See "--Results of
Operations--
24
<PAGE>
Non-Interest Income" below. Deferred fees accreted into interest income on tax
residuals amounted to $5.7 million during 1994, as compared to $2.6 million in
1993, and significantly increased the weighted average yield on "investment
securities and other" during this period.
The weighted average rate paid on the Company's interest-bearing liabilities
increased to 4.20% in 1994 from 3.74% in 1993, reflecting the increasing
interest rate environment and increased utilization of brokered certificates of
deposit. The average rates paid by the Company on its reverse repurchase
agreements decreased from 4.77% in 1993 to 4.09% in 1994 as a result of interest
rate exchange agreements intended to hedge the cost of such agreements.
Exclusive of the effects of such interest rate exchange agreements, the weighted
average rate on reverse repurchase agreements was 3.56% and 3.98% during 1993
and 1994, respectively. See Note 15 to the Consolidated Financial Statements.
PROVISIONS FOR LOAN LOSSES. Provisions for losses on loans are charged to
operations to maintain an allowance for losses on each of the loan portfolio and
the discounted loan portfolio at a level which management considers adequate
based upon an evaluation of known and inherent risks in such loan portfolios.
Management's periodic evaluation is based upon an analysis of each of the
discounted loan portfolio and the loan portfolio, historical loss experience,
current economic conditions and other relevant factors.
Prior to the six months ended June 30, 1996, provisions for losses on loans
were not established in connection with the discounted loan portfolio because
adjustments to reduce the carrying value of discounted loans to the lower of
amortized cost or the fair market value of the properties securing the loans
discounted at the effective interest rate, which amounted to $5.0 million during
1995, were recorded in interest income on discounted loans. Moreover, because
discounted loans generally are acquired at discounts from both the stated value
of the loans and the values of the underlying collateral, management of the
Company did not believe that it was necessary to maintain an allowance for loan
losses for the discounted loan portfolio. As a result of discussions between the
Bank and the OTS following an examination of the Bank by the OTS, the Company
changed this policy, which resulted in the establishment of a $9.5 million
provision for losses on the discounted loan portfolio during the six months
ended June 30, 1996. In addition, beginning in 1996 the Company has recorded all
charge-offs on the discounted loan portfolio against the allowance for losses on
discounted loans. During the six months ended June 30, 1996, the Company also
established a $1.1 million provision for losses related to its loan portfolio,
which was primarily general in nature. Based on the types of lending activities
currently emphasized by the Company, the Company anticipates that in the future
it will establish provisions for loan losses on each of its loan portfolios on a
quarterly basis.
Provisions for loan losses relating to the loan portfolio amounted to $1.1
million in 1995 and reflect both the substantial increase in the amount and the
change in the type of loans in the Company's loan portfolio in 1995 and the
Company's policy to maintain reserves based, among other factors, on the level
of its classified assets. See "Business--Lending Activities" and "-Asset
Quality." Provisions for losses on loans were not deemed necessary in 1994 and
1993 in light of the relatively small size of the loan portfolio, the
composition of the loan portfolio, which was primarily single-family residential
loans to non-conforming borrowers, the level of the allowance for loan losses
and management's assessment of the credit risks inherent in such portfolio.
Although management utilizes its best judgment in providing for possible
loan losses, changing economic and business conditions, fluctuations in local
markets for real estate, future changes in nonperforming asset trends, large
upward movements in market interest rates or other factors could affect the
Company's future provisions for loan losses. In addition, as noted above, the
OTS, as an integral part of its examination process, periodically reviews the
adequacy of the Bank's allowances for losses on loans and discounted loans and
such agency may require the Company to recognize changes to such allowances for
losses based on its judgment about information available to it at the time of
examination.
NON-INTEREST INCOME. Non-interest income increased by $2.4 million or 27.2%
during the six months ended June 30, 1996, as compared to the comparable period
in the prior year. Exclusive of the $5.4 million and $62.6 million gains from
the sale of branch offices in 1995 and 1994, respectively, non-interest income
25
<PAGE>
increased by $6.8 million or 35.7% in 1995 and decreased by $16.9 million or
47.1% in 1994. The increase in non-interest income during the six months ended
June 30, 1996, as compared to the comparable period in the prior year, was
primarily attributable to gains from the sale of interest-earning assets, which
more than offset a loss on real estate owned, net due to valuation adjustments
related to real estate owned, and a decrease in servicing fees and other charges
due to a write-down of mortgage servicing rights. The increase in non-interest
income in 1995 was primarily attributable to income on real estate owned and
gains from the sale of interest-earning assets, and the decrease in non-interest
income in 1994 was primarily attributable to a decrease in fees on financing
transactions, as discussed below, and, to a lesser extent, a decrease in gains
from the sale of interest-earning assets.
The following table sets forth the principal components of the Company's
non-interest income during the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Servicing fees and other charges............................ $ 787 $ 1,805 $ 2,870 $ 4,786 $ 3,800
Gains on sales of interest-earning assets, net.............. 9,601 3,356 6,955 5,727 8,386
Fees on financing transactions.............................. -- -- -- -- 15,340
Gain on sale of subsidiary's stock.......................... -- -- -- -- 3,835
Income (loss) on real estate owned, net..................... (1,028) 2,558 9,540 5,995 (1,158)
Gain on sale of hotel....................................... -- -- 4,658 -- --
Other income................................................ 1,996 1,208 1,727 2,467 5,669
--------- --------- --------- --------- ---------
Subtotal................................................ 11,356 8,927 25,750 18,975 35,872
Gain from sale of branch offices............................ -- -- 5,430 62,600 --
--------- --------- --------- --------- ---------
Total................................................... $ 11,356 $ 8,927 $ 31,180 $ 81,575 $ 35,872
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Servicing fees and other charges decreased during the six months ended June
30, 1996, as compared to the comparable period in the prior year, because in the
six months ended June 30, 1995 the Company received $783,000 of servicing fees
from the purchaser of the branch offices sold at the end of 1994 for servicing
deposits subsequent to the sale but prior to their effective transfer and no
such fees were received during the six months ended June 30, 1996. In addition,
during the six months ended June 30, 1996 the Company recorded a $928,000
valuation adjustment to mortgage servicing rights which were acquired by the
Company in 1995 in connection with its acquisition of the right to service all
of the loans which backed a REMIC in which the Company acquired a subordinate
interest. The valuation adjustment to mortgage servicing rights was due to a
significant increase in prepayments of the underlying loans due primarily to
refinancings, which resulted in a decrease in the number of underlying loans
(which consist primarily of jumbo adjustable-rate loans) from 1,000 to 550.
Mortgage servicing rights, net, amounted to $2.7 million at June 30, 1996. The
foregoing effects on servicing fees and other charges during the six months
ended June 30, 1996 more than offset $1.0 million of loan servicing fees earned
by the Bank from the joint venture which acquired discounted single-family
residential loans from HUD in April 1996. Servicing fees and other charges
decreased in 1995 primarily as a result of a $2.3 million decrease in
deposit-related fees, which decreased as a result of the branch sales at the end
of 1995 and 1994, and a $121,000 decrease in loan fees, primarily as a result of
a decrease in late charges on loans, which was offset in part by a $783,000
servicing fee received by the Company from the purchaser of the branch offices
sold at the end of 1994 for servicing deposits subsequent to the sale but prior
to their effective transfer. Servicing fees and other charges increased in 1994
primarily as a result of a $1.0 million increase in deposit-related fees as a
result of the inclusion of Old Berkeley's deposit base for all of 1994.
26
<PAGE>
Net gains on sales of interest-earning assets during the six months ended
June 30, 1996 were primarily comprised of $6.8 million of gains on the sale of
single-family residential loans to non-conforming borrowers available for sale
and $5.3 million of gains on the sale of performing single-family residential
loans in the Company's discounted loan portfolio, which were offset in part by a
$1.6 million adjustment to record delinquent single-family residential loans to
non-conforming borrowers available for sale to the lower of cost or market and a
$748,000 net loss on the sale of securities available for sale. Net gains on
sales of interest-earning assets in 1995 were primarily comprised of a $6.0
million gain from the sale of performing single-family residential loans in the
Company's discounted loan portfolio and a $1.6 million gain from the
securitization of $83.9 million of multi-family residential loans and subsequent
sale of the FNMA mortgage-backed securities backed by such loans, net of related
hedges. Net gains on sales of interest-earning assets in 1994 were primarily
comprised of $7.2 million of gains from the sale of multi-family residential
loans and mortgage-backed securities, net of related hedges, $1.8 million of
gains from trading activities, $890,000 of gains from the sale of performing
single-family residential loans in the Company's discounted loan portfolio and
$2.1 million of gains from the sale of timeshare and other consumer loans, which
more than offset $6.3 million of losses from the sale of mortgage-backed and
related securities backed by single-family residential loans, net of related
hedges. Net gains on sales of interest-earning assets in 1993 were primarily
comprised of $3.9 million and $773,000 of gains from the sale of discounted
loans and other loans, respectively, and a $2.3 million gain from the sale of
mortgage-backed and related securities.
Through 1993, the Company recorded a portion of the fees received by it in
connection with the acquisition of tax residuals as fees on financing
transactions. Effective January 1, 1994, the Company ceased recognizing a
portion of the fees received upon acquisition of tax residuals immediately into
income and began to defer all fees received and recognize such fees in interest
income on a level yield basis over the expected life of that portion of the
deferred tax asset which relates to tax residuals. See "Taxation--Federal
Taxation--Tax Residuals."
The $3.8 million gain on sale of subsidiary's stock in 1993 was recorded in
connection with the Company's sale of all of the stock of two subsidiaries which
were engaged in the private mortgage insurance business. For additional
information relating to this transaction, see Note 2 to the Consolidated
Financial Statements.
The following table sets forth information relating to the Company's income
(loss) on real estate owned, net during the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- --------------------------------
1996 1995 1995 1994 1993
--------- --------- ---------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Gains on sales............................................. $ 7,778 $ 9,137 $ 19,006 $ 21,308 $ 2,541
Provision for losses in fair value......................... (9,788) (5,035) (10,510) (9,074) (2,980)
Carrying costs, net of rental income....................... 982 (1,544) 1,044 (6,239) (719)
--------- --------- ---------- --------- ---------
Income (loss) on real estate owned, net.................. $ (1,028) $ 2,558 $ 9,540 $ 5,995 $ (1,158)
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
</TABLE>
Income (loss) on real estate owned, net primarily relates to real estate
owned acquired by foreclosure or deed-in-lieu thereof on loans in the Company's
discounted loan portfolio. The provision for losses in fair value on real estate
owned during the six months ended June 30, 1996 included $3.8 million which was
established as a result of discussions between the Bank and the OTS following an
examination of the Bank by the OTS. For additional information relating to the
Company's real estate owned, see "Business--Asset Quality--Real Estate Owned."
In October 1995, the Company sold one of the two hotels owned by the Company
for a gain of $4.7 million.
Other income increased during the six months ended June 30, 1996, as
compared to the comparable period in 1995, as a result of a $990,000 gain from
the sale of low-income housing tax credit interests and the Company's receipt of
an additional premium of $335,000 which was earned in accordance with the
original
27
<PAGE>
agreement to sell 23 branch offices at the end of 1994. See
"Business--Investment Activities--Investments in Low-Income Housing Tax Credit
Interests." Other income decreased in 1995 primarily because other income in
1994 included $627,000 of servicing fees received in connection with the
servicing of the private mortgage insurance business of subsidiaries of
Investors Mortgage Insurance Holding Company ("IMI"), which were sold in 1993,
and $858,000 of fees received by Ocwen Asset Management, Inc. ("OAM"), a
subsidiary of the Company which has managed mortgage-backed and related
securities as a discretionary asset manager for an unaffiliated party since May
1992. These decreases were partially offset by a $1.0 million litigation
settlement received from a broker-dealer relating to a tax residual transaction.
Other income decreased in 1994 primarily because other income in 1993 included
$1.7 million of insurance premiums received in connection with the private
mortgage insurance business of subsidiaries of IMI and a decrease of $1.2
million of fees received by OAM. At June 30, 1996, OAM had under management
approximately $37.6 million of loans and mortgage related securities for the
unaffiliated account.
The Company realized a $5.4 million gain from the sale of two branch offices
and $111.7 million of related deposits at the end of 1995 and a $62.6 million
gain from the sale of 23 branch offices and $909.3 million of related deposits
at the end of 1994. For a breakdown of the components of the gains from these
branch sales, see Note 2 to the Consolidated Financial Statements.
NON-INTEREST EXPENSE. Non-interest expense increased by $3.7 million or
16.7% during the six months ended June 30, 1996, as compared to the comparable
period in the prior year, decreased by $23.3 million or 33.8% during 1995 and
increased by $27.0 million or 64.5% during 1994. The increase in non-interest
expense during the six months ended June 30, 1996, as compared to the comparable
period in the prior year, was primarily attributable to increases in
compensation and employee benefits. The decrease in non-interest expense in 1995
reflects the sale of 23 of the Company's branch offices at the end of 1994 and,
to a lesser extent, the sale of two of the Company's other branch offices at the
end of 1995. The increase in non-interest expense in 1994 was attributable in
part to the inclusion of the operations of Old Berkeley, which was acquired in
mid-1993, in the operations of the Company for all of 1994, increased profit
sharing expense as a result of the gain from the sale of branch offices in 1994
and the substantial expansion of certain of the Company's business lines,
including its discounted loan acquisition and resolution activities and its
multi-family residential lending activities.
The following table sets forth the principal components of the Company's
non-interest expense during the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Compensation and employee benefits......................... $ 14,562 $ 10,464 $ 23,787 $ 42,395 $ 23,507
Occupancy and equipment.................................... 4,227 4,795 8,360 11,537 9,106
Amortization of goodwill................................... -- -- -- 1,346 1,301
Hotel operations expense (income), net..................... 57 264 337 (723) (710)
Other operating expenses................................... 6,703 6,369 13,089 14,303 8,655
--------- --------- --------- --------- ---------
Total.................................................. $ 25,549 $ 21,892 $ 45,573 $ 68,858 $ 41,859
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The increase in compensation and employee benefits during the six months
ended June 30, 1996, as compared to the comparable period in the prior year, was
primarily attributable to a $2.4 million increase in the accrual for profit
sharing expense, as well as normal salary adjustments. The decrease in
compensation and employee benefits in 1995 reflected a decrease in the average
number of full-time equivalent employees from 548 in 1994 to 344 in 1995 as a
result of the sales of branch offices and other reduction in work force
measures, as well as a $10.7 million decrease in profit sharing expense. The
increase in compensation and employee benefits in 1994 was primarily
attributable to increases in salary, the largest component of compensation and
employee benefits, which increased by $8.3 million or 78% during this period.
This increase was primarily attributable to an increase in the average number of
full-time equivalent employees from 362 in 1993 to 548 in 1994, reflecting the
inclusion of the operations of Old Berkeley in the Company's
28
<PAGE>
operations for the entire year in 1994 and the expansion of new business
activities, particularly discounted loan acquisition and resolution activities
and multi-family residential lending activities. Compensation and employee
benefits also increased in 1994 as a result of a $10.9 million increase in
profit sharing expense, the majority of which was attributable to the large gain
recorded in connection with the sale of branch offices at the end of 1994.
The decrease in occupancy and equipment expense during the six months ended
June 30, 1996, as compared to the comparable period in the prior year, was
primarily attributable to expenses incurred in the first half of 1995 to
relocate the Company's executive offices. The decrease in occupancy and
equipment expense in 1995 reflected the sale of branch offices at the end of
1994 and lower occupancy costs as a result of the Company's move to new
executive offices in 1995. The increase in occupancy and equipment expense in
1994 was primarily attributable to the acquisition of Old Berkeley in mid-1993,
the expansion of the executive offices of the Company to accommodate increases
in personnel and the increased use of technology to support the Company's
activities.
The changes in hotel operations expense (income), net in recent periods
generally reflect the Company's acquisition of two hotels for investment in
mid-1993 and the significant renovation and sale of one of these hotels in 1995.
Other expenses increased during the six months ended June 30, 1996, as
compared to the comparable period in the prior year, primarily as a result of a
$596,000 increase in FDIC insurance expense, a $249,000 increase in loan fees, a
$238,000 increase in professional fees and a $183,000 increase in amortized
costs related to the Debentures, which more than offset decreases in various
other expenses. Other expenses decreased in 1995 primarily as a result of a
$641,000 decrease in travel and lodging expenses, a $337,000 decrease in
marketing expenses and a $683,000 decrease in miscellaneous other expenses,
which were offset in part by a $1.1 million increase in loan related expenses.
Other expenses increased in 1994 primarily as a result of a $965,000 increase in
FDIC insurance expense, a $945,000 increase in marketing expense, a $572,000
increase in travel and lodging expense and a $1.4 million increase in
miscellaneous other expenses. Many of these expenses were directly attributable
to the inclusion of a full year of operations of Old Berkeley in the Company's
operations in 1994 and the expansion of the Company's business lines. For a
detailed breakout of other operating expenses, see Note 23 to the Consolidated
Financial Statements.
EQUITY IN EARNINGS OF JOINT VENTURE. Equity in earnings of joint venture
relates to the recently-formed joint venture to acquire discounted single-family
residential loans from HUD in April 1996. The Company's $1.1 million of earnings
from this joint venture during the six months ended June 30, 1996 consisted of
50% of the joint venture's net income during this period plus 50% of the loan
servicing fee received by the Bank from the joint venture during this period.
(The remainder of the loan servicing fee received by the Bank from the joint
venture during this period has been included in servicing fees and other
charges, as discussed above.) Income of the joint venture is primarily
attributable to interest on discounted loans, which had an annualized weighted
average yield of 9.43% during the period from the date of acquisition by the
joint venture to June 30, 1996. See "Business--Investment in Joint Venture" and
Note 6 to the Interim Consolidated Financial Statements.
INCOME TAX EXPENSE. Income tax expense amounted to $1.9 million and
$760,000 during the six months ended June 30, 1996 and 1995, respectively, and
$4.6 million, $29.7 million and $10.3 million during 1995, 1994 and 1993,
respectively. The Company's effective tax rate amounted to 11.3% and 6.2% during
the six months ended June 30, 1996 and 1995, respectively, and to 12.1%, 36.4%
and 27.4% during 1995, 1994 and 1993, respectively. The Company's low effective
tax rates in recent periods were primarily attributable to the benefits of tax
credits and tax benefits resulting from the Company's investment in low-income
housing tax credit interests, which amounted to $4.1 million and $3.8 million
during the six months ended June 30, 1996 and 1995, respectively, and $7.7
million, $5.3 million and $2.0 million during the years ended December 31, 1995,
1994 and 1993, respectively. Exclusive of such amounts, the Company's effective
tax rate amounted to 35.3% and 37.1% during the six months ended June 30, 1996
and 1995, respectively, and 32.6%, 43.1% and 32.8% during 1995, 1994 and 1993,
respectively. The increase in the Company's effective tax rate in 1994 was
primarily attributable to the write-off of the remaining goodwill in connection
with the sale of branch offices
29
<PAGE>
which was not deductible for tax purposes, and an increase in state taxes, which
more than offset the benefits of tax credits resulting from the Company's
investment in low-income housing tax credit interests. For additional
information regarding the Company's effective tax rates and information
regarding net operating loss carryforwards of the Company resulting from the
manner in which tax residuals are treated for federal income tax purposes, see
Note 19 to the Consolidated Financial Statements.
DISCONTINUED OPERATIONS. In September 1995, the Company announced its
decision to dispose of its automated banking division and related activities. As
a result of this decision, an after-tax loss on disposal of $3.2 million was
recorded, which consisted of a net loss of $2.0 million on the sale of assets
and a loss of $1.2 million (net of income of $1.2 million) incurred from related
operations until the sale and disposition, which was substantially completed at
December 31, 1995. Losses from the operations of the discontinued division prior
to discontinuance, net of tax, amounted to $3.1 million, $4.5 million, $4.5
million and $2.3 million during the six months ended June 30, 1995 and the years
ended December 31, 1995, 1994 and 1993, respectively.
The Company's automated banking division generally emphasized the
installation of automated teller machines and automated banking centers in a
wide variety of locations which were not associated with branch offices of the
Company, such as colleges and universities, business establishments and other
high-density locations, as well as the development and installation of an
automated multi-application card system for the distribution of financial
products and services to members of a college or university population. The
discontinuance of the operations of the automated banking division did not
adversely affect the revenues of the Company or otherwise have a material
adverse effect on its financial condition, capital resources or liquidity.
The Company's statements of operations have been restated for all periods
presented to reflect the discontinuance of the above-described operations. See
Note 3 to the Consolidated Financial Statements.
EXTRAORDINARY GAIN. In October and December 1993, the Company purchased at
a discount loans which had been made by third parties to Berkeley Realty Group,
Inc. ("BRG"), a wholly-owned subsidiary of the Company which was acquired in
connection with the acquisition of Old Berkeley. BRG was engaged in real estate
development and residential construction activities prior to its acquisition by
the Company and was a mortgagor on loans collateralized by real estate held for
development. The loans of BRG purchased by the Company and the related discount
totalled $9.0 million and $2.4 million, respectively, which resulted in an
extraordinary gain of $1.5 million after deduction of $828,000 for applicable
income taxes.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE. In February 1992,
the Financial Accounting Standards Board ("FASB") issued SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 requires reporting entities to take
into account changes in tax rates when valuing the deferred income tax amounts
recorded on the balance sheet. SFAS No. 109 also requires that deferred taxes be
provided for all temporary differences between financial statement amounts and
the tax basis of assets and liabilities. The Company adopted SFAS No. 109 on a
prospective basis effective January 1, 1993, and recorded a $1.3 million charge
in connection therewith.
30
<PAGE>
CHANGES IN FINANCIAL CONDITION
The following table sets forth certain information relating to the Company's
assets and liabilities at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------
1996 1995 1994
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Assets:
Securities available for sale......................................... $ 263,199 $ 337,480 $ 187,717
Loans available for sale.............................................. 84,078 251,790 102,293
Investment securities, net............................................ 8,902 18,665 17,011
Mortgage-related securities held for investment....................... -- -- 91,917
Loan portfolio, net................................................... 312,576 295,605 57,045
Discounted loan portfolio, net........................................ 594,634 669,771 529,460
Investments in low-income housing tax credit interests................ 92,273 81,362 49,442
Investment in joint venture........................................... 63,404 -- --
Real estate owned, net................................................ 133,604 166,556 96,667
Premises and equipment, net........................................... 28,750 25,359 38,309
Deferred tax asset.................................................... 17,981 22,263 20,695
Total assets.......................................................... 1,899,308 1,973,590 1,266,403
Liabilities:
Deposits.............................................................. 1,502,175 1,501,646 1,023,268
FHLB advances......................................................... 70,399 70,399 5,399
Reverse repurchase agreements......................................... -- 84,761 --
Subordinated debentures and other interest-bearing obligations........ 115,703 117,054 20,111
Total liabilities..................................................... 1,744,570 1,834,043 1,113,020
Stockholders' equity.................................................... 154,738 139,547 153,383
</TABLE>
SECURITIES AVAILABLE FOR SALE. Securities available for sale decreased by
$74.3 million during the six months ended June 30, 1996 primarily as a result of
the sale and repayment of $52.9 million of CMOs. The proceeds from these sales
and repayments, as well as the proceeds from the sale of loans available for
sale, as discussed below, contributed to the $194.4 million increase in
interest-bearing deposits, federal funds sold and repurchase agreements during
the six months ended June 30, 1996. Securities available for sale increased by
$149.8 million during 1995 primarily as a result of a $115.7 million increase in
the Company's investment in IO strips and PO strips and a $48.2 million increase
in the Company's investment in subordinated classes of mortgage-related
securities. From time to time the Company invests in these and other types of
mortgage-related securities based on its capital position, interest rate risk
profile, the market for such securities and other factors. For additional
information relating to these investments, see "Business-- Investment
Activities--Mortgage-Backed and Related Securities" and Note 5 to the
Consolidated Financial Statements. The Company's investment in CMOs decreased by
$79.2 million during 1995 prior to the transfer of $73.7 million of
mortgage-related securities held by the Company for investment to available for
sale pursuant to a guide to the implementation of SFAS No. 115 issued by the
FASB in November 1995. See Note 1 to the Consolidated Financial Statements.
LOANS AVAILABLE FOR SALE. Loans available for sale decreased by $167.7
million or 66.6% during the six months ended June 30, 1996 primarily because
during this period the Company sold $285.2 million of single-family residential
loans to non-conforming borrowers, which substantially offset the purchase and
origination of $132.4 million of such loans. Loans available for sale increased
by $149.5 million during 1995 primarily as a result of the Company's successful
implementation of a program to acquire single-family residential loans to
non-conforming borrowers, which resulted in the acquisition of $240.3 million of
single-family residential loans to non-conforming borrowers during the year. The
increase in single-family residential loans more than offset a $55.2 million
decrease in multi-family residential loans available for sale during
31
<PAGE>
1995, which was due to the Company's exchange of $83.9 million of multi-family
residential loans classified as available for sale for FNMA securities backed by
such loans, all of which were subsequently sold by the Company. See
"Business--Lending Activities."
At June 30, 1996, loans available for sale which were past due 90 days or
more ("non-performing loans") amounted to $15.6 million or 18.5% of total loans
available for sale, as compared to $7.9 million or 3.2% at December 31, 1995. At
June 30, 1996 and December 31, 1995, non-performing loans available for sale
consisted primarily of $15.4 million and $7.8 million of single-family
residential loans to non-conforming borrowers, reflecting the higher risks
associated with such loans and the recent sales of performing single-family
residential loans to non-conforming borrowers available for sale. During the six
months ended June 30, 1996, the Company recorded a $1.6 million reduction in the
carrying value of these loans to record them at the lower of cost or fair value.
INVESTMENT SECURITIES. Investment securities, which are held by the Company
for investment purposes, decreased by $9.8 million during the six months ended
June 30, 1996 due to the maturity of $10.0 million of U.S. Government
securities. At June 30, 1996, investment securities consisted almost entirely of
required holdings of FHLB stock.
MORTGAGE-RELATED SECURITIES HELD FOR INVESTMENT. The Company did not have
any mortgage-related securities held for investment at June 30, 1996 or at
December 31, 1995 because of its decision at the end of 1995 to reclassify $73.7
million of securities in this portfolio to available for sale.
LOAN PORTFOLIO, NET. The Company's net loan portfolio increased by $17.0
million during the six months ended June 30, 1996 primarily as a result of
increased investment in multi-family residential loans, particularly
construction loans, and commercial real estate loans secured by hotels and
office buildings. The Company's net and gross loan portfolio increased by $238.6
million and $281.5 million, respectively, during 1995 primarily as a result of
the Company's multi-family residential and commercial real estate lending
activities. From December 31, 1994 to December 31, 1995, multi-family
residential loans, including construction loans, increased by $47.2 million, and
commercial real estate and land loans increased by $188.5 million, including a
$106.1 million and a $61.3 million increase in loans secured by hotels and
office buildings, respectively. In addition to the increases in multi-family
residential and commercial real estate loans, single-family residential loans
increased by $44.0 during 1995, primarily as a result of the Company's purchase
of a pool of loans which were primarily secured by properties located in the
Company's market area in northern New Jersey. See "Business--Lending
Activities."
Non-performing loans in the Company's loan portfolio amounted to $2.5
million or 0.8% of total loans at June 30, 1996, as compared to $3.9 million or
1.27% of total loans at December 31, 1995 and $2.7 million or 4.35% of total
loans at December 31, 1994. At June 30, 1996, non-performing loans consisted
primarily of $2.3 million of single-family residential loans. The Company's
allowance for losses on its loan portfolio amounted to 0.9%, 0.7% and 1.8% of
total loans at June 30, 1996 and December 31, 1995 and 1994, respectively, and
115.2%, 50.5% and 40.3% of nonperforming loans at the same dates, respectively.
See "Business--Asset Quality" and Note 8 to the Consolidated Financial
Statements. The foregoing amounts and ratios do not include non-performing loans
in the discounted loan portfolio, as discussed under "--Discounted Loan
Portfolio" below, or non-performing loans available for sale, as discussed under
"--Loans Available for Sale" above.
DISCOUNTED LOAN PORTFOLIO, NET. The Company's net discounted loan portfolio
decreased by $75.1 million during the six months ended June 30, 1996 because
discounted loan acquisitions having an unpaid principal balance of $161.8
million were more than offset by resolutions and repayments, loans transferred
to real estate owned and sales of discounted loans. Acquisitions of discounted
loans during this period consisted primarily of commercial real estate loans and
do not reflect the Company's acquisition of a 50% interest in a joint venture
which acquired discounted single-family residential loans from HUD in April
1996. See "--Investment in Joint Venture" below. The Company's net discounted
loan portfolio increased by $140.3 million during 1995 primarily as a result of
the acquisition of $374.9 million gross principal amount of discounted
commercial real estate loans. These acquisitions more than offset a $124.0
million decrease in gross principal amount of discounted multi-family
residential loans during 1995, which was due to decreased
32
<PAGE>
acquisitions and substantial resolutions of such loans during this period, as
well as a $5.7 million decrease in gross principal amount of discounted
single-family residential loans. Discounted loans having an unpaid principal
balance of $791.2 million were acquired during 1995, as compared to $826.4
million during 1994. See "Business--Discounted Loan Acquisition and Resolution
Activities" and Notes 1 and 9 to the Consolidated Financial Statements.
In August 1996, the Company acquired discounted multi-family residential
loans with an unpaid principal balance of $225 million from HUD and discounted
commercial real estate loans with an unpaid principal balance of $150 million
from another third party. Together with an additional $35 million gross
principal amount of discounted loans acquired during July and August 1996 from a
variety of other sources, these acquisitions bring the Company's total
acquisitions of gross discounted loans through the eight months ended August 31,
1996 to $572 million (exclusive of interests in loans acquired as a result of
the Company's investment in joint venture). In addition to the foregoing, in
September 1996 the Company was notified that it and a co-investor were the
successful bidder to purchase 4,591 single-family residential loans with an
aggregate unpaid principal balance of $258.8 million auctioned by HUD. Upon
closing of this transaction in late September 1996, the Company will acquire
$113.3 million of such loans and the right to service all of such loans.
At June 30, 1996, discounted loans which were performing in accordance with
original or modified terms amounted to $500.7 million or 60.3% of the gross
discounted loan portfolio, as compared to $351.6 million or 37.3% of the gross
discounted loan portfolio at December 31, 1995 and $113.8 million or 14.5% of
the gross discounted loan portfolio at December 31, 1994. Management of the
Company generally considers the discounted loan portfolio to be performing in
accordance with the expectations and assumptions employed by the Company in
acquiring and managing such portfolio. The Company's allowance for losses on its
discounted loan portfolio amounted to 1.6% of the net discounted loan portfolio
at June 30, 1996. See "Business--Asset Quality."
INVESTMENTS IN LOW-INCOME HOUSING TAX CREDIT INTERESTS. In 1993, the
Company commenced a multi-family residential lending program which includes
indirect investments in multi-family residential projects which have been
allocated low-income housing tax credits under Section 42 of the Code by a state
tax credit allocating agency. At June 30, 1996, the Company had $92.3 million of
investments in low-income housing tax credit interests, as compared to $81.4
million at December 31, 1995.
Investments by the Company in low-income housing tax credit interests made
on or after May 18, 1995 in which the Company invests solely as a limited
partner, which amounted to $8.7 million at June 30, 1996, are accounted for
using the equity method in accordance with the consensus of the Emerging Issues
Task Force through issue number 94-1. Income attributable to such investments,
of which there was none in 1995 and $13,500 in the six months ended June 30,
1996, is recorded as non-interest income and the associated tax credits and tax
benefits result in a reduction to income tax expense. Limited partnership
investments made prior to May 18, 1995, which amounted to $57.6 million at June
30, 1996, are accounted for under the effective yield method as a reduction of
income tax expense. Low-income housing tax credit partnerships in which the
Company invests as both a limited and, through a subsidiary, a general partner
amounted to $22.5 million at June 30, 1996 and are presented on a consolidated
basis. See "Business--Investment Activities--Investments in Low-Income Housing
Tax Credit Interests" and Note 11 to the Consolidated Financial Statements.
INVESTMENT IN JOINT VENTURE. The $63.4 million investment in joint venture
at June 30, 1996 represented the Company's investment in a newly-formed company
in which the Company and a co-investor each have a 50% interest. The Company's
investment, along with the contribution of the Company's co-investor, enabled
this joint venture to purchase discounted single-family residential loans from
HUD in April 1996. These loans had a net balance of $559.4 million at June 30,
1996. See "Business--Investment in Joint Venture."
REAL ESTATE OWNED, NET. Real estate owned, net consists almost entirely of
properties acquired by foreclosure or deed-in-lieu thereof on loans in the
Company's discounted loan portfolio. Such properties amounted to $132.0 million
or 98.8% of total real estate owned at June 30, 1996 and consisted of $66.0
million, $37.4 million and $28.6 million of properties attributable to
single-family residential loans, multi-family
33
<PAGE>
residential loans and commercial real estate loans, respectively. Real estate
owned decreased by $33.0 million or 19.8% during the six months ended June 30,
1996 as a result of decreases in all categories of real estate owned
attributable to the discounted loan portfolio. The $69.9 million increase in the
Company's net real estate owned during 1995 was entirely attributable to
increases in real estate owned related to the Company's discounted loan
portfolio, which reflects the growth in the Company's discounted loan
acquisition and resolution activities in recent periods.
The Company actively manages its real estate owned. During the six months
ended June 30, 1996, the Company sold 508 properties of real estate owned
related to its discounted loan portfolio with a carrying value of $72.5 million.
During 1995, the Company sold 1,221 properties of real estate owned related to
its discounted loan portfolio with a carrying value of $138.5 million, as
compared to the sale of 1,386 and 347 properties of real estate owned related to
its discounted loan portfolio with carrying values of $111.7 million and $10.9
million during 1994 and 1993, respectively. See "Business--Asset Quality" and
Note 10 to the Consolidated Financial Statements.
PREMISES AND EQUIPMENT, NET. Premises and equipment, net, which consists of
premises and equipment related to the Company's hotel subsidiaries and premises
and equipment related to its other subsidiaries, decreased during 1995 primarily
as a result of the Company's sale of one of the two hotels acquired by it in
1993. Net premises and equipment related to the Company's other subsidiaries
also decreased during 1995 as a result of the Company's sale of two branch
offices and the disposition of its automated banking division during 1995, which
offset increased investment in leasehold improvements as a result of the
Company's move to new executive offices during this period. See
"Business--Offices" and Note 12 to the Consolidated Financial Statements.
DEPOSITS. Deposits increased by $478.4 million during 1995 primarily as a
result of brokered deposits obtained through national investment banking firms
which solicit deposits from their customers, which amounted to $1.12 billion at
December 31, 1995, as compared to $857.8 million at December 31, 1994. The
Company's deposits also increased during 1995 as a result of deposits obtained
through regional and local investment banking firms and the Company's direct
solicitation of institutional investors and high net worth individuals, which in
the aggregate amounted to $273.4 million at December 31, 1995; no such deposits
were outstanding at December 31, 1994. See "Business--Sources of
Funds--Deposits" and Note 13 to the Consolidated Financial Statements.
FHLB ADVANCES AND REVERSE REPURCHASE AGREEMENTS. FHLB advances and reverse
repurchase agreements decreased by $84.8 million during the six months ended
June 30, 1996 as a result of the repayment of reverse repurchase agreements.
FHLB advances and reverse repurchase agreements increased by $149.8 million in
the aggregate during 1995 because they are utilized as sources of funds from
time to time. See "Business--Sources of Funds--Borrowings" and Notes 14 and 15
to the Consolidated Financial Statements.
SUBORDINATED DEBENTURES AND OTHER INTEREST-BEARING
OBLIGATIONS. Subordinated debentures and other interest-bearing obligations
increased by $96.9 million during 1995 as a result of the Bank's issuance of
$100 million principal amount of Debentures in June 1995 and, to a lesser
extent, $7.6 million of notes which were privately issued to certain
stockholders of the Company. These increases more than offset a $10.7 million
decrease in hotel mortgages payable, which was primarily attributable to the
sale of one of the two hotels owned by the Company in 1995. See Note 16 to the
Consolidated Financial Statements.
DEFERRED TAX ASSET. At June 30, 1996, the Company had a net deferred tax
asset of $18.0 million. At the same date, the gross deferred tax asset amounted
to $37.6 million and consisted primarily of $16.1 million related to tax
residuals and deferred income thereon, $3.7 million related to accrued profit
sharing, $2.6 million of mark-to-market adjustments and reserves related to real
estate owned and $2.6 million of deferred interest expense on the discounted
loan portfolio, and the gross deferred tax liability amounted to $19.6 million
and consisted primarily of $6.5 million of bad debt reserves established for tax
purposes in excess of book reserves and $6.2 million of deferred interest income
on the discounted loan portfolio. At December 31, 1995, the Company had a net
deferred tax asset of $22.3 million. At the same date, the gross deferred tax
asset amounted to $30.6 million, of which $26.3 million related to tax residuals
and deferred
34
<PAGE>
income therein, and the gross deferred liability amounted to $9.6 million and
consisted primarily of $6.8 million of bad debt reserves established for tax
purposes in excess of book reserves and $2.4 million of deferred interest income
on the discounted loan portfolio.
As a result of the Company's earnings history, current tax position and
taxable income projections, management believes that the Company will generate
sufficient taxable income in future years to realize the deferred tax assets
which existed at June 30, 1996. In evaluating the expectation of sufficient
future taxable income, management considered future reversals of temporary
differences and available tax planning strategies that could be implemented, if
required. A valuation allowance was not required as of June 30, 1996 because it
was management's assessment that, based on available information, it is more
likely than not that all of the deferred tax asset will be realized. A valuation
allowance will be established in the future to the extent of a change in
management's assessment of the amount of the net deferred tax asset that is
expected to be realized. See Note 19 to the Consolidated Financial Statements.
STOCKHOLDERS' EQUITY. Stockholders' equity increased during the six months
ended June 30, 1996 primarily as a result of the Company's net income during the
period. Stockholders' equity decreased during 1995 primarily as a result of the
Company's repurchase of 8,815,060 shares of Common Stock at a price of $4.76 per
share, or an aggregate of $42.0 million, pursuant to an offer made to all
stockholders of the Company during 1995, which more than offset the Company's
$25.5 million of net income during 1995.
ASSET AND LIABILITY MANAGEMENT
Asset and liability management is concerned with the timing and magnitude of
the repricing of assets and liabilities. It is the objective of the Company to
attempt to control risks associated with interest rate movements. In general,
management's strategy is to match asset and liability balances within maturity
categories to limit the Company's exposure to earnings variations and variations
in the value of assets and liabilities as interest rates change over time. The
Company's asset and liability management strategy is formulated and monitored by
the Asset/Liability Committee, which is composed of directors and officers of
the Company and the Bank, in accordance with policies approved by the Board of
Directors of the Bank. The Asset/Liability Committee meets regularly to review,
among other things, the sensitivity of the Company's assets and liabilities to
interest rate changes, the book and market values of assets and liabilities,
unrealized gains and losses, including those attributable to hedging
transactions, purchase and sale activity, and maturities of investments and
borrowings. The Asset/Liability Committee also approves and establishes pricing
and funding decisions with respect to overall asset and liability composition.
The Asset/Liability Committee is authorized to utilize a wide variety of
off-balance sheet financial techniques to assist it in the management of
interest rate risk. These techniques include interest rate exchange agreements,
pursuant to which the parties exchange the difference between fixed-rate and
floating-rate interest payments on a specified principal amount (referred to as
the "notional amount") for a specified period without the exchange of the
underlying principal amount. Interest rate exchange agreements are utilized by
the Company to protect against the decrease in value of a fixed-rate asset or
the increase in borrowing cost from a short-term, fixed-rate liability, such as
reverse repurchase agreements, in an increasing interest rate environment.
Although the Company had no interest rate exchange agreements outstanding during
1996, interest rate exchange agreements had the effect of increasing the
Company's net interest income by $303,000 and $358,000 during the six months
ended June 30, 1995 and the year ended December 31, 1995, respectively, and
decreasing the Company's net interest income by $754,000 and $2.2 million during
1994 and 1993, respectively. For additional information see Note 17 to the
Consolidated Financial Statements.
In recent periods, the Company also entered into interest rate futures
contracts, which are commitments to either purchase or sell designated financial
instruments at a future date for a specified price and may be settled in cash or
through delivery. Eurodollar futures contracts have been sold by the Company to
hedge the repricing or maturity risk of certain adjustable-rate mortgage-backed
securities and short duration mortgage-related securities, and U.S. Treasury
futures contracts have been sold by the Company to offset declines in the market
value of its fixed-rate multi-family residential loans and certain fixed-rate
mortgage-backed and related securities available for sale in the event of an
increasing interest rate environment. At
35
<PAGE>
June 30, 1996, the Company had entered into Eurodollar futures (short) contracts
with an aggregate notional amount of $593.0 million and U.S. Treasury futures
(short) contracts with an aggregate notional amount of $306.6 million. Futures
contracts had the effect of decreasing the Company's net interest income by
$381,000 and $619,000 during the six months ended June 30, 1996 and the year
ended December 31, 1995, respectively, and increasing the Company's net interest
income by $7,000 and $650,000 during the six months ended June 30, 1995 and the
year ended December 31, 1994, respectively. Futures contracts had no effect on
the Company's net interest income in 1993. For additional information, see Note
17 to the Consolidated Financial Statements.
The Asset/Liability Committee's methods for evaluating interest rate risk
include an analysis of the Company's interest rate sensitivity "gap," which is
defined as the difference between interest-earning assets and interest-bearing
liabilities maturing or repricing within a given time period. A gap is
considered positive when the amount of interest-rate sensitive assets exceeds
the amount of interest-rate sensitive liabilities. A gap is considered negative
when the amount of interest-rate sensitive liabilities exceeds interest-rate
sensitive assets. During a period of rising interest rates, a negative gap would
tend to adversely affect net interest income, while a positive gap would tend to
result in an increase in net interest income. During a period of falling
interest rates, a negative gap would tend to result in an increase in net
interest income, while a positive gap would tend to affect net interest income
adversely. Because different types of assets and liabilities with the same or
similar maturities may react differently to changes in overall market rates or
conditions, changes in interest rates may affect net interest income positively
or negatively even if an institution were perfectly matched in each maturity
category.
The following table sets forth the estimated maturity or repricing of the
Company's interest-earning assets and interest-bearing liabilities at June 30,
1996. The amounts of assets and liabilities shown within a particular period
were determined in accordance with the contractual terms of the assets and
liabilities, except (i) adjustable-rate loans, performing discounted loans,
securities and FHLB advances are included in the period in which they are first
scheduled to adjust and not in the period in which they mature, (ii) fixed-rate
mortgage-related securities reflect estimated prepayments, which were estimated
based on analyses of broker estimates, the results of a prepayment model
utilized by the Company and empirical data, (iii) non-performing discounted
loans reflect the estimated timing of resolutions which result in repayment to
the Company, (iv) fixed-rate loans reflect scheduled contractual amortization,
with no estimated prepayments, (v) NOW and money market checking deposits and
savings deposits, which do not have contractual maturities, reflect estimated
levels of attrition, which are based on detailed studies of each such category
of deposit by the Company, and (vi) escrow deposits and other non-interest
bearing checking accounts, which amounted to $55.6 million at June 30, 1996, are
excluded. Management believes that these assumptions approximate actual
experience and considers them reasonable; however, the interest rate sensitivity
of the Company's assets and liabilities in the table could vary substantially if
different assumptions were used or actual experience differs from the historical
experience on which the assumptions are based.
36
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------------------------------------------------------
MORE THAN
WITHIN THREE FOUR TO ONE YEAR TO THREE YEARS
MONTHS TWELVE MONTHS THREE YEARS AND OVER TOTAL
------------ ------------- ----------- -------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Rate-Sensitive Assets:
Interest-earning cash................... $ 244,870 $ -- $ -- $ -- $ 244,870
Securities available for sale........... 14,870 55,427 66,383 126,519 263,199
Loans available for sale(1)............. 3,773 34,479 5,044 40,782 84,078
Investment securities, net.............. -- -- -- 8,902 8,902
Loan portfolio, net(1).................. 106,170 46,472 30,375 129,559 312,576
Discounted loan portfolio, net.......... 206,856 193,890 89,537 104,351 594,634
------------ ------------- ----------- -------------- ------------
Total rate-sensitive assets........... 576,539 330,268 191,339 410,113 1,508,259
------------ ------------- ----------- -------------- ------------
Rate-Sensitive Liabilities:
NOW and money market checking
deposits............................... 12,835 835 940 4,775 19,385
Savings deposits........................ 191 513 563 2,253 3,520
Certificates of deposit................. 247,620 525,400 302,963 347,684 1,423,667
------------ ------------- ----------- -------------- ------------
Total interest-bearing deposits....... 260,646 526,748 304,466 354,712 1,446,572
FHLB advances........................... 70,000 -- 399 -- 70,399
Subordinated notes and other
interest-bearing obligations........... -- 7,365 -- 108,338 115,703
------------ ------------- ----------- -------------- ------------
Total rate-sensitive liabilities...... 330,646 534,113 304,865 463,050 1,632,674
------------ ------------- ----------- -------------- ------------
Interest rate sensitivity gap before
off-balance sheet financial
instruments............................ 245,893 (203,845) (113,526) (52,937) (124,415)
Off-Balance Sheet Financial Instruments:
Futures contracts....................... 437,631 (108,126) (81,732) (247,773) --
------------ ------------- ----------- -------------- ------------
Interest rate sensitivity gap............. $ 683,524 $ (311,971) $(195,258) $ (300,710) $ (124,415)
------------ ------------- ----------- -------------- ------------
------------ ------------- ----------- -------------- ------------
Cumulative interest rate sensitivity
gap...................................... $ 683,524 $ 371,553 $ 176,295 $ (124,415)
------------ ------------- ----------- --------------
------------ ------------- ----------- --------------
Cumulative interest rate sensitivity gap
as a percentage of total rate-sensitive
assets................................... 45.32% 24.63% 11.69% (8.25)%
------------ ------------- ----------- --------------
------------ ------------- ----------- --------------
</TABLE>
- ------------------------
(1) Balances have not been reduced for non-performing loans.
The Company's rate-sensitive liabilities exceeded its rate-sensitive assets
at June 30, 1996 primarily because rate-sensitive assets do not include $92.3
million of investments in low-income housing tax credit interests, a $63.4
million investment in joint venture and $133.6 million of real estate owned.
Exclusive of futures contracts, the Company's cumulative one-year interest
rate sensitivity gap was $42.0 million or 2.8% of total rate-sensitive assets at
June 30, 1996. The Company's futures contracts generally are intended to
maintain the values of certain assets, primarily securities available for sale,
in increasing interest rate environments. Also included in off-balance sheet
financial instruments is $171.3 million of futures contracts related to the
Company's investment in a joint venture formed to acquire discounted loans.
Although interest rate sensitivity gap is a useful measurement and
contributes toward effective asset and liability management, it is difficult to
predict the effect of changing interest rates based solely on that measure. As a
result, and as required by OTS regulations, the Asset/Liability Committee also
regularly
37
<PAGE>
reviews interest rate risk by forecasting the impact of alternative interest
rate environments on net interest income and market value of portfolio equity
("MVPE"), which is defined as the net present value of an institution's existing
assets, liabilities and off-balance sheet instruments, and evaluating such
impacts against the maximum potential changes in net interest income and MVPE
that is authorized by the Board of Directors of the Bank. At June 30, 1996,
management estimates that the estimated percentage change in the Company's net
interest income over the ensuing four quarter period as a result of a 200 basis
point increase or decrease in interest rates would be an approximately 5.9%
increase or decrease, respectively. In addition, at June 30, 1996, management
estimates that the estimated percentage change in the Company's MVPE over the
ensuing four quarter period as a result of a 200 basis point increase or
decrease in interest rates would be an approximate 5.0% increase and 6.6%
decrease, respectively. The maximum potential changes in MVPE and net interest
income authorized by the Board of Directors of the Company in the event of a 200
basis point change in interest rates is 30% and, thus, the Company's asset and
liability position currently is in compliance with the policy adopted by its
Board of Directors. For a detailed presentation in this regard, see Note 18 to
the Consolidated Financial Statements.
Management of the Company believes that the assumptions used by it to
evaluate the vulnerability of the Company's operations to changes in interest
rates approximate actual experience and considers them reasonable; however, the
interest rate sensitivity of the Company's assets and liabilities and the
estimated effects of changes in interest rates on the Company's net interest
income and MVPE could vary substantially if different assumptions were used or
actual experience differs from the historical experience on which they are
based.
LIQUIDITY
Liquidity is a measurement of the Company's ability to meet potential cash
requirements, including ongoing commitments to fund deposit withdrawals, repay
borrowings, fund investment, discounted loan and lending activities and for
other general business purposes. The primary sources of funds for liquidity
consist of deposits, FHLB advances, reverse repurchase agreements and maturities
and principal payments on loans and securities and proceeds from sales thereof.
The Company's liquidity is actively managed on a daily basis, monitored
regularly by the Asset/Liability Committee and reviewed periodically with the
Board of Directors. This process is intended to ensure the maintenance of
sufficient funds to meet the needs of the Company, including adequate cash flows
for off-balance sheet instruments.
Sources of liquidity include certificates of deposit which are obtained
primarily from wholesale sources. At June 30, 1996, the Company had $1.42
billion of certificates of deposit, including $1.02 billion of brokered
certificates of deposit obtained through national investment banking firms, of
which $925.4 million were non-cancelable. At the same date, scheduled maturities
of certificates of deposit during the 12 months ending June 30, 1997 and 1998
and thereafter amounted to $768.8 million, $306.0 million and $348.9 million,
respectively. Brokered and other wholesale deposits generally are more
responsive to changes in interest rates than core deposits and, thus, are more
likely to be withdrawn from the Company upon maturity as changes in interest
rates and other factors are perceived by investors to make other investments
more attractive. Management of the Company believes that it can adjust the rates
paid on certificates of deposit to retain deposits in changing interest rate
environments, however, and that brokered and other wholesale deposits can be
both a relatively cost-effective and stable source of funds. There can be no
assurance that this will continue to be the case in the future.
Sources of borrowings include FHLB advances, which are required to be
secured by single-family and/ or multi-family residential loans or other
acceptable collateral, and reverse repurchase agreements. At June 30, 1996, the
Company had $70.4 million of FHLB advances outstanding, was eligible to borrow
up to an aggregate of $465.2 million from the FHLB of New York (subject to
availability of acceptable collateral) and had $10.6 million of single-family
residential loans, $27.5 million of multi-family residential loans and $45.4
million of hotel loans which could be pledged as security for such advances. At
the same date, the Company had contractual relationships with 12 brokerage firms
and the FHLB of New York pursuant to
38
<PAGE>
which it could obtain funds from reverse repurchase agreements and had $228.2
million of unencumbered investment securities and mortgage-backed and related
securities which could be used to secure such borrowings.
The Company's operating activities provided cash flows of $193.1 million
during the six months ended June 30, 1996 and $14.8 million during the year
ended December 31, 1993, while during the six months ended June 30, 1995 and the
years ended December 31, 1995 and 1994, net cash used in operating activities
totalled $57.2 million, $189.4 million and $108.8 million, respectively. During
the foregoing periods cash resources were provided primarily by net income and
proceeds from sales of loans available for sale, and cash resources were used
primarily to purchase and originate loans available for sale, which in the
aggregate amounted to $142.9 million and $116.5 million during the six months
ended June 30, 1996 and 1995, respectively, and $274.0 million, $549.9 million
and $74.6 million during the years ended December 31, 1995, 1994 and 1993,
respectively.
The Company's investing activities provided cash flows totalling $89.1
million and $19.1 million during the six months ended June 30, 1996 and 1995,
respectively, and $234.5 million and $130.8 million during the years ended
December 31, 1994 and 1993, respectively, while during the year ended December
31, 1995 cash flows from investing activities utilized $474.5 million. During
the foregoing periods, cash flows from investing activities were provided
primarily by principal payments on discounted loans and loans held for
investment, maturities of and principal payments received on securities
available for sale and proceeds from sales of securities available for sale,
discounted loans, loans held for investment and real estate owned, and cash
flows from investing activities were primarily utilized to purchase and
originate discounted loans and loans held for investment and purchase securities
available for sale. During 1995, purchases and originations of discounted loans
and loans held for investment and purchases of securities available for sale
aggregated $818.6 million and $934.2 million, respectively, and were the
principal reasons why net cash was used in investing activities during this
period.
The Company's financing activities used $85.8 million, $127.9 million and
$140.6 million during the six months ended June 30, 1996 and the years ended
December 31, 1994 and 1993, respectively, and provided cash flows of $185.0
million and $681.8 million during the six months ended June 30, 1995 and the
year ended December 31, 1995, respectively. Cash flows from financing activities
primarily relate to changes in the Company's deposits and, to a lesser extent,
borrowings. Cash was provided by financing activities during the year ended
December 31, 1995 as increases in deposits and reverse repurchase agreements, a
net increase in FHLB advances and proceeds from the issuance of the Debentures
more than offset the transfer of deposits in connection with the sale of branch
offices at the end of 1995.
On a parent-only basis, the principal source of funds of the Company has
been and will continue to be the receipt of dividends and other distributions
from the Bank. The Bank is permitted, subject to certain limitations under
federal regulations and restrictions contained in the indenture related to the
Bank's issuance of the Debentures, to pay dividends to the Company. At June 30,
1996, taking into account the foregoing restrictions, the Bank could have
distributed $18.7 million to the Company with 30 day's notice to the OTS, which
amount will be increased by the amount of the net proceeds from the Notes
Offering contributed by the Company to the Bank. See "Use of Proceeds."
Immediately following consummation of the Offerings, the principal assets of the
Company will consist primarily of all of the outstanding capital stock of the
Bank, investments in non-bank subsidiaries and the portion of the estimated net
proceeds from the Notes Offering retained by it. See "Use of Proceeds." Other
than the Notes, the Company will have no material liquidity requirements
immediately following consummation of the offerings on a parent-only basis.
The Bank is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of U.S. Government,
federal agency and other investments having maturities of five years or less.
Current OTS regulations require that a savings association maintain liquid
assets of not less than 5% of its average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less, of which short-term
liquid assets must consist of not less than 1%. Monetary penalties may be
imposed for failure to meet applicable liquidity requirements. The Bank's
liquidity, as measured for regulatory purposes, amounted to 11.6% at June 30,
1996 and averaged 8.2%, 12.9%, 14.2% and 11.4% during the
39
<PAGE>
six months ended June 30, 1996 and the years ended December 31, 1995, 1994 and
1993, respectively. The high level of liquidity during 1994 was attributable to
the Bank's efforts to increase cash, interest-bearing deposits and other liquid
sources of funds to fund the transfer of deposits in connection with the sale of
23 offices consummated at year end.
COMMITMENTS AND OFF-BALANCE SHEET RISKS
At June 30, 1996, the Company had commitments to fund (i) $25.1 million of
multi-family residential loans, (ii) $32.0 million of hotel loans, (iii) $6.8
million of office building loans and (iv) $4.9 million on a loan secured by
land. Management of the Company believes that the Company has adequate resources
to fund all of its commitments to the extent required and that substantially all
of such commitments will be funded during 1996. For additional information
relating to commitments and contingencies, see Note 9 to the interim
Consolidated Financial Statements.
In addition to commitments to extend credit, the Company is party to various
off-balance sheet financial instruments entered into in the normal course of
business to manage its interest rate risk. See "--Asset and Liability
Management" above and Note 18 to the Consolidated Financial Statements.
The Company conducts business with a variety of financial institutions and
other companies in the normal course of business, including counterparties to
its off-balance sheet financial instruments. The Company is subject to potential
financial loss if the counterparty is unable to complete an agreed upon
transaction. The Company seeks to limit counterparty risk through financial
analysis, dollar limits and other monitoring procedures.
REGULATORY CAPITAL REQUIREMENTS
Federally-insured savings associations such as the Bank are required to
maintain minimum levels of regulatory capital. These standards generally must be
as stringent as the comparable capital requirements imposed on national banks.
The OTS also is authorized to impose capital requirements in excess of these
standards on individual associations on a case-by-case basis.
The following table sets forth the regulatory capital ratios of the Bank at
June 30, 1996.
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------------------------------------------------------------
REQUIRED ACTUAL (1) EXCESS (1)
------------------------- ----------------------- -------------------------
PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT
------------- ---------- ----------- ---------- ------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital........................ 1.50% $ 31,367 6.74% $ 140,969 5.24% $ 109,602
Core (leverage) capital................. 3.00 62,735 6.74 140,969 3.74 78,234
Risk-based capital (2).................. 8.00 148,525 13.61 252,710 5.61 104,185
</TABLE>
- ------------------------
(1) For a presentation of the Bank's regulatory capital position on a pro forma
basis at June 30, 1996 after giving effect to the Notes Offering and the
Company's contribution of a portion of the net proceeds therefrom to the
Bank, see "Capitalization."
(2) At June 30, 1996, the Bank's supplementary capital included $100 million
attributable to the Debentures and $11.7 million of general allowances for
loan losses. The regulatory capital of the Bank will not include any amount
attributable to the Notes, except to the extent that a portion of the net
proceeds from the issuance thereof is contributed by the Company to the
Bank. See "Use of Proceeds" and "Capitalization."
For a reconciliation of the Bank's regulatory capital and its stockholders'
equity under generally accepted accounting principles at June 30, 1996, see Note
8 to the interim Consolidated Financial Statements.
In August 1993, the OTS promulgated regulations which incorporate an
interest rate risk component into the OTS' risk-based capital requirements, and
in August 1995 the OTS postponed the effectiveness of this regulation after
having previously deferred the effective date several times. Because only
institutions whose measured interest rate risk exceeds certain parameters will
be subject to the interest rate risk capital
40
<PAGE>
requirement, management of the Company does not believe that this regulation
will increase the Bank's risk-based regulatory capital requirement if it becomes
effective in its current form. For additional information relating to regulatory
capital requirements, see "Regulation--The Bank--Regulatory Capital
Requirements" and Note 22 to the Consolidated Financial Statements.
RECENT ACCOUNTING DEVELOPMENTS
For information relating to the effect of recent accounting standards on the
Company, see Note 1 to the Consolidated Financial Statements and Note 4 to the
Interim Consolidated Financial Statements.
41
<PAGE>
BUSINESS
GENERAL
The Company considers itself to be involved in a single business segment of
providing financial services and conducts a wide variety of business activities
within this segment. The Company's primary business activities currently consist
of its discounted loan acquisition and resolution activities, multi-family
residential and commercial real estate lending activities, single-family
residential lending activities involving non-conforming borrowers and various
investment activities, including investments in a wide variety of mortgage-
related securities and investments in low-income housing tax credit interests.
In addition, until recently the Company operated an automated banking division,
the operations of which were discontinued in September 1995. See
"Business--Discontinued Operations." The Company obtains funds for investment in
the foregoing and other business activities primarily from brokered and other
wholesale certificates of deposit, as well as retail deposits obtained through
its office in northern New Jersey, FHLB advances, reverse repurchase agreements,
structured financings, maturities and principal repayments on securities and
loans and proceeds from the sale of securities and loans held for sale.
Substantially all of the Company's business activities are conducted through the
Bank and subsidiaries of the Bank.
At June 30, 1996, the only significant subsidiary of the Company other than
the Bank was Investors Mortgage Insurance Holding Company, which currently is
engaged, directly and indirectly through subsidiaries, in the servicing of
certain private mortgage insurance policies which were formerly owned by it
through its ownership of two subsidiaries sold by it in 1993, as well as
management of the hotel in Columbus, Ohio which was purchased by the Company for
investment in mid-1993.
DISCOUNTED LOAN ACQUISITION AND RESOLUTION ACTIVITIES
The Company believes that under appropriate circumstances the acquisition of
non-performing and underperforming mortgage loans (collectively, "non-performing
loans") at discounts offers significant opportunities to the Company. Because
discounted loans generally have collateral coverage which is in excess of the
purchase price of the loan, successful resolutions can produce total returns
which are in excess of an equivalent investment in performing mortgage loans.
The Company began its discounted loan operations in 1991 and initially
focused on the acquisition of single-family residential loans. In 1994 the
Company expanded this business to include the acquisition and resolution of
discounted multi-family residential and commercial real estate loans (together,
unless the context otherwise requires, "commercial real estate loans"). Prior to
entering the discounted loan business, management of the Company had substantial
loan resolution experience through former subsidiaries of the Company which had
been engaged in the business of providing private mortgage insurance for
residential loans since 1986. This experience assisted the Company in developing
the procedures, facilities and systems which are necessary to appropriately
evaluate and acquire discounted loans and to resolve such loans in a timely and
profitable manner. Management of the Company believes that the resources
utilized by the Company in connection with the acquisition and resolution of
discounted real estate loans, which include proprietary technology and software,
allow the Company to effectively manage an extremely data-intensive business and
that, as discussed below, these resources have substantial applications in other
areas. See "Business--Computer Systems and Other Equipment."
COMPOSITION OF THE DISCOUNTED LOAN PORTFOLIO. At June 30, 1996, the
Company's net discounted loan portfolio amounted to $594.6 million or 31.3% of
the Company's total assets. Virtually all of the Company's discounted loan
portfolio is secured by first mortgage liens on real estate.
42
<PAGE>
The following table sets forth the composition of the Company's discounted
loan portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------------------------------------------------
1996 1995 1994 1993 1992 1991
-------------- ----------- ----------- ----------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Single-family residential loans......... $ 262,468(1) $ 376,501 $ 382,165 $ 430,355 $ 306,401 $ 34,549
Multi-family residential loans.......... 145,310 176,259 300,220 -- -- --
Commercial real estate loans............ 421,101(2) 388,566 102,138 1,845 2,227 5,362
Other loans............................. 1,442 2,203 911 1,316 1,836 7,708
-------------- ----------- ----------- ----------- ---------- ----------
Total discounted loans................ 830,321 943,529 785,434 433,516 310,464 47,619
Unaccreted discount..................... (226,217)(3) (273,758) (255,974) (129,882) (97,426) (21,908)
Allowance for loan losses............... (9,470) -- -- -- -- --
-------------- ----------- ----------- ----------- ---------- ----------
Discounted loans, net................... $ 594,634(1) $ 669,771 $ 529,460 $ 303,634 $ 213,038 $ 25,711
-------------- ----------- ----------- ----------- ---------- ----------
-------------- ----------- ----------- ----------- ---------- ----------
</TABLE>
- ------------------------
(1) Does not include the Company's $63.4 million investment in a 50% interest in
a newly-formed company which held $559.4 million of discounted single-family
residential loans, net at June 30, 1996. See "Business--Investment in Joint
Venture." Inclusive of the Company's pro rata interest in such loans, the
Company's discounted loans, net would amount to $874.3 million at June 30,
1996.
(2) Consists of $141.4 million of loans secured by office buildings, $80.4
million of loans secured by hotels, $106.1 million of loans secured by
retail properties or shopping centers and $93.2 million of loans secured by
other properties.
(3) Consists of $57.8 million, $39.8 million, $128.3 million and $300,000
attributable to single-family residential loans, multi-family residential
loans, commercial real estate loans and other loans, respectively.
The properties which secure the Company's discounted loans are located
throughout the United States. At June 30, 1996, the five states with the
greatest concentration of properties securing the Company's discounted loans
were California, New Jersey, New York, Illinois and Florida, which had $343.6
million, $91.8 million, $86.8 million, $66.9 million and $48.6 million principal
amount of discounted loans (before unaccreted discount), respectively. The
Company believes that the broad geographic distribution of its discounted loan
portfolio reduces the risks associated with concentrating such loans in limited
geographic areas, and that, due to its expertise and procedures, the geographic
diversity of its discounted loan portfolio does not place greater burdens on the
Company's ability to resolve such loans.
At June 30, 1996, the discounted loan portfolio included two loans with a
carrying value equal to or more than $15 million and less than $25 million and
one loan with a carrying value greater than $25 million.
ACQUISITION OF DISCOUNTED LOANS. In the early years of the program, the
Company acquired discounted loans primarily from the FDIC and the Resolution
Trust Corporation, primarily in auctions of pools of loans acquired by them from
the large number of financial institutions which failed during the late 1980s
and early 1990s. Although governmental agencies, such as the FDIC and HUD,
continue to be potential sources of discounted loans, as indicated by the large
acquisition of discounted loans from HUD by the Company and a co-investor in
April 1996, as discussed under "Business--Investment in Joint Venture," in
recent years the Company has obtained discounted loans primarily from various
private sector sellers, such as banks, savings institutions, mortgage companies
and insurance companies. At June 30, 1996, approximately 92.4% of the loans in
the Company's discounted loan portfolio had been acquired from the private
sector.
Although the Company believes that a permanent market for the acquisition of
discounted loans has emerged in recent years within the private sector, there
can be no assurance that the Company will be able to acquire the desired amount
and type of discounted loans in future periods or that there will not be
significant inter-period variations in the amount of such acquisitions.
43
<PAGE>
Discounted real estate loans generally are acquired in pools, although
discounted commercial real estate loans may be acquired individually. These
pools generally are acquired in auctions or competitive bid circumstances in
which the Company faces substantial competition. Although many of the Company's
competitors have access to greater capital and have other advantages, the
Company believes that it has a competitive advantage relative to many of its
competitors as a result of its experience in managing and resolving discounted
loans, its large investment in the computer systems, technology and other
resources which are necessary to conduct this business, its national reputation
and the strategic relationships and contacts which it has developed in
connection with these activities.
The Company generally acquires discounted loans solely for its own
portfolio. From time to time, however, the Company and a co-investor may submit
a joint bid to acquire a pool of discounted loans in order to enhance the
prospects of submitting a successful bid. If successful, the Company and the
co-investor generally split up the acquired loans in an agreed upon manner,
although in certain instances the Company and the co-investor may continue to
have a joint interest in the acquired loans. See "Business--Investment in Joint
Venture."
Prior to making an offer to purchase a portfolio of discounted loans, the
Company conducts an extensive investigation and evaluation of the loans in the
portfolio. Evaluations of potential discounted loans are conducted primarily by
the Company's employees who specialize in the analysis of non-performing loans,
often with further specialization based on geographic or collateral specific
factors. The Company's employees regularly use third parties, such as brokers
who are familiar with the property's type and location, to assist them in
conducting an evaluation of the value of the collateral property, and depending
on the circumstances, particularly in the case of commercial real estate loans,
may use subcontractors, such as local counsel and engineering and environmental
experts, to assist in the evaluation and verification of information and the
gathering of other information not previously made available by the potential
seller.
The Company determines the amount to be offered by it to acquire potential
discounted loans by using a proprietary modeling system and loan information
database which focuses on the anticipated recovery amount, timing and cost of
the resolution of the loans. The amount offered by the Company generally is at a
discount from both the stated value of the loan and the value of the underlying
collateral which the Company estimates is sufficient to generate an acceptable
return on its investment.
RESOLUTION OF DISCOUNTED LOANS. After a discounted loan is acquired, the
Company utilizes its proprietary computer software system to resolve the loan in
accordance with specified procedures as expeditiously as possible. The various
resolution alternatives generally include the following: (i) the borrower brings
the loan current in accordance with original or modified terms, (ii) the
borrower repays the loan or a negotiated amount of the loan, (iii) the borrower
agrees to deed the property to the Company in lieu of foreclosure, in which case
it is classified as real estate owned and held for sale by the Company, and (iv)
the Company forecloses on the loan and the property is acquired at the
foreclosure sale either by a third party or by the Company, in which case it is
classified as real estate owned and held for sale by the Company.
The general goal of the Company's asset resolution process is to maximize in
a timely manner cash recovery on each loan in the discounted loan portfolio. The
Company generally anticipates a longer period (approximately 12 to 30 months) to
resolve discounted commercial real estate loans than discounted single-family
residential loans because of their complexity and the wide variety of issues
that may occur in connection with such loans.
The Bank's credit manager and the Credit Committee of the Board of Directors
of the Bank actively monitor the asset resolution process to identify discounted
loans which have exceeded their expected foreclosure period and real estate
owned which has been held longer than anticipated. Plans of action are developed
for each of these assets to remedy the cause for delay and are reviewed by the
Credit Committee.
ACTIVITY IN THE DISCOUNTED LOAN PORTFOLIO. The following table sets forth
the activity in the Company's gross discounted loan portfolio during the periods
indicated.
44
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
SIX MONTHS ENDED JUNE ----------------------------------------------------------------------
30, 1996 1995 1994 1993
---------------------- ---------------------- ---------------------- ----------------------
NO. OF NO. OF NO. OF NO. OF
BALANCE LOANS BALANCE LOANS BALANCE LOANS BALANCE LOANS
--------- ----------- --------- ----------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of
period...................... $ 943,529 4,543 $ 785,434 3,894 $ 433,516 5,160 $ 310,464 5,358
Acquisitions(1).............. 161,811 144 791,195 2,972 826,391 2,781 294,359 2,412
Resolutions and
repayments(2)............... (188,780) (642) (300,161) (960) (265,292) (2,153) (116,890) (1,430)
Loans transferred to real
estate owned................ (59,613) (444) (281,344) (984) (171,300) (1,477) (26,887) (602)
Sales(3)..................... (26,626) (257) (51,595) (379) (37,881) (417) (27,530) (578)
--------- ----- --------- ----- --------- ----------- --------- -----------
Balance at end of period..... $ 830,321 3,344 $ 943,529 4,543 $ 785,434 3,894 $ 433,516 5,160
--------- ----- --------- ----- --------- ----------- --------- -----------
--------- ----- --------- ----- --------- ----------- --------- -----------
<CAPTION>
1992 1991
---------------------- ------------------------
NO. OF NO. OF
BALANCE LOANS BALANCE LOANS
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at beginning of
period...................... $ 47,619 590 $ -- --
Acquisitions(1).............. 297,169 5,380 49,996 620
Resolutions and
repayments(2)............... (28,194) (473) (2,377) (30)
Loans transferred to real
estate owned................ (6,130) (139) -- --
Sales(3)..................... -- -- -- --
--------- ----- ----------- ---
Balance at end of period..... $ 310,464 5,358 $ 47,619 590
--------- ----- ----------- ---
--------- ----- ----------- ---
</TABLE>
- ------------------------------
(1) In the six months ended June 30, 1996, acquisitions consisted of $6.1
million of single-family residential loans, $32.9 million of multi-family
residential loans and $122.8 million of commercial real estate loans. In
1995, acquisitions consisted of $272.8 million of single-family residential
loans, $141.2 million of multi-family residential loans, $374.9 million of
commercial real estate loans and $2.3 million of other loans. In 1994,
acquisitions consisted of $395.8 million of single-family residential loans,
$315.5 million of multi-family residential loans and $115.1 million of
commercial real estate loans. In 1993, 1992 and 1991 substantially all of
the acquisitions were of single-family residential loans.
(2) Consists of loans which were resolved in a manner which resulted in partial
or full repayment of the loan to the Bank, as well as payments on loans
which have been brought current in accordance with their original or
modified terms or on other loans which have not been resolved.
(3) The Company realized $5.3 million of gains from the sale of discounted loans
during the six months ended June 30, 1996 and $6.0 million, $890,000 and
$3.9 million of gains from the sale of discounted loans during 1995, 1994
and 1993, respectively. The terms of these sales did not provide for any
recourse to the Company based on the subsequent performance of the loans.
For information relating to the activity in the Company's real estate owned
which is attributable to the Company's discounted loan acquisitions, see
"Business--Asset Quality--Real Estate Owned."
PAYMENT STATUS OF DISCOUNTED LOANS. The following table sets forth certain
information relating to the payment status of loans in the Company's discounted
loan portfolio at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------------------------------------------------
1996 1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loan status:
Current............................ $ 500,726 $ 351,630 $ 113,794 $ 23,629 $ 25,463 $ --
Past due less than 90 days......... 13,212 86,838 57,023 15,175 4,063 --
Past due 90 days or more........... 316,383 385,112 413,506 254,413 31,808 47,619
Acquired and servicing not yet
transferred....................... -- 119,949 201,111 140,299 249,130 --
----------- ----------- ----------- ----------- ---------- ----------
830,321 943,529 785,434 433,516 310,464 47,619
Unaccreted discount.................. (226,217) (273,758) (255,974) (129,882) (97,426) (21,908)
Allowance for loan losses............ (9,470) -- -- -- -- --
----------- ----------- ----------- ----------- ---------- ----------
$ 594,634 $ 669,771 $ 529,460 $ 303,634 $ 213,038 $ 25,711
----------- ----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ----------- ---------- ----------
</TABLE>
ACCOUNTING FOR DISCOUNTED LOANS. The discount associated with single-family
residential loans is recognized as a yield adjustment and is accreted into
interest income using the interest method applied on a loan-by-loan basis to the
extent the timing and amount of cash flows can be reasonably determined. The
45
<PAGE>
remaining unamortized discount which is associated with a single-family
residential loan which is subsequently brought current by the borrower in
accordance with the loan terms is accreted into the Company's interest income as
a yield adjustment using the interest method over the contractual maturity of
the loan. For all other loans interest is earned as cash is received.
Gains on the repayment and discharge of loans are recorded in interest
income on discounted loans. Upon receipt of title to property securing a
discounted loan, the loans are transferred to real estate owned and accretion of
the related discount is discontinued.
Beginning in 1996, adjustments to reduce the carrying value of discounted
loans to the fair value of the property securing the loan are charged against
the allowance for loan losses on the discounted loan portfolio. Prior to the
first quarter of 1996, such adjustments were charged against interest income on
discounted loans.
During the six months ended June 30, 1996 and the years ended December 31,
1995, 1994 and 1993, 88.9%, 93.2%, 92.7% and 83.4%, respectively, of the
Company's income on discounted loans was comprised of realized discount. For
additional information, see Note 9 to the Consolidated Financial Statements.
OTHER DISCOUNTED LOAN ACTIVITIES. The Company believes that the procedures,
facilities and systems which it has developed in connection with the acquisition
and resolution of discounted loans may be applied in other areas. Recently, the
Company commenced a program to utilize this experience by financing the
acquisition of discounted loans by other institutions. During 1995, the Company
originated $41.7 million of portfolio finance loans, which had an aggregate
balance of $39.5 million at June 30, 1996. Portfolio finance loans generally
have two-year terms, floating interest rates which adjust in accordance with a
designated reference rate and a loan-to-value ratio which does not exceed the
lesser of 90% of the purchase price or the estimated value of the collateral as
determined by the Company, and may include terms which provide the Company with
a participation interest in the profits from the resolution of the discounted
loan collateral. Portfolio finance loans are included in the Company's
non-discounted loan portfolio under the category of loan which is represented by
the properties which secure the discounted loans which collateralize the
Company's portfolio finance loans. See "Business--Lending Activities."
The Company also currently is developing a program to provide asset
management and resolution services to third parties pursuant to contracts with
the owner or purchaser of non-performing assets. It is anticipated that
servicing contracts entered into by the Company will provide for the payment to
the Company of specified fees and include terms which allow the Company to
participate in the profits resulting from the successful resolution of the
assets. There can be no assurance that the Company will be able to successfully
implement this program in the near term or at all.
INVESTMENT IN JOINT VENTURE
GENERAL. On March 22, 1996, the Company was notified by HUD that BCBF,
L.L.C., a newly-formed limited liability company ("LLC") in which the Bank and a
co-investor each have a 50% interest, was the successful bidder to purchase
16,196 single-family residential loans offered by HUD at an auction (the "HUD
Loans"), and on April 10, 1996 the LLC consummated the acquisition of the HUD
Loans. Many of the loans, which had an aggregate unpaid principal balance of
$741.2 million at the date of acquisition, were not performing in accordance
with the terms of the loans or an applicable forbearance agreement. The
aggregate purchase price paid to HUD amounted to $616.0 million and was paid
with the proceeds from $53.3 million of equity contributions to the LLC by each
of the Bank and its co-investor, $36.3 million of proceeds from the LLC's
concurrent sale of 1,631 HUD Loans with an aggregate unpaid principal balance of
$61.9 million and the proceeds of a $473.0 million loan to the LLC from an
unaffiliated party (the "LLC Loan"). The LLC Loan has a term of nine months,
bears interest at a rate which is equal to the one-month LIBOR plus 2.25% and is
collateralized by the HUD Loans. At June 30, 1996, the HUD Loans held by the LLC
had a net balance of $559.4 million.
In connection with the LLC's acquisition of the HUD Loans the Company
entered into an agreement with the LLC to service the HUD Loans in accordance
with its loan servicing and loan default resolution procedures. In return for
such servicing, the Company receives specified fees which are payable on a
monthly
46
<PAGE>
basis. The Company did not pay any additional amount to acquire these servicing
rights and, as a result, the acquisition of the right to service the HUD Loans
for the LLC did not result in the Company's recording capitalized mortgage
servicing rights for financial reporting purposes.
DESCRIPTION OF THE HUD LOANS. All of the HUD Loans are secured by first
mortgage liens on single-family residences. Of the $660.9 million gross
principal amount of the HUD Loans as of June 30, 1996, $648.8 million had fixed
interest rates and $12.1 million had adjustable rates. As of the same date, the
HUD Loans had a weighted average rate of 10.06% and a weighted average maturity
of 19 years.
The properties which secure the HUD Loans are located in 31 states, the
District of Columbia and Puerto Rico. As of June 30, 1996, the five
jurisdictions with the greatest concentration of properties securing the HUD
Loans were Texas, California, Colorado, Tennessee and Georgia, which had $155.4
million, $87.1 million, $67.1 million $32.8 million and $32.4 million gross
principal amount of loans, respectively.
The HUD Loans were acquired by HUD pursuant to various assignment programs
of the FHA. Under programs of the FHA, a lending institution may assign a
FHA-insured loan to HUD because of an economic hardship on the part of the
borrower which precludes the borrower from making the scheduled principal and
interest payment on the loan. FHA-insured loans also are automatically assigned
to HUD upon the 20th anniversary of the mortgage loan. In most cases, loans
assigned to HUD after this 20-year period are performing under the original
terms of the loan. Once a loan is assigned to HUD, the FHA insurance has been
paid and the loan is no longer insured. As a result, none of the HUD Loans are
insured by the FHA.
HUD assistance to borrowers is provided in the form of forbearance
agreements under which the borrower either makes a monthly payment less than or
equal to the original monthly payment or makes a monthly payment more than the
original monthly payment to make up for arrearages. Forbearance agreements are
12 months in duration and the borrower may be granted up to a maximum of three
consecutive 12-month plans. Under the terms of the contract governing the sale
of the HUD Loans, the LLC and the Company, as the servicer of the HUD Loans, are
obligated to comply with the terms of the forbearance agreements, which may be
written or oral in nature, until the term of the forbearance agreement expires
or there is a default under the forbearance agreement.
The following table sets forth information relating to the payment status of
the HUD Loans as of the date indicated, which is subject to change as a result
of information obtained by the Company in connection with its servicing
activities.
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------
<S> <C> <C>
% OF HUD
AMOUNT LOANS
---------- -----------
(DOLLARS IN THOUSANDS)
HUD Loans without Forbearance Agreements:
Current................................................................................. $ 65,270 9.9%
Past due less than 90 days.............................................................. 4,727 0.7
Past due 90 days or more................................................................ 276,418 41.8
---------- -----------
Total............................................................................... 346,415 52.4
---------- -----------
HUD Loans with Forbearance Agreements:
Current................................................................................. 11,540 1.7
Past due less than 90 days.............................................................. 3,857 0.6
Past due 90 days or more................................................................ 299,134 45.3
---------- -----------
Total............................................................................... 314,531 47.6
---------- -----------
Total............................................................................... $ 660,946 100.0%
---------- -----------
---------- -----------
</TABLE>
In connection with the acquisition of the HUD Loans, the LLC established an
allowance for loan losses, which amounted to $2.8 million at June 30, 1996. The
allowance for loan losses is based primarily on the Company's evaluation of the
credit risk inherent in the HUD Loans and the methodology adopted by the
47
<PAGE>
Company during the six months ended June 30, 1996 for establishing an allowance
for loan losses related to its discounted loan portfolio. Provisions for loan
losses are based on numerous factors, including the state of national and
regional economies, real estate values in the areas in which the properties
which secure the HUD Loans are located and the performance of the HUD Loans.
SECURITIZATION OF THE HUD LOANS. The Company and its co-investor intend to
securitize a substantial amount of the HUD Loans within approximately six to
nine months and to repay the LLC Loan out of the proceeds therefrom.
Securitization would involve the creation of a special purpose entity to acquire
the HUD Loans which are to be securitized from the LLC, with payment being made
from the proceeds of the issuance of the REMIC securities backed by such loans.
The amount of the HUD Loans to be securitized will be dependent in part on the
Company's ability to enhance the performance of the HUD Loans by, among other
things, resolving existing delinquencies, documenting verbal forbearance
agreements and bringing loans which are subject to forbearance agreements into
compliance with such agreements. Any securitization of the HUD Loans also will
be dependent on market conditions for REMICs of this nature and other factors
which are not necessarily within the control of the LLC and its members. As a
result, there can be no assurance that the LLC will be able to securitize the
HUD Loans in the manner contemplated by the Company and its co-investor. In the
event that the LLC is unable to securitize or otherwise sell an amount of the
HUD Loans which would enable it to repay the LLC Loan at maturity, it could
attempt to renegotiate an extension of the LLC Loan from the current lender,
seek financing from another lender and/or sell the loans held by the joint
venture to the joint venturers or third parties. In the event of default on the
LLC Loan, the lender's sole recourse would be against the loans and related
collateral which secures the LLC Loan.
In the event of a securitization of the HUD Loans, the REMIC securities
backed by the HUD Loans likely will consist of a senior class and one or more
subordinated classes which provide credit enhancement to the senior class. See
"Business--Investment Activities--Mortgage-Backed and Related Securities."
Depending on the circumstances, the Company may acquire the subordinated class
or classes of the REMIC securities backed by the HUD Loans. The Company also may
seek to retain the rights to service the HUD Loans which back the REMIC, which
would result in the Company recording capitalized mortgage servicing rights for
financial reporting purposes.
ACCOUNTING FOR INVESTMENT IN THE LLC. The Company's investment in the LLC
is accounted for under the equity method of accounting. Under the equity method
of accounting, an investment in the shares or other interests of an investee is
initially recorded at the cost of the shares or interests acquired and
thereafter is periodically increased (decreased) by the investor's proportionate
share of the earnings (losses) of the investee and decreased by all dividends
received by the investor from the investee. As of June 30, 1996, the Company's
investment in the LLC amounted to $63.4 million under the equity method of
accounting. Because the LLC is a pass-through entity for federal income tax
purposes, provisions for income taxes will be established by each of the Company
and its co-investor and not the LLC. For additional information, see Note 6 to
the interim Consolidated Financial Statements.
LENDING ACTIVITIES
COMPOSITION OF LOAN PORTFOLIO. At June 30, 1996, the Company's net loan
portfolio amounted to $312.6 million or 16.5% of the Company's total assets.
Loans held for investment in the Company's loan portfolio are carried at
amortized cost, less an allowance for loan losses, because the Company has the
ability and presently intends to hold them to maturity.
48
<PAGE>
The following table sets forth the composition of the Company's loan
portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ----------------------------------------------------------
1996 1995 1994 1993 1992 1991
-------------- -------------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Single-family residential loans......... $ 77,724 $ 75,928 $ 31,926 $ 30,385 $ 33,799 $ 41,895
Multi-family residential loans.......... 86,295(1) 49,047(1) 1,800 39,352 5,563 7,305
Commercial real estate and land loans:
Hotels................................ 132,005(2) 125,791 19,659 14,237 -- --
Office buildings...................... 74,939 61,262 -- -- -- --
Land.................................. 16,575 24,904 1,315 4,448 -- --
Other................................. 1,093 2,494 4,936 4,059 1,908 2,009
-------------- -------------- --------- --------- --------- ---------
Total............................. 224,612 214,451 25,910 22,744 1,908 2,009
Consumer and other loans................ 493 3,223 1,558 3,639 2,395 2,195
-------------- -------------- --------- --------- --------- ---------
Total loans....................... 389,124 342,649 61,194 96,120 43,665 53,404
Undisbursed loan proceeds............... (68,769) (39,721) -- -- -- --
Unaccreted discount..................... (4,924) (5,376) (3,078) (6,948) (1,898) (3,210)
Allowance for loan losses............... (2,855) (1,947) (1,071) (884) (752) (934)
-------------- -------------- --------- --------- --------- ---------
Loans, net............................ $ 312,576 $ 295,605 $ 57,045 $ 88,288 $ 41,015 $ 49,260
-------------- -------------- --------- --------- --------- ---------
-------------- -------------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) At June 30, 1996 and December 31, 1995, multi-family residential loans
included $42.8 million and $7.7 million of construction loans, respectively.
(2) At June 30, 1996, hotel loans included $7.0 million of construction loans.
The Company's lending activities are conducted on a nationwide basis and, as
a result, the properties which secure its loan portfolio are geographically
located throughout the United States. At June 30, 1996, the five states in which
the largest amount of properties securing the loans in the Company's loan
portfolio were located were New York, California, New Jersey, Illinois and
Florida, which had $85.5 million, $84.8 million, $50.4 million, $31.2 million
and $30.9 million of principal amount of loans, respectively. As noted above,
the Company believes that the broad geographic distribution of its loan
portfolio reduces the risks associated with concentrating such loans in limited
geographic areas.
At June 30, 1996, the Company's loan portfolio included seven loans with a
balance equal to $15 million or more and less than $25 million and no loans with
a balance equal to $25 million or more.
CONTRACTUAL PRINCIPAL REPAYMENTS. The following table sets forth certain
information at December 31, 1995 regarding the dollar amount of loans maturing
in the Company's loan portfolio based on their contractual terms to maturity and
includes scheduled payments but not potential prepayments, as well as the dollar
amount of loans which have fixed or adjustable interest rates. Demand loans,
loans having no stated
49
<PAGE>
schedule of repayments and no stated maturity and overdrafts are reported as due
in one year or less. Loan balances have not been reduced for (i) undisbursed
loan proceeds, unearned discounts and the allowance for loan losses and (ii)
non-performing loans.
<TABLE>
<CAPTION>
MATURING IN
----------------------------------------------------------
AFTER FIVE
ONE YEAR OR AFTER ONE YEAR YEARS THROUGH AFTER TEN
LESS THROUGH FIVE YEARS TEN YEARS YEARS
----------- ------------------ -------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Single-family residential loans..................... $ 8,533 $ 8,203 $ 3,245 $ 55,947
Multi-family residential loans...................... 2,357 44,582 2,040 68
Commercial real estate and land loans............... 32,742 151,902 25,143 4,664
Consumer and other loans............................ 88 228 527 2,380
----------- -------- ------- ---------
Total............................................. $ 43,720 $ 204,915 $ 30,955 $ 63,059
----------- -------- ------- ---------
----------- -------- ------- ---------
Interest rate terms on amounts due after one year:
Fixed............................................. $ 42,150 $ 146,777 $ 27,328 $ 47,204
----------- -------- ------- ---------
----------- -------- ------- ---------
Adjustable........................................ $ 1,570 $ 58,138 $ 3,627 $ 15,855
----------- -------- ------- ---------
----------- -------- ------- ---------
</TABLE>
Scheduled contractual principal repayments do not reflect the actual
maturities of loans because of prepayments and, in the case of conventional
mortgage loans, due-on-sale clauses. The average life of mortgage loans,
particularly fixed-rate loans, tends to increase when current mortgage loan
rates are substantially higher than rates on existing mortgage loans and,
conversely, decrease when rates on existing mortgages are substantially higher
than current mortgage loan rates.
ACTIVITY IN THE LOAN PORTFOLIO. The following table sets forth the activity
in the Company's gross loan portfolio during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
SIX MONTHS ENDED -----------------------------------
JUNE 30, 1996 1995 1994 1993
----------------- ---------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at beginning of period........................... $ 342,649 $ 61,194 $ 96,120 $ 43,665
-------- ---------- ---------- -----------
Originations:
Single-family residential loans........................ 7,556 14,776 7,119 32,668
Multi-family residential loans......................... 45,249 48,664 -- 23,696
Commercial real estate and land loans.................. 52,916 212,630 22,486 18,586
Consumer loans......................................... -- 207 -- 2,299
-------- ---------- ---------- -----------
Total loans originated............................... 105,721 276,277 29,605 77,249
-------- ---------- ---------- -----------
Purchases:
Single-family residential loans........................ -- 29,833 -- --
Multi-family residential loans......................... -- -- -- 126,506
Commercial real estate loans........................... -- 2,245 -- --
Consumer loans......................................... -- 1,966 -- --
Purchase of a savings institution...................... -- -- -- 475,105
-------- ---------- ---------- -----------
Total loans purchased................................ -- 34,044 -- 601,611
-------- ---------- ---------- -----------
Sales.................................................... -- -- (1,078) (418,812)
-------- ---------- ---------- -----------
Loans transferred from (to) available for sale........... 6 4,353 (24,380) (139,297)
-------- ---------- ---------- -----------
Principal repayments, net of capitalized interest (58,694) (33,168) (39,073) (68,296)
-------- ---------- ---------- -----------
Transfer to real estate owned............................ (558) (51) -- --
-------- ---------- ---------- -----------
Net increase (decrease) in net loans................. 46,475 281,455 (34,926) 52,455
-------- ---------- ---------- -----------
Balance at end of period................................. $ 389,124 $ 342,649 $ 61,194 $ 96,120
-------- ---------- ---------- -----------
-------- ---------- ---------- -----------
</TABLE>
50
<PAGE>
LOANS AVAILABLE FOR SALE. In addition to loans acquired for investment and
held in the Company's loan portfolio, the Company originates and purchases loans
which it presently does not intend to hold to maturity. Such loans are
designated as loans available for sale upon origination or purchase and are
carried at the lower of cost or aggregate market value.
The following table sets forth the composition of the Company's loans
available for sale by type of loan at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------------------------------------
1996 1995 1994 1993 1992 1991
--------- ---------- ---------- ---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Single-family residential loans................. $ 54,583 $ 221,927 $ 16,825 $ 30,217 $ 754 $ 2,059
Multi-family residential loans.................. 28,611 28,694 83,845 44,919 -- --
Consumer loans.................................. 884 1,169 1,623 25,930 -- --
--------- ---------- ---------- ---------- --------- ---------
$ 84,078 $ 251,790 $ 102,293 $ 101,066 $ 754 $ 2,059
--------- ---------- ---------- ---------- --------- ---------
--------- ---------- ---------- ---------- --------- ---------
</TABLE>
Although the Company's loans available for sale are secured by properties
located nationwide, currently a substantial majority of such loans are
single-family residential loans to non-conforming borrowers originated primarily
in the western states, particularly California. As a result, $20.1 million or
23.9% of the Company's loans available for sale at June 30, 1996 were secured by
properties located in California.
SINGLE-FAMILY RESIDENTIAL LOANS. The Company's lending activities include
the origination and purchase of single-family residential loans to borrowers
who, because of prior credit problems, the absence of a credit history or other
factors, are unable or unwilling to qualify as borrowers for a single-family
residential loan under FHLMC/FNMA guidelines ("conforming loans") and who have
substantial equity in the properties which secure the loans. Loans to
non-conforming borrowers are perceived by the Company's management as being
advantageous to the Company because they generally have higher interest rates
and origination and servicing fees and generally lower loan-to-value ratios than
conforming loans and because the Company's expertise in the resolution of
non-performing loans can be utilized in underwriting such loans, as well as to
address loans acquired pursuant to this program which become non-performing
after acquisition. The Company commenced development of this program in late
1994 and fully implemented it by mid-1995.
In recent periods the Company has acquired single-family residential loans
to non-conforming borrowers primarily through a correspondent relationship with
an established mortgage banking firm which is headquartered in California and
conducts business in eleven western states, and to a lesser extent correspondent
relationships with three other financial services companies. Correspondent
institutions originate loans based on guidelines provided by the Company and
promptly sell the loans to the Company on a servicing-released basis.
The Company's current strategy is to continue to solidify and expand its
wholesale sources, which are subject to a thorough due diligence and approval
process to ensure quality sources of new business. In addition, in order to
diversify its sources, the Company currently is developing the ability to
directly originate loans to non-conforming borrowers on a retail basis.
Recently, the Company established a loan production office for this purpose in
Edison, New Jersey. The Company currently is in the process of staffing this
office, as well as its full-service office located in Fort Lee, New Jersey, with
experienced originators of non-conforming single-family residential loans.
Although the Company is evaluating sites for additional loan production offices,
there can be no assurance that the Company will establish other offices or that
its loan production office or offices will be able to successfully originate
single-family residential loans to non-conforming borrowers.
The Company has adopted policies that set forth the specific lending
requirements of the Company as they relate to the processing, underwriting,
property appraisal, closing, funding and delivery of loans to non-conforming
borrowers. These policies include program descriptions which set forth four
classes of non-conforming loans, designated A, B, C and D. Class A loans
generally relate to borrowers who have no or limited adverse incidents in their
credit histories, whereas Class B, C and D loans relate to increasing degrees
51
<PAGE>
of non-conforming borrowers. Factors which are considered in evaluating a
borrower in this regard are the presence or absence of a credit history, prior
delinquencies in the payment of mortgage and consumer credit and personal
bankruptcies.
The terms of the loan products offered by the Company directly or through
correspondents to non-conforming borrowers emphasize real estate loans which
generally are underwritten with significant reliance on a borrower's level of
equity in the property securing the loan, which may be an owner-occupied or,
depending on the class of loan and its terms, a non-owner occupied property.
Although the Company's guidelines require information in order to enable the
Company to evaluate a borrower's ability to repay a loan by relating the
borrower's income, assets and liabilities to the proposed indebtedness, because
of the significant reliance on the ratio of the principal amount of the loan to
the appraised value of the security property, each of the four principal classes
of loans identified by the Company include products which permit reduced or no
documentation for verifying a borrower's income and employment. Loans which
permit reduced documentation in this regard generally require documentation of
employment and income for the most recent six-month period, as opposed to the
two-year period required in the case of full documentation loans. Loans which
permit no documentation require only an oral or written verification of
employment and do not require independent verification of a borrower's income or
assets and liabilities as represented by the borrower in the application.
Although the Company reserves the right to verify a borrower's income, assets
and liabilities and employment history, other than as set forth above, it
generally does not verify such information through other sources.
The Company's strategy is to offer a broad range of products to its
borrowers and its origination sources. Loans may have principal amounts which
conform to the guidelines set by FHLMC or FNMA for conforming loans, or
principal amounts which significantly exceed these amounts (so called "jumbo
loans"). Loans may have fixed or adjustable interest rates and terms ranging up
to 30 years.
The Company purchased and originated a total of $132.4 million of
single-family residential loans to non-conforming borrowers during the six
months ended June 30, 1996 and $240.3 million of such loans during 1995,
including $158.6 million during the last six months of the year. At June 30,
1996, the Company had $40.9 million of single-family residential loans to
non-conforming borrowers, which had a weighted average yield of 9.75%.
The Company generally intends to sell or securitize its single-family
residential loans to non-conforming borrowers and, as a result, all of such
loans were classified as available for sale at June 30, 1996. During the six
months ended June 30, 1996, the Company sold $285.2 million of single-family
residential loans to non-conforming borrowers for a gain of $6.8 million, and
during 1995 the Company sold $25.3 million of such loans for a gain of $188,000.
Of the loans sold during the six months ended June 30, 1996, $134.8 million were
securitized and sold in an underwritten public offering managed by an
unaffiliated investment banking firm. The Company received a residual security
in the REMIC which was formed in connection with this transaction as partial
payment for the loans sold by it, which had a carrying value of $10.7 million at
June 30, 1996.
Although non-conforming loans generally have higher levels of default than
conforming loans, the Company believes that the borrower's equity in the
security property and its expertise in the area of resolution of non-performing
loans will continue to make its non-conforming borrower loan program a
profitable one notwithstanding such defaults and any resulting losses. There can
be no assurance that this will be the case, however.
In addition to the Company's single-family residential loan programs to
non-conforming borrowers, from time to time the Company purchases pools of
single-family residential loans for investment purposes. During 1995, the
Company purchased $29.8 million of loans which were primarily secured by
properties located in the Company's market area in northern New Jersey.
MULTI-FAMILY RESIDENTIAL LOANS. The Company's lending activities include
the acquisition of conventional loans secured by existing multi-family
residences located nationwide. The Company commenced these activities in
mid-1993 and acquired $34.9 million, $378.4 million and $140.5 million of loans
secured by
52
<PAGE>
existing multi-family residences during 1995, 1994 and 1993, respectively.
Originations of these loans have declined since mid-1994 as a result of
decreases in the volume of refinances of mortgage loans and increased
competition, which resulted in a decrease in available yields and a general
increase in the values of multi-family residential properties. At June 30, 1996,
the Company's permanent multi-family residential loans originated or purchased
under this program amounted to $28.6 million, all of which were classified as
available for sale.
Originations of multi-family residential loans are obtained through the
Company's direct marketing efforts to mortgage brokers, mortgage bankers and
other institutional sources. From time to time the Company also may utilize
independent contractors or brokers who for a fee identify lending opportunities
for the Company.
The Company's permanent multi-family residential loans may have adjustable
or fixed rates of interest, generally have terms of three to seven years and are
amortized over a period of up to 30 years, thus requiring a balloon payment at
maturity. The maximum loan-to-value ratio generally does not exceed the lesser
of 75% of appraised value of the security property and 80% of the purchase
price. Loans secured by existing multi-family residences generally are made on a
non-recourse basis except for standard FNMA requirements and environmental
matters.
During 1995, 1994 and 1993, the Company exchanged multi-family residential
loans with an aggregate principal amount of $83.9 million, $346.6 million and
$67.1 million, respectively, for FNMA mortgage-backed securities backed by such
loans. With the exception of a subordinate interest resulting from a related
securitization, which had a carrying value of $10.7 million at June 30, 1996,
the Company has sold all of the securities acquired in connection with these
securitizations.
In addition to loans secured by existing multi-family residences, which are
available for sale, from time to time the Company originates loans for the
construction of multi-family residences located nationwide, as well as bridge
loans to finance the acquisition and rehabilitation of distressed multi-family
residential properties. At June 30, 1996, the Company had $42.8 million of
multi-family residential construction loans, of which $18.6 million had been
funded, and $43.5 million of acquisition and rehabilitation loans, of which
$42.6 million had been funded.
Construction loans generally have terms of three years and interest rates
which float on a monthly basis in accordance with a designated reference rate.
Payments during the term of the loan may be made to the Company monthly on an
interest-only basis. The loan amount may include an interest reserve which is
maintained by the Company and utilized to pay interest on the loan during its
term. In addition to stated interest, and in order to compensate the Company for
the greater risk which generally is associated with construction loans, the
Company's multi-family residential construction loans may include provisions
pursuant to which the borrower agrees to pay the Company as additional interest
on the loan an amount based on specified percentages (generally between 25-50%)
of the net proceeds from the sale of the property and the net economic value of
the property upon refinancing or maturity of the loan.
Construction loans are secured by a first priority lien on the real
property, all improvements thereon and all fixtures and equipment used in
connection therewith, as well as a first priority assignment of all apartment
revenues and gross receipts generated in connection with the property.
Construction loans are made without pre-leasing requirements or any requirement
of a commitment by another lender to "take-out" the construction loan by making
a permanent loan secured by the property upon completion of construction.
Disbursements on a construction loan are subject to a retainage percentage of
10% and are made only after evidence that available funds have been utilized by
the borrower and are sufficient to pay for all construction costs through the
date of the construction advance and funds remain in the construction budget and
from sources other than the loan to complete construction of the project.
The Company generally requires the general contractor selected by the
borrower, which along with the general construction contract is subject to the
Company's review and approval, to provide payment and performance bonds issued
by a surety approved by the Company in an amount at least equal to the
53
<PAGE>
construction contract costs which are estimated to be necessary to complete
construction of the project in accordance with the construction contract.
Moreover, the Company generally conducts site inspections of projects under
construction at least bi-monthly and of completed projects at least
semi-annually.
The Company's multi-family residential lending program also includes
investments in low-income housing tax credit partnerships which own multi-family
residential properties which have been allocated tax credits under the Code, as
well as loans to such partnerships for the purpose of construction of such
properties. See "Business--Investment Activities--Investment in Low-Income
Housing Tax Credit Interests."
COMMERCIAL REAL ESTATE AND LAND LOANS. The Company's lending activities
include the acquisition of loans secured by commercial real estate, particularly
loans secured by hotels and office buildings, which the Company began
originating in late 1994 and late 1995, respectively. Commercial real estate
loans currently are made to finance the purchase and refinance of properties,
the refurbishment of distressed properties and, recently, the construction of
hotels. At June 30, 1996, the Company's loans secured by commercial real estate
(and land) amounted to $224.6 million and consisted primarily of $132.0 million
and $74.9 million of loans secured by hotels and office buildings, respectively.
In the future, the Company may expand the types of commercial loans originated
by it, including without limitation loans secured by various special purpose
health care properties.
Commercial real estate loans are obtained directly by the Company through
its marketing efforts to mortgage brokers, mortgage bankers, developers and
other sources. Such loans generally have terms of five to seven years and are
amortized over 15 to 25 year periods. The maximum loan-to-value ratio generally
does not exceed the lesser of 85% of appraised value or the purchase price of
the property.
Commercial real estate loans generally have fixed rates of interest. In
addition to stated interest, commercial real estate loans may include provisions
pursuant to which the borrower agrees to pay the Company as additional interest
on the loan an amount based on specified percentages (generally between 25-50%)
of the net cash flow from the property during the term of the loan and/or the
net proceeds from the sale or refinance of the property upon maturity of the
loan. Alternatively, participating interests may be obtained in the form of
additional fees which must be paid by the borrower in connection with a
prepayment of the loan, generally after an initial lock-out period during which
prepayments are prohibited. The fees which could be payable by a borrower during
specified periods of the loan consist either of fixed exit fees or yield
maintenance payments, which are required to be paid over a specified number of
years after the prepayment and are intended to increase the yield of the Company
on the proceeds from the loan payoff to a level which is comparable to the yield
on the prepaid loan.
Commercial real estate loans are secured by a first priority lien on the
real property, all improvements thereon and, in the case of hotel loans, all
fixtures and equipment used in connection therewith, as well as a first priority
assignment of all revenues and gross receipts generated in connection with the
property. The liability of a borrower on a commercial real estate loan generally
is limited to the borrower's interest in the property, except with respect to
certain specified circumstances.
At June 30, 1996, the Company's commercial real estate loans included $7.0
million of hotel construction loans. These loans generally have the same terms
as the Company's multi-family residential construction loans, as discussed
above.
Also included in the Company's commercial real estate lending activities are
land loans, including land acquisition and development loans. At June 30, 1996,
the Company had $16.6 million of land loans. The Company's largest land loan at
June 30, 1996 was a $13.7 million five-year loan to finance the acquisition and
development of lots, as well as the construction of seven model homes, in a
planned community in Florida, of which $4.9 million was unfunded at such date.
The remainder of the Company's land loans at June 30, 1996 consisted of two
loans which aggregated $2.9 million and which were made to finance the sale of
real estate which was held by a subsidiary of the Company acquired in connection
with the acquisition of Old Berkeley.
Multi-family residential, commercial real estate and construction lending
generally is considered to involve a higher degree of risk than single-family
residential lending because such loans involve larger loan
54
<PAGE>
balances to a single borrower or group of related borrowers. In addition, the
payment experience on multi-family residential and commercial real estate loans
typically is dependent on the successful operation of the project, and thus such
loans may be adversely affected to a greater extent by adverse conditions in the
real estate markets or in the economy generally. Risk of loss on a construction
loan is dependent largely upon the accuracy of the initial estimate of the
property's value at completion of construction or development and the estimated
cost (including interest) of construction, as well as the availability of
permanent take-out financing. During the construction phase, a number of factors
could result in delays and cost overruns. If the estimate of value proves to be
inaccurate, the Company may be confronted, at or prior to the maturity of the
loan, with a project which, when completed, has a value which is insufficient to
ensure full repayment. In addition to the foregoing, multi-family residential
and commercial real estate loans which are not fully amortizing over their
maturity and which have a balloon payment due at their stated maturity, as is
generally the case with the Company's multi-family residential and commercial
real estate loans, involve a greater degree of risk than fully amortizing loans
because the ability of a borrower to make a balloon payment typically will
depend on its ability either to timely refinance the loan or to timely sell the
security property. The ability of a borrower to accomplish these results will be
affected by a number of factors, including the level of available mortgage rates
at the time of sale or refinancing, the financial condition and operating
history of the borrower and the property which secures the loan, tax laws,
prevailing economic conditions and the availability of financing for
multi-family residential and commercial real estate generally.
ASSET QUALITY
The Company, like all financial institutions, is exposed to certain credit
risks related to the value of the collateral that secures its loans and the
ability of borrowers to repay their loans. Management of the Company closely
monitors the Company's loan and investment portfolios and the Company's real
estate owned for potential problems on a periodic basis and reports to the Board
of Directors at regularly scheduled meetings.
NON-PERFORMING LOANS. It is the Company's policy to establish an allowance
for uncollectible interest on loans in its loan portfolio and loans available
for sale which are past due 90 days or more and to place such loans on
non-accrual status. As a result, the Company currently does not have any loans
which are accruing interest but are past due 90 days or more. Loans also may be
placed on non-accrual status when, in the judgment of management, the
probability of collection of interest is deemed to be insufficient to warrant
further accrual. When a loan is placed on non-accrual status, previously accrued
but unpaid interest is reversed by a charge to interest income.
The following table sets forth certain information relating to the Company's
non-performing loans in its loan portfolio at the dates indicated. For
information relating to the payment status of loans in the
55
<PAGE>
Company's discounted loan portfolio, see "Business--Discounted Loan Acquisition
and Resolution Activities," and for information concerning non-performing loans
available for sale, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Changes in Financial Condition-- Loans
Available for Sale."
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------------------------------------
1996 1995 1994 1993 1992 1991
-------- --------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Non-performing loans(1):
Single-family residential loans............ $2,334 $ 2,923 $ 2,478 $ 2,347 $ 2,955 $ 712
Multi-family residential loans............. 106 731 152 664 269 1,006
Commercial real estate and land loans...... -- -- -- -- -- 1,710
Consumer and other loans................... 38 202 29 556 407 517
-------- --------- ------- ------- ------- -------
Total.................................... $2,478 $ 3,856 $ 2,659 $ 3,567 $ 3,631 $ 3,945
-------- --------- ------- ------- ------- -------
-------- --------- ------- ------- ------- -------
Non-performing loans as a percentage of:
Total loans(2)............................. 0.77% 1.27% 4.35% 3.71% 8.32% 7.39%
Total assets............................... 0.13 0.20 0.21 0.26 0.44 0.63
Allowance for loan losses as a percentage of:
Total loans(3)............................. 0.91 0.65(4) 1.84 0.99 1.80 1.86
Non-performing loans....................... 115.21 50.49 40.28 24.78 20.71 23.68
</TABLE>
- ------------------------
(1) The Company did not have any non-performing loans in its loan portfolio
which were deemed troubled debt restructurings at the dates indicated.
(2) Total loans is exclusive of undisbursed loan proceeds, unaccreted discount
and allowance for loan losses.
(3) Total loans is exclusive of the allowance for loan losses.
(4) The decrease in the allowance for loan losses as a percentage of total loans
from 1994 was due to the significant increase in the loan portfolio in 1995
as a result of the purchase of single-family residential loans and the
origination of multi-family residential and commercial real estate loans.
REAL ESTATE OWNED. Properties acquired through foreclosure or by
deed-in-lieu thereof are valued at the lower of amortized cost or fair value.
Properties included in the Company's real estate owned are periodically
re-evaluated to determine that they are being carried at the lower of cost or
fair value less estimated costs to sell. Holding and maintenance costs related
to properties are recorded as expenses in the period incurred. Deficiencies
resulting from valuation adjustments to real estate owned subsequent to
acquisition are recognized as a valuation allowance. Subsequent increases
related to the valuation of real estate owned are reflected as a reduction in
the valuation allowance, but not below zero. Increases and decreases in the
valuation allowance are charged or credited to income, respectively. Accumulated
specific valuation allowances amounted to $9.7 million at June 30, 1996.
The following table sets forth certain information relating to the Company's
real estate owned at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ------------------------------------------------------
1996 1995 1994 1993 1992 1991
---------- ---------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Discounted loan portfolio:
Single-family residential....................... $ 65,988 $ 75,144 $ 86,426 $ 33,369 $ 4,390 $ 93
Multi-family residential........................ 37,438 59,932 -- -- -- --
Commercial real estate.......................... 28,580 31,218 8,801 -- -- --
---------- ---------- --------- --------- --------- ---------
Total......................................... 132,006 166,294 95,227 33,369 4,390 93
Loan portfolio.................................... 522 262 1,440 128 320 435
Loans available for sale portfolio................ 1,076 -- -- -- -- --
---------- ---------- --------- --------- --------- ---------
Total......................................... $ 133,604 $ 166,556 $ 96,667 $ 33,497 $ 4,710 $ 528
---------- ---------- --------- --------- --------- ---------
---------- ---------- --------- --------- --------- ---------
</TABLE>
56
<PAGE>
The following table sets forth certain geographical information at June 30,
1996 related to the Company's real estate owned attributable to the Company's
discounted loan acquisitions.
<TABLE>
<CAPTION>
JUNE 30, 1996
---------------------------------------------------------------------------
MULTI-FAMILY RESIDENTIAL
SINGLE-FAMILY RESIDENTIAL
AND COMMERCIAL TOTAL
------------------------- ------------------------ --------------------
NO. OF NO. OF NO. OF
AMOUNT PROPERTIES AMOUNT PROPERTIES AMOUNT PROPERTIES
----------- ----------- ----------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
California................................... $ 17,586 116 $ 55,644 53 $ 73,230 169
New York..................................... 21,624 334 2,357 15 23,981 349
New Jersey................................... 5,857 94 2,996 21 8,853 115
Connecticut.................................. 6,883 127 567 11 7,450 138
Florida...................................... 1,194 19 2,378 2 3,572 21
Other........................................ 12,844(1) 199 2,076(2) 13 14,920 212
----------- --- ----------- --- -------- -----
$ 65,988 889 $ 66,018 115 $132,006 1,004
----------- --- ----------- --- -------- -----
----------- --- ----------- --- -------- -----
</TABLE>
- ------------------------
(1) Consists of properties located in 27 other states, none of which aggregated
over $1.7 million in any one state.
(2) Consists of properties located in four other states, none of which
aggregated over $2.0 million in any one state.
The following table sets forth the activity in the real estate owned related
to the Company's discounted loan portfolio during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
SIX MONTHS ENDED JUNE -----------------------------------------------------------------------------
30, 1996 1995 1994 1993
----------------------- ------------------------ ------------------------ -------------------------
NO. OF NO. OF NO. OF NO. OF
AMOUNT PROPERTIES AMOUNT PROPERTIES AMOUNT PROPERTIES AMOUNT PROPERTIES
---------- ----------- ----------- ----------- ----------- ----------- ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of
period.................... $ 166,294 1,065 $ 95,227 1,005 $ 33,369 516 $ 3,812 93
Properties acquired........ 38,244 447 209,567 1,281 173,556 1,875 40,457 770
Sales...................... (72,532) (508) (138,500) (1,221) (111,698) (1,386) (10,900) (347)
---------- ----- ----------- ----------- ----------- ----------- ---------- ---
Balance at end of period... $ 132,006 1,004 $ 166,294 1,065 $ 95,227 1,005 $ 33,369 516
---------- ----- ----------- ----------- ----------- ----------- ---------- ---
---------- ----- ----------- ----------- ----------- ----------- ---------- ---
</TABLE>
The following table sets forth the amount of time that the Company had held
its real estate owned related to its discounted loan acquisitions at the dates
indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ---------------------
1996 1995 1994
---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
One to two months.............................................................. $ 18,724 $ 25,398 $ 20,989
Three to four months........................................................... 10,415 22,672 22,985
Five to six months............................................................. 6,025 25,742 16,369
Seven to 12 months............................................................. 43,010 76,782 29,499
Over 12 months................................................................. 53,832 15,700 5,385
---------- ---------- ---------
$ 132,006 $ 166,294 $ 95,227
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
The average period during which the Company held the $72.5 million, $138.5
million and $111.7 million of real estate owned related to its discounted loan
acquisitions which was sold during the six months ended June 30, 1996 and the
years ended December 31, 1995 and 1994, respectively, was ten months, eight
months and seven months, respectively.
57
<PAGE>
Although the Company evaluates the potential for significant environmental
problems prior to acquiring a loan, there is a risk for any mortgage loan,
particularly a multi-family residential and commercial real estate loan, that
hazardous substances or other environmentally restricted substances could be
discovered on the related real estate. In such event, the Company might be
required to remove such substances from the affected properties or to engage in
abatement procedures at its sole cost and expense. There can be no assurance
that the cost of such removal or abatement will not substantially exceed the
value of the affected properties or the loans secured by such properties, that
the Company would have adequate remedies against the prior owners or other
responsible parties or that the Company would be able to resell the affected
properties either prior to or following completion of any such removal or
abatement procedures. If such environmental problems are discovered prior to
foreclosure, the Company generally will not foreclose on the related loan;
however, the value of such property as collateral will generally be
substantially reduced and the Company may suffer a loss upon collection of the
loan as a result.
From time to time the Company makes loans to finance the sale of real estate
owned. At June 30, 1996, such loans amounted to $11.7 million and consisted of
$6.9 million of single-family residential loans, $1.9 million of multi-family
residential loans and $2.9 million of land loans. The land loans were made to
finance the sale of real estate held by a subsidiary of the Company acquired in
connection with the acquisition of Old Berkeley. All of the Company's loans to
finance the sale of real estate owned were performing in accordance with their
terms at June 30, 1996.
CLASSIFIED ASSETS. OTS regulations require that each insured savings
association classify its assets on a regular basis. In addition, in connection
with examinations of insured associations, OTS examiners have authority to
identify problem assets and, if appropriate, require them to be classified.
There are three classifications for problem assets: "substandard," "doubtful"
and "loss." Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified loss is considered uncollectible and of
such little value that continuance as an asset of the institution is not
warranted. Another category designated "special mention" also must be
established and maintained for assets which do not currently expose an insured
institution to a sufficient degree of risk to warrant classification as
substandard, doubtful or loss but do possess credit deficiencies or potential
weaknesses deserving management's close attention. Assets classified as
substandard or doubtful require the institution to establish general allowances
for loan losses. If an asset or portion thereof is classified loss, the insured
institution must either establish specific allowances for loan losses in the
amount of 100% of the portion of the asset classified loss or charge off such
amount. In this regard, the Company establishes required reserves and charges
off loss assets as soon as administratively practicable. General loss allowances
established to cover possible losses related to assets classified substandard or
doubtful may be included in determining an institution's regulatory capital,
while specific valuation allowances for loan losses do not qualify as regulatory
capital.
Based upon recent discussions with the OTS, the Company has modified its
policy for classifying non-performing discounted loans and real estate owned
related to its discounted loan portfolio ("non-performing discounted assets") to
take into account both the holding period of such assets from the date of
acquisition and the ratio of book value to market value of such assets. Under
the new policy, all non-performing discounted assets which are held 15 months or
more after the date of acquisition are classified substandard; non-performing
discounted assets held 12 months to less than 15 months from the date of
acquisition are classified as special mention if they have a ratio of book value
to market value of less than 80% and substandard if such ratio is 80% or more;
non-performing discounted assets held 90 days to less than 12 months from the
date of acquisition are classified as special mention if they have a ratio of
book value to market value of more than 80% and less than 85% and substandard if
such ratio is equal to or greater than 85%; and non-performing discounted assets
held less than 90 days from the date of acquisition are classified substandard
if they have a ratio of book value to market value equal to or greater than 85%.
In addition, non-performing discounted assets which are performing for a period
of time subsequent to
58
<PAGE>
acquisition by the Company are classified as substandard at the time such loans
become non-performing. The Company's past experience indicates that the
resulting classified discounted assets do not necessarily correlate to
probability of loss.
Excluding assets which have been classified loss and fully reserved by the
Company, the Company's classified assets at June 30, 1996 under the new policy
consisted of $178.1 million of assets classified as substandard and $12,000 of
assets classified as doubtful. In addition, at the same date $30.7 million of
assets was designated as special mention.
Substandard assets at June 30, 1996 under the new policy consisted primarily
of $113.5 million of loans and real estate owned related to the Company's
discounted single-family residential loan program, $49.8 million of loans and
real estate owned related to the Company's discounted commercial real estate
loan program and $14.4 million of single-family residential loans to
non-conforming borrowers. Special mention assets at June 30, 1996 under the new
policy consisted primarily of loans and real estate owned related to the
Company's discounted loan programs, consisting of $16.0 million and $3.7 million
of assets related to the Company's discounted single-family residential and
discounted commercial real estate loan programs, respectively.
ALLOWANCES FOR LOSSES. The Company maintains an allowance for losses for
each of its loan portfolio and discounted loan portfolio at a level which
management considers adequate to provide for potential losses based upon an
evaluation of known and inherent risks in such portfolios.
The following table sets forth the breakdown of the Company's allowances for
losses on the Company's loan portfolio and discounted loan portfolio by category
of loan and the percentage of loans in each category to total loans in the
respective portfolios at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------
JUNE 30,
1996 1995 1994 1993
----------------------- ----------------------- ----------------------- -----------------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loan portfolio:
Single-family residential
loans..................... $ 297 20.0% $ 346 22.2% $ 615 52.2% $ 174 31.6%
Multi-family residential
loans..................... 682 22.2 683 14.3 -- 2.9 333 40.9
Commercial real estate and
land loans................ 1,876 57.7 875 62.6 218 42.3 218 23.7
Consumer and other loans... -- 0.1 43 0.9 238 2.6 159 3.8
----------- ----- ----------- ----- ----------- ----- ----- -----
Total.................... $ 2,855 100.0% $ 1,947 100.0% $ 1,071 100.0% $ 884 100.0%
----------- ----- ----------- ----- ----------- ----- ----- -----
----------- ----- ----------- ----- ----------- ----- ----- -----
Discounted loan portfolio
(1):
Single-family residential
loans..................... $ 4,233 31.6%
Multi-family residential
loans..................... 1,659 17.5
Commercial real estate
loans..................... 3,578 50.7
Other loans................ -- 0.2
----------- -----
Total.................... $ 9,470 100.0%
----------- -----
----------- -----
<CAPTION>
1992 1991
----------------------- -----------------------
AMOUNT % AMOUNT %
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Loan portfolio:
Single-family residential
loans..................... $ 20 77.3% $ 28 78.4%
Multi-family residential
loans..................... 281 12.7 272 13.7
Commercial real estate and
land loans................ 220 4.6 399 3.8
Consumer and other loans... 231 5.4 235 4.1
----- ----- ----- -----
Total.................... $ 752 100.0% $ 934 100.0%
----- ----- ----- -----
----- ----- ----- -----
Discounted loan portfolio
(1):
Single-family residential
loans.....................
Multi-family residential
loans.....................
Commercial real estate
loans.....................
Other loans................
Total....................
</TABLE>
- ------------------------------
(1) Not applicable at or prior to December 31, 1995.
The allocation of the allowance to each category is not necessarily
indicative of future losses and does not restrict the use of the allowance to
absorb losses in any other category.
59
<PAGE>
The following table sets forth an analysis of activity in the allowance for
losses relating to the Company's loan portfolio during the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, -----------------------------------
1996 1995 1994 1993 1992 1991
---------- ------ ------ ---- ----- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of period................. $1,947 $1,071 $ 884 $752 $934 $1,170
Provision for loan losses.................... 1,132 1,121 -- -- -- --
Charge-offs:
Single-family residential loans............ (188) (131) (302) (150) (138) (8)
Multi-family residential loans............. (7) -- -- (170) (3) (96)
Commercial real estate and land loans...... -- (40) -- -- -- (135)
Consumer loans............................. (29) (92) (170) (16) (88) (37)
---------- ------ ------ ---- ----- ------
Total charge-offs........................ (224) (263) (472) (336) (229) (276)
Recoveries:
Single-family residential loans............ -- 3 410 346 29 35
Multi-family residential loans............. -- -- -- -- -- --
Commercial real estate and land loans...... -- 15 -- -- -- --
Consumer loans............................. -- -- 249 122 18 5
---------- ------ ------ ---- ----- ------
Total recoveries......................... -- 18 659 468 47 40
---------- ------ ------ ---- ----- ------
Net (charge-offs) recoveries............. (224) (245) 187 132 (182) (236)
---------- ------ ------ ---- ----- ------
Balance, end of period....................... $2,855 $1,947 $1,071 $884 $752 $ 934
---------- ------ ------ ---- ----- ------
---------- ------ ------ ---- ----- ------
Net (charge-offs) recoveries as a percentage
of average loan portfolio................... (0.07)% (0.19)% 0.28% 0.10% (0.37)% (0.46)%
</TABLE>
During the six months ended June 30, 1996, the activity in the allowance for
losses related to the discounted loan portfolio consisted of $13.2 million of
general provisions for losses, $3.8 million of charge-offs (consisting of $2.4
million, $448,000 and $929,000 related to single-family residential loans,
multi-family residential loans and commercial real estate loans, respectively)
and $43,000 of recoveries.
INVESTMENT ACTIVITIES
GENERAL. The investment activities of the Company currently include
investments in mortgage-related securities, investment securities and low-income
housing tax credit interests. The investment policy of the Company, which is
established by the Investment Committee and approved by the Board of Directors,
is designed primarily to provide a portfolio of high quality, diversified
instruments while seeking to optimize net interest income within acceptable
limits of interest rate risk, credit risk and liquidity.
MORTGAGE-BACKED AND RELATED SECURITIES. From time to time the Company
invests in mortgage-backed and related securities. Although mortgage-backed and
related securities generally yield less than the loans that back such securities
because of costs associated with their payment guarantees or credit
enhancements, such securities are more liquid than individual loans and may be
used to collateralize borrowings of the Company. See Note 15 to the Consolidated
Financial Statements.
Mortgage-related securities include regular and residual interests in
REMICs. The regular interests of some REMICs are like traditional debt
instruments because they have stated principal amounts and traditionally defined
interest-rate terms. Purchasers of certain other REMICs are entitled to the
excess, if any, of the issuer's cash inflows, including reinvestment earnings,
over the cash outflows for debt service and administrative expenses. These
REMICs may include instruments designated as residual interests, which represent
an equity ownership interest in the underlying collateral, subject to the first
lien of the investors in the other classes of the REMIC.
A senior-subordinated structure often is used with REMICs to provide credit
enhancement for securities which are backed by collateral which is not
guaranteed by FNMA, FHLMC or GNMA. These structures
60
<PAGE>
divide mortgage pools into two risk classes: a senior class and one or more
subordinated classes. The subordinated classes provide protection to the senior
class. When cash flow is impaired, debt service goes first to the holders of
senior classes. In addition, incoming cash flows also may go into a reserve fund
to meet any future shortfalls of cash flow to holders of senior classes. The
holders of subordinated classes may not receive any funds until the holders of
senior classes have been paid and, when appropriate, until a specified level of
funds has been contributed to the reserve fund.
The following table sets forth the Company's mortgage-related securities
available for sale at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ----------------------------------
1996 1995 1994 1993
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage-backed securities:
Single-family residential:
Privately issued-AAA rated................................... $ -- $ -- $ 19,099 $ 162,392
FHLMC........................................................ -- -- -- 63,475
FNMA......................................................... -- -- -- 42,990
---------- ---------- ---------- ----------
Total...................................................... -- -- 19,099 268,857
Multi-family residential....................................... -- -- -- 69,701
Futures contracts.............................................. -- -- -- 756
---------- ---------- ---------- ----------
Total...................................................... -- -- -- 70,457
Mortgage-related securities:
Single-family residential:
Interest only................................................ 10,685 11,774 1,996 --
Principal only............................................... 6,922 8,218 11,490 --
CMOs-AAA rated............................................... 86,606 138,831 75,032 187,059
PAC securities............................................... -- 574 -- --
REMIC residuals.............................................. 10,688 472 -- --
Subordinates................................................. 29,119 27,310 -- --
Futures contracts............................................ (381) (1,598) 1,143 --
---------- ---------- ---------- ----------
Total...................................................... 143,639 185,581 89,661 187,059
Multi-family residential and commercial:
CMOs........................................................... -- -- 53,939 --
Interest only.................................................. 96,100 109,193 -- --
Subordinates................................................... 23,409 42,954 22,095 --
Futures contracts.............................................. 51 (248) (609) --
---------- ---------- ---------- ----------
Total...................................................... 119,560 151,899 75,425 --
---------- ---------- ---------- ----------
Total.................................................... $ 263,199 $ 337,480 $ 184,185 $ 526,373
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The following table sets forth the Company's mortgage-related securities
held for investment at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------------------
1996 1995 (1) 1994 1993
----------- ----------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CMOs......................................... $-- $-- $90,153 $114,884
PAC securities............................... -- -- 994 4,844
REMIC residuals.............................. -- -- 770 1,186
----- ----- ------- --------
Total...................................... $ --(1) $ --(1) $91,917 $120,914
----- ----- ------- --------
----- ----- ------- --------
</TABLE>
- ------------------------
(1) Reflects the transfer of $73.7 million of securities to available for sale
pursuant to guidance issued by the FASB in November 1995.
61
<PAGE>
The following table sets forth certain information relating to each
mortgage-related security held by the Company which had a carrying value which
exceeded 10% of the Company's stockholders' equity at June 30, 1996, all of
which were classified as available for sale.
<TABLE>
<CAPTION>
TYPE OF
ISSUER SECURITY
- ------------------------------------------------------- ---------------------------- MARKET VALUE
--------------
(IN THOUSANDS)
<S> <C> <C>
ITT Federal Bank, FSB 1994-P1, 1B Single-family subordinate $ 29,119
Securitized Asset Sales, Inc. 1993-3, A1 Single-family CMO 21,589
Merrill Lynch Mortgage Investor, Inc. 1993 M1 B Multi-family subordinate 19,031
Countrywide Funding Corporation 1993-7, A1 Single-family CMO 17,761
Countrywide Funding Corporation 1993-3, A1 Single-family CMO 17,001
FBS Mortgage Corporation 1993-E, A1 Single-family CMO 16,772
</TABLE>
At June 30, 1996, $22.4 million of the Company's securities available for
sale were issued by FHLMC or FNMA and $240.8 million of such securities were
privately issued. Of the $240.8 million of securities available for sale which
were privately issued at June 30, 1996, $176.0 million were rated AAA by
national rating agencies, $4.4 million were rated investment grade by national
rating agencies below this level and $60.4 million (amortized cost of $59.9
million) were unrated.
At June 30, 1996, the carrying value of the Company's investment in IO
strips and PO strips amounted to $113.7 million. The Company invests in IO
strips and PO strips from time to time based on its capital position, interest
rate risk profile and the market for such securities. IO strips and PO strips
exhibit considerably more price volatility than mortgages or ordinary mortgage
pass-through securities, due in part to the uncertain cash flows that result
from changes in the prepayment rates of the underlying mortgages. In the case of
IO strips in particular, increased prepayments of the underlying mortgages as a
result of decreases in market interest rates can result in a loss of all or part
of the purchase price of such security, although IO strips relating to
mortgage-related securities backed by multi-family residential and commercial
real estate loans (which amounted to $96.1 million of the $106.8 million of IO
strips owned by the Company at June 30, 1996) generally have provisions which
prohibit and/or provide economic disincentives to prepayments for specified
periods. The Company generally attempts to offset the interest rate risk
associated with a particular IO strip or PO strip by purchasing other securities
and/or hedging against such risk through futures contracts. The Company believes
that these investments complement its overall interest rate sensitivity profile
and, in the case of IO strips from securities backed by multi-family residential
and commercial real estate loans, provide some hedge against the risk that the
Company's multi-family residential and commercial real estate loans, which
generally do not fully amortize over the term of the loan and require balloon
payments at maturity, may not be repaid or refinanced at maturity at market
rates or at all due to increases in interest rates subsequent to origination of
the loan. At June 30, 1996, all of the Company's IO strips and PO strips were
either issued by FHLMC or FNMA or rated AAA by national rating agencies, with
the exception of two IO securities with an aggregate carrying value of $1.7
million, which were rated investment grade below this level.
At June 30, 1996, the carrying value of the Company's investment in
subordinate classes of mortgage-related securities amounted to $52.5 million.
The Company invests in subordinate classes of mortgage-related securities from
time to time based on its capital position, interest rate risk profile, the
market for such securities and other factors. During 1995, in connection with
its acquisition of $28.0 million of subordinate interests in a CMO backed by
single-family residential loans, the Company acquired the rights to service the
loans which backed all classes of the CMO for approximately $3.8 million. This
transaction was primarily responsible for the increase in the amount of loans
serviced by the Company for others from $132.8 million at December 31, 1994 to
$361.6 million at December 31, 1995. At June 30, 1996, the Company's subordinate
securities supported senior classes of securities having an aggregate
outstanding principal balance of $664.7 million. Because of their subordinate
position, subordinate classes of mortgage-related securities involve
substantially more risk than the other classes.
62
<PAGE>
Under a regulatory bulletin issued by the OTS, a federally-chartered savings
institution such as the Bank generally may invest in "high risk" mortgage
securities only to reduce its overall interest rate risk and after it has
adopted various policies and procedures, although under specified circumstances
such securities also may be acquired for trading purposes. A "high risk"
mortgage security for this purpose generally is any mortgage-related security
which meets one of three tests which are intended to measure the average life or
price volatility of the security in relation to a benchmark fixed rate, 30-year
mortgage-backed pass-through security. At June 30, 1996, the Company held
mortgage-related securities with a carrying value of $30.8 million (amortized
cost of $31.3 million) which were classified as "high-risk" mortgage securities
by the OTS, all of which were utilized to reduce the Company's overall interest
rate risk.
The expected actual maturity of a mortgage-backed and related security is
shorter than its stated maturity due to prepayments of the underlying mortgages.
Prepayments that are faster than anticipated may shorten the life of the
security and adversely affect its yield to maturity. The yield is based upon the
interest income and the amortization of any premium or accretion of any discount
related to the mortgage-backed and related security. Prepayments on
mortgage-backed and related securities have the effect of accelerating the
amortization of premiums and accretion of discounts, which decrease and increase
interest income, respectively. Although prepayments of underlying mortgages
depend on many factors, including the type of mortgages, the coupon rate, the
age of mortgages, the geographical location of the underlying real estate
collateralizing the mortgages and general levels of market interest rates, the
difference between the interest rates on the underlying mortgages and the
prevailing mortgage interest rates generally is the most significant determinant
of the rate of prepayments. During periods of falling mortgage interest rates,
if the coupon rate of the underlying mortgages exceeds the prevailing market
interest rates offered for mortgage loans, refinancing generally increases and
accelerates the prepayment of the underlying mortgages and the related security.
Similarly, during periods of increasing interest rates, refinancing generally
decreases, thus lengthening the estimated maturity of mortgage loans.
For additional information relating to the Company's mortgage-related
securities, see Notes 5 and 7 to the Consolidated Financial Statements.
INVESTMENT SECURITIES. Investment securities currently consist primarily of
U.S. Government securities and required investment in FHLB stock.
The following table sets forth the Company's investment securities available
for sale and held for investment at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------------------
1996 1995 1994 1993
----------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Available for sale:
U.S. Government securities........................................... $ -- $ -- $ 3,532 $ 692
Municipal obligations................................................ -- -- -- 118
----------- --------- --------- ---------
Total.............................................................. -- -- 3,532 810
Held for investment:
U.S. Government securities........................................... -- 10,036 10,325 20,041
FHLB stock(1)........................................................ 8,798 8,520 6,555 12,396
Limited partnership interests........................................ 104 109 131 131
----------- --------- --------- ---------
Total................................................................ 8,902 18,665 17,011 32,568
----------- --------- --------- ---------
Total investment securities........................................ $ 8,902 $ 18,665 $ 20,543 $ 33,378
----------- --------- --------- ---------
----------- --------- --------- ---------
</TABLE>
- ------------------------
(1) As a member of the FHLB of New York, the Bank is required to purchase and
maintain stock in the FHLB of New York in an amount equal to at least 1% of
its aggregate unpaid residential mortgage loans, home purchase contracts and
similar obligations at the beginning of each year or 5% of borrowings,
whichever is greater.
63
<PAGE>
TRADING SECURITIES. From time to time the Company purchases investment and
mortgage-backed and related securities for trading purposes. In addition,
securities resulting from the exchange of loans are also accounted for as the
purchase of trading securities.
When securities are purchased with the intent to resell in the near term,
they are classified as trading securities and carried on the Company's
consolidated balance sheet as a separately identified trading account.
Securities in this account are carried at current market value and any increase
or decrease in unrealized appreciation or depreciation is included in the
Company's consolidated statements of operations.
Under guidelines approved by the Board of Directors of the Company, the
Company is authorized to hold a wide variety of securities as trading
securities, including U.S. Government and agency securities and mortgage-backed
and related securities. The Company also is authorized by such guidelines to use
various hedging techniques in connection with its trading activities, as well as
to effect short sales of securities, pursuant to which the Company sells
securities which are to be acquired by it at a future date. Under current
guidelines, the amount of securities held by the Company in a trading account
may not exceed on a gross basis the greater of $200 million or 15% of the
Company's total assets, and the total net amount of securities (taking into
account any related hedge or buy/sell agreement relating to similar securities)
may not exceed the greater of $150 million or 10% of total assets.
The Company traded assets on a short-term basis (generally within a day)
totalling $10.1 million, $275.4 million and $78.6 million during 1995, 1994 and
1993, respectively, resulting in net gains of $84,000, $1.8 million and $1.2
million during these respective periods.
INVESTMENTS IN LOW-INCOME HOUSING TAX CREDIT INTERESTS. The Company invests
in low-income housing tax credit interests (generally limited partnerships) for
the purpose of obtaining income tax credits pursuant to Section 42 of the Code,
which provides a tax credit to investors in qualified low-income rental housing
that is constructed, rehabilitated or acquired after December 31, 1986. To be
eligible for housing tax credits, a property generally must first be allocated
an amount of tax credits by the state tax credit allocating agency, which in
most cases also serves as the state housing finance agency, of the state in
which the property is located. If the property is to be constructed or
rehabilitated, it must be completed and placed in service within a specified
time, generally within two years after the year in which the tax credit
allocation is received. A specified portion of the apartment units in a
qualifying project may only be rented to qualified tenants for a period of 15
years, or a portion of any previously claimed tax credits will be subject to
recapture, as discussed below.
At June 30, 1996, the Company's investments in low-income housing tax credit
interests amounted to $92.3 million, as compared to $81.4 million and $49.4
million at December 31, 1995 and 1994, respectively. The Company's investments
in low-income housing tax credit interests are made by the Company indirectly
through subsidiaries of the Bank, which may be a general partner and/or a
limited partner in the partnership.
In accordance with a recent pronouncement of the Emerging Issues Task Force,
the Company's accounting for investments in low-income housing tax credit
partnerships in which it acts solely as a limited partner, which amounted to
$66.9 million in the aggregate at June 30, 1996, depends on whether the
investment was made on or after May 18, 1995. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Changes in Financial
Condition--Investments in Low-Income Housing Tax Credit Interests."
Low-income housing tax credit partnerships in which the Company, through a
subsidiary, acts as a general partner, are presented on a consolidated basis. At
June 30, 1996, the Company's investments in low-income housing tax credit
interests included $22.5 million of assets related to low-income housing tax
credit partnerships in which a subsidiary of the Company acts as a general
partner. At the same date, the amount of the Company's equity investments in
such partnerships amounted to $16.2 million and the Company had commitments to
make $18.0 million of additional equity investments in such partnerships. The
Company's equity investments in its consolidated partnerships and, as discussed
below, loans by the Company to such partnerships, are eliminated from inclusion
in the Company's investments and loan portfolio, respectively, upon
consolidation of such partnerships with the Company for financial reporting
purposes.
64
<PAGE>
The Company also makes loans to low-income housing tax credit partnerships
in which it has invested to construct the affordable housing project owned by
the partnership. At June 30, 1996, the Company had $19.2 million of construction
loans outstanding to low-income housing tax credit partnerships and commitments
to fund an additional $44.4 million of such loans. Approximately $6.3 million of
such funded construction loans at June 30, 1996 were made to partnerships in
which subsidiaries of the Company acted as a general partner and which thus were
consolidated with the Company for financial reporting purposes. The risks
associated with these construction loans are the same as those made by the
Company to unaffiliated third parties. See "Business--Lending Activities."
The affordable housing projects owned by the low-income housing tax credit
partnerships in which the Company had invested at June 30, 1996 are
geographically located throughout the United States. At June 30, 1996, the
Bank's largest funded investment in a low-income housing tax credit partnership
was a $16.5 million investment in a partnership which owned a 408-unit
qualifying project in Fort Lauderdale, Florida, and the Bank's largest funded
and unfunded investment in such a partnership was a $28.2 million commitment to
fund equity and debt investments in a partnership which will construct a
240-unit qualifying project in Greece, New York, of which $236,000 of equity and
$4.1 million of debt was funded as of such date.
At June 30, 1996, the Company had invested in or had commitments to invest
in 22 low-income housing tax credit partnerships, all of which had been
allocated tax credits. The Company estimates that its investment in low-income
housing tax credit interests at June 30, 1996 will provide approximately $173.6
million of tax credits.
During the six months ended June 30, 1996, the Company sold $6.7 million of
its investments in low-income housing tax credit interests for a pre-tax gain of
$990,000. In addition, the Company has entered into an agreement to sell
additional low-income tax credit interests with a carrying value of $11.7
million, which will not be recognized as a sale under generally accepted
accounting principles until certain construction and other obligations of the
Company are substantially completed. Depending on available prices, its ability
to utilize tax credits and other factors, the Company may seek to sell other of
its low-income housing tax credit interests in the future.
The ownership of low-income housing tax credit interests produce two types
of tax benefits. The primary tax benefit flows from the low-income housing tax
credits under the Code which are generated by the ownership and operation of the
real property in the manner required to obtain such tax credits. These credits
may be used to offset Federal income tax on a dollar for dollar basis but may
not offset the alternative minimum tax; tax credits thus may reduce the overall
federal income tax to an effective rate of 20%. At December 31, 1995, the
Company could recover $8.7 million and $1.4 million of taxes paid in 1994 and
1993, respectively, through the carryback of tax credits realized in the current
year which would not otherwise be deductible due to the alternative minimum tax.
In addition, the operation of the rental properties produces tax losses in the
early years and sometimes throughout the anticipated ownership period. These tax
losses may be used to offset taxable income from other operations and thereby
reduce the income tax which would otherwise be paid on such taxable income.
Tax credits can be claimed over a ten-year period on a straight-line basis
once the underlying multi-family residential properties are placed in service to
reduce the tax payments computed based upon taxable income to not less than the
alternative minimum tax computed for that year or any year not more than three
years before or 15 years after the year the tax credit is earned. Tax credits
are realized regardless of whether units in the project continue to be occupied
once the units in the project have been initially rented to a qualifying tenant,
and tax credits are not dependent on a project's operating income or
appreciation. Tax credits can be claimed over a ten-year period and generally
can be lost or recaptured only if non-qualifying tenants are placed in units,
ownership of the project is transferred or the project is destroyed and not
rebuilt during a 15-year compliance period for the project. The Company has
established specific investment criteria for investment in multi-family
residential projects which have been allocated tax credits, which require, among
other things, a third party developer of the project and/or the seller of the
interest therein to provide a guarantee against loss or recapture of tax credits
and to maintain appropriate insurance to fund rebuilding in case of destruction
of the project. Notwithstanding the Company's efforts, there can be no
65
<PAGE>
assurance that the multi-family residential projects owned by the low-income
housing tax credit partnerships in which it has invested will satisfy applicable
criteria during the 15-year compliance period and that there will not be loss or
recapture of the tax credits associated therewith.
Investments made pursuant to the affordable housing tax credit program of
the Code are subject to numerous risks resulting from changes in the Code. For
example, the Balanced Budget Act of 1995, which was vetoed by the President of
the United States in December 1995 for reasons which were unrelated to the tax
credit program, generally would have established a sunset date for the
affordable housing tax credit program of the Code for housing placed in service
after December 31, 1997 and would have repealed, effective December 31, 1995,
provisions which generally permitted a state's unused low-income housing tax
credits to be reallocated for use by other states through a "national pool" of
unused housing credit carryovers. Although these changes would not have impacted
the Company's existing investments, other potential changes in the Code which
have been discussed from time to time could reduce the benefits associated with
the Company's existing investments in low-income housing tax credit interests,
including the replacement of the current graduated income taxation provisions of
the Code with a "flat tax" based system and increases in the alternative minimum
tax, which cannot be reduced by tax credits. Management of the Company is unable
to predict whether any of the foregoing or other changes to the Code which may
directly or indirectly affect the affordable housing tax credit program of the
Code will be the subject of future legislation and, if so, what the contents of
such legislation will be and its effects, if any, on the Company.
SOURCES OF FUNDS
GENERAL. Deposits, FHLB advances, reverse repurchase agreements, structured
financings, maturities and principal repayments on securities and loans and
proceeds from the sale of securities and loans held for sale currently are the
principal sources of funds for use in the Company's investment and lending
activities and for other general business purposes. Management of the Company
closely monitors rates and terms of competing sources of funds on a regular
basis and generally utilizes the source which is the most cost effective.
DEPOSITS. The primary source of deposits for the Company currently is
brokered certificates of deposit obtained through national investment banking
firms which, pursuant to agreements with the Company, solicit funds from their
customers for deposit with the Bank. Such deposits amounted to $1.02 billion or
67.9% of the Company's total deposits at June 30, 1996. In addition, during 1995
the Company commenced a program to obtain certificates of deposit from customers
of regional and local investment banking firms which are made aware of the
Company's products by the Company's direct solicitation and marketing efforts.
These deposits generally are obtained on more economically attractive terms to
the Company than the brokered deposits obtained through national investment
banking firms. At June 30, 1996, $267.7 million or 17.8% of the Company's
deposits were obtained in this manner through over 100 regional and local
investment banking firms. During 1995, the Company also expanded its wholesale
deposit program to directly solicit certificates of deposit from institutional
investors and high net worth individuals identified by the Company. At June 30,
1996, $109.2 million or 7.3% of the Company's total deposits consisted of
deposits obtained by the Company from such efforts. Ultimately, it is
anticipated that these efforts will increase the Company's internally-generated
deposits and reduce the costs associated with and its dependence on brokered
deposits.
During 1996, the Company intends to expand its direct deposit solicitation
efforts to solicit certificates of deposit on behalf of other financial
institutions. These activities will be conducted through Ocwen Capital Markets
Inc., a Florida corporation and a wholly-owned subsidiary of the Company which,
subject to the receipt of required regulatory approvals, will be a registered
broker-dealer under the Exchange Act. It is currently anticipated that Ocwen
Capital Markets Inc. will commence these activities in the second half of 1996.
The Company's brokered deposits at June 30, 1996 were net of $7.6 million of
unamortized deferred fees. The amortization of deferred fees is computed using
the interest method and is included in interest expense on certificates of
deposit.
66
<PAGE>
The Company believes that the effective cost of brokered and other wholesale
deposits is more attractive to the Company than deposits obtained on a retail
basis from branch offices after the general and administrative expense
associated with the maintenance of branch offices is taken into account.
Moreover, brokered and other wholesale deposits may include provisions which
make them non-cancelable during their terms. At June 30, 1996, $925.4 million or
90.8% of the Company's $1.02 billion of brokered deposits obtained through
national investment banking firms were non-cancelable. The remainder of the
Company's brokered and other wholesale deposits at such date were cancelable by
the depositor only upon the payment of a substantial penalty. Brokered and other
wholesale deposits also generally give the Company more flexibility than retail
sources of funds in structuring the maturities of deposits. At June 30, 1996,
approximately 54.0% of the Company's certificates of deposit were scheduled to
mature within one year.
There are various limitations on the ability of all but well-capitalized
insured financial institutions to obtain brokered deposits. See "Regulation--The
Bank--Brokered Deposits." These limitations currently are not applicable to the
Company because the Bank is a well-capitalized financial institution under
applicable laws and regulations. See "Regulation--The Bank--Regulatory Capital
Requirements."
In addition to brokered and other wholesale deposits, the Company obtains
deposits from its office located in Bergen County, New Jersey. These deposits
include non-interest bearing checking accounts, NOW and money market checking
accounts, savings accounts and certificates of deposit and are obtained through
advertising, walk-ins and other traditional means. At June 30, 1996, the
deposits which were allocated to this office amounted to $49.0 million or 3.3%
of the Company's deposits.
The following table sets forth information relating to the Company's
deposits at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------
JUNE 30,
1996 1995 1994 1993
--------------------- --------------------- --------------------- ---------------------
AMOUNT AVG. RATE AMOUNT AVG. RATE AMOUNT AVG. RATE AMOUNT AVG. RATE
---------- --------- ---------- --------- ---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing checking
accounts..................... $ 55,603 -- % $ 48,482 -- % $ 35,943 -- % $ 45,096 -- %
NOW and money market checking
accounts..................... 19,385 4.05 17,147 3.37 18,934 2.17 115,402 1.07
Savings accounts.............. 3,520 2.30 3,471 2.30 24,007 2.30 167,026 1.20
---------- ---------- ---------- ----------
78,508 69,100 78,884 327,524
---------- ---------- ---------- ----------
Certificates of deposit (1)... 1,431,221 1,440,240 950,817 537,147
Unamortized (deferred fees)
purchase accounting
discount..................... (7,554) (7,694) (6.433) 7,208
---------- ---------- ---------- ----------
1,423,667 5.84 1,432,546 5.68 944,384 5.50 544,355 4.22
---------- ---------- ---------- ----------
Total deposits.............. $1,502,175 5.60 $1,501,646 5.46 $1,023,268 5.17 $ 871,879 3.01
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
- ------------------------------
(1) At June 30, 1996 and December 31, 1995 and 1994, certificates of deposit
issued on an uninsured basis amounted to $110.6 million, $80.0 million and
$21.1 million, respectively.
67
<PAGE>
The following table sets forth by various interest rate categories the
certificates of deposit in the Company at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ------------------------------------
1996 1995 1994 1993
------------ ------------ ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
2.99% or less................................................ $ 382 $ 222 $ 3,613 $ 121,266
3.00-3.50%................................................... 3 39 642 194,650
3.51-4.50.................................................... 3,869 42,751 221,459 165,862
4.51-5.50.................................................... 535,304 454,653 242,383 42,206
5.51-6.50.................................................... 646,270 660,745 310,898 6,251
6.51-7.50.................................................... 237,348 273,655 165,197 6,460
7.51-8.50.................................................... 491 481 192 3,794
8.51-9.50.................................................... -- -- -- 3,866
------------ ------------ ---------- ----------
$ 1,423,667 $ 1,432,546 $ 944,384 $ 544,355
------------ ------------ ---------- ----------
------------ ------------ ---------- ----------
</TABLE>
The following table sets forth the amount and maturities of the certificates
of deposit in the Company at June 30, 1996.
<TABLE>
<CAPTION>
OVER SIX MONTHS ONE YEAR
SIX MONTHS AND LESS THAN THROUGH OVER TWO
AND LESS ONE YEAR TWO YEARS YEARS TOTAL
----------- ---------------- ---------- ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
2.99% or less............................... $ 217 $ 122 $ -- $ 43 $ 382
3.00-3.50%.................................. -- -- -- 3 3
3.51-4.50................................... 3,187 555 107 20 3,869
4.51-5.50................................... 247,179 96,558 87,051 104,516 535,304
5.51-6.50................................... 279,731 85,131 151,283 130,125 646,270
6.51-7.50................................... 38,589 17,561 67,543 113,655 237,348
7.51-8.50................................... -- -- -- 491 491
----------- -------- ---------- ---------- ------------
$ 568,903 $ 199,927 $ 305,984 $ 348,853 $ 1,423,667
----------- -------- ---------- ---------- ------------
----------- -------- ---------- ---------- ------------
</TABLE>
At June 30, 1996, the Company had $110.6 million of certificates of deposit
in amounts of $100,000 or more outstanding maturing as follows: $35.8 million
within three months; $24.5 million over three months through six months; $22.3
million over six months through 12 months; and $28.0 million thereafter.
For additional information relating to the Company's deposits, see Note 13
to the Consolidated Financial Statements.
BORROWINGS. Through the Bank the Company obtains advances from the FHLB of
New York upon the security of certain of its residential first mortgage loans,
mortgage-backed and related securities and other assets, including FHLB stock,
provided certain standards related to the creditworthiness of the Bank have been
met. FHLB advances are available to member financial institutions such as the
Bank for investment and lending activities and other general business purposes.
FHLB advances are made pursuant to several different credit programs, each of
which has its own interest rate, which may be fixed or adjustable, and range of
maturities.
The Company also obtains funds pursuant to securities sold under reverse
repurchase agreements. Under these agreements, the Company sells securities
(generally mortgage-backed and related securities) under an agreement to
repurchase such securities at a specified price at a later date. Reverse
repurchase agreements have short-term maturities (typically 90 days or less) and
are deemed to be financing transactions. All securities underlying reverse
repurchase agreements are reflected as assets in the Company's Consolidated
Financial Statements and are held in safekeeping by broker-dealers.
68
<PAGE>
The Company's borrowings also include subordinated debentures and notes. At
June 30, 1996, this category of borrowings consisted primarily of $100 million
principal amount of the Debentures issued by the Bank in June 1995. At June 30,
1996, this category of borrowings also included $7.4 million of short-term notes
which are privately issued by the Company from time to time to certain
stockholders of the Company.
At June 30, 1996, borrowings also included a hotel mortgage payable in
connection with a hotel in Columbus, Ohio which is owned by the Company.
The following table sets forth information relating to the Company's
borrowings and other interest-bearing obligations at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ---------------------------------
1996 1995 1994 1993
---------- ---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
FHLB advances..................................................... $ 70,399 $ 70,399 $ 5,399 $ 57,399
Reverse repurchase agreements..................................... -- 84,761 -- 275,468
Subordinated debentures and other interest-bearing obligations:
Debentures...................................................... 100,000 100,000 -- --
Short-term notes................................................ 7,365 8,627 1,012 14,578
Hotel mortgages payable......................................... 8,338 8,427 19,099 26,347
---------- ---------- --------- ----------
115,703 117,054 20,111 40,925
---------- ---------- --------- ----------
$ 186,102 $ 272,214 $ 25,510 $ 373,792
---------- ---------- --------- ----------
---------- ---------- --------- ----------
</TABLE>
The following table sets forth certain information relating to the Company's
short-term borrowings having average balances during the period of greater than
30% of stockholders' equity at the end of the period. During each reported
period, FHLB advances and reverse repurchase agreements are the only categories
of borrowings meeting this criteria.
<TABLE>
<CAPTION>
AT OR FOR
THE
SIX MONTHS AT OR FOR THE YEAR ENDED DECEMBER
ENDED JUNE 31,
30, ----------------------------------
1996 1995 1994 1993
------------ ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FHLB advances:
Average amount outstanding during the period................. $ 70,399 $ 14,866 $ 26,476 $ 64,130
Maximum month-end balance outstanding during the period...... 70,399 100,399 57,399 67,399
Weighted average rate:
During the period.......................................... 5.77% 7.57% 4.65% 4.42%
At end of period........................................... 5.55 5.84 9.59 4.02
Reverse repurchase agreements:
Average amount outstanding during the period................. $ 23,793 $ 16,754 $ 254,052 $ 195,111
Maximum month-end balance outstanding during the period...... 84,321 84,761 537,629 275,468
Weighted average rate:
During the period.......................................... 5.76% 5.68% 3.98% 3.56%
At end of period........................................... -- 5.70 -- 3.57
</TABLE>
For additional information relating to the Company's borrowings, see Notes
14, 15 and 16 to the Consolidated Financial Statements.
DISCONTINUED OPERATIONS
Until recently, the Company's business activities included an automated
banking division which generally emphasized the installation of automated teller
machines and automated banking centers in a wide
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variety of locations which were not associated with branch offices of the
Company, as well as the development and installation of an automated
multi-application card system for the distribution of financial products and
services to members of a college or university population. For further
information relating to this division, which was discontinued in September 1995,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Discontinued Operations."
OFFICES
At June 30, 1996, the Company conducted business from its executive offices
located in West Palm Beach, Florida, a full-service banking office located in
northern New Jersey and a loan production office located in New Jersey.
The following table sets forth information relating to the Company's
executive, main and other offices at June 30, 1996.
<TABLE>
<CAPTION>
LOCATION OWNED/LEASED
- ----------------------------------- ------------- NET BOOK VALUE OF
PROPERTY OR LEASEHOLD
IMPROVEMENTS
---------------------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Executive Offices:
1675 Palm Beach Lakes Blvd. Leased $ 5,824
West Palm Beach, FL
Main Office:
1350 Sixteenth Street Leased 7
Fort Lee, NJ
Loan Production Office:
100 Menlo Park Drive Leased 13
Suite 200
Edison, New Jersey
</TABLE>
COMPUTER SYSTEMS AND OTHER EQUIPMENT
The Company believes that its use of information technology is a key factor
in achieving competitive advantage in the servicing of nonperforming loans,
improving servicing efficiencies to minimize operating costs and increasing
overall profitability. The Company has invested in a state-of-the-art computer
infrastructure, and uses an IBM AS400 and NetFRAME file servers as its primary
hardware platforms. In addition to its standard industry software applications,
the Company has internally developed fully integrated proprietary applications
designed to provide decision support, automation of decision execution and
tracking and exception reporting. The Company's systems have significant
capacity for expansion or upgrade.
The proprietary software packages developed for asset resolution use
advanced financial models to predict the resolution strategy with the highest
returns and to route the loan or property through the resolution process, as
well as track performance against specified timelines for each procedure. These
activities are linked with automated communications, including FAX, e-mail or
letter with the borrower or outside vendors, such as attorneys and brokers. The
systems also are integrated with a document imaging system which currently
stores two million images on magnetic media with a 50 gigabyte optical juke box
for additional storage. This system permits the immediate access to pertinent
loan documents and the automatic preparation of foreclosure packages. The
Company also has implemented a data warehouse strategy which provides corporate
data on a centralized basis for decision support.
EMPLOYEES
At June 30, 1996, the Company had 325 full-time equivalent employees
(exclusive of the employees of the hotel owned by the Company). The employees
are not represented by a collective bargaining agreement, and management
believes that it has good relations with its employees.
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LEGAL PROCEEDINGS
The Company is involved in various legal proceedings occurring in the
ordinary course of business which management of the Company believes will not
have a material adverse effect on the financial condition or operations of the
Company.
REGULATION
Financial institutions and their holding companies are extensively regulated
under federal and state laws. As a result, the business, financial condition and
prospects of the Company and the Bank can be materially affected not only by
management decisions and general economic conditions, but also by applicable
statutes and regulations and other regulatory pronouncements and policies
promulgated by regulatory agencies with jurisdiction over the Company and the
Bank, such as the OTS and the FDIC. The effect of such statutes, regulations and
other pronouncements and policies can be significant, cannot be predicted with a
high degree of certainty and can change over time. Moreover, such statutes,
regulations and other pronouncements and policies are intended to protect
depositors and the insurance funds administered by the FDIC, and not
stockholders or holders of indebtedness which is not insured by the FDIC.
The enforcement powers available to federal banking regulators is
substantial and includes, among other things, the ability to assess civil
monetary penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties, as defined. In general, these enforcement actions must be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with regulatory authorities.
The following discussion and other references to and descriptions of the
regulation of financial institutions contained herein constitute brief summaries
thereof as in effect on the date of this Prospectus. This discussion is not
intended to constitute and does not purport to be a complete statement of all
legal restrictions and requirements applicable to the Company and the Bank and
all such descriptions are qualified in their entirety by reference to applicable
statutes, regulations and other regulatory pronouncements.
As noted under "Risk Factors--Regulation," in recent periods there have been
various legislative proposals in the U.S. Congress to eliminate the thrift
charter and the OTS. Although the Company currently is unable to predict whether
the existence of the thrift charter and the OTS may be the subject of future
legislation and, if so, what the final contents of such legislation will be and
their effects, if any, on the Company and the Bank, such legislation could
result in, among other things, the Company becoming subject to the same
regulatory capital requirements, activities limitations and other requirements
which are applicable to bank holding companies under the BHCA. Unlike savings
and loan holding companies, bank holding companies are subject to regulatory
capital requirements, which generally are comparable to the regulatory capital
requirements which are applicable to the Bank (see "Regulation--The
Bank--Regulatory Capital Requirements"), and unlike unitary savings and loan
holding companies such as the Company, which generally are not subject to
activities limitations, bank holding companies generally are prohibited from
engaging in activities or acquiring or controlling, directly or indirectly, the
voting securities or assets of any company engaged in any activity other than
banking, managing or controlling banks and bank subsidiaries or other activities
that the Federal Reserve Board has determined, by regulation or otherwise, to be
so closely related to banking or managing or controlling banks as to be a proper
incident thereto.
THE COMPANY
GENERAL. The Company is a registered savings and loan holding company under
the Home Owners' Loan Act ("HOLA"). As such, the Company is subject to
regulation, supervision and examination by the OTS.
ACTIVITIES RESTRICTIONS. There are generally no restrictions on the
activities of a savings and loan holding company, such as the Company, which
holds only one subsidiary savings institution. However, if the Director of the
OTS determines that there is reasonable cause to believe that the continuation
by a savings and loan
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<PAGE>
holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings institution, the
Director may impose such restrictions as deemed necessary to address such risk,
including limiting (i) payment of dividends by the savings institution; (ii)
transactions between the savings institution and its affiliates; and (iii) any
activities of the savings institution that might create a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings institution. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
institution subsidiary of such a holding company fails to meet a qualified
thrift lender ("QTL") test set forth in OTS regulations, then such unitary
holding company shall become subject to the activities restrictions applicable
to multiple savings and loan holding companies and, unless the savings
institution requalifies as a QTL within one year thereafter, shall register as,
and become subject to the restrictions applicable to, a bank holding company.
See "--The Bank--Qualified Thrift Lender Test."
If the Company were to acquire control of another savings institution, other
than through merger or other business combination with the Bank, the Company
would thereupon become a multiple savings and loan holding company. Except where
such acquisition is pursuant to the authority to approve emergency thrift
acquisitions and where each subsidiary savings institution meets the QTL test,
as set forth below, the activities of the Company and any of its subsidiaries
(other than the Bank or other subsidiary savings institutions) would thereafter
be subject to further restrictions. Among other things, no multiple savings and
loan holding company or subsidiary thereof which is not a savings institution
generally shall commence or continue for a limited period of time after becoming
a multiple savings and loan holding company or subsidiary thereof any business
activity, other than: (i) furnishing or performing management services for a
subsidiary savings institution; (ii) conducting an insurance agency or escrow
business; (iii) holding, managing, or liquidating assets owned by or acquired
from a subsidiary savings institution; (iv) holding or managing properties used
or occupied by a subsidiary savings institution; (v) acting as trustee under
deeds of trust; (vi) those activities authorized by regulation as of March 5,
1987 to be engaged in by multiple savings and loan holding companies; or (vii)
unless the Director of the OTS by regulation prohibits or limits such activities
for savings and loan holding companies, those activities authorized by the
Federal Reserve Board as permissible for bank holding companies. Those
activities described in clause (vii) above also must be approved by the Director
of the OTS prior to being engaged in by a multiple savings and loan holding
company.
RESTRICTIONS ON ACQUISITIONS. Except under limited circumstances, savings
and loan holding companies are prohibited from acquiring, without prior approval
of the Director of the OTS, (i) control of any other savings institution or
savings and loan holding company or substantially all the assets thereof or (ii)
more than 5% of the voting shares of a savings institution or holding company
thereof which is not a subsidiary. Except with the prior approval of the
Director of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock, may acquire control of any savings institution, other than
a subsidiary savings institution, or of any other savings and loan holding
company.
The Director of the OTS may approve acquisitions resulting in the formation
of a multiple savings and loan holding company which controls savings
institutions in more than one state only if (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office located in the state of the institution to be acquired as of March
5, 1987; (ii) the acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act ("FDIA"); or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by state-chartered savings institutions located in the state where the
acquiring entity is located (or by a holding company that controls such
state-chartered savings institutions).
RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between the
Company or any of its non-bank subsidiaries and the Bank are subject to various
restrictions, which are described below under "--The Bank--Affiliate
Transactions" below.
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<PAGE>
THE BANK
GENERAL. The Bank is a federally-chartered savings bank organized under the
HOLA. As such, the Bank is subject to regulation, supervision and examination by
the OTS. The deposit accounts of the Bank are insured up to applicable limits by
the SAIF administered by the FDIC and, as a result, the Bank also is subject to
regulation, supervision and examination by the FDIC.
The business and affairs of the Bank are regulated in a variety of ways.
Regulations apply to, among other things, insurance of deposit accounts, capital
ratios, payment of dividends, liquidity requirements, the nature and amount of
the investments that the Bank may make, transactions with affiliates, community
and consumer lending laws, internal policies and controls, reporting by and
examination of the Bank and changes in control of the Bank.
INSURANCE OF ACCOUNTS. As an FDIC-insured institution, the Bank is required
to pay deposit insurance premiums to the FDIC. In 1993, the FDIC adopted a
transitional risk-based deposit insurance system, which became permanent
effective January 1, 1994. Under current FDIC regulations, institutions are
assigned to one of three capital groups which are based solely on the level of
an institution's capital--"well capitalized," "adequately capitalized," and
"undercapitalized"--which are defined in the same manner as the regulations
establishing the prompt corrective action system under Section 38 of the FDIA,
as discussed below. These three groups are then divided into three subgroups
which are based on supervisory evaluations by the institution's primary federal
regulator, resulting in nine assessment classifications. Assessment rates
currently range from .23% for well capitalized, healthy institutions to .31% for
undercapitalized institutions with substantial supervisory concerns.
On November 14, 1995, the FDIC adopted a new assessment rate schedule of
zero to 27 basis points (subject to a $2,000 annual minimum) for BIF members
beginning on or about January 1, 1996 while retaining the existing assessment
rate schedule for SAIF member institutions. In announcing this new schedule, the
FDIC noted that the premium differential may have adverse consequences for SAIF
members, including reduced earnings and an impaired ability to raise funds in
the capital markets. In addition, as a result of this differential SAIF members,
such as the Bank, could be placed at a competitive disadvantage to BIF members
with respect to the pricing of loans and deposits and the ability to achieve
lower operating costs. For information concerning proposed legislation which is
intended to address this competitive disadvantage and, among other things,
recapitalize the SAIF, see "Risk Factors--Recapitalization of SAIF."
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the Bank's deposit insurance.
REGULATORY CAPITAL REQUIREMENTS. Federally-insured savings associations are
required to maintain minimum levels of regulatory capital. These standards
generally must be as stringent as the comparable capital requirements imposed on
national banks. The OTS also is authorized to impose capital requirements in
excess of these standards on individual associations on a case-by-case basis. At
June 30, 1996, the Bank's regulatory capital substantially exceeded applicable
requirements. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Regulatory Capital Requirements."
Federally-insured savings associations are subject to three capital
requirements: a tangible capital requirement, a core or leverage capital
requirement and a risk-based capital requirement. All savings associations
currently are required to maintain tangible capital of at least 1.5% of adjusted
total assets (as defined in the regulations), core capital equal to 3% of
adjusted total assets and total capital (a combination of core and supplementary
capital) equal to 8% of risk-weighted assets. For purposes of the regulation,
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<PAGE>
tangible capital is core capital less all intangibles other than qualifying
mortgage servicing rights, of which the Bank had $2.7 million at June 30, 1996.
Core capital includes common stockholders' equity, non-cumulative perpetual
preferred stock and related surplus, minority interests in the equity accounts
of fully consolidated subsidiaries and certain nonwithdrawable accounts and
pledged deposits. Core capital generally is reduced by the amount of a savings
association's intangible assets, other than qualifying mortgage servicing
rights.
A savings association is allowed to include both core capital and
supplementary capital in the calculation of its total capital for purposes of
the risk-based capital requirements, provided that the amount of supplementary
capital included does not exceed the savings association's core capital.
Supplementary capital consists of certain capital instruments that do not
qualify as core capital, including subordinated debt (such as the Debentures)
which meets specified requirements, and general valuation loan and lease loss
allowances up to a maximum of 1.25% of risk-weighted assets. In determining the
required amount of risk-based capital, total assets, including certain
off-balance sheet items, are multiplied by a risk weight based on the risks
inherent in the type of assets. The risk weights assigned by the OTS for
principal categories of assets currently range from 0% to 100%, depending on the
type of asset.
OTS policy imposes a limitation on the amount of net deferred tax assets
under SFAS No. 109 that may be included in regulatory capital. (Net deferred tax
assets represent deferred tax assets, reduced by any valuation allowances, in
excess of deferred tax liabilities). Application of the limit depends on the
possible sources of taxable income available to an institution to realize
deferred tax assets. Deferred tax assets that can be realized from the following
generally are not limited: taxes paid in prior carryback years and future
reversals of existing taxable temporary differences. To the extent that the
realization of deferred tax assets depends on an institution's future taxable
income (exclusive of reversing temporary differences and carryforwards), or its
tax-planning strategies, such deferred tax assets are limited for regulatory
capital purposes to the lesser of the amount that can be realized within one
year of the quarter-end report date or 10% of core capital. The foregoing
considerations did not affect the calculation of the Bank's regulatory capital
at June 30, 1996.
In August 1993, the OTS adopted a final rule incorporating an interest-rate
risk component into the risk-based capital regulation. Under the rule, an
institution with a greater than "normal" level of interest rate risk will be
subject to a deduction of its interest rate risk component from total capital
for purposes of calculating the risk-based capital requirement. As a result,
such an institution will be required to maintain additional capital in order to
comply with the risk-based capital requirement. Although the final rule was
originally scheduled to be effective as of January 1994, the OTS has indicated
that it will delay invoking its interest rate risk rule requiring institutions
with above normal interest rate risk exposure to adjust their regulatory capital
requirement until appeal procedures are implemented and evaluated. The OTS has
not yet established an effective date for the capital deduction. Management of
the Bank does not believe that the OTS' adoption of an interest rate risk
component to the risk-based capital requirement will adversely affect the Bank
if it becomes effective in its current form.
In April 1991, the OTS proposed to modify the 3% of adjusted total assets
core capital requirement in the same manner as was done by the Comptroller of
the Currency for national banks. Under the OTS proposal, only savings
associations rated composite 1 under the CAMEL rating system will be permitted
to operate at the regulatory minimum core capital ratio of 3%. For all other
savings associations, the minimum core capital ratio will be 3% plus at least an
additional 100 to 200 basis points, which thus will increase the core capital
ratio requirement to 4% to 5% of adjusted total assets or more. In determining
the amount of additional capital, the OTS will assess both the quality of risk
management systems and the level of overall risk in each individual savings
association through the supervisory process on a case-by-case basis.
PROMPT CORRECTIVE ACTION. Federal law provides the federal banking
regulators with broad power to take "prompt corrective action" to resolve the
problems of undercapitalized institutions. The extent of the regulators' powers
depends on whether the institution in question is "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized"
or "critically undercapitalized." Under regulations adopted by the federal
banking regulators, an institution shall be deemed to be (i) "well capitalized"
if
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<PAGE>
it has a total risk-based capital ratio of 10.0% or more, has a Tier I
risk-based capital ratio of 6.0% or more, has a Tier I leverage capital ratio of
5.0% or more and is not subject to specified requirements to meet and maintain a
specific capital level for any capital measure; (ii) "adequately capitalized" if
it has a total risk-based capital ratio of 8.0% or more, a Tier I risk-based
capital ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0% or
more (3.0% under certain circumstances) and does not meet the definition of
"well capitalized," (iii) "undercapitalized" if it has a total risk-based
capital ratio that is less than 8.0%, a Tier I risk-based capital ratio that is
less than 4.0% or a Tier I leverage capital ratio that is less than 4.0% (3.0%
under certain circumstances), (iv) "significantly undercapitalized" if it has a
total risk-based capital ratio that is less than 6.0%, a Tier I risk-based
capital ratio that is less than 3.0% or a Tier I leverage capital ratio that is
less than 3.0%, and (v) "critically undercapitalized" if it has a ratio of
tangible equity to adjusted total assets that is equal to or less than 2.0%. The
regulations also permit the appropriate federal banking regulator to downgrade
an institution to the next lower category (provided that a significantly
undercapitalized institution may not be downgraded to critically
undercapitalized) if the regulator determines (i) after notice and opportunity
for hearing or response, that the institution is in an unsafe or unsound
condition or (ii) that the institution has received (and not corrected) a
less-than-satisfactory rating for any of the categories of asset quality,
management, earnings or liquidity in its most recent exam. At June 30, 1996, the
Bank was a "well capitalized" institution under the prompt corrective action
regulations of the OTS.
Depending upon the capital category to which an institution is assigned, the
regulators' corrective powers, many of which are mandatory in certain
circumstances, include prohibition on capital distributions; prohibition on
payment of management fees to controlling persons; requiring the submission of a
capital restoration plan; placing limits on asset growth; limiting acquisitions,
branching or new lines of business; requiring the institution to issue
additional capital stock (including additional voting stock) or to be acquired;
restricting transactions with affiliates; restricting the interest rates that
the institution may pay on deposits; ordering a new election of directors of the
institution; requiring that senior executive officers or directors be dismissed;
prohibiting the institution from accepting deposits from correspondent banks;
requiring the institution to divest certain subsidiaries; prohibiting the
payment of principal or interest on subordinated debt; and, ultimately,
appointing a receiver for the institution.
QUALIFIED THRIFT LENDER TEST. All savings associations are required to meet
a QTL Test set forth in the HOLA and regulations of the OTS thereunder to avoid
certain restrictions on their operations. A savings association that does not
meet the QTL Test set forth in the HOLA and implementing regulations must either
convert to a bank charter or comply with the following restrictions on its
operations: (i) the association may not engage in any new activity or make any
new investment, directly or indirectly, unless such activity or investment is
permissible for a national bank; (ii) the branching powers of the association
shall be restricted to those of a national bank; (iii) the association shall not
be eligible to obtain any advances from its FHLB; and (iv) payment of dividends
by the association shall be subject to the rules regarding payment of dividends
by a national bank. Upon the expiration of three years from the date the
association ceases to be a QTL, it must cease any activity and not retain any
investment not permissible for a national bank and immediately repay any
outstanding FHLB advances (subject to safety and soundness considerations).
Currently, the QTL test requires that 65% of an institution's "portfolio
assets" (as defined) consist of certain housing and consumer-related assets on a
monthly basis in at least nine out of every 12 months. At June 30, 1996, the
qualified thrift investments of the Bank were approximately 70% of its portfolio
assets.
RESTRICTIONS ON CAPITAL DISTRIBUTIONS. The OTS has promulgated a regulation
governing capital distributions by savings associations, which include cash
dividends, stock redemptions or repurchases, cash-out mergers, interest payments
on certain convertible debt and other transactions charged to the capital
account of a savings association as a capital distribution. Generally, the
regulation creates three tiers of associations based on regulatory capital, with
the top two tiers providing a safe harbor for specified levels of capital
distributions from associations so long as such associations notify the OTS and
receive no objection to the distribution from the OTS. Associations that do not
qualify for the safe harbor provided for the top two tiers of associations are
required to obtain prior OTS approval before making any capital distributions.
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<PAGE>
Tier 1 associations may make the highest amount of capital distributions,
and are defined as savings associations that before and after the proposed
distribution meet or exceed their fully phased-in regulatory capital
requirements. Tier 1 associations may make capital distributions during any
calendar year equal to the greater of (i) 100% of net income for the calendar
year-to-date plus 50% of its "surplus capital ratio" at the beginning of the
calendar year and (ii) 75% of its net income over the most recent four-quarter
period. The "surplus capital ratio" is defined to mean the percentage by which
the association's ratio of total capital to assets exceeds the ratio of its
fully phased-in capital requirement to assets, and "fully phased-in capital
requirement" is defined to mean an association's capital requirement under the
statutory and regulatory standards applicable on December 31, 1994, as modified
to reflect any applicable individual minimum capital requirement imposed upon
the association. At June 30, 1996, the Bank was a Tier 1 association under the
OTS capital distribution regulation.
In December 1994, the OTS published a notice of proposed rulemaking to amend
its capital distribution regulation. Under the proposal, the three tiered
approach contained in existing regulations would be replaced and institutions
would be permitted to make capital distributions that would not result in their
capital being reduced below the level required to remain "adequately
capitalized," as defined above under "--The Bank--Prompt Corrective Action."
LOANS-TO-ONE BORROWER. Under applicable laws and regulations, the amount of
loans and extensions of credit which may be extended by a savings institution
such as the Bank to any one borrower, including related entities, generally may
not exceed the greater of $500,000 or 15% of the unimpaired capital and
unimpaired surplus of the institution. Loans in an amount equal to an additional
10% of unimpaired capital and unimpaired surplus also may be made to a borrower
if the loans are fully secured by readily marketable securities. An
institution's "unimpaired capital and unimpaired surplus" includes, among other
things, the amount of its core capital and supplementary capital included in its
total capital under OTS regulations.
At June 30, 1996, the Bank's unimpaired capital and surplus amounted to
$252.7 million, resulting in a general loans-to-one borrower limitation of $37.9
million under applicable laws and regulations. See "Business--Discounted Loan
Acquisition and Resolution Activities--Composition of the Discounted Loan
Portfolio" and "--Lending Activities--Composition of Loan Portfolio."
BROKERED DEPOSITS. Under applicable laws and regulations, an insured
depository institution may be restricted in obtaining, directly or indirectly,
funds by or through any "deposit broker," as defined, for deposit into one or
more deposit accounts at the institution. The term "deposit broker" generally
includes any person engaged in the business of placing deposits, or facilitating
the placement of deposits, of third parties with insured depository institutions
or the business of placing deposits with insured depository institutions for the
purpose of selling interests in those deposits to third parties. Under FDIC
regulations, well-capitalized institutions are subject to no brokered deposit
limitations, while adequately capitalized institutions are able to accept, renew
or roll over brokered deposits only (i) with a waiver from the FDIC and (ii)
subject to the limitation that they do not pay an effective yield on any such
deposit which exceeds by more than (a) 75 basis points the effective yield paid
on deposits of comparable size and maturity in such institution's normal market
area for deposits accepted in its normal market area or (b) by 120% for retail
deposits and 130% for wholesale deposits, respectively, of the current yield on
comparable maturity U.S. treasury obligations for deposits accepted outside the
institution's normal market area. Undercapitalized institutions are not
permitted to accept brokered deposits and may not solicit deposits by offering
an effective yield that exceeds by more than 75 basis points the prevailing
effective yields on insured deposits of comparable maturity in the institution's
normal market area or in the market area in which such deposits are being
solicited. At June 30, 1996, the Bank was a well-capitalized institution which
was not subject to restrictions on brokered deposits, which otherwise would be
applicable to all of its brokered and wholesale deposits. See "Business--Sources
of Funds--Deposits."
LIQUIDITY REQUIREMENTS. All savings associations are required to maintain
an average daily balance of liquid assets, which include specified short-term
assets and certain long-term assets, equal to a certain percentage of the sum of
its average daily balance of net withdrawable deposit accounts and borrowings
payable in one year or less. The liquidity requirement may vary from time to
time (between 4% and 10%)
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depending upon economic conditions and savings flows of all savings
associations. At the present time, the required liquid asset ratio is 5%.
Historically, the Bank has operated in compliance with these requirements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity."
POLICY STATEMENT ON NATIONWIDE BRANCHING. Current OTS policy generally
permits a federally-chartered savings association to establish branch offices
outside of its home state if the association meets the domestic building and
loan test in Section 7701(a)(19) of the Code or the asset composition test of
subparagraph (c) of that section for institutions seeking to so qualify, and if,
with respect to each state outside of its home state where the association has
established branches, the assets attributable to the branches, taken alone, also
would qualify them as a domestic building and loan association were they
otherwise eligible (which restrictions are not applicable in the event that a
state-chartered association organized under the laws of the federal
association's home state would be permitted under relevant state law to operate
in the other state). See "Taxation-Federal Taxation." An association seeking to
take advantage of this authority would have to have a branching application
approved by the OTS, which would consider the regulatory capital of the
association and its record under the Community Reinvestment Act of 1977, as
amended ("CRA"), among other things.
AFFILIATE TRANSACTIONS. Under federal law and regulation, transactions
between a savings association and its affiliates are subject to quantitative and
qualitative restrictions. Affiliates of a savings association include, among
other entities, companies that control, are controlled by or are under common
control with the savings association. As a result, the Company and its non-bank
subsidiaries are affiliates of the Bank.
Savings associations are restricted in their ability to engage in "covered
transactions" with their affiliates. In addition, covered transactions between a
savings association and an affiliate, as well as certain other transactions with
or benefiting an affiliate, must be on terms and conditions at least as
favorable to the savings association as those prevailing at the time for
comparable transactions with non-affiliated companies. Savings associations are
required to make and retain detailed records of transactions with affiliates.
Notwithstanding the foregoing, a savings association is not permitted to
make a loan or extension of credit to any affiliate unless the affiliate is
engaged only in activities the Federal Reserve Board has determined to be
permissible for bank holding companies. Savings associations also are prohibited
from purchasing or investing in securities issued by an affiliate, other than
shares of a subsidiary.
Savings associations are also subject to various limitations and reporting
requirements on loans to insiders. These limitations require, among other
things, that all loans or extensions of credit to insiders (generally executive
officers, directors or 10% stockholders of the institution) or their "related
interests" be made on substantially the same terms (including interest rates and
collateral) as, and follow credit underwriting procedures that are not less
stringent than, those prevailing for comparable transactions with the general
public and not involve more than the normal risk of repayment or present other
unfavorable features.
COMMUNITY INVESTMENT AND CONSUMER PROTECTION LAWS. In connection with its
lending activities, the Bank is subject to a variety of federal laws designed to
protect borrowers and promote lending to various sectors of the economy and
population. Included among these are the federal Home Mortgage Disclosure Act,
Real Estate Settlement Procedures Act, Truth-in-Lending Act, the Equal Credit
Opportunity Act, Fair Credit Reporting Act and the CRA.
SAFETY AND SOUNDNESS. Other regulations which were recently adopted or are
currently proposed to be adopted pursuant to recent legislation include: (i)
real estate lending standards for insured institutions, which provide guidelines
concerning loan-to-value ratios for various types of real estate loans; (ii)
revisions to the risk-based capital rules to account for interest rate risk,
concentration of credit risk and the risks posed by "non-traditional
activities;" (iii) rules requiring depository institutions to develop and
implement internal procedures to evaluate and control credit and settlement
exposure to their correspondent banks: and (iv) rules addressing various "safety
and soundness" issues, including operations and managerial standards, standards
for asset quality, earnings and stock valuations, and compensation standards for
the officers, directors, employees and principal stockholders of the insured
institution.
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<PAGE>
TAXATION
FEDERAL TAXATION
GENERAL. The Company and, with one exception, its subsidiaries currently
file, and expect to continue to file, a consolidated federal income tax return
based on a calendar year. Consolidated returns have the effect of eliminating
inter-company transactions, including dividends, from the computation of taxable
income.
Savings institutions such as the Bank, which meet certain definitional tests
primarily relating to their assets and the nature of their businesses,
historically have been permitted to establish a reserve for bad debts and to
make annual additions to the reserve. These additions may, within specified
formula limits, be deducted in arriving at the Bank's taxable income. For
purposes of computing the deductible addition to its bad debt reserve, the
Bank's loans are separated into "qualifying real property loans" (I.E.,
generally those loans secured by certain interests in real property) and all
other loans ("non-qualifying loans"). The deduction with respect to
nonqualifying loans must be computed under the experience method, while a
deduction with respect to qualifying loans may be computed using a percentage
based on actual loss experience or a percentage of taxable income.
Under the percentage of taxable income method, the bad debt deduction equals
8% of taxable income determined without regard to that deduction and with
certain adjustments. The availability of the percentage of taxable income method
has permitted a qualifying savings institution to be taxed at a lower maximum
effective marginal federal income tax rate than that applicable to corporations
in general. This resulted generally in a maximum effective marginal federal
income tax rate payable by a qualifying savings institution fully able to use
the maximum deduction permitted under the percentage of taxable income method,
in the absence of other factors affecting taxable income, of 32.2% exclusive of
any minimum tax or environmental tax (as compared to 35% for corporations
generally). Any savings institution at least 60% of whose assets are qualifying
assets, as described in Section 7701(a)(19)(c) of the Code, generally will be
eligible for the full deduction of 8% of taxable income, subject to certain
limitations on the amount of the bad debt deduction that a savings association
may claim with respect to additions to its reserve for bad debts under the
percentage of income method. As of December 31, 1995, approximately 71% of the
Bank's assets were "qualifying assets" described in Section 7701(a)(19)(C) of
the Code.
Legislation adopted by the U.S. Congress in August 1996 (i) repeals the
provision of the Code which authorizes use of the percentage of taxable income
method by qualifying savings institutions to determine deductions for bad debts,
effective for taxable years beginning after 1995, and (ii) requires that a
savings institution recapture for tax purposes (i.e. take into income) over a
six-year period its applicable excess reserves, which for a thrift institution
such as the Bank which becomes a "large bank," as defined in Section 585(c)(2)
of the Code, generally is the excess of the balance of its bad debt reserves as
of the close of its last taxable year beginning before January 1, 1996 over the
balance of such reserves as of the close of its last taxable year beginning
before January 1, 1988, which recapture would be suspended for any tax year that
begins after December 31, 1995 and before January 1, 1998 (thus a maximum of two
years) in which a savings institution originates an amount of residential loans
which is not less than the average of the principal amount of such loans made by
a savings institution during its six most recent taxable years beginning before
January 1, 1996. In part because the Bank has provided for deferred taxes with
respect to the excess of its bad debt reserves as of December 31, 1995 over the
balance of such reserves as of December 31, 1987, the Company does not believe
that these provisions will have a material adverse effect on the Company's
financial condition or operations.
The above-referenced legislation also repeals certain provisions of the Code
that only apply to thrift institutions to which Section 593 applies: (i) the
denial of a portion of certain tax credits to a thrift institution (Section
50(d)(1)); (ii) the special rules with respect to the foreclosure of property
securing loans of a thrift institution (Section 595); (iii) the reduction in the
dividends received deduction of a thrift institution (Section 596); and (iv) the
ability of a thrift institution to use a net operating loss to offset its income
from a residual interest in a REMIC (Section 860(E)(a)(2)). It is not
anticipated that the repeal of these provisions will have a material adverse
effect on the Company's financial condition or operations.
ALTERNATIVE MINIMUM TAX. In addition to regular income taxes, corporations
may be subject to an alternative minimum tax which is generally equal to 20% of
alternative minimum taxable income (taxable income, increased by tax preference
items and adjusted for certain regular tax items). The preference items
generally applicable to savings associations include (i) 100% of the excess of a
savings association's bad debt
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<PAGE>
deduction computed under the percentage of taxable income method over the amount
that would have been allowable under the experience method and (ii) an amount
equal to 75% of the amount by which a savings association's adjusted current
earnings (alternative minimum taxable income computed without regard to this
preference, adjusted for certain items) exceeds its alternative minimum taxable
income without regard to this preference. Alternative minimum tax paid can be
credited against regular tax due in later years.
TAX RESIDUALS. From time to time the Company invests in tax residuals,
which, net of deferred fees, are included in the Company's deferred tax assets.
Although a tax residual has little or no future economic cash flows from the
REMIC from which it has been issued, the tax residual does bear the income tax
liability or benefit resulting from the difference between the interest rate
paid on the securities issued by the REMIC and the interest rate received on the
mortgage loans held by the REMIC. This generally results in taxable income for
the Company in the first several years of the REMIC and equal amounts of tax
deductions thereafter. The Company receives cash payments in connection with the
purchase of tax residuals to compensate the Company for the time value of money
associated with the tax payments related to these securities and the costs of
modeling, recording, monitoring and reporting the securities; thus, the Company
in effect receives payments in connection with its acquisition of the security
and acceptance of the related tax liabilities. Prior to 1994, a portion of the
fees received by the Company related to the acquisition of tax residuals were
recorded in the Company's non-interest income as fees on financing transactions
at the time of acquisition and the remainder were deferred and recognized in
interest income (under "investment securities and other") on a level yield basis
over the expected life of the deferred tax asset related to tax residuals. From
time to time, the Company revises its estimate of its future obligations under
the tax residuals, and in 1994, due primarily to certain changes in the
marketplace, consisting of a significant decrease in the availability of new tax
residuals and an increase in the number of purchasers of such securities, the
Company began to defer all fees received and recognize such fees in interest
income on a level yield basis over the expected life of the deferred tax asset
related to tax residuals. The Company also adjusts the recognition in interest
income of fees deferred based upon changes in the actual prepayment rates of the
underlying mortgages held by the REMIC and periodic reassessments of the
expected life of the deferred tax asset related to tax residuals. At June 30,
1996, the Company's gross deferred tax assets included $16.1 million which was
attributable to the Company's tax residuals and related deferred income. The
Company's current portfolio of tax residuals generally have a negative tax basis
and are not expected to generate future taxable income. Because of the manner in
which REMIC residual interests are treated for tax purposes, at June 30, 1996,
the Company had approximately $46.8 million of net operating loss carryforwards
for federal income tax purposes which were attributable to sales of tax
residuals. See Notes 1 and 19 to the Consolidated Financial Statements.
INVESTMENTS IN LOW-INCOME HOUSING TAX CREDIT INTERESTS. For a discussion of
the tax effects of investments in low-income housing tax credit interests, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Income Tax Expense" and "Business--
Investment Activities--Investment in Low-Income Housing Tax Credit Interests."
EXAMINATIONS. The most recent examination by the Internal Revenue Service
of the Company's federal income tax returns was of the tax returns filed for
1989 and 1990. The statute of limitations has run with respect to all tax years
prior to those years. Thus, the federal income tax returns for the years 1991
through 1994 (due to a waiver of the statute of limitations) are open for
examination. The Internal Revenue Service currently is completing an examination
of the Company's federal income tax returns for 1992 and 1991 and commencing an
examination of the returns for 1994 and 1993; management of the Company does not
anticipate any material adjustments as a result of these examinations, although
there can be no assurances in this regard. No state return of the Company has
been examined, and no notification has been received by the Company that any
state intends to examine any of the tax returns with respect to which the
statute of limitations has not run.
STATE TAXATION
The Company's income, property and wages are apportioned to Florida to
determine taxable income based on certain apportionment factors, which has a
statutory tax rate of 5.5%. The Company is taxed in New Jersey on income, net of
expenses, earned in New Jersey at a statutory rate of 3.0%.
For additional information regarding taxation, see Note 19 to the
Consolidated Financial Statements.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following tables set forth certain information about the directors and
executive officers of the Company. Directors are elected annually and hold
office until the earlier of the election and qualification of their successors
or their resignation or removal. Executive officers of the Company are elected
annually by the Board of Directors and generally serve at the discretion of the
Board. There are no arrangements or understandings between the Company and any
person pursuant to which such person was elected as a director or executive
officer of the Company. Other than William C. Erbey and John R. Erbey, who are
brothers, no director or executive officer is related to any other director or
executive officer of the Company or any of its subsidiaries by blood, marriage
or adoption.
DIRECTORS OF THE COMPANY
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE(1) POSITION SINCE
- --------------------- --------- ---------------------------------------------- -----------
<S> <C> <C> <C>
William C. Erbey 47 Chairman, President and Chief Executive 1988
Officer(2)
Barry N. Wish 54 Chairman, Emeritus(2) 1988
W. C. Martin 47 Director 1996
Howard H. Simon 55 Director 1996
</TABLE>
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
<TABLE>
<CAPTION>
NAME AGE(1) POSITION
- --------------------- --------- ----------------------------------------------
<S> <C> <C> <C>
John R. Barnes 53 Senior Vice President
Rory A. Brown 33 Managing Director
John R. Erbey 55 Managing Director and Secretary
Robert E. Koe 51 Managing Director
Christine A. Reich 35 Managing Director and Chief Financial Officer
Stephen C. Wilhoit 35 Senior Vice President
<FN>
- ------------------------
(1) As of June 30, 1996.
(2) Upon consummation of the Common Stock Offering, Mr. Erbey, who currently
serves as President and Chief Executive Officer, will become Chairman of
the Board, and Mr. Wish, who currently serves as Chairman of the Board,
will become Chairman, Emeritus and continue as a director of the Company.
</TABLE>
The principal occupation for the last five years of each director of the
Company, as well as certain other information, is set forth below.
WILLIAM C. ERBEY. Mr. Erbey has served as President and Chief Executive
Officer of the Company since January 1988 and as Chief Investment Officer of the
Company since January 1992, and will become Chairman of the Board upon closing
of the Common Stock Offering. Mr. Erbey has served as Chairman of the Board of
the Bank since February 1988 and as President and Chief Executive Officer of the
Bank since June 1990. From 1983 to 1995, Mr. Erbey served as a Managing General
Partner of The Oxford Financial Group ("Oxford"), a private investment company,
in charge of merchant banking. From 1975 to 1983, he served at General Electric
Capital Corporation ("GECC") in various capacities, most recently as President
and Chief Operating Officer of General Electric Mortgage Insurance Corporation,
a subsidiary of the General Electric Company engaged in the mortgage insurance
business. Mr. Erbey also served as Program General Manager of GECC's Commercial
Financial Services Department and its subsidiary Acquisition Funding
Corporation. He received a B.A. in Economics from Allegheny College and an
M.B.A. from the Harvard Graduate School of Business Administration.
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<PAGE>
BARRY N. WISH. Mr. Wish has served as Chairman of the Board of the Company
since January 1988, and will become Chairman, Emeritus and continue as a
director of the Company upon closing of the Common Stock Offering. From 1983 to
1995, he served as a Managing General Partner of Oxford, which he founded. From
1979 to 1983, he was a Managing General Partner of Walsh, Greenwood, Wish & Co.,
a member firm of the New York Stock Exchange. Prior to founding that firm, Mr.
Wish was a Vice President and Shareholder of Kidder, Peabody & Co., Inc. He is a
graduate of Bowdoin College.
W. C. MARTIN. Since 1982, Mr. Martin has been associated with Holding
Capital Group ("HCG"), which is engaged in the acquisition and turnaround of
businesses in a broad variety of industries. Since March 1993, Mr. Martin also
has served as President and Chief Executive Officer of Solitron Vector Microwave
Products, Inc., a company he formed along with other HCG investors to acquire
the assets of the former Microwave Division of Solitron Devices, Inc. Prior to
1982, Mr. Martin was a Manager in Touche Ross & Company's Management Consulting
Division, and prior to that he held positions in financial management with
Chrysler Corporation. Mr. Martin is a graduate of LaSalle University and
received an M.B.A. from Notre Dame.
HOWARD H. SIMON. From 1978 to the present, Mr. Simon has been President of
Simon, Master & Sidlow, P.A., a certified public accounting firm which Mr. Simon
founded and which is based in Wilmington, Delaware. He is a member of the Board
of Directors and the Executive Committee of CPA Associates International, Inc.
Mr. Simon is a Certified Public Accountant in the State of Delaware. He is
graduate of the University of Delaware.
The background for the last five years of each executive officer of the
Company who is not a director, as well as certain other information, is set
forth below.
JOHN R. BARNES. Mr. Barnes has served as Senior Vice President of the
Company and the Bank since May 1994 and served as Vice President of the same
from October 1989 to May 1994. Mr. Barnes was a Tax Partner in the firm of
Deloitte Haskins & Sells from 1986 to 1989 and in the firm of Arthur Young & Co.
from 1979 to 1986. Mr. Barnes was the Partner in Charge of the Cleveland Office
Tax Department of Arthur Young & Co. from 1979 to 1984. Mr. Barnes is a graduate
of Ohio State University.
RORY A. BROWN. Mr. Brown has served as a Managing Director of the Company
since January 1993, as Vice President--Corporate Development of the Company from
December 1991 until January 1993 and as Vice President and Treasurer of the
Company from June 1988 to December 1991. Mr. Brown has served as a director of
the Bank and as a Managing Director of the Bank since May 1993. Mr. Brown served
as a Vice President of the Bank from July 1989 to May 1993 and as Treasurer from
July 1989 to December 1991. Mr. Brown was a Senior Consultant with the Asset
Securitization Group of Arthur Andersen & Co. from 1985 to 1988. He is a
graduate of Humboldt State University.
JOHN R. ERBEY. Mr. Erbey has served as a Managing Director of the Company
since January 1993 and as Secretary of the Company since June 1989, and served
as Senior Vice President of the Company from June 1989 until January 1993. Mr.
Erbey has served as a director of the Bank since 1990, as a Managing Director of
the Bank since May 1993 and as Secretary of the Bank since July 1989.
Previously, he served as Senior Vice President of the Bank from June 1989 until
May 1993. From 1971 to 1989 he was a member of the Law Department of
Westinghouse Electric Corporation and held various management positions,
including Associate General Counsel and Assistant Secretary from 1984 to 1989.
Previously, he held the positions of Assistant General Counsel of the Industries
and International Group and Assistant General Counsel of the Power Systems Group
of Westinghouse. Mr. Erbey is a graduate of Allegheny College and Vanderbilt
University School of Law.
ROBERT E. KOE. Mr. Koe was elected as a Managing Director of the Company
and the Bank on July 1, 1996. Mr. Koe has served as a director of the Bank since
1994. Mr. Koe formerly was Chairman, President and Chief Executive Officer of
United States Leather, Inc. ("USL"), which includes Pfister & Vogel Leather,
Lackawanna Leather, A.L. Gebhardt and Caldwell/Moser Leather. Prior to joining
USL in 1990, he was Vice Chairman of Heller Financial Inc., and served as a
member of the board of its parent company, Heller International Corp.
("Heller"), as well as Heller Overseas Corp. Mr. Koe came to Heller in 1984 from
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<PAGE>
General Electric Capital Corp. ("GECC"), where he held positions which included
Vice President and General Manager of Commercial Financial Services, Vice
President and General Manager of Commercial Equipment Financing, and President
of Acquisition Funding Corp. Before joining GECC, Mr. Koe held various
responsibilities with its parent, the General Electric Company, from 1967 to
1975. Mr. Koe is a graduate of Kenyon College.
CHRISTINE A. REICH. Ms. Reich has served as a Managing Director of the
Company since June 1994 and as Chief Financial Officer of the Company since
January 1990. Ms. Reich served as Senior Vice President of the Company from
January 1993 until June 1994 and as Vice President from January 1990 until
January 1993. Ms. Reich has served as a director of the Bank since 1993, as a
Managing Director of the Bank since June 1994 and as Chief Financial Officer of
the Bank since May 1990. Ms. Reich served as Senior Vice President of the Bank
from May 1993 to June 1994 and Vice President of the Bank from January 1990 to
May 1993. From 1987 to 1990, Ms. Reich served as an officer of another
subsidiary of the Company. Prior to 1987, Ms. Reich was employed by KPMG Peat
Marwick LLP, most recently in the position of Manager. She is a graduate of the
University of Southern California.
STEPHEN C. WILHOIT. Mr. Wilhoit has served as Senior Vice President of the
Company and the Bank since May 1994. He served as Vice President of the Company
from March 1990 to May 1994 and served as Vice President of the Bank from May
1992 to May 1994. From 1986 to 1990 he was an attorney with the Atlanta law firm
of Trotter Smith & Jacobs. Mr. Wilhoit is a graduate of the University of
Virginia and Wake Forest University School of Law.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Company recently established an Executive
Committee, an Audit Committee and a Nominating and Compensation Committee. A
brief description of these committees is set forth below.
The Executive Committee is generally responsible to act on behalf of the
Board of Directors on all matters when the full Board of Directors is not in
session. Currently, the members of this committee are Directors Erbey and Wish.
The Audit Committee of the Board of Directors reviews and advises the Board
of Directors with respect to reports by the Company's independent auditors and
monitors the Company's compliance with laws and regulations applicable to the
Company's operations. Currently, the members of the Audit Committee are
Directors Simon and Martin.
The Nominating and Compensation Committee evaluates and makes
recommendations to the Board of Directors for the election of directors, as well
as handles personnel and compensation matters relating to the executive officers
of the Company. Currently, the members of the Nominating and Compensation
committee are Directors Simon and Martin.
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<PAGE>
REMUNERATION OF EXECUTIVE OFFICERS--SUMMARY COMPENSATION TABLE
The following table discloses compensation received by the Company's chief
executive officer and the four other most highly paid directors and executive
officers of the Company for the years ended December 31, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
AWARDS
--------------------------
NUMBER OF
ANNUAL COMPENSATION RESTRICTED SECURITIES
----------------------------------- STOCK UNDERLYING ALL OTHER
NAME AND POSITION YEAR SALARY BONUS($)(1) AWARDS OPTIONS(#)(2) COMPENSATION($)(3)
- --------------------------------------- --------- ---------- ------------ ----------- ------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
William C. Erbey,...................... 1995 $ 150,000 $ -- -- -- $ 3,000
President and Chief 1994 150,000 1,171,675 -- 269,400 3,000
Executive Officer 1993 150,000 100,000 -- 166,350 4,497
Barry N. Wish.......................... 1995 150,000 -- -- -- 3,000
Chairman 1994 150,000 800,000 -- 175,970 3,000
1993 150,000 100,000 -- 110,400 4,497
John R. Erbey,......................... 1995 150,000 50,000 -- 44,500 3,000
Managing Director 1994 150,000 800,000 -- 175,970 3,000
and Secretary 1993 150,000 100,000 -- 166,350 4,497
Rory A. Brown,......................... 1995 150,000 50,000 -- 44,500 3,000
Managing Director 1994 150,000 650,000 -- 138,260 3,000
1993 150,000 100,000 -- 166,350 4,497
Christine A. Reich,.................... 1995 150,000 50,000 -- 44,500 3,000
Managing Director 1994 147,917 487,500 -- 97,410 3,000
and Chief Financial 1993 122,917 100,000 -- 86,350 4,497
Officer
</TABLE>
- ------------------------
(1) The indicated bonuses were paid in the first quarter of the following year
for services rendered in the year indicated.
(2) Consists of options granted pursuant to the Company's Stock Option Plan.
(3) Consists of contributions by the Company pursuant to the Company's 401(k)
Savings Plan.
ANNUAL INCENTIVE PLAN
Since 1990, the Company has maintained an annual incentive plan for the
management and other salaried employees of the Company and its subsidiaries. The
plan provides the participants with bonuses each year paid from a pool based
upon the Company's consolidated operating income for that year. Accordingly, the
plan provides the Company's management and other personnel with a significant
incentive to contribute to the Company's financial success by allowing them to
share in a portion of the consolidated operating income of the Company and its
subsidiaries.
The aggregate bonus pool payable under the plan may not exceed 20% of income
before taxes and incentive awards of the Company plus pre-tax equivalent income
generated by tax advantaged investments. The plan is administered by the
President of the Company and may be amended or terminated at any time by the
Board of Directors.
Incentive awards are paid to participants following the end of each fiscal
year after the determination of the Company's income. Incentive awards may be
paid in cash or in any other form approved by the Board of Directors. Since
1990, certain executive officers and other eligible participants have received a
portion of their annual incentive award in the form of options to acquire Common
Stock pursuant to the Stock Option Plan.
Under present federal income tax law, participants will realize ordinary
income immediately upon receipt of a cash distribution under the incentive plan.
The Company will be entitled to an income tax
83
<PAGE>
deduction, in the amount of such ordinary income, for the fiscal year for which
such bonus payment is made, provided the bonus payment is made within two and
one-half months after the close of that fiscal year; otherwise the payment will
be deductible in the fiscal year in which such payment is made to the
participant. It is expected that through the year 1999 all payments under the
plan will be fully deductible by the Company for federal income tax purposes and
will not be subject to Section 162(m) of the Code, which provides for a cap on
the deductibility of compensation paid to certain corporate executives of $1
million per covered executive.
DIRECTORS STOCK PLAN
In July 1996, the Board of Directors and stockholders of the Company
approved the Directors Stock Plan, pursuant to which the sole compensation of
the directors of the Company shall be paid in Common Stock, subject to
consummation of the Common Stock Offering. (Directors also are reimbursed for
their travel and other reasonable expenses incurred in performing their duties
as directors of the Company.) The Directors Stock Plan is intended to encourage
directors to own shares of Common Stock and the highest level of director
performance, as well as to provide a financial incentive that will help attract
and retain the most qualified directors.
Beginning in 1996, the Company will compensate directors by delivering a
total annual value of $10,000 (which may be prorated for a director serving less
than a full one-year term, as in the case of a director joining the Board after
an annual meeting of stockholders), subject to review and adjustment by the
Board of Directors from time to time. Except for 1996, such payment will be made
after the annual organizational meeting of the Board of Directors which follows
the annual meeting of stockholders of the Company. An additional annual fee
payable in shares of Common Stock, which is $2,000 beginning in 1996, subject to
review and adjustment by the Board of Directors from time to time, will be paid
to committee chairs after the annual organizational meeting of the Board of
Directors. For 1996, the four directors of the Company and three committee
chairs will receive shares of Common Stock issuable under the Directors Stock
Plan upon consummation of the Common Stock Offering.
Shares issued pursuant to the Directors Stock Plan will be based on their
"fair market value" on the date of grant. The term "fair market value" is
defined in the Directors Stock Plan to mean the mean of the high and low prices
of the Common Stock as reported by the Nasdaq Stock Market's National Market on
the relevant date, or if no sale of Common Stock shall have been reported for
that day, the average of such prices on the next preceding day and the next
following day for which there are reported sales.
Shares issued pursuant to the Directors Stock Plan, other than the committee
fee shares, would be subject to forfeiture during the 12 full calendar months
following election or appointment to the Board of Directors or a committee
thereof if the director does not attend an aggregate of at least 75% of all
meetings of the Board of Directors and committees thereof of which he is a
member during such period.
An aggregate of 250,000 shares of Common Stock has been reserved for
issuance pursuant to the Directors Stock Plan, subject to adjustment in the
event of specified changes in the Common Stock resulting from recapitalizations,
stock splits, stock dividends and other circumstances set forth in the Directors
Stock Plan.
STOCK OPTION PLAN
The Company's Stock Option Plan is designed to advance the interests of the
Company, its subsidiaries (including the Bank) and the Company's shareholders by
affording certain officers and other key employees of the Company, the Bank and
other subsidiaries an opportunity to acquire or increase their proprietary
interests in the Company by granting such persons options to acquire Common
Stock. A total of 9,316,750 shares of Common Stock currently are authorized for
issuance under the Stock Option Plan. As of June 30, 1996, options to acquire
3,210,540 shares of Common Stock were outstanding under the Stock Option Plan.
Options granted pursuant to the Stock Option Plan have had exercise prices which
are at a substantial discount to the book value of the Common Stock. At June 30,
1996, the average exercise price of the outstanding options granted under the
Stock Option Plan was $1.27 and the book value per share of Common Stock was
$6.50.
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<PAGE>
The Stock Option Plan currently is administered and interpreted by either
the Board of Directors of the Company or, to the extent authority is delegated,
the stock option committee thereof. After the offerings, the Stock Option Plan
will be administered by a committee consisting of not less than two
"disinterested" directors within the meaning of Rule 16b-3 under the Exchange
Act. In the event that the outstanding shares of Common Stock are affected by
reason of a merger, consolidation, reorganization, recapitalization, combination
of shares, stock split or dividend, the number and kind of shares to which any
option relates and the exercise price of any option shall be appropriately
adjusted as determined solely by the Board of Directors of the Company or the
Nominating and Compensation Committee. In the event of a liquidation or
dissolution of the Company, an optionee generally shall have the right,
immediately prior to such dissolution or liquidation, to exercise any
outstanding options in whole or in part.
OPTION GRANTS FOR 1995
The following table provides information relating to option grants made
pursuant to the Stock Option Plan to the individuals named in the Summary
Compensation Table for services rendered in 1995.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF RATES OF STOCK PRICE
SECURITIES PERCENT OF APPRECIATION FOR
UNDERLYING SECURITIES BOOK VALUE PER OPTION TERM(3)
OPTIONS UNDERLYING TOTAL EXERCISE SHARE OF OCWEN --------------------
GRANTED OPTIONS GRANTED TO PRICE COMMON STOCK AT EXPIRATION 0% 5%
NAME (#)(1)(2) EMPLOYEES(2) ($/SH) DECEMBER 31, 1995 DATE ($) ($)
- --------------------- ----------- ------------------- ------------- ------------------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
William C. Erbey..... -- -- % $ -- $ -- -- $ -- $ --
Barry N. Wish........ -- -- -- -- -- -- --
John R. Erbey........ 44,500 14.6 5.76 5.86 2006 4,450 168,655
Rory A. Brown........ 44,500 14.6 5.76 5.86 2006 4,450 168,655
Christine A. Reich... 44,500 14.6 5.76 5.86 2006 4,450 168,655
<CAPTION>
10%
NAME ($)
- --------------------- ---------
<S> <C>
William C. Erbey..... $ --
Barry N. Wish........ --
John R. Erbey........ 420,080
Rory A. Brown........ 420,080
Christine A. Reich... 420,080
</TABLE>
- ------------------------------
(1) All options vest and become exercisable in January 1997.
(2) Indicated grants were made in January 1996 for services rendered in 1995.
The percentage of securities underlying these options to the total number of
securities underlying all options granted to employees of the Company is
based on options to purchase a total of 304,490 shares of Common Stock
granted to participants under the Stock Option Plan in January 1996.
(3) Assumes future prices of shares of Common Stock of $5.86, $9.55 and $15.20
at compounded rates of return of 0%, 5% and 10%, respectively.
AGGREGATED OPTION EXERCISES IN 1995 AND YEAR-END OPTION VALUES
The following table provides information relating to option exercises in
1995 by the individuals named in the Summary Compensation Table and the value of
each such individual's unexercised options at December 31, 1995.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
NUMBER OF OPTIONS AT OPTIONS AT
SHARES DECEMBER 31, 1995 DECEMBER 31, 1995(1)(2)
ACQUIRED VALUE -------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------ ----------- ------------ ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
William C. Erbey.............. -- $ -- 924,640 -- $ 4,742,422 $ --
Barry N. Wish................. 432,620 1,754,237 175,970 -- 892,696 --
John R. Erbey................. -- -- 747,880 44,500 3,810,136 4,450
Rory A. Brown................. -- -- 504,610 44,500 2,474,254 4,450
Christine A. Reich............ -- -- 222,650 44,500 1,060,577 4,450
</TABLE>
- ------------------------
(1) Based on the $5.86 book value of a share of Common Stock at December 31,
1995.
(2) For information regarding recent exercises of stock options, see
"--Transactions with Affiliates" below.
85
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Determinations regarding compensation of the Company's employees are made by
the Company's Board of Directors. Although Director William C. Erbey is an
employee of the Company, he does not participate in deliberations of the Board
of Directors concerning his compensation.
TRANSACTIONS WITH AFFILIATES
As of June 30, 1996, the Company (through the Bank) held a residential
mortgage loan with an interest rate of 8.5% which was made by the Company in
1987 to Howard H. Simon, a director of the Company. The principal balance of
this loan amounted to $124,624 at June 30, 1996, and the highest principal
balance of this loan during 1996 was $132,427.
From time to time the Company raises funds by privately issuing short-term
notes to its stockholders. At June 30, 1996, the Company had $7.4 million of
such short-term notes outstanding, including $1.0 million and $250,000 which
were held by William C. Erbey and John R. Erbey (or their affiliates),
respectively. All of such short-term notes bear interest at 10.5% per annum and
mature on May 1, 1997.
In September 1996, the Company loaned $6.7 million to certain of its and the
Bank's officers to fund their exercise of vested stock options to purchase an
aggregate of 2,713,660 shares of Common Stock, including 924,640 shares, 175,970
shares, 747,880 shares, 471,280 shares and 222,650 shares acquired by William C.
Erbey, Barry N. Wish, John R. Erbey, Rory A. Brown and Christine A. Reich,
respectively, who issued notes to the Company in the amount of $2.2 million,
$423,000, $1.8 million, $1.2 million and $583,000, respectively. Such notes bear
interest at 10.5% per annum, are payable in two equal installments on March 1,
1998 and March 1, 1999 and are secured by the related shares of Common Stock. At
the time of the issuance of the foregoing notes, the Company also agreed to loan
the issuers thereof up to an additional $1.7 million to fund the payment of
additional taxes owed in connection with the exercise of the above-referenced
stock options, including $594,000, $112,000, $478,000, $288,000 and $134,000 in
the case of William C. Erbey, Barry N. Wish, John R. Erbey, Rory A. Brown and
Christine A. Reich, respectively. Such loans will have the same terms as the
above-referenced notes.
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<PAGE>
BENEFICIAL OWNERSHIP OF COMMON STOCK
As of the date hereof, the Company had 26,741,100 shares of Common Stock
outstanding which were held by 86 stockholders of record. The Common Stock is
privately held and, as a result, there are no market prices available for such
stock.
The following table sets forth, as of the date hereof, certain information
as to the Common Stock beneficially owned by (i) persons or entities, including
any "group" as that term is used in Section 13(d)(3) of the Exchange Act, who or
which were known to the Company to be the beneficial owners of 5% or more of the
issued and outstanding Common Stock, (ii) the executive officers of the Company
identified in the summary compensation table and (iii) all directors and
executive officers of the Company as a group. Other than Mr. Harold D. Price,
whose address is 2450 Presidential Way, #1806, West Palm Beach, Florida 33401,
the address for each of the individuals named below is the same as that of the
Company. See "The Company."
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
SHARES BENEFICIALLY OWNED AS AFTER THE
OF SEPTEMBER 25, 1996 COMMON STOCK OFFERING
------------------------------ ------------------------------
NAME OF BENEFICIAL OWNER AMOUNT(1) PERCENT(1) AMOUNT(1) PERCENT(1)
- -------------------------------------------------------- --------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Harold D. Price......................................... 2,048,480(2) 7.7% 1,764,192 6.6%
Directors and executive officers:
William C. Erbey...................................... 9,852,420(3) 36.8 9,852,420 36.8
Barry N. Wish......................................... 6,011,020(4) 22.5 5,178,350 19.4
John R. Erbey......................................... 976,030 3.6 976,030 3.6
Rory A. Brown......................................... 504,610 1.9 504,610 1.9
Christine A. Reich.................................... 222,650 0.8 222,650 0.8
All directors and executive officers as a group
(nine persons)..................................... 17,732,380 66.3 16,899,971 63.2
</TABLE>
- ------------------------
(1) For purposes of this table, pursuant to rules promulgated under the Exchange
Act, an individual is considered to beneficially own any shares of Common
Stock if he directly or indirectly has or shares: (i) voting power, which
includes the power to vote or to direct the voting of the shares, or (ii)
investment power, which includes the power to dispose or direct the
disposition of the shares. Unless otherwise indicated, an individual has
sole voting power and sole investment power with respect to the indicated
shares. Amounts shown assume no exercise of the Common Stock underwriters'
over-allotment option.
(2) Includes 1,436,990 shares held by HAP Investment Partnership, the partners
of which are Harold D. Price and his spouse. Mr. and Mrs. Price share voting
and dispositive power with respect to the shares owned by HAP Investment
Partnership. Also includes 611,490 shares held by Mr. Price as nominee for
various trusts for the benefit of members of his family.
(3) Includes 5,923,700 shares held by FF Plaza Partners, a Delaware partnership
of which the partners are William C. Erbey, his spouse, E. Elaine Erbey, and
Delaware Permanent Corporation, a corporation wholly owned by William C.
Erbey. Mr. and Mrs. William C. Erbey share voting and dispositive power with
respect to the shares owned by FF Plaza Partners. Also includes 3,004,080
shares held by Erbey Holding Corporation, a corporation wholly owned by
William C. Erbey.
(4) Includes 5,835,050 shares held by Wishco, Inc., a corporation controlled by
Barry N. Wish pursuant to his ownership of 93.0% of the common stock
thereof.
For additional information, see "Management--Transactions with Affiliates."
87
<PAGE>
DESCRIPTION OF NOTES
GENERAL
The Notes will be issued pursuant to an Indenture (the "Indenture") between
the Company and Bank One, Columbus, NA, as trustee (the "Trustee"), a copy of
which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. The summaries of certain provisions of the Indenture set
forth below do not purport to be complete and are qualified in their entirety by
reference to all of the provisions of the Indenture and the Notes. Capitalized
terms not otherwise defined herein have the meanings specified in the Indenture.
Whenever sections or defined terms of the Indenture are referred to, such
sections or defined terms are hereby incorporated herein by such reference.
The Notes will be limited in aggregate original principal amount to $125
million ($143.75 million aggregate principal amount if the Note underwriter's
over-allotment option is exercised in full). The Notes will mature on October 1,
2003 (the "Stated Maturity"). The Notes will rank PARI PASSU with all other
general unsecured obligations of the Company and will be issued in book-entry
form only in denominations of $1,000 and integral multiples in excess thereof.
The Notes will bear interest from the date of their initial issuance, at the
rate per annum set forth on the cover page of this Prospectus, payable
semi-annually in arrears on April 1 and October 1 of each year (each an
"Interest Payment Date"), commencing April 1, 1997, to the holders of record at
the close of business on the March 15 or September 15 (whether or not a business
day), as the case may be, next preceding such Interest Payment Date (each, a
"Regular Record Date"). Interest will be computed on the basis of a 360-day year
of twelve 30-day months.
The Notes are not savings accounts or deposits and are not insured by the
FDIC or by the United States or any agency or fund thereof. The Notes will not
be secured by the assets of the Company or any of its Subsidiaries, including
the Bank, or otherwise and will not have the benefit of a sinking fund for the
retirement of principal or interest. Because the Company is a holding company
that currently conducts substantially all of its operations through its
Subsidiaries, the right of the Company to participate in any distribution of
assets of any Subsidiary, including the Bank, upon its liquidation or
reorganization or otherwise (and thus the ability of Holders of the Notes to
benefit indirectly from such distribution) are subject to the prior claims of
creditors of that Subsidiary, including, in the case of the Bank, to the claims
of depositors of the Bank. Claims on the Company's Subsidiaries by creditors,
other than the Company, include substantial obligations with respect to deposit
liabilities and other borrowings. Additionally, distributions to the Company by
the Bank, whether in liquidation, reorganization or otherwise, will be subject
to regulatory restrictions and, under certain circumstances, may be prohibited.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity" and "Regulation."
GLOBAL NOTES, DELIVERY AND FORM
The Notes offered hereby will be represented by one or more Global Notes
deposited with the Depositary, and will trade in the Depositary's Same-Day Funds
Settlement System ("SDFS System") until maturity. The Notes will not be
exchangeable for certificated notes, except in the circumstances described
below.
The Depository Trust Company, New York, New York, will be the initial
Depositary with respect to the Notes. DTC has advised the Company and the
Underwriter that it is a limited-purpose trust company organized under the laws
of the State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. DTC was created to hold securities of its participants and to facilitate
the clearance and settlement of securities transactions among its participants
in such securities through electronic book-entry changes in accounts of the
participants, thereby eliminating the need for physical movement of securities
certificates. DTC's participants include securities brokers and dealers
(including the Underwriters), banks, trust companies, clearing corporations and
certain other organizations, some of whom (and/or their representatives) own
DTC. Access to DTC's book-entry system is
88
<PAGE>
also available to others, such as banks, dealers and trust companies that clear
through or maintain a custodial relationship with a participant, either directly
or indirectly. Persons who are not participants may beneficially own securities
held by DTC only through participants.
Upon the issuance of the Notes represented by the Global Notes, the
Depositary will credit, on its book-entry registration and transfer system, the
principal amount of the Notes represented by the Global Notes to the accounts of
participants. Ownership of beneficial interests in the Global Notes will be
limited to participants or persons that hold interests through participants.
Ownership of beneficial interests in the Notes will be shown on, and the
transfer of that ownership will be effected only through, records maintained by
the Depositary (with respect to interests of participants in the Depositary), or
by participants in the Depositary or persons that may hold interests through
such participants (with respect to persons other than participants in the
Depositary). The laws of some states require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
limitations and such laws may impair the ability of holders of the Notes to
transfer beneficial interests in the Global Notes.
So long as the Depositary for the Global Notes, or its nominee, is the
registered owner of the Global Notes, the Depositary or its nominee, as the case
may be, will be considered the sole owner or holder of the Notes represented by
the Global Notes for all purposes under the Indenture. Except as provided below,
owners of beneficial interests in the Notes represented by the Global Notes will
not receive or be entitled to receive physical delivery of such Notes in
definitive form and will not be considered the owners or holders thereof under
the Indenture.
So long as the Notes are represented by a Global Note, payments of principal
and interest on the Notes will be made by the Company through the Trustee to the
Depositary or its nominee, as the case may be, as the registered owner of the
Global Notes representing the Notes. Neither the Company nor the Trustee will
have any responsibility or liability for any aspect of the records relating to
or payments made on account of beneficial ownership interests of such Global
Notes or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests. The Company expects that the Depositary, upon
receipt of any payment of principal or interest in respect of the Global Notes
representing the Notes, will credit the accounts of the related participants
with payment in amounts proportionate to their respective holdings in principal
amount of beneficial interests in such Global Notes as shown on the records of
the Depositary. The Company also expects that payments by participants to owners
of beneficial interests in such Global Notes will be governed by standing
customer instructions and customary practices, as is now the case with
securities held for the accounts of customers in bearer form or registered in
"street name," and will be the responsibility of such participants.
If the Depositary is at any time unwilling, ineligible or unable to continue
as Depositary under the Indenture and a successor Depositary is not appointed in
respect thereof within 90 days, the Company will issue definitive Notes in
exchange for the Notes represented by the Global Notes. In addition, the Company
may at any time and in its sole discretion determine to discontinue use of the
Global Notes and, in such event, will issue definitive securities in exchange
for the securities represented by the Global Notes. Notes so issued will be
issued in registered form only, in denominations of $1,000 and integral
multiples thereof, without coupons.
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Notes will be made in immediately available funds. All
payments of principal and interest on the Notes will be made by the Company in
immediately available funds. The Notes will trade in the Depositary's SDFS
System until maturity, and, therefore, the Depositary will require secondary
trading activity in the Notes to be settled in immediately available funds.
89
<PAGE>
OPTIONAL REDEMPTION
The Notes may not be redeemed prior to October 1, 2001 except as described
below. On or after such date, the Notes may be redeemed, in whole or in part, at
the following redemption prices (expressed as a percentage of the principal
amount) plus accrued and unpaid interest to (but excluding) the redemption date,
if redeemed during the 12-month period beginning October 1 of the years
indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ----------------------------------------------------------------------- -----------
<S> <C>
2001................................................................... 105.938%
2002................................................................... 102.969
</TABLE>
In addition, the Company may redeem, at its option, up to 35% of the
original aggregate principal amount of the Notes at any time and from time to
time until October 1, 1999, with the Net Cash Proceeds received by the Company
from one or more public or private sales of Qualified Capital Stock at a
redemption price of 111.875% of the principal amount of the Notes redeemed, plus
accrued and unpaid interest thereon; PROVIDED, HOWEVER, that at least 65% of the
original aggregate principal amount of Notes must remain outstanding after each
such redemption, and PROVIDED FURTHER, that such redemption must occur within 60
days after the closing date of any such public or private sale of Qualified
Capital Stock.
If at any time fewer than all of the Notes then outstanding are to be
redeemed, the Trustee shall select the Notes or portions thereof to be redeemed
pro rata, by lot or by any other method the Trustee shall deem fair and
reasonable. Notes in denominations larger than $1,000 may be redeemed in part in
integral multiples of $1,000. Notice of redemption will be mailed to each Holder
of Notes to be redeemed at such Holder's registered address at least 30, but not
more than 60, days before the redemption date. On or after the redemption date,
interest will cease to accrue on Notes or portions thereof called for
redemption.
NO SINKING FUND OR MANDATORY REDEMPTION
The Notes will not be entitled to the benefit of any sinking fund or
mandatory redemption.
CERTAIN COVENANTS
The Indenture will contain, among others, the following covenants:
LIMITATIONS ON INDEBTEDNESS. The Company will not create, incur, issue,
assume, guarantee or otherwise in any manner become directly or indirectly
liable for or with respect to, or otherwise permit to exist, any Junior
Indebtedness (other than Acquired Indebtedness) unless the Stated Maturity of
principal (or any required repurchase, redemption, defeasance or sinking fund
payments) of such Junior Indebtedness is after the final Stated Maturity of
principal of the Notes.
The Company will not create, incur, assume, guarantee or otherwise become
responsible for the payment of any Funded Indebtedness (including any Funded
Indebtedness assumed in connection with the acquisition of assets from another
Person) unless at the time of such event either (i) the principal amount of
total Funded Indebtedness of the Company (which includes the Notes) would not
exceed 100% of the Company's Consolidated Tangible Net Worth, or (ii) if the
Notes are then rated by a nationally recognized statistical rating organization
in an investment grade category, after the incurrence, assumption, guarantee or
creation by the Company of the additional Funded Indebtedness, (A) the Notes
continue to retain such investment grade rating, and (B) the Fixed Charge
Coverage Ratio for the Company for the most recently ended four full fiscal
quarters for which internal financial statements are available immediately
preceding the date of such incurrence would have been greater than 3.00 to 1.00
determined on a pro forma basis (including a pro forma application of the net
proceeds therefrom), as if the additional Funded Indebtedness had been incurred
and the application of the net proceeds therefrom had occurred at the beginning
of such four-quarter period.
The Bank will not, and will not permit any of its Subsidiaries to, create or
incur any Indebtedness or issue any Preferred Stock that in either case would
qualify as regulatory capital for the Bank under 12 C.F.R. Part 567 or any
successor regulation, except to the extent that after giving effect to the
creation or incurrence
90
<PAGE>
of such Indebtedness or the issuance of such Preferred Stock the total of the
Bank's Indebtedness and Preferred Stock that qualifies as capital under 12
C.F.R. Part 567 does not exceed 65% of the Bank's tangible common equity.
LIQUIDITY MAINTENANCE. The Company shall, at all times when the Notes are
not rated in an investment grade category by one or more nationally recognized
statistical rating organizations, maintain Liquid Assets with a value equal to
at least 100% of the required interest payments due on the Notes on the next two
succeeding semi-annual Interest Payment Dates. Such Liquid Assets shall not be
the subject of any pledge, Lien, encumbrance or charge of any kind and shall not
be used as collateral or security for Indebtedness for borrowed money or
otherwise of the Company or its Subsidiaries nor may such Liquid Assets be used
as reserves for any self-insurance maintained by the Company.
RESTRICTIONS ON ISSUANCE AND SALE OR DISPOSITION OF CAPITAL STOCK OF THE
BANK. The Indenture provides that the Company shall not sell, transfer or
otherwise dispose of shares of Capital Stock of the Bank or permit the Bank to
issue, sell or otherwise dispose of shares of its Capital Stock (other than
shares of Preferred Stock which do not constitute Voting Stock as permitted in
the last paragraph under "Limitations on Indebtedness" above, and except that
the Company may sell the shares of the Bank's Series A Non-cumulative Preferred
Stock that it owns as of the date of this Prospectus) unless in either case the
Bank remains a Wholly-Owned Subsidiary of the Company. In addition, the
Indenture provides that the Company shall not permit the Bank to merge or
consolidate with any other entity (other than the Company or another
Wholly-Owned Subsidiary of the Company) unless the surviving entity is the
Company or a Wholly-Owned Subsidiary of the Company, or permit the Bank to
convey or transfer its properties and assets substantially as an entirety to any
Person except to the Company or any Wholly-Owned Subsidiary of the Company.
LIMITATION ON RESTRICTED PAYMENTS. The Company will not, and will not
permit any Subsidiary to, directly or indirectly, make any Restricted Payment
if, at the time of such Restricted Payment or after giving effect thereto,
(a) a Default or Event of Default shall have occurred and be continuing; or
(b) the Bank would fail to meet any of the applicable capital requirements
under the regulations of the OTS which are necessary to enable the Bank to
qualify as a "well capitalized" institution under such regulations or the
Company would fail to maintain sufficient Liquid Assets to comply with the terms
of the covenant described above under "Liquidity Maintenance"; or
(c) the aggregate amount of all Restricted Payments (the amount of such
payments, if other than in cash, having been determined in good faith by the
Board of Directors, whose determination shall be conclusive and evidenced by a
Board resolution filed with the Trustee) declared and made after the issue date
of the Notes would exceed the sum of
(i) 33% of the aggregate Consolidated Net Income (or, if such
Consolidated Net Income is a deficit, 100% of such deficit) of the Company
accrued on a cumulative basis during the period beginning on the first day
of the fiscal quarter during which the issue date of the Notes occurred and
ending on the last day of the Company's last fiscal quarter ending prior to
the date of such proposed Restricted Payment, PLUS
(ii) the aggregate Net Cash Proceeds received by the Company as capital
contributions (other than from a Subsidiary) after the issue date of the
Notes, PLUS
(iii) the aggregate Net Cash Proceeds and the Fair Market Value of
property not constituting Net Cash Proceeds received by the Company from the
issuance or sale (other than to a Subsidiary) of Qualified Capital Stock
after the issue date of the Notes; PLUS
(iv) 100% of the amount of any Indebtedness of the Company or a
Subsidiary that is issued after the issue date of the Notes that is
thereafter converted into or exchanged for Qualified Capital Stock of the
Company;
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<PAGE>
PROVIDED, HOWEVER, that the foregoing provisions will not prevent (x) the
payment of a dividend within 60 days after the date of its declaration if at the
date of declaration such payment was permitted by the foregoing provisions, or
(y) any Permitted Payment, or (z) tax sharing payments by the Company pursuant
to the existing tax sharing agreement among the Company and its Subsidiaries (or
any subsequently adopted tax sharing agreement the terms of which are not
materially less favorable in the aggregate to the Company than the terms of such
existing tax sharing agreement).
LIMITATIONS ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES. The Company will not, and will not permit any of its Subsidiaries
to, create, assume or otherwise cause or suffer to exist or to become effective
any consensual encumbrance or restriction on the ability of any such Subsidiary
to
(a) pay any dividends or make any other distribution on its Capital Stock;
(b) make payments in respect of any Indebtedness owed to the Company or any
other Subsidiary; or
(c) make loans or advances to the Company or any Subsidiary or to guarantee
Indebtedness of the Company or any other Subsidiary;
other than, in the case of (a), (b) and (c),
(1) restrictions imposed by applicable law;
(2) restrictions existing under agreements in effect on the date of the
Indenture under which the Notes are issued;
(3) consensual encumbrances or restrictions binding upon any Person at
the time such Person becomes a Subsidiary of the Company so long as such
encumbrances or restrictions are not created, incurred or assumed in
contemplation of such Person becoming a Subsidiary;
(4) restrictions with respect to a Subsidiary imposed pursuant to an
agreement which has been entered into for the sale or disposition of all or
substantially all the assets (which term may include the Capital Stock) of
such Subsidiary;
(5) restrictions on the transfer of assets which are subject to Liens;
(6) restrictions existing under agreements evidencing Indebtedness of
any Subsidiary that is formed for the sole purpose of acquiring, holding or
managing a portfolio of assets, if such Indebtedness (i) is made without
recourse to, and with no cross-collateralization against the assets of, the
Company or any other Subsidiary, and (ii) upon complete or partial
liquidation of which the Indebtedness must be correspondingly repaid in
whole or in part, as the case may be;
(7) restrictions existing under agreements evidencing Indebtedness which
is incurred after the date of the Indenture as permitted by the covenant
described under "Limitation on Indebtedness", PROVIDED that the terms and
conditions of any such restrictions are no more restrictive than those
contained in the indenture pursuant to which the Bank's 12% Subordinated
Debentures due 2005 were issued; and
(8) restrictions existing under any agreement which refinances or
replaces any of the agreements containing the restrictions in clauses (2),
(3) and (7); PROVIDED that the terms and conditions of any such restrictions
are not less favorable to the Holders than those under the agreement
evidencing or relating to the Indebtedness refinanced.
LIMITATION ON TRANSACTIONS WITH AFFILIATES. The Company will not, and will
not permit any of its Subsidiaries to, directly or indirectly, enter into any
transaction or series of related transactions (including without limitation, the
sale, purchase, exchange or lease of assets, property or services) with any
Affiliate of the Company (except that the Company and any of its Subsidiaries
may enter into any transaction or series of related transactions with any
Subsidiary of the Company without limitation under this covenant) UNLESS:(i)
such transactions or series of related transactions is on terms that are no less
favorable to the Company or such Subsidiary, as the case may be, than would be
available in a comparable transaction in an arm's length dealing with a Person
that is not such an Affiliate or, in the absence of such a comparable
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<PAGE>
transaction, on terms that the Board of Directors determines in good faith would
be offered to a Person that is not an Affiliate; (ii) with respect to any
transaction or series of related transactions involving aggregate payments in
excess of $1 million, the Company delivers an officers' certificate to the
Trustee certifying that such transaction or series of transactions complies with
clause (i) above and has been approved by a majority of the Disinterested
Directors of the Board of Directors of the Company; and (iii) with respect to
any transaction or series of related transaction involving aggregate payments in
excess of $5 million, or in the event that no members of the Board of Directors
are Disinterested Directors with respect to any transaction or series of
transactions included in clause (ii), (x) in the case of a transaction involving
real property, the aggregate rental or sale price of such real property shall be
the fair market sale or rental value of such real property as determined in a
written opinion by a nationally recognized expert with experience in appraising
the terms and conditions of the type of transaction or series of transactions
for which approval is required and (y) in all other cases, the Company delivers
to the Trustee a written opinion of a nationally recognized expert with
experience in appraising the terms and conditions of the type of transaction or
series of transactions for which approval is required to the effect that the
transaction or series of transactions are fair to the Company or such Subsidiary
from a financial point of view. The limitations set forth in this paragraph will
not apply to (i) transactions entered into pursuant to any agreement already in
effect on the date of the Indenture and any renewals or extensions thereof not
involving modifications adverse to the Company or any Subsidiary, (ii) normal
banking relationships with an Affiliate on an arms' length basis, (iii) any
employment agreement, stock option, employee benefit, indemnification,
compensation, business expense reimbursement or other employment-related
agreement, arrangement or plan entered into by the Company or any of its
Subsidiaries either (A) in the ordinary course of business and consistent with
the past practice of the Company or such Subsidiary or (B) which agreement,
arrangement or plan was adopted by the Board of Directors of the Company or such
Subsidiary (including a majority of the Disinterested Directors), as the case
may be, (iv) residential mortgage, credit card and other consumer loans to an
Affiliate who is an officer, director or employee of the Company or any of its
Subsidiaries and which comply with the applicable provisions of 12 U.S.C.
Section1468(b) and any rules and regulations of the OTS thereunder, (v) any
Restricted Payment, or (vi) any transaction or series of transactions in which
the total amount involved does not exceed $250,000.
LIMITATIONS ON LIENS AND GUARANTEES. The Company will not create, assume,
incur or suffer to exist any Lien upon (i) the Capital Stock of the Bank as
security for Indebtedness or (ii) any of the Company's assets (other than the
Capital Stock of the Bank) as security for Indebtedness having a contractual
time to maturity greater than one year, without, in the case of either (i) or
(ii), effectively providing that the Notes will be equally and ratably secured
with (or prior to) such Indebtedness.
In addition, the Company will not permit any Subsidiary of the Company,
directly or indirectly, to guarantee or assume, or subject any of its assets to
a Lien to secure, any Pari Passu Indebtedness or Junior Indebtedness UNLESS(i)
such Subsidiary simultaneously executes and delivers a supplemental indenture to
the Indenture providing for a guarantee of, or pledge of assets to secure, the
Notes by such Subsidiary on terms at least as favorable to the Holders of the
Notes as such guarantee or security interest in such assets is to the holders of
such Pari Passu Indebtedness or Junior Indebtedness, except that in the event of
a guarantee or security interest in such assets with respect to (x) Pari Passu
Indebtedness, the guarantee or security interest in such assets under the
supplemental indenture shall be made PARI PASSU to the guarantee or security
interest in such assets with respect to such Pari Passu Indebtedness or (y)
Junior Indebtedness, any such guarantee or security interest in such assets with
respect to such Junior Indebtedness shall be subordinated to such Subsidiary's
guarantee or security interest in such assets with respect to the Notes to the
same extent as such Junior Indebtedness is subordinated to the Notes and (ii)
such Subsidiary waives and will not in any manner whatsoever claim, or take the
benefit or advantage of, any rights of reimbursement, indemnity or subrogation
or any other rights against the Company or any other Subsidiary of the Company
as a result of any payment by such Subsidiary under its guarantees.
OFFER TO PURCHASE UPON A CHANGE OF CONTROL. If a Change of Control Event
shall occur at any time, then each Holder will have the right to require the
Company to repurchase such Holder's Notes (pursuant to an offer made to all
Holders), in whole or in part, in integral multiples of $1,000 at a purchase
price in cash
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equal to 101% of the principal amount of such Notes, plus accrued and unpaid
interest, if any, to the date of repurchase. There can be no assurance that the
Company will have the funds available to repurchase the Notes in the event of a
Change of Control Event.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws or regulations are applicable in connection with the repurchase
of the Notes upon the occurrence of a Change of Control Event. To the extent
that the provisions of any securities laws or regulations conflict with the
provisions of the Indenture, the Company will comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations described in the Indenture by virtue thereof.
STATUS OF THE BANK AS AN FDIC-INSURED INSTITUTION. The Indenture will
include a provision pursuant to which the Company will agree to use its best
efforts to have the Bank remain an FDIC-insured depository institution.
ADDITIONAL COVENANTS. The Indenture will also contain covenants with
respect to, among other things, the following matters: (i) payment of principal,
premium and interest; (ii) maintenance of corporate existence; (iii) payment of
taxes and other claims; (iv) maintenance of properties; and (v) maintenance of
insurance.
MERGER AND CONSOLIDATION
The Indenture will provide that the Company may not, in a single transaction
or a series of transactions, consolidate with or merge into any other Person or
sell, assign, convey, transfer, lease or otherwise dispose of all or
substantially all of its assets to any Person or group of affiliated Persons
unless (a) either (i) the Company shall be the continuing entity, or (ii) the
Person (if other than the Company) formed by such consolidation or into which
the Company is merged or the Person that acquires by sale, assignment,
conveyance, transfer, lease or other disposition of all or substantially all of
the assets of the Company (the "Surviving Entity") is organized under the laws
of the United States or a state thereof or the District of Columbia and such
Surviving Entity assumes by supplemental indenture, executed and delivered to
the Trustee in form reasonably satisfactory to the Trustee, all obligations of
the Company on the Notes and under the Indenture, (b) immediately after giving
effect to such transaction or series of transactions, no Default or Event of
Default shall have occurred and be continuing, (c) the Company or the Surviving
Entity, as applicable, could incur at least $1.00 of additional Funded
Indebtedness without violating the covenant described above under "Limitation on
Indebtedness" and (d) the Company or the Surviving Entity, as applicable, shall
have delivered, or caused to be delivered, to the Trustee, in form and substance
reasonably satisfactory to the Trustee, an officers' certificate and an opinion
of counsel, each to the effect that such consolidation, merger, transfer, sale,
assignment, conveyance, transfer, lease or other disposition and the
supplemental indenture in respect thereto comply with the Indenture and that all
conditions precedent provided for relating to such transaction have been
complied with.
MODIFICATION OF THE INDENTURE; WAIVER OF COVENANTS
Modifications and amendments of the Indenture may be made by the Company and
the Trustee with the consent of the Holders of greater than 50% in aggregate
principal amount of the Notes then outstanding; PROVIDED, HOWEVER, that no such
modification or amendment may, without the consent of the Holder of each
outstanding Note affected thereby, (i) change the Stated Maturity of the
principal of, or any installment of principal of or interest on, any Note or
reduce the principal amount thereof, premium, if any, or the rate of interest
thereon, or change the coin or currency in which any Note or any premium or the
interest thereon is payable or impair the right to institute suit for the
enforcement of any such payment after the Stated Maturity thereof; (ii) reduce
the percentage in principal amount of the outstanding Notes, the consent of
whose Holders is required for any such amendment or modification, or the consent
of whose Holders is required for any waiver; (iii) modify any of the provisions
relating to supplemental indentures requiring the consent of Holders or relating
to the waiver of past defaults or relating to the waiver of certain covenants,
except to increase the percentage in principal amount of outstanding Notes
required for such action or to provide that certain other provisions of the
Indenture may not be modified or waived without the consent of the Holder of
each Note affected thereby; (iv) except as otherwise permitted under the "Merger
and
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Consolidation" provisions of the Indenture, consent to the assignment or
transfer by the Company of any of its rights and obligations under the
Indenture; or (v) waive a default in payment with respect to any Note (other
than a default in payment that is due solely because of acceleration of the
maturity of the Notes).
Notwithstanding the foregoing, without the consent of any Holders of the
Notes, the Company and the Trustee may modify or amend the Indenture (i) to
evidence the succession of another Person to the Company and the assumption by
any such successor of the covenants of the Company in the Indenture and in the
Notes in accordance with the "Merger and Consolidation" provisions of the
Indenture; (ii) to add any additional Events of Default, to add to the covenants
of the Company for the benefit of the Holders of the Notes, or to surrender any
right or power herein conferred upon the Company in the Indenture or in the
Notes; (iii) to cure any ambiguity, to correct or supplement any provision in
the Indenture which may be defective or inconsistent with any other provision in
the Indenture or in the Notes, PROVIDED that any such action shall not adversely
affect in any material respect the interests of any Holder of any Note; (iv) to
secure the Notes or add a guarantor under the Indenture pursuant to the
provisions of the covenant on "Limitations on Liens and Guarantees" described
above; (v) to evidence and provide the acceptance of the appointment of a
successor Trustee under the Indenture; or (vi) to make any other provisions with
respect to matters or questions arising under the Indenture or the Note,
provided that such provisions shall not adversely affect in any material respect
the interests of any holder of any Note.
The Holders of greater than 50% in aggregate principal amount of the Notes
outstanding may waive compliance with certain restrictive covenants and
provisions of the Indenture.
EVENTS OF DEFAULT
An Event of Default will be defined in the Indenture to include:
(i) failure by the Company to pay interest on any Note when due and
payable, if such failure continues for a period of 30 days;
(ii) failure by the Company to pay the principal on any Note when due
and payable at maturity or upon redemption, acceleration or otherwise;
(iii) failure by the Company to comply with any other agreement or
covenant contained in the Indenture if such failure continues for a period
of 30 days after notice to the Company by the Trustee or to the Company and
the Trustee by the holders of at least 25% in principal amount of the Notes
then outstanding;
(iv) indebtedness of the Company or any subsidiary of the Company is not
paid within any applicable grace period after final maturity or in the event
that final maturity is accelerated because of a default and, in either case,
the total amount of such indebtedness unpaid or accelerated is equal to or
greater than 5% of the Company's Consolidated Tangible Net Worth;
(v) failure by the Bank to comply with any of its Regulatory Capital
Requirements; provided, that an Event of Default under this clause (v) shall
not be deemed to have occurred (a) during the 60 day period following the
first day on which the Bank fails to comply with any of its Regulatory
Capital Requirements, if within such 60 day period the Bank files a capital
plan with the OTS, (b) during the 90 day period following the initial
submission of a capital plan to the OTS by the Bank (or, if the OTS notifies
the Bank in writing that it needs a longer period of time to determine
whether to approve such capital plan, such longer period as is so specified
by the OTS), unless prior to such date the OTS shall have notified the Bank
of its determination not to approve such capital plan, or (c) during the
period that the Bank is operating in material compliance with a capital plan
approved by the OTS; PROVIDED, FURTHER, that if the Bank meets the minimum
amount of capital required to meet each of the industry-wide regulatory
capital requirements pursuant to 12 U.S.C. Section 1464(t) and 12 C.F.R.
Section 567 (and any amendment to either thereof) or any successor law or
regulation, notwithstanding the Bank's failure to meet an individual minimum
capital requirement pursuant to 12 U.S.C. Section 1464(s) and 12.C.F.R.
Section 567.3 (and any amendment to either thereof) or any successor law or
regulation, no
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Event of Default shall have occurred pursuant to this clause (v) unless
written notice thereof shall have been given (x) to the Company by the
Trustee or (y) to the Company and the Trustee by the Holders of 25% in
aggregate principal amount of the Notes then outstanding;
(vi) occurrence of certain events of bankruptcy or insolvency of the
Company or the Bank; and
(vii) existence of one or more judgments against the Company or the Bank
or any of its Subsidiaries in excess of 5% of the Company's Consolidated
Tangible Net Worth, either individually or in the aggregate, which remain
undischarged 60 days after all rights to directly review such judgment,
whether by appeal or writ, have been exhausted or have expired.
The Company will covenant in the Indenture to file annually with the Trustee
a statement regarding compliance by the Company with the terms of the Indenture
and specifying any defaults of which the signers may have knowledge.
If an Event of Default occurs and is continuing, the Trustee or the Holders
of not less than 25% in principal amount of the Notes then outstanding may
declare all the Notes to be immediately due and payable by notice to the Company
(and to the Trustee if given by the Holders). Under certain circumstances, the
Holders of a majority in principal amount of the Notes then outstanding may
rescind such a declaration.
PROVISION OF REPORTS
The Company will furnish to the Holders of Notes, whether or not required by
the rules and regulations of the Commission, (i) all quarterly and annual
financial information that would be required to be contained in a filing with
the Commission on Form 10-Q and Form 10-K if the Company was required to file
such forms, including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" that describes the financial condition and
results of operations of the Company and its Subsidiaries, and, with respect to
the annual information only, a report thereon by the Company's certified
independent accountants, and (ii) all reports that would be required to be filed
with the Commission on Form 8-K if the Company were required to file such
reports.
DEFEASANCE OR COVENANT DEFEASANCE OF THE INDENTURE
The Company may, at its option and at any time, elect to have its obligation
and the obligation of any of its Subsidiaries with respect to the outstanding
Notes discharged ("defeasance"). Such defeasance means that the Company shall be
deemed to have paid and discharged the entire indebtedness represented by the
outstanding Notes, except for the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
on such Notes when such payments are due and certain provisions of the Indenture
with respect to the registration and transfer of the Notes. In addition, the
Company may, at its option and at any time, elect to have its obligations and
the obligations of any of its Subsidiaries with respect to certain covenants
described in the Indenture released ("covenant defeasance") and thereafter any
failure to comply with such covenants shall not constitute a Default or an Event
of Default. In the event of a covenant defeasance, certain other events (not
including prepayment, bankruptcy, receivership or insolvency events) described
under "Events of Default" will no longer constitute a Default or an Event of
Default with respect to the Notes.
In order to exercise either defeasance or covenant defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the Holders of Notes, cash in United States Dollars, U.S. Government Obligations
(as defined in the Indenture), or a combination thereof (collectively, the
"trust fund"), in such amounts as will be sufficient (without considering any
reinvestment of amounts earned on such U.S. Government Obligations), in the
opinion of a nationally recognized firm of independent public accountants, to
pay and discharge interest on the outstanding Notes as it becomes due and to pay
and discharge the principal of and premium, if any, on the outstanding Notes at
redemption or maturity; (ii) in the case of defeasance, the Company must deliver
to the Trustee an opinion of independent counsel in the United States stating
that (A) the Company has received from, or there has been published by, the
Internal Revenue Service a ruling or (B) since the date of the Indenture, there
has been a change in the applicable federal income tax law, in either case to
the effect that, and based thereon such opinion of counsel in the United States
shall confirm that, the Holders of the outstanding Notes will not recognize
income, gain or loss
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for federal income tax purposes as a result of such defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such defeasance had not occurred;
(iii) in the case of covenant defeasance, the Company must deliver to the
Trustee an opinion of independent counsel in the United States to the effect
that the Holders of the outstanding Notes will not recognize income, gain or
loss for federal income tax purposes as a result of such covenant defeasance and
will be subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such covenant defeasance
had not occurred; (iv) no Default or Event of Default may have occurred and be
continuing on the date of such deposit and after giving effect thereto; (v) such
defeasance or covenant defeasance may not cause the Trustee for the Notes to
have a conflicting interest with respect to any securities of the Company; (vi)
such defeasance or covenant defeasance may not result in a breach or violation
of, or constitute a Default under, the Indenture or any material agreement or
instrument to which the Company is a party or by which it is bound; (vii) the
Company must deliver to the Trustee an opinion of independent counsel in the
United States to the effect that the trust fund will not be subject to the
effect of any applicable bankruptcy, insolvency, receivership, conservatorship,
reorganization or similar laws affecting creditors' rights generally (including,
without limitation, fraudulent and avoidable transfers); (viii) the Company must
deliver to the Trustee an officers' certificate stating that the deposit was not
made by the Company with the intent of preferring the Holders of the Notes over
the other creditors of the Company or with the intent of defeating, hindering,
delaying or defrauding creditors of the Company; (ix) no event or condition may
exist that would prevent the Company from making payments of the principal of,
premium, if any, and interest on the Notes, on the date of such deposit; and (x)
the Company must deliver to the Trustee an officers' certificate and an opinion
of independent counsel in the United States, each stating that all conditions
precedent relating to either the defeasance or the covenant defeasance, as the
case may be, have been complied with.
SATISFACTION AND DISCHARGE
The Indenture will cease to be of further effect (except as to surviving
rights of registration of transfer or exchange of the Notes, as expressly
provided for in the Indenture) as to all outstanding Notes when (i) either (a)
all the Notes theretofore authenticated and delivered (except lost, stolen or
destroyed Notes which have been replaced or paid) have been delivered to the
Trustee for cancellation or (b) all Notes not theretofore delivered to the
Trustee for cancellation have become due and payable, or will become due and
payable or are to be called for redemption within one year, and the Company has
irrevocably deposited or caused to be deposited with the Trustee funds in an
amount sufficient to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal of, and
premium, if any, and interest on the Notes to the date of deposit together with
irrevocable instructions to the Trustee from the Company directing the Trustee
to apply such funds to the payment thereof at maturity or redemption, as the
case may be; (ii) the Company has paid all other sums payable under the
Indenture by the Company; and (iii) the Company has delivered to the Trustee an
officers' certificate and an opinion of counsel each stating that all conditions
precedent under the Indenture relating to the satisfaction and discharge of the
Indenture have been complied with.
REGARDING THE TRUSTEE
Bank One, Columbus, NA, the Trustee under the Indenture, may from time to
time enter into ordinary correspondent and other banking relationships with the
Company. The address of the principal corporate trust office of the Trustee is
100 East Broad Street, Columbus, Ohio 43271-0181.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a person (i) existing at the
time such Person becomes a Subsidiary of or is merged with or into any other
Person or (ii) assumed in connection with the acquisition of assets from such
Person, in each case, other than Indebtedness incurred in connection with, or in
contemplation of, such Person becoming a Subsidiary of such other Person or such
acquisition. Acquired Indebtedness shall be deemed to be incurred on the date of
the related acquisition of assets from such Person or the date such Person
becomes a Subsidiary of or is merged with or into such other Person.
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"Affiliate" means, with respect to any specified Person, any other Person
directly or indirectly Controlling or Controlled by or under direct or indirect
common Control with such specified Person and any legal or beneficial owner,
directly or indirectly, of 20% or more of the Voting Stock of such specified
Person. Notwithstanding the foregoing, no Securitization Entity shall be deemed
an Affiliate of the Company.
"Average Life to Stated Maturity" means, as of the date of determination
with respect to any Indebtedness, the quotient obtained by dividing (i) the sum
of the products of (a) the number of years from the date of determination to the
date or dates of each successive scheduled principal payment of such
Indebtedness multiplied by (b) the amount of each such principal payment by (ii)
the sum of all such principal payments.
"Capital Lease Obligation" of any Person means any obligations of such
Person under any capital lease for real or personal property which, in
accordance with GAAP, is required to be recorded as a capitalized lease
obligation; and, for the purpose of the Indenture, the amount of such obligation
at any date shall be the capitalized amount thereof at such date, determined in
accordance with GAAP.
"Capital Stock" in any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents or interests in
(however designated) capital stock in such Person, including, with respect to a
corporation, common stock, Preferred Stock and other corporate stock and, with
respect to a partnership, partnership interests, whether general or limited, and
any rights (other than debt securities convertible into corporate stock,
partnership interests or other capital stock), warrants or options exchangeable
for or convertible into such corporate stock, partnership interests or other
capital stock.
"Change of Control Event" means an event or series of events by which
(a) any "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act), other than the Existing Principal
Stockholders, is or becomes after the date of issuance of the Notes the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act as in effect on the date of the Indenture), of more than 40% of the
total voting power of all Voting Stock of the Company then outstanding;
(b) (1) another corporation merges into the Company or the Company
consolidates with or merges into any other corporation, or
(2) the Company conveys, transfers or leases all or substantially all
its assets to any person or group, in one transaction or a series of
transactions other than any conveyance, transfer or lease between the
Company and a Wholly-Owned Subsidiary of the Company,
in each case, with the effect that a person or group, other than the Existing
Principal Stockholders, is or becomes the beneficial owner of more than 40% of
the total voting power of all Voting Stock of the surviving or transferee
corporation of such transaction or series of transactions;
(c) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Company's Board of Directors, or
whose nomination for election by the Company's shareholders was approved by
a vote of a majority of the Directors then still in office who were either
directors at the beginning of such period or whose election or nomination
for election was previously so approved, cease for any reason to constitute
a majority of the Directors then in office;
(d) (1) the Company sells, transfers or otherwise disposes of any shares
of Capital Stock of any Significant Subsidiary (other than to the Company or
a Wholly-Owned Subsidiary), or
(2) any Significant Subsidiary (i) issues, sells or otherwise
disposes of shares of its Capital Stock (or securities convertible into or
exercisable for shares of Capital Stock), (ii) conveys, transfers or leases
all or substantially all its assets to any Person or group or (iii) merges
with or into any other entity, except in the case of any event described in
this clause (2) with the Company or a Wholly-Owned Subsidiary; or
(e) the shareholders of the Company shall approve any plan or proposal
for the liquidation or dissolution of the Company.
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"Consolidated Depreciation and Amortization Expense" means with respect to
any Person for any period, the total amount of depreciation and amortization
expense of such Person for such period on a consolidated basis and otherwise
determined in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to any period, the sum
of: (a) consolidated interest expense of such Person for such period, other than
interest expense on deposits, whether paid or accrued (except to the extent
accrued in a prior period), to the extent such expense was deducted in computing
Consolidated Net Income (Loss) (including amortization of original issue
discount, non-cash interest payments and the interest component of Capitalized
Lease Obligations, excluding amortization of deferred financing fees) and (b)
consolidated capitalized interest of such Person for such period, whether paid
or accrued, to the extent such expense was deducted in computing Consolidated
Net Income (Loss).
"Consolidated Net Income (Loss)" of any Person means, for any period, the
consolidated net income (or loss) of such Person and its consolidated
Subsidiaries for such period as determined in accordance with GAAP, adjusted, to
the extent included in calculating such net income (loss), by excluding, without
duplication, (i) all extraordinary gains and losses (other than those relating
to the use of net operating losses of such Person carried forward), less all
fees and expenses relating thereto, net of taxes, (ii) the portion of net income
(or loss) of any other Person (other than any of such Person's consolidated
Subsidiaries) in which such Person or any of its Subsidiaries has an ownership
interest, except to the extent of the amount of dividends or other distributions
actually paid to such Person or its consolidated Subsidiaries in cash by such
other Person during such period, (iii) net income (or loss) of any Person
combined with such Person or any of its Subsidiaries on a "pooling of interests"
basis attributable to any period prior to the date of combination, (iv) any gain
or loss, net of taxes, realized upon the termination of any employee pension
benefit plan or (v) the net income of any consolidated Subsidiary of such Person
to the extent that the declaration or payment of dividends or similar
distributions by that Subsidiary of that income is not at the time permitted,
directly or indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulations applicable to that Subsidiary or its shareholders; PROVIDED that,
upon the termination or expiration of such dividend or distribution
restrictions, the portion of net income (or loss) of such consolidated
Subsidiary allocable to such Person and previously excluded shall be added to
the Consolidated Net Income (Loss) of such Person to the extent of the amount of
dividends or other distributions available to be paid to such Person in cash by
such Subsidiary.
"Consolidated Tangible Net Worth" of any Person and its Subsidiaries mean as
of the date of determination all amounts that would be included under
stockholders' equity on a consolidated balance sheet of such Person and its
Subsidiaries determined in accordance with GAAP less an amount equal to the
consolidated intangible assets (other than capitalized mortgage servicing
rights) of such Person and its Subsidiaries determined in accordance with GAAP.
"Control" when used with respect to any specified Person means the power to
direct the management and policies of such Person directly or indirectly,
whether through ownership of voting securities (or pledge of voting securities
if the pledgee thereof may on the date of determination exercise or control the
exercise of the voting rights of the owner of such voting securities), by
contract or otherwise; and the terms "to Control," "Controlling" and
"Controlled" have meanings correlative to the foregoing.
"Default" means an event or condition the occurrence of which would, with
the lapse of time or the giving of notice or both, become an Event of Default.
"Disqualified Capital Stock" means any Capital Stock which, by its terms (or
by the terms of any security into which it is convertible or exchangeable), or
upon the happening of any event, matures or is mandatorily redeemable, pursuant
to a sinking fund obligation or otherwise, or redeemable at the option of the
holder thereof, in whole or in part on, or prior to, or is exchangeable for debt
securities of the Company or its Subsidiaries prior to, the final Stated
Maturity of principal of the Notes; PROVIDED that only the amount of such
Capital Stock that is redeemable prior to the Stated Maturity of principal of
the Notes shall be deemed to be Disqualified Capital Stock.
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"Disinterested Director" of any Person means, with respect to any
transaction or series of related transactions, a member of the board of
directors of such Person who does not have any material direct or indirect
financial interest in or with respect to such transaction or series of related
transactions.
"Earnings" means, with respect to any Person for any period, the
Consolidated Net Income (Loss) of such Person for such period from continuing
operations plus (a) an amount equal to any net loss realized in connection with
an asset sale or sales of capital stock of any subsidiary (to the extent such
losses were deducted in computing Consolidated Net Income (Loss)), plus (b)
provision for taxes based on income or profits of such Person for such period
deducted in computing Consolidated Net Income (Loss) and any provision for taxes
utilized in computing net loss under clause (a), plus (c) Consolidated Interest
Expense of such Person for such period, plus (d) Consolidated Depreciation and
Amortization Expense of such Person for such period to the extent such
depreciation and amortization were deducted in computing Consolidated Net Income
(Loss), plus (e) without duplication, any other non-cash charges reducing
Consolidated Net Income (Loss) of such Person for such period (excluding any
such charge which represents an accrual of a reserve for an anticipated cash
charge in any future period), less (f) without duplication, non-cash items
increasing Consolidated Net Income (Loss) of such Person for such period
(excluding any items which represent the reversal of any accrual in a prior
period of a reserve for anticipated cash charges in subsequent periods), in each
case, on a consolidated basis for such Person.
"Existing Principal Stockholders" means, individually or collectively,
William C. Erbey, Barry N. Wish and Harold D. Price and their respective
estates, spouses, heirs, ancestors, lineal descendants and legatees and legal
representatives of any of the foregoing and the trustee of any bona fide trust
of which one or more of the foregoing are the trustees or the majority
beneficiaries, and any entity of which any of the foregoing, individually or
collectively, beneficially owns more than 50% of the Voting Stock thereof.
"Fair Market Value" means, with respect to any asset, the price which could
be negotiated in an arm's-length free market transaction, for cash, between a
willing seller and a willing buyer, neither of which is under compulsion to
complete the transaction; PROVIDED, HOWEVER, that the Fair Market Value of any
asset or assets shall be determined by the Board of Directors of the Company,
acting in good faith, and shall be evidenced by a resolution of such Board of
Directors delivered to the Trustee.
"FDIC" means the Federal Deposit Insurance Corporation or any successor
thereto.
"Fixed Charge Coverage Ratio" means, with respect to any Person for any
period, the ratio of Earnings of such Person for such period to the Fixed
Charges of such Person for such period. In the event that the Company incurs,
assumes, guarantees or redeems any Funded Indebtedness (including any Funded
Indebtedness which constitutes Acquired Indebtedness) subsequent to the
commencement of the period for which the Fixed Charge Coverage Ratio is being
calculated but prior to the event for which the calculation of the Fixed Charge
Coverage Ratio is made (the "Calculation Date"), then the Fixed Charge Coverage
Ratio shall be calculated giving pro forma effect to such incurrence,
assumption, guarantee or redemption of Funded Indebtedness, as if the same had
occurred at the beginning of the applicable four-quarter period. For purposes of
making the computation referred to above, investments in the equity of, or other
acquisitions or dispositions, which constitute all or substantially all of an
operating unit of a business and discontinued operations (as determined in
accordance with GAAP) that have been made by the Company or any of its
Subsidiaries, including all mergers, consolidations and dispositions, during the
four-quarter reference period or subsequent to such reference period and on or
prior to the Calculation Date shall be calculated on a pro forma basis assuming
that all such investments, acquisitions, dispositions, discontinued operations,
mergers and consolidations (and the reduction of any associated fixed charge
obligations and the change in Earnings resulting therefrom) had occurred on the
first day of the four-quarter period. If since the beginning of such period any
Person (that subsequently became a Subsidiary or was merged with or into the
Company or any Subsidiary since the beginning of such period) shall have made
any investment in the equity of, or other acquisition or disposition, which
constitutes all or substantially all of an operating unit of a business,
discontinued operation, merger or consolidation that would have required
adjustment pursuant to this definition, then the Fixed Charge Coverage Ratio
shall be calculated giving pro forma effect thereto for such period as if such
investment, acquisition, disposition, discontinued operation, merger or
consolidation had occurred at the beginning of the applicable four-quarter
period. For purposes of this definition, whenever
100
<PAGE>
pro forma effect is to be given to a transaction, the pro forma calculations
shall be made in good faith by a responsible financial or accounting officer of
the Company. If any Funded Indebtedness bears a floating rate of interest and is
being given pro forma effect, the interest on such Funded Indebtedness shall be
calculated as if the rate in effect on the Calculation Date had been the
applicable rate for the entire period. Interest on a Capital Lease Obligation
shall be deemed to accrue at an interest rate reasonably determined by a
responsible financial or accounting officer of the Company to be the rate of
interest implicit in such Capital Lease Obligation in accordance with GAAP.
Interest on Funded Indebtedness that may optionally be determined at an interest
rate based upon a factor of a prime or similar rate, a eurocurrency interbank
offered rate, or other rate, shall be deemed to have been based upon the rate
actually chosen, or, if none, then based upon such optional rate chosen as the
Company may designate.
"Fixed Charges" means, with respect to any Person for any period, the sum of
(i) Consolidated Interest Expense of such Person for such period, and (ii) the
product of (A) all cash dividend payments on any series of Preferred Stock or
Disqualified Capital Stock of such Person or its Subsidiaries for such period,
and (B) a fraction, the numerator of which is one and the denominator of which
is one minus the then-current combined federal, state and local statutory tax
rate of such Person, expressed as a decimal, in each case on a consolidated
basis and in accordance with GAAP.
"Funded Indebtedness" means, with respect to any Person as of the date of
determination Indebtedness which by its terms has a Maturity, or is extendable
or renewable at the option of such Person to a date, which is more than twelve
months after the date of creation or incurrence of such Indebtedness.
"GAAP" means generally accepted accounting principles.
"Guaranteed Indebtedness" of any Person means, without duplication, all
Indebtedness of any other Person guaranteed directly or indirectly in any manner
by such Person, or in effect guaranteed directly or indirectly by such person
through an agreement (i) to pay or purchase such Indebtedness or to advance or
supply funds for the payment or purchase of such Indebtedness, (ii) to purchase,
sell or lease (as lessee or lessor) property, or to purchase or sell services,
primarily for the purpose of enabling the debtor to make payment of such
Indebtedness or to assure the holder of such Indebtedness against loss, (iii) to
supply funds to, or in any other manner invest in, the debtor (including any
agreement to pay for property or services without requiring that such property
be received or such services be rendered), (iv) to maintain working capital or
equity capital of the debtor, or otherwise to maintain the net worth, solvency
or other financial condition of the debtor, or (v) otherwise to assure a
creditor with respect to Indebtedness against loss; provided that the term
"guarantee" shall not include endorsements for collection of deposit, in either
case in the ordinary course of business.
"Holders" means the registered holders of the Notes.
"Indebtedness" means, with respect to any Person, without duplication, (i)
all indebtedness of such Person for borrowed money or for the deferred purchase
price of property or services, excluding any trade payables and other accrued
current liabilities arising in the ordinary course of business, but including,
without limitation, all obligations, contingent or otherwise, of such Person in
connection with any letters of credit issued under letter of credit facilities,
and in connection with any agreement by such Person to purchase, redeem,
exchange, convert or otherwise acquire for value any Capital Stock of such
Person now or hereafter outstanding, (ii) all obligations of such Person
evidenced by bonds, notes, debentures or other similar instruments, (iii) all
indebtedness of such Person created or arising under any conditional sale or
other title retention agreement with respect to property acquired by such Person
(even if the rights and remedies of the seller or lender under such agreement in
the event of default are limited to repossession or sale of such property), but
excluding trade payables arising in the ordinary course of business, (iv) all
obligations under interest rate agreements of such Person, (v) all Capital Lease
Obligations of such Person, (vi) all Indebtedness referred to in clauses (i)
through (v) above of other Persons and all dividends payable by other Persons,
the payment of which is secured by (or for which the holder of such Indebtedness
has an existing right, contingent or otherwise, to be secured by) any Lien, upon
or with respect to property (including, without limitation, accounts and
contract rights) owned by such Person, even though such Person has not assumed
or become liable for the payment of such Indebtedness (the amount of such
obligations
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being deemed to be the lesser of the value of such property or asset or the
amount of the obligations so secured), (vii) all guarantees by such Person of
Guaranteed Indebtedness, (viii) all Disqualified Capital Stock (valued at the
greater of book value and voluntary or involuntary maximum fixed repurchase
price plus accrued and unpaid dividends) of such Person, and (ix) any amendment,
supplement, modification, deferral, renewal, extension, refunding or refinancing
or any liability of the types referred to in clauses (i) through (viii) above.
For purposes hereof, (x) the "maximum fixed repurchase price" of any
Disqualified Capital Stock which does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Disqualified Capital Stock as if
such Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture, and if such price
is based upon, or measured by, the fair market value of such Disqualified
Capital Stock, such fair market value is to be determined in good faith by the
board of directors (or any duly authorized committee thereof) of the issuer of
such Disqualified Capital Stock, and (y) Indebtedness is deemed to be incurred
pursuant to a revolving credit facility each time an advance is made thereunder.
"Junior Indebtedness" means any Indebtedness of the Company subordinated in
right of payment of either principal, premium (if any) or interest thereon to
the Notes.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
security interest, hypothecation or other encumbrance upon or with respect to
any property of any kind, real or personal, movable or immovable, now owned or
hereafter acquired.
"Liquid Assets" shall include: (i) cash; (ii) any of the following
instruments that have a remaining term to maturity not in excess of 90 days from
the determination date: (a) repurchase agreements on obligations of, or are
guaranteed as to timely receipt of principal and interest by, the United States
or any agency or instrumentality thereof when such obligations are backed by the
full faith and credit of the United States provided that the party agreeing to
repurchase such obligations is a primary dealer in U.S. government securities,
(b) federal funds and deposit accounts, including but not limited to
certificates of deposit, time deposits and bankers' acceptances of any U.S.
depository institution or trust company incorporated under the laws of the
United States or any state, provided that the debt of such depository
institution or trust company at the date of acquisition thereof has been rated
by Standard & Poor's Corporation in the highest short-term rating category or
has an equivalent rating from another nationally recognized rating agency, or
(c) commercial paper of any corporation incorporated under the laws of the
United States or any state thereof that on the date of acquisition is rated
investment grade by Standard & Poor's Corporation or has an equivalent rating
from another nationally recognized rating agency; (iii) any debt instrument
which is an obligation of, or is guaranteed as to the receipt of principal and
interest by the United States, its agencies or any U.S. government sponsored
enterprise, or (iv) any mortgage-backed or mortgage-related security issued by
the United States, its agencies, or any U.S. government sponsored enterprise
which the payment of principal and interest from the mortgages underlying such
securities will be passed through to the holder thereof and which such security
has a remaining weighted average maturity of 15 years or less. Notwithstanding
the foregoing, Liquid Assets shall not include any debt instruments, securities
or collateralized mortgage obligations (real estate mortgage investment
conduits) that would be classified as a "High-Risk Mortgage Security" pursuant
to the policy statement adopted by the Federal Financial Institutions
Examination Counsel on February 10, 1992, as reflected in Volume I of the
Federal Reserve Report Service, Part 3-1562.
"Net Cash Proceeds" means, with respect to any issuance or sale of Capital
Stock, or options, warrants or rights to purchase Capital Stock, or debt
securities or Capital Stock that have been converted into or exchanged for
Capital Stock, or any capital contribution in respect of Capital Stock, as
referred to under "Certain Covenants--Limitation on Restricted Payments," the
proceeds of such issuance or sale or capital contribution in the form of cash or
cash equivalents, including payments in respect of deferred payment obligations
when received in the form of, or stock or other assets when disposed for, cash
or cash equivalents (except to the extent that such obligations are financed or
sold with recourse to the Company or any Subsidiary of the Company), net of
attorney's fees, accountant's fees and brokerage, consulting, underwriting and
other fees and expenses actually incurred in connection with such issuance or
sale or capital contribution and net of taxes paid or payable by the Company as
a result thereof.
"OTS" means the Office of Thrift Supervision or any successor thereto.
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<PAGE>
"Pari Passu Indebtedness" means any Indebtedness of the Company that is PARI
PASSU in right of payment of principal, premium (if any) and interest thereon to
the Notes.
"Permitted Payment" means, so long as no Default or Event of Default is
continuing,
(a) the purchase, redemption, defeasance or other acquisition or retirement
for value of any Capital Stock of the Company or any Affiliate (other than a
Wholly-Owned Subsidiary, which is unrestricted) of the Company, Junior
Indebtedness or Pari Passu Indebtedness in exchange for (including any such
exchange pursuant to the exercise of a conversion right or privilege where, in
connection therewith, cash is paid in lieu of the issuance of fractional shares
or scrip), or out of the Net Cash Proceeds or Fair Market Value of property not
constituting Net Cash Proceeds of, a substantially concurrent issue and sale
(other than to a Subsidiary of the Company or to an employee benefit plan of the
Company or any of its Subsidiaries) of Qualified Capital Stock of the Company;
PROVIDED that the Net Cash Proceeds or Fair Market Value of such property
received by the Company from the issuance of such shares of Qualified Capital
Stock, to the extent so utilized, shall be excluded from clause (c)(iii) of the
covenant described under "Covenants--Limitation on Restricted Payments" above;
and
(b) the repurchase, redemption, defeasance or other acquisition or
retirement for value of any Junior Indebtedness or Pari Passu Indebtedness in
exchange for, or out of the Net Cash Proceeds of, a substantially concurrent
issue and sale (other than to a Subsidiary of the Company) of new Indebtedness
to the Company (such a transaction, a "refinancing"); PROVIDED, that any such
new Indebtedness of the Company (i) shall be in a principal amount that does not
exceed an amount equal to the sum of (A) the principal amount of the
Indebtedness so refinanced less any discount from the face amount of such
Indebtedness to be refinanced expected to be deducted from the amount payable to
the holders of such Indebtedness in connection with such refinancing, (B) the
amount of any premium expected to be paid in connection with such refinancing
pursuant to the terms of the Junior Indebtedness or Pari Passu Indebtedness
refinanced or the amount of any premium reasonably determined by the Company as
necessary to accomplish such refinancing by means of a tender offer, privately
negotiated repurchase or otherwise and (C) the amount of legal, accounting,
printing and other similar expenses of the Company incurred in connection with
such refinancing; PROVIDED, FURTHER, that for purposes of this clause (i), the
principal amount of any Indebtedness shall be deemed to mean the principal
amount thereof or, if such Indebtedness provides for an amount less than the
principal amount thereof to be due and payable upon a declaration of
acceleration thereof, such lesser amount as of the date of determination; (ii)
(A) if such refinanced Indebtedness has an Average Life to Stated Maturity
shorter than that of the Notes or a final Stated Maturity earlier than the final
Stated Maturity of the Notes, such new Indebtedness shall have an Average Life
to Stated Maturity no shorter than the Average Life to Stated Maturity of such
refinanced Indebtedness and a final Stated Maturity no earlier than the final
Stated Maturity of such refinanced Indebtedness or (B) in all other cases each
Stated Maturity of principal (or any required repurchase, redemption, defeasance
or sinking fund payments) of such new Indebtedness shall be after the final
Stated Maturity of principal of the Notes; and (iii) is (A) made expressly
subordinated to or PARI PASSU with the Notes to substantially the same extent as
the Indebtedness being refinanced or (B) expressly subordinate to such
refinanced Indebtedness.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political
subdivisions thereof.
"Preferred Stock" means, with respect to any Person, any Capital Stock of
any class or classes (however designated) which is preferred as to the payment
of dividends or distributions, or as to the distribution of assets upon any
voluntary liquidation or dissolution of such Person, over Capital Stock of any
other class in such Person.
"Qualified Capital Stock" of any Person means any and all Capital Stock of
such Person other than Disqualified Capital Stock.
"Regulatory Capital Requirements" means the minimum amount of capital
required to meet each of the industry-wide regulatory capital requirements
applicable to the Bank pursuant to 12 U.S.C. Section 1464(t) and 12 C.F.R.
Section 567 (and any amendment to either thereof) or any successor law or
103
<PAGE>
regulation, or such higher amount of capital as the Bank, individually, is
required to maintain in order to meet any individual minimum capital standard
applicable to the Bank pursuant to 12 U.S.C. Section 1464(s) and 12 C.F.R.
Section 567.3 (and any amendment to either thereof) or any successor law or
regulation.
"Restricted Payment" means
(a) the declaration, payment or setting apart of any funds for the
payment of any dividend on, or making of any distribution to holders of, the
Capital Stock of the Company or any Subsidiary of the Company (other than
(i) dividends or distributions in Qualified Capital Stock of the Company and
(ii) dividends or distributions payable on or in respect of any class or
series of Capital Stock of a Subsidiary of the Company as long as the
Company receives at least its pro rata share of such dividends or
distributions in accordance with its ownership interests in such class or
series of Capital Stock);
(b) the purchase, redemption or other acquisition or retirement for
value, directly or indirectly, of any Capital Stock of the Company or any
Affiliate of the Company (other than a Wholly-Owned Subsidiary, and other
than the purchase from a non-Affiliate of the Company of Capital Stock of
any joint venture or other Person which is an Affiliate of the Company
solely because of the Company's direct or indirect ownership of 20% or more
of the Voting Stock of such joint venture or other Person); or
(c) prior to any Stated Maturity of principal or scheduled redemption or
defeasance of, or any scheduled sinking fund payment on, any Junior
Indebtedness or Pari Passu Indebtedness, the making of any principal
payments on, or repurchase, redemption, defeasance, retirement or other
acquisition for value, directly or indirectly, such Junior Indebtedness or
Pari Passu Indebtedness.
"Securitization Entity" means any pooling arrangement or entity formed or
originated for the purpose of holding, and/or issuing securities representing
interests in, one or more pools of mortgages, leases, credit card receivables,
home equity loan receivables, automobile loans, leases or installment sales
contracts, other consumer receivables or other financial assets of the Company
or any Subsidiary, and shall include, without limitation, any partnership,
limited liability company, liquidating trust, grantor trust, owner trust or real
estate mortgage investment conduit.
"Significant Subsidiary" means, with respect to any Person, any consolidated
Subsidiary of such Person for which the net income of such Subsidiary was more
than 25% of the Consolidated Net Income of such Person in both of the two prior
fiscal years.
"Stated Maturity" when used with respect to any Indebtedness (including,
without limitation, the Notes) means the dates specified in the instrument
governing such Indebtedness as the fixed dates on which any principal amount of
such Indebtedness is due and payable (including, without limitation, by reason
of any required redemption, purchase, defeasance or sinking fund payment) and,
when used with respect to any installment of interest on Indebtedness, means the
date on which such installment is due and payable.
"Subsidiary" means, with respect to any Person, any corporation, association
or other business entity of which more than 50% of the voting power of Voting
Stock thereof is at the time owned or controlled, directly or indirectly, by
such Person or one or more of the other Subsidiaries of such Person or a
combination thereof.
"Voting Stock" means Capital Stock of the class or classes of which the
holders have (i) in respect of a corporation, the general voting power under
ordinary circumstances to elect at least a majority of the board of directors,
managers or trustees of such corporation (irrespective of whether or not at the
time Capital Stock of any other class or classes shall have or might have voting
power by reason of the happening of any contingency) or (ii) in respect of a
partnership, the general voting power under ordinary circumstances to elect the
board of directors or other governing board of such partnership or of the Person
which is a general partner of such partnership.
"Wholly-Owned Subsidiary" means a Subsidiary all of the Capital Stock of
which (other than directors' qualifying shares) is owned by the Company or
another Wholly-Owned Subsidiary.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement
with respect to the Notes Offering (the "Note Underwriting Agreement") between
the Company and Friedman, Billings, Ramsey & Co., Inc. (the "Note Underwriter"),
the Company has agreed to sell to the Note Underwriter, and the Note Underwriter
has agreed to purchase, the $125,000,000 aggregate principal amount of the Notes
being offered in the Notes Offering.
The Note Underwriting Agreement provides that, subject to the terms and
conditions set forth therein, the Note Underwriter is obligated to purchase all
of the Notes if any are purchased.
The Note Underwriter proposes to offer the Notes directly to the public at
the initial public offering price set forth on the cover page of this Prospectus
and to certain dealers at such price less a concession not in excess of 1.0% of
the principal amount. The Note Underwriter may allow, and such dealers may
re-allow, a concession not in excess of 0.5% of the principal amount on sales to
certain other dealers. The offering of the Notes is made for delivery when, as
and if accepted by the Note Underwriter and is subject to prior sale and to
withdrawal, cancellation or modification of the offer without notice. The Note
Underwriter reserves the right to reject any offer for the purchase of the
Notes. After the initial public offering of the Notes, the public offering price
and other selling terms may be changed by the Note Underwriter.
The Company has granted an option to the Note Underwriter, exercisable
during the 30-day period after the date of this Prospectus, to purchase up to an
aggregate of $18.75 million additional principal amount of Notes, at the initial
public offering price set forth on the cover page of this Prospectus, less the
underwriting discount. The Note Underwriter may exercise this option only to
cover over-allotments, if any, made on the sale of the Notes in the Note
Offering. To the extent that the Note Underwriter exercises this option, the
Note Underwriter will be obligated, subject to certain conditions, to purchase
such additional principal amount of Notes.
The Note Underwriter does not intend to confirm sales to any accounts over
which it exercises discretionary authority.
The Company has agreed to indemnify the Note Underwriter against certain
liabilities, including liabilities under the federal securities laws, or to
contribute to payments that the Note Underwriter may be required to make in
respect thereof.
LEGAL MATTERS
The legality of the Notes will be passed upon for the Company by Elias,
Matz, Tiernan & Herrick L.L.P., Washington, D.C. Certain legal matters in
connection with the Notes Offering will be passed upon for the Note Underwriter
by Simpson Thacher & Bartlett (a partnership which includes professional
corporations), New York, New York.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1995
and 1994 and for each of the three years in the period ended December 31, 1995
included in this Prospectus have been so included in reliance on the report of
Price Waterhouse LLP, independent certified public accountants, given upon the
authority of said firm as experts in auditing and accounting.
105
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants...................................................... F-2
Consolidated Statements of Financial Condition at December 31, 1995 and 1994............................ F-3
Consolidated Statements of Operations for each of the three years in the period ended December 31,
1995................................................................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for each of the three years in the period
ended December 31, 1995................................................................................ F-5
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31,
1995................................................................................................... F-6
Notes to Consolidated Financial Statements.............................................................. F-8
INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED):
Consolidated Statements of Financial Condition at June 30, 1996 and December 31, 1995................... F-45
Consolidated Statements of Operations for the three and six months ended June 30, 1996 and 1995......... F-46
Consolidated Statements of Changes in Stockholders' Equity for the six months ended June 30, 1996....... F-47
Consolidated Statements of Cash Flows for the six months ended June 30, 1996 and 1995................... F-48
Notes to Interim Consolidated Financial Statements...................................................... F-50
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Ocwen Financial Corporation
In our opinion, the accompanying consolidated statements of financial
condition and the related consolidated statements of operations, of changes in
stockholders' equity and of cash flows present fairly, in all material respects,
the financial position of Ocwen Financial Corporation and its subsidiaries (the
"Company") at December 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosure in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Fort Lauderdale, Florida
February 16, 1996, except as to Note 21 which
is as of July 31, 1996
F-2
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Cash and amounts due from depository institutions..................................... $ 4,200 $ 32,954
Interest bearing deposits............................................................. 50,432 3,796
Securities available for sale, at market value........................................ 337,480 187,717
Loans available for sale, at lower of cost or market.................................. 251,790 102,293
Investment securities, net............................................................ 18,665 17,011
Mortgage-related securities held for investment, net.................................. -- 91,917
Loan portfolio, net................................................................... 295,605 57,045
Discounted loan portfolio, net........................................................ 669,771 529,460
Principal, interest and dividends receivable.......................................... 12,636 6,152
Investments in low income housing tax credit interests................................ 81,362 49,442
Real estate owned, net................................................................ 166,556 96,667
Premises and equipment, net........................................................... 25,359 38,309
Income taxes receivable............................................................... 1,005 --
Deferred tax asset.................................................................... 22,263 20,695
Other assets.......................................................................... 36,466 32,945
------------ ------------
$ 1,973,590 $ 1,266,403
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits............................................................................ $ 1,501,646 $ 1,023,268
Advances from the Federal Home Loan Bank............................................ 70,399 5,399
Securities sold under agreements to repurchase...................................... 84,761 --
Subordinated debentures and other interest bearing obligations...................... 117,054 20,111
Income taxes payable................................................................ -- 10,025
Accrued expenses, payables and other liabilities.................................... 60,183 54,217
------------ ------------
Total liabilities................................................................. 1,834,043 1,113,020
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 20,000,000 shares authorized; 0 shares issued and
outstanding........................................................................ -- --
Common stock, $.01 par value; 200,000,000 shares authorized; 23,812,270 and
32,194,710 shares issued and outstanding at December 31, 1995 and 1994,
respectively....................................................................... 238 322
Additional paid-in capital.......................................................... 10,449 13,652
Retained earnings................................................................... 130,275 142,230
Unrealized loss on securities available for sale, net of taxes...................... (1,415) (2,821)
------------ ------------
Total stockholders' equity........................................................ 139,547 153,383
------------ ------------
$ 1,973,590 $ 1,266,403
------------ ------------
------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-3
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Interest income:
Federal funds sold and repurchase
agreements................................ $ 3,502 $ 8,861 $ 873
Securities available for sale.............. 18,391 27,988 19,714
Loans available for sale................... 15,608 19,353 5,376
Mortgage-related securities held for
investment................................ 4,313 6,930 9,379
Loans...................................... 15,430 5,924 6,232
Discounted loans........................... 75,998 52,560 31,036
Investment securities and other............ 4,033 9,842 6,313
----------- ----------- -----------
137,275 131,458 78,923
----------- ----------- -----------
Interest expense:
Deposits................................... 71,853 44,961 19,039
Securities sold under agreements to
repurchase................................ 951 10,416 9,340
Securities sold but not yet purchased...... 1,142 2,780 -
Advances from the Federal Home Loan Bank... 1,126 1,232 2,834
Subordinated debentures and other interest
bearing obligations....................... 8,988 3,209 4,093
----------- ----------- -----------
84,060 62,598 35,306
----------- ----------- -----------
Net interest income before provision for
loan losses............................. 53,215 68,860 43,617
Provision for loan losses.................... 1,121 -- --
----------- ----------- -----------
Net interest income after provision for
loan losses............................. 52,094 68,860 43,617
----------- ----------- -----------
Non-interest income:
Servicing fees and other charges........... 2,870 4,786 3,800
Gains on sales of interest earning assets,
net....................................... 6,955 5,727 8,386
Fees on financing transactions............. -- -- 15,340
Gain from sale of branch offices........... 5,430 62,600 --
Gain on sale of subsidiary's stock......... -- -- 3,835
Income (loss) on real estate owned, net.... 9,540 5,995 (1,158)
Gain on sale of hotel...................... 4,658 -- --
Other income............................... 1,727 2,467 5,669
----------- ----------- -----------
31,180 81,575 35,872
----------- ----------- -----------
Non-interest expense:
Compensation and employee benefits......... 23,787 42,395 23,507
Occupancy and equipment.................... 8,360 11,537 9,106
Amortization of excess cost over net assets
acquired.................................. -- 1,346 1,301
Hotel operations expense (income), net..... 337 (723) (710)
Other operating expenses................... 13,089 14,303 8,655
----------- ----------- -----------
45,573 68,858 41,859
----------- ----------- -----------
Income from continuing operations before
income taxes............................ 37,701 81,577 37,630
Income tax expense........................... 4,562 29,724 10,325
----------- ----------- -----------
Income from continuing operations........ 33,139 51,853 27,305
Discontinued operations:
Loss from operations of discontinued
divisions to September 30, 1995 net of tax
benefits of $2,321, $2,227 and $1,259 for
1995, 1994 and 1993, respectively......... (4,468) (4,514) (2,270)
Loss on disposal of divisions, net of tax
benefit of $1,776......................... (3,204) -- --
----------- ----------- -----------
Income before extraordinary gain and
cumulative effect of a change in
accounting principle.................... 25,467 47,339 25,035
Extraordinary gain on extinguishment of debt,
net of tax expense of $828.................. -- -- 1,538
Cumulative effect on prior year of a change
in accounting principle..................... -- -- (1,341)
----------- ----------- -----------
Net income................................. $ 25,467 $ 47,339 $ 25,232
----------- ----------- -----------
----------- ----------- -----------
Earnings per share:
Income from continuing operations.......... $ 1.19 $ 1.52 $ 0.80
Discontinued operations, net of tax
benefit................................... (0.28) (0.13) (0.07)
Extraordinary gain on extinguishment of
debt, net of taxes........................ -- -- 0.04
Cumulative effect of a change in accounting
principle................................. -- -- (0.04)
----------- ----------- -----------
Net income............................... $ 0.91 $ 1.39 $ 0.73
----------- ----------- -----------
----------- ----------- -----------
Weighted average common shares outstanding... 27,769,080 34,084,160 34,285,850
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
ON
SECURITIES
COMMON STOCK ADDITIONAL AVAILABLE
------------------------- PAID-IN RETAINED FOR SALE,
SHARES AMOUNT CAPITAL EARNINGS NET OF TAXES TOTAL
------------ ----------- ----------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1992................. 34,810,920 $ 348 $ 21,142 $ 72,906 $ -- $ 94,396
Net income.................................. -- -- -- 25,232 -- 25,232
Exercise of common stock options............ 250,000 3 447 -- -- 450
Repurchase of common stock.................. (2,865,880) (29) (7,944) -- -- (7,973)
Predecessor basis of subsidiary
accounting................................. -- -- -- (3,247) -- (3,247)
Subsidiary's retirement of common stock..... -- -- 81 -- -- 81
Change in unrealized gain on securities
available for sale, net of taxes........... -- -- -- -- 2,892 2,892
------------ ----- ----------- ---------- ------------ ----------
Balances at December 31, 1993................. 32,195,040 322 13,726 94,891 2,892 111,831
Net income.................................. -- -- -- 47,339 -- 47,339
Repurchase of common stock options.......... -- -- (73) -- -- (73)
Repurchase of common stock.................. (330) -- (1) -- -- (1)
Change in unrealized loss on securities
available for sale, net of tax benefit..... -- -- -- -- (5,713) (5,713)
------------ ----- ----------- ---------- ------------ ----------
Balances at December 31, 1994................. 32,194,710 322 13,652 142,230 (2,821) 153,383
Net income.................................. -- -- -- 25,467 -- 25,467
Repurchase of common stock options.......... -- -- (132) -- -- (132)
Exercise of common stock options............ 432,620 4 1,416 -- -- 1,420
Repurchase of common stock.................. (8,815,060) (88) (4,487) (37,422) -- (41,997)
Change in unrealized loss on securities
available for sale, net of taxes........... -- -- -- -- 1,406 1,406
------------ ----- ----------- ---------- ------------ ----------
Balances at December 31, 1995................. 23,812,270 $ 238 $ 10,449 $ 130,275 $ (1,415) $ 139,547
------------ ----- ----------- ---------- ------------ ----------
------------ ----- ----------- ---------- ------------ ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
---------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................................... $ 25,467 $ 47,339 $ 25,232
Adjustments to reconcile net income to net cash (used) provided in
operating activities:
Net cash provided from trading activities.............................. 2,949 4,118 1,183
Proceeds from sales of loans available for sale........................ 100,104 383,673 95,936
Purchases of loans available for sale.................................. (271,210) (510,362) (70,483)
Origination of loans available for sale................................ (2,829) (39,546) (4,162)
Principal payments received on loans available for sale................ 10,103 36,966 1,051
Amortization of excess of costs over net assets acquired............... -- 1,346 1,372
(Discount accretion) premium amortization, net......................... (2,401) (8,268) 5,617
Depreciation and amortization.......................................... 3,755 4,877 2,509
Provision for loan losses.............................................. 1,262 -- --
Loss on sales of premises and equipment................................ 3,002 -- --
Gains on sales of interest earning assets, net......................... (6,955) (5,727) (8,386)
(Gain) loss on sale of real estate owned, net.......................... (8,496) (12,234) 439
Gain from sale of branch offices....................................... (5,430) (62,600) --
Gain on sale of hotel.................................................. (4,658) -- --
Gain on sale of stock in subsidiary.................................... -- -- (3,835)
Extraordinary gain on extinguishment of debt, net of taxes............. -- -- (1,538)
Cumulative effect of a change in accounting principle.................. -- -- 1,341
Decrease in minority interest.......................................... -- -- (10,726)
(Increase) decrease in principal, interest and dividends receivable.... (6,484) 5,710 (3,719)
(Increase) decrease in income taxes receivable......................... (10,769) 16,473 12,187
(Increase) decrease in other assets.................................... (15,159) 8,841 (4,394)
(Decrease) increase in accrued expenses, payables and other
liabilities........................................................... (1,677) 20,587 (24,852)
---------- ----------- -----------
Net cash (used) provided in operating activities........................... (189,426) (108,807) 14,772
---------- ----------- -----------
Cash flows from investing activities:
Proceeds from sales of securities available for sale..................... 836,247 877,911 744,636
Purchases of securities available for sale............................... (934,179) (511,694) (1,048,685)
Maturities of and principal payments received on securities available for
sale.................................................................... 21,639 115,357 245,554
Purchase of securities held for investment............................... -- (4,804) (218,222)
Maturities of and principal payments received on securities held for
investments............................................................. 17,545 44,133 194,262
Proceeds from sale of hotel.............................................. 25,193 -- --
Purchases of low income housing tax credit interests..................... (29,280) (31,821) (11,988)
Proceeds from sales of discounted loans and loans held for investment.... 38,942 35,161 456,434
Origination of loans held for investment................................. (235,527) (29,013) (75,280)
Purchases of loans held for investment................................... (35,073) -- (123,293)
Purchases of discounted loans............................................ (547,987) (543,982) (195,750)
Principal payments received on discounted loans and loans held for
investment.............................................................. 251,485 188,850 141,674
Proceeds from sales of real estate owned................................. 148,225 129,671 30,976
Purchases of real estate owned in connection with discounted loan
purchases............................................................... (24,617) (38,071) (7,782)
Cash balances acquired in connection with the purchase of a Federal
savings bank............................................................ -- -- 39,558
Cash balances released in connection with the sale of a subsidiary....... -- -- (18,933)
Net acquisition of hotel businesses...................................... -- -- (23,204)
Additions to premises and equipment...................................... (12,207) (7,438) (9,775)
Other, net............................................................... 5,067 10,262 10,599
---------- ----------- -----------
Net cash (used) provided by investing activities........................... (474,527) 234,522 130,781
---------- ----------- -----------
</TABLE>
(continued on next page)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-6
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
---------- ----------- -----------
Cash flows from financing activities:
<S> <C> <C> <C>
Increase (decrease) in deposits.......................................... $ 585,335 $ 1,065,300 $ (121,237)
Proceeds from issuance of subordinated debentures...................... 100,000 -- --
Payment of debt issuance costs......................................... (3,301) -- --
Sales of deposits...................................................... (111,686) (909,315) --
Premium received on sales of deposits.................................. 5,492 66,595 --
Advances from the Federal Home Loan Bank............................... 170,000 17,000 2,000
Payments on advances from the Federal Home Loan Bank................... (105,000) (69,000) (34,500)
Increase (decrease) in securities sold under agreements to repurchase.. 84,761 (276,095) (14,746)
Issuance of notes and mortgages payable................................ 7,615 -- 40,694
Payments and repurchase of notes and mortgages payable................. (10,672) (22,270) (5,386)
Exercise of common stock options....................................... 1,420 -- 450
Repurchase of common stock options and common stock.................... (42,129) (74) (7,892)
---------- ----------- -----------
Net cash provided (used) by financing activities........................... 681,835 (127,859) (140,617)
---------- ----------- -----------
Net increase (decrease) in cash and cash equivalents....................... 17,882 (2,144) 4,936
Cash and cash equivalents at beginning of year............................. 36,750 38,894 33,958
---------- ----------- -----------
Cash and cash equivalents at end of year................................... $ 54,632 $ 36,750 $ 38,894
---------- ----------- -----------
---------- ----------- -----------
Reconciliation of cash and cash equivalents at end of year:
Cash and amounts due from depository institutions........................ $ 4,200 $ 32,954 $ 38,894
Interest bearing deposits................................................ 50,432 3,796 --
---------- ----------- -----------
$ 54,632 $ 36,750 $ 38,894
---------- ----------- -----------
---------- ----------- -----------
Supplemental disclosure of cash flow information:
Cash paid (received) during the year for:
Interest............................................................... $ 72,626 $ 58,174 $ 32,333
---------- ----------- -----------
---------- ----------- -----------
Income taxes........................................................... $ 12,858 $ 11,170 $ (6,607)
---------- ----------- -----------
---------- ----------- -----------
Supplemental schedule of non-cash investing and financing activities:
The Company purchased certain assets and assumed certain liabilities of a
Federal savings institution as follows:
Fair value of assets acquired.......................................... $ -- $ -- $ 667,792
---------- ----------- -----------
---------- ----------- -----------
Liabilities assumed.................................................... $ -- $ -- $ 667,792
---------- ----------- -----------
---------- ----------- -----------
Exchange of loans available for sale for FNMA securities................. $ 83,875 $ 346,588 $ 67,121
---------- ----------- -----------
---------- ----------- -----------
Real estate owned acquired through foreclosure........................... $ 185,001 $ 136,764 $ 26,887
---------- ----------- -----------
---------- ----------- -----------
Retirement of subsidiary's common stock.................................. $ -- $ -- $ 81
---------- ----------- -----------
---------- ----------- -----------
Purchase of common stock of a subsidiary in exchange for a subordinated
note.................................................................... $ -- $ -- $ 4,351
---------- ----------- -----------
---------- ----------- -----------
Transfer of mortgage--related securities from held for investment to
available for sale...................................................... $ 73,706 $ -- $ --
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-7
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
Ocwen Financial Corporation (the "Company") is a financial services holding
company engaged in asset acquisition and resolution, residential finance,
commercial finance, investment management and hotel operations through its
subsidiaries. The Company owns directly and indirectly all of the outstanding
common and preferred stock of its primary subsidiaries, Berkeley Federal Bank &
Trust FSB (the "Bank") and Investors Mortgage Insurance Holding Company ("IMI"),
which are included in the Company's consolidated financial statements. The Bank
changed its name from First Federal Savings Bank (of Delaware) to Berkeley
Federal Bank & Trust FSB on June 3, 1993 following the acquisition of Berkeley
Federal Savings Bank ("Old Berkeley"). All significant intercompany transactions
and balances have been eliminated in consolidation.
The Bank is a federally chartered savings bank regulated by the Office of
Thrift Supervision ("OTS"). IMI's primary subsidiaries are engaged in hotel
operations and other real estate related ventures.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, interest bearing and non-interest bearing deposits and all highly
liquid debt instruments purchased with an original maturity of three months or
less. Cash flows associated with items intended as hedges of identifiable
transactions or events are classified in the same category as the cash flows
from the items being hedged.
SECURITIES AVAILABLE FOR SALE
Certain U.S. Treasury securities, mortgage-backed securities and
mortgage-related securities are designated as assets available for sale because
the Company does not intend to hold them to maturity. Securities available for
sale are carried at market value with the net unrealized gains or losses
reported as a separate component of stockholders' equity. Unrealized losses on
securities that reflect a decline in value which is other than temporary, if
any, are charged to earnings. At disposition the realized net gain or loss is
included in earnings on a specific identification basis. The amortization of
premiums and accretion of discounts are computed using the interest method after
considering actual and estimated prepayment rates, if applicable. During
December 1995, in conjunction with a transition provision provided by the
Financial Accounting Standards Board pertaining to the classification of
securities in accordance with Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", the Company transferred all of its mortgage-related securities held
for investment, with a book value of $75,194 and a market value of $73,706 to
securities available for sale.
INVESTMENTS AND MORTGAGE-RELATED SECURITIES HELD FOR INVESTMENT
Investments and mortgage-related securities held for investment are stated
at cost, adjusted for amortization of premiums and accretion of discounts,
because the Company has the ability and the intent to hold them to maturity.
Unrealized losses on securities that reflect a decline in value which is other
than temporary, if any, are charged to earnings. The amortization of premiums
and accretion of discounts are computed using the interest method after
considering actual and estimated prepayment rates, if applicable. Actual
prepayment experience is periodically reviewed and effective yields are
recalculated when differences arise between prepayments originally anticipated
and amounts actually received plus anticipated future prepayments.
F-8
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
TRADING ACTIVITIES
From time to time the Company purchases investment and mortgage-backed and
related securities into its trading account. In addition, securities acquired
and sold shortly thereafter resulting from the securitization of loans available
for sale are accounted for as the sale of loans and the purchase and sale of
trading securities. Securities held for trading purposes are carried at market
value with the unrealized gains or losses included in gains on sales of interest
earning assets, net. Although no such positions were held as of December 31,
1995 or 1994, the Company traded assets totaling $93,942, $621,991 and $145,716
in aggregate sales proceeds during the years ended December 31, 1995, 1994 and
1993, respectively, resulting in net gains of $2,949, $4,118 and $1,183 for the
years ended December 31, 1995, 1994 and 1993, respectively.
LOANS AVAILABLE FOR SALE AND HELD FOR INVESTMENT
Loans originated or purchased by the Company which the Company presently
does not intend to hold to maturity are designated as loans available for sale
upon origination or purchase and are stated at the lower of cost, after
considering deferred loan fees and costs, or aggregate market value. Upon the
sale of a loan, any unamortized deferred loan fees, net of costs, are included
in the gain or loss on sale of interest earning assets. Gains and losses on
disposal of such assets are computed on a specific identification basis.
Loans held for investment are stated at amortized cost, less an allowance
for loan losses, because the Company has the ability and the intent to hold them
to maturity.
Interest income is accrued as it is earned. Loans are placed on non-accrual
status after being delinquent greater than 90 days, or earlier if the borrower
is deemed by management to be unable to continue performance. When a loan is
placed on non-accrual status, interest accrued but not received is reversed.
While a loan is on non-accrual status, interest is recognized only as cash is
received. Loans are returned to accrual status only when the loan is reinstated
and ultimate collectibility of future interest is no longer in doubt.
Loan origination fees and certain direct loan origination costs are deferred
and recognized over the lives of the related loans as a yield adjustment and
included in interest income using the interest method applied on a loan-by-loan
basis.
ALLOWANCE FOR ESTIMATED LOAN LOSSES ON LOAN PORTFOLIO
The allowance for estimated loan losses is maintained at a level that
management, based upon an evaluation of known and inherent risks in the
portfolio, considers adequate to provide for potential losses. Specific
valuation allowances are established for impaired loans in the amount by which
the carrying value, before allowance for estimated losses, exceeds the fair
value of collateral less costs to dispose on an individual loan basis except for
single family residential mortgage loans and consumer loans which are generally
evaluated for impairment as homogeneous pools of loans. The Company considers a
loan to be impaired when, based upon current information and events, it believes
that it is probable that the Company will be unable to collect all amounts due
according to the contractual terms of the loan agreement on a timely basis. The
Company measures these impaired loans at the fair value of the loans' collateral
properties less selling costs. Impaired loans may be left on accrual status
during the period the Company is pursuing repayment of the loan. These loans are
placed on non-accrual status at such time that the loans either: (1) become 90
days delinquent; or (2) the Company determines the borrower is incapable of, or
has ceased efforts toward, curing a loan. Impairment losses are recognized
through an increase in the allowance for loan losses and a corresponding charge
to the provision for loan losses. When an impaired loan is either sold,
transferred to REO or charged off, any related valuation allowance is credited
to the allowance for loan losses. Charge-offs occur when loans are considered
uncollectible and of such little value that their continuance as bankable assets
is not warranted. General valuation allowances are also established for the
inherent
F-9
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
risks in the loan portfolio which have yet to be specifically identified.
Management's periodic evaluation of the allowance for estimated losses is based
upon an analysis of the portfolio, historical loss experience, economic
conditions and trends, collateral values and other relevant factors. Future
adjustments to the allowance may be necessary if economic conditions and trends,
collateral values and other relevant factors differ substantially from the
assumptions used in making the evaluation.
DISCOUNTED LOAN PORTFOLIO
Certain mortgage loans, for which the borrower is not current as to
principal and interest payments, are acquired at a discount. The acquisition
cost for a pool of loans is allocated to each individual loan within the pool
based upon the Company's pricing methodology. The discount associated with
single family residential mortgage loans is recognized as a yield adjustment and
included in interest income using the interest method applied on a loan-by-loan
basis to the extent the timing and amount of cash flows can be reasonably
determined. For those single family residential mortgage loans which are brought
current by the borrower and certain multi-family and commercial real estate
loans which are current and the Company believes will remain current, the
remaining unamortized discount is accreted to income as a yield adjustment using
the interest method over the contractual maturity of the loan. For all other
loans, interest is reported as cash is received. Adjustments to reduce the
carrying value of discounted loans to the fair value of the properties securing
the loan discounted at the effective interest rate, as well as gains on the
repayment and discharging of loans, are reported as interest income. In
situations where the collateral is foreclosed upon, the loans are transferred to
real estate owned upon receipt of title to the property and accretion of the
related discount is discontinued.
REAL ESTATE OWNED
Properties acquired through foreclosure are valued at the lower of the
adjusted cost basis of the loan or fair value less estimated costs of disposal
of the property at the date of foreclosure. Properties held are periodically
re-evaluated to determine that they are being carried at the lower of cost or
fair value less estimated costs to dispose. Sales proceeds and related costs are
recognized with passage of title to the buyer, and in cases where the Company
finances the sale, receipt of sufficient down payment. Rental income related to
properties is reported as income as earned. Holding and maintenance costs
related to properties are reported as period costs as incurred. No depreciation
expense related to properties has been recorded. Decreases in market value of
foreclosed real estate subsequent to foreclosure are recognized as a valuation
allowance on a property specific basis. Subsequent increases in market value of
the foreclosed real estate are reflected as reductions in the valuation
allowance, but not below zero. Such changes in the valuation allowance are
charged or credited to income.
VALUATION ALLOWANCES ON ASSETS HELD FOR DISPOSITION AND RESOLUTION
The Company is currently reviewing its methodology for valuing assets held
for disposition and resolution, which include discounted loans, loans available
for sale and real estate owned, with the OTS. Although the Company believes that
its methods for determining net carrying values of such assets are in accordance
with generally accepted accounting principles, as a result of this review,
however, the Company may provide a general allowance for losses on discounted
loans, loans available for sale and real estate owned. Such a general allowance
would supplement, or otherwise amend, the Company's current practice of
adjusting discounted loans, loans available for sale and real estate owned to
the lower of the recorded investment or fair value through direct charges to
interest income or non-interest income, as appropriate. Although the Company
cannot at this time estimate the amount of general allowance which may be
required, such amount may be material. The Company at this time believes,
however, that it will continue to be classified as a well-capitalized
institution subsequent to any such provision for general allowance for losses.
F-10
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
INVESTMENTS IN LOW INCOME HOUSING TAX CREDIT INTERESTS
Low income housing tax credit partnerships own multi-family residential
properties which have been allocated tax credits under the Internal Revenue
Code. The obligations of the partnership to sustain qualifying status of the
properties covers a 15-year period; however, tax credits accrue over a 10-year
period on a straight-line basis. Investments by the Company in low income
housing tax credit partnerships made on or after May 18, 1995 in which the
Company invests solely as a limited partner are accounted for using the equity
method in accordance with the consensus of the Emerging Issues Task Force
through issue number 94-1. For the Company's limited partnership investments
made prior to this date, the Company records its receipt of tax credits and
other tax benefits on a level yield basis over the 15-year obligation period and
reports the tax credits and tax benefits, net of the amortization of its
investment in the limited partnership as a reduction of income tax expense. Low
income housing tax credit partnerships in which the Company, through a
subsidiary, acts as the general partner are presented on a consolidated basis.
Through December 31, 1995, the operations of such partnerships in which a
Company subsidiary acted as general partner were limited to pre-operating
construction activities.
EXCESS OF COST OVER NET ASSETS ACQUIRED
On February 17, 1988, the Company acquired 100% of the common stock of First
Federal Savings Bank (of Delaware). Through 1994 the excess of cost over net
assets acquired was being amortized over the estimated periods benefited. As of
December 31, 1994, the remaining depository branches acquired in 1988, along
with certain other branches subsequently acquired, were sold, and the
unamortized excess of cost over net assets acquired of $9,135 was retired and
charged against the gain recorded on the sale of branches.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost and depreciated over their
estimated useful lives on the straight-line method. The estimated useful lives
of the related assets range from 3 to 40 years.
INTEREST RATE RISK MANAGEMENT ACTIVITIES
The Company manages its exposure to interest rate movements by seeking to
match asset and liability balances within maturity categories, both directly and
through the use of derivative financial instruments. These instruments include
interest rate swaps ("swaps") and interest rate futures contracts that are
designated and effective as hedges, as well as swaps that are designated and
effective in modifying the interest rate and/or maturity characteristics of
specified assets or liabilities.
The net interest received or paid on swaps is reflected as interest income
or expense of the related hedged position. Gains and losses resulting from the
termination of swaps are recognized over the shorter of the remaining contract
lives of the swaps or the lives of the related hedged positions or, if the
hedged positions are sold, are recognized in the current period as gains on
sales of interest earning assets, net. Gains and losses on futures contracts are
deferred and amortized over the terms of the related assets or liabilities and
reflected as interest income or expense of the related hedged positions. If the
hedged positions are sold, any unamortized deferred gains or losses on futures
contracts are recognized in the current period as gains on sales of interest
earning assets, net.
Interest rate contracts used in connection with the securities portfolio
designated as available for sale are carried at fair value with gains and
losses, net of applicable taxes, reported in a separate component of
stockholders' equity, consistent with the reporting of unrealized gains and
losses on such securities.
F-11
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
INCOME TAXES
The Company files consolidated Federal income tax returns with its
subsidiaries, excluding IMI and its subsidiaries which file separate Federal
consolidated returns. Consolidated income tax is allocated among the
subsidiaries participating in the consolidated returns as if each subsidiary of
the Company which has one or more subsidiaries filed its own consolidated
return.
In January 1993 the Company adopted SFAS No. 109, "Accounting for Income
Taxes", resulting in a $1.3 million charge in the accompanying 1993 consolidated
statements of operations for the cumulative effect of a change in accounting
principle. The adoption of SFAS No. 109 changed the Company's method of
accounting for income taxes to the asset and liability method rather than the
deferred method. The asset and liability approach requires the recognition of
deferred tax liabilities and assets for the expected future tax consequences of
temporary differences between the carrying amounts and the tax basis of assets
and liabilities. Additionally, SFAS No. 109 requires the adjustment of deferred
taxes for subsequent tax rate changes and also required upon adoption the
recognition of a deferred tax liability for the Bank's tax bad debt reserve in
excess of the 1987 balance to the extent that it exceeds the book reserve.
INVESTMENT MANAGEMENT AND TRUST ACTIVITIES
At December 31, 1995 and 1994 Ocwen Asset Management Inc. ("OAM") had under
management $48,229 and $503,730, respectively, of mortgage-backed and related
securities and mortgage loans for an unaffiliated account. Such amounts are not
included in the Company's consolidated statements of financial condition.
At December 31, 1995 and 1994 the Bank held $2,002 and $11,225,
respectively, in investments in trust accounts for customers. Such amounts are
not included in the Company's consolidated statements of financial condition.
RECENT ACCOUNTING STANDARDS
The financial statements reflect the required disclosures and certain
encouraged disclosures of SFAS No. 119, "Disclosure About Derivative Financial
Instruments and Fair Value of Financial Statements". SFAS No. 114, "Accounting
by Creditors for Impairment of a Loan", as amended by SFAS No. 118, was adopted
by the Company in the first quarter of 1995 and did not have a material impact
on the Company's financial statements.
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", is effective for financial statements
issued for fiscal years beginning after December 15, 1995. Given the Company's
current accounting policies for recording and measuring its long-lived assets,
primarily real estate owned and premises and equipment, the Company does not
anticipate a material impact on its operations or financial position from the
implementation of SFAS No. 121 in 1996.
SFAS No. 122, "Accounting for Mortgage Servicing Rights", requires that an
institution engaged in mortgage banking activities recognize as a separate asset
rights to service mortgage loans for others, regardless of the manner in which
those servicing rights are acquired. Upon sale or securitization of loans with
servicing rights retained, the Company will be required to capitalize the cost
associated with the mortgage servicing rights based on their relative fair
values. SFAS No. 122 also requires that an institution assess its capitalized
mortgage servicing rights for impairment based on the fair value of those
rights. Impairment is to be recognized through a valuation allowance. The
Company does not anticipate a material impact on its operations or financial
position from the implementation of SFAS No. 122 in 1996.
As provided in SFAS No. 123, "Accounting for Stock-Based Compensation", the
Company intends to retain the intrinsic value method of accounting for
stock-based compensation, which it currently uses.
F-12
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
EARNINGS PER SHARE
Earnings per share is calculated based upon the weighted average number of
shares of common stock outstanding during the year. The computation of the
weighted average number of shares includes the impact of the exercise of the
outstanding options to purchase common stock and assumes that the proceeds from
such issuance are used to repurchase common shares at fair value.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change in the near or
medium term relate to the determination of the allowance for losses on loans.
RECLASSIFICATION
Certain amounts included in the 1994 and 1993 consolidated financial
statements have been reclassified in order to conform to the 1995 presentation.
NOTE 2 ACQUISITION AND DISPOSITION TRANSACTIONS
ACQUISITIONS
On June 3, 1993 the Company acquired all of the stock issued by Old Berkeley
in connection with that institution's voluntary supervisory conversion. Old
Berkeley was then merged into First Federal Savings Bank (of Delaware) and the
corporate name changed to Berkeley Federal Bank & Trust FSB. IMI purchased the
assets of the Knickerbocker Hotel in Chicago, Illinois on April 19, 1993 for
$13,704 and the Great Southern Hotel in Columbus, Ohio on August 17, 1993 for
$9,500. These acquisitions were accounted for under the purchase method of
accounting. The operating results of these acquisitions are included in the
Company's consolidated statements of operations from the date of the respective
acquisitions.
DISPOSITIONS
The Bank sold two branches with deposit liabilities totaling $111,686 as of
November 17, 1995, and twenty-three branches with deposit liabilities totaling
$909,315 as of December 31, 1994. The components of the gain recorded on these
transactions is summarized below:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Premium received on deposit liabilities sold................................................. $ 5,492 $ 66,595
Difference between carrying value and face value of deposits sold............................ -- 4,596
Retirement of excess of cost over net assets acquired, net................................... -- (9,135)
Net gain on sale of land, buildings, furniture, fixtures and equipment....................... 158 2,908
Broker's fee and other costs associated with the sale of the deposits........................ (220) (2,364)
--------- ---------
Gains on sales of branches............................................................... $ 5,430 $ 62,600
--------- ---------
--------- ---------
</TABLE>
Additionally, on October 4, 1995 the Company sold the Knickerbocker Hotel
for a gain of $4,658.
Effective December 30, 1993 the Company sold all of the stock of Investors
Mortgage Insurance Company ("Investors") and Investors Equity Insurance Company,
Inc. ("Equity"), both wholly-owned subsidiaries of IMI, for approximately $24.8
million. All assets and liabilities of these two subsidiaries were transferred
including the 50 state insurance business licenses held by Investors and the 17
state insurance business licenses held by Equity. A gain of $3,835 was
recognized on the sale. IMI continues to service the
F-13
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
insurance policies through December 31, 1996 for a fee of 25 basis points of the
insured mortgage loan amount at the beginning of each calendar year. In
addition, the Company has guaranteed through December 31, 1996 that the loss
reserves transferred will be sufficient to cover the claims on all policies
underwritten prior to the sale date.
NOTE 3 DISCONTINUED OPERATIONS
In September 1995, the Company announced its decisions to dispose of its
automated banking division and related activities. As a result of these
decisions, a loss of $3,204, net of a tax benefit of $1,776 was recorded
consisting of a net loss of $1,954 on the sale of assets and a loss of $1,250,
incurred from related operations until the sales and dispositions, both of which
were substantially complete at December 31, 1995. The Company's consolidated
statements of operations have been restated for all periods presented to reflect
the discontinuance of these operations. Losses from operations of the
discontinued division, net of tax, amounted to $4,468, $4,514 and $2,270 for the
nine months ended September 30, 1995, the year ended December 31, 1994 and the
year ended December 31, 1993, respectively. Gross revenues from the automated
banking division and related activities for the years ended December 31, 1995,
1994 and 1993 amounted to $1,822, $1,768 and $1,451, respectively.
NOTE 4 FAIR VALUE OF FINANCIAL INSTRUMENTS
Substantially all of the Company's assets, liabilities and off-balance sheet
instruments and commitments are considered financial instruments. For the
majority of the Company's financial instruments, principally loans and deposits,
fair values are not readily available since there are no available trading
markets as characterized by current exchanges between willing parties.
Accordingly, fair values can only be derived or estimated using various
valuation techniques, such as computing the present value of estimated future
cash flows using discount rates commensurate with the risks involved. However,
the determination of estimated future cash flows is inherently subjective and
imprecise. In addition, for those financial instruments with option-related
features, prepayment assumptions are incorporated into the valuation techniques.
It should be noted that minor changes in assumptions or estimation methodologies
can have a material effect on these derived or estimated fair values.
The fair values reflected below are indicative of the interest rate
environments as of December 31, 1995 and 1994 and do not take into consideration
the effects of interest rate fluctuations. In different interest rate
environments, fair value results can differ significantly, especially for
certain fixed-rate financial instruments and non-accrual assets. In addition,
the fair values presented do not attempt to estimate the value of the Company's
fee generating businesses and anticipated future business activities. In other
words, they do not represent the Company's value as a going concern.
Furthermore, the differences between the carrying amounts and the fair values
presented may not be realized because, except as indicated, the Company
generally intends to hold these financial instruments to maturity and realize
their recorded values.
Reasonable comparability of fair values among financial institutions is
difficult due to the wide range of permitted valuation techniques and numerous
estimates that must be made in the absence of secondary market prices. This lack
of objective pricing standards introduces a degree of subjectivity to these
derived or estimated fair values. Therefore, while disclosure of estimated fair
values of financial instruments is required, readers are cautioned in using this
data for purposes of evaluating the financial condition of the Company.
The methodologies used and key assumptions made to estimate fair value, the
estimated fair values determined and recorded carrying values follow:
F-14
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents have been valued at their carrying amounts as
these are reasonable estimates of fair value given the relatively short period
of time between origination of the instruments and their expected realization.
INVESTMENTS AND MORTGAGE-BACKED AND RELATED SECURITIES
For investments and mortgage-backed and related securities, fair value
equals quoted price, if available. For securities for which a quoted market
price is not available, fair value is estimated using quoted market prices for
similar instruments.
LOANS AND DISCOUNTED LOANS
The fair value of whole loans is estimated based upon quoted market prices
for similar whole loan pools. The fair value of the discounted loan portfolio is
estimated based upon current market yields at which recent pools of similar
mortgages have traded taking into consideration the timing and amount of
expected cash flows.
LOW INCOME HOUSING TAX CREDIT INTERESTS
The fair value of the investments in low income housing tax credit interests
is estimated by discounting the future tax benefits expected to be realized from
these investments using discount rates at which similar investments were being
made on or about the respective financial statement dates.
DEPOSITS
The fair value of demand deposits, savings accounts and money market
deposits is the amount payable on demand at the reporting date. The fair value
of fixed-maturity certificates of deposit is estimated by discounting the
required cash payments at the market rates offered for deposits with similar
maturities on or about the respective financial statement dates.
BORROWINGS
The fair value of the Company's subordinated debentures is based upon quoted
market prices. The fair value of the Company's other borrowings is estimated
based upon the discounted value of the future cash flows expected to be paid on
such borrowings using estimated market discount rates that reflect the
borrowings of others with similar terms and maturities.
RISK MANAGEMENT INSTRUMENTS
The fair value of interest rate swap agreements is the estimated amount that
the Company would receive or pay to terminate the swap agreements at the
reporting date taking into account interest rates and the credit worthiness of
the swap counterparties on or about the respective financial statement dates.
Market quotes are used to estimate the fair value of interest rate futures
contracts.
LOAN COMMITMENTS
The fair value of loan commitments is estimated considering the difference
between interest rates on or about the respective financial statement dates and
the committed rates.
REAL ESTATE OWNED
Real estate owned, although not a financial instrument, is an integral part
of the Company's discounted loan business. The fair value of real estate owned
is estimated based upon appraisals, broker price opinions and other standard
industry valuation methods, less anticipated selling costs.
F-15
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
The carrying amounts and the estimated fair values of the Company's
financial instruments and real estate owned are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
-------------------------- ------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents................................ $ 54,632 $ 54,632 $ 36,750 $ 36,750
Securities available for sale............................ 337,480 337,480 187,717 187,717
Loans available for sale................................. 251,790 253,854 102,293 102,934
Investment securities.................................... 18,665 18,657 17,011 16,728
Mortgage-related securities held for investment.......... -- -- 91,917 85,547
Loan portfolio, net...................................... 295,605 300,075 57,045 55,731
Discounted loan portfolio, net........................... 669,771 682,241 529,460 529,460
Investments in low income housing tax credit interest.... 81,362 94,238 49,442 60,144
Real estate owned, net................................... 166,556 187,877 96,667 109,169
Financial Liabilities:
Deposits................................................. 1,501,646 1,488,668 1,023,268 992,340
Advances from the Federal Home Loan Bank................. 70,399 70,530 5,399 5,528
Securities sold under agreements to repurchase........... 84,761 84,761 -- --
Subordinated debentures and other interest bearing
obligations............................................. 117,054 120,398 20,111 19,993
Other:
Loan commitments......................................... 54,405 54,405 41,027 41,027
</TABLE>
F-16
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
NOTE 5 SECURITIES AND LOANS AVAILABLE FOR SALE
The amortized cost, fair value and gross unrealized gains and losses on the
Company's securities and loans available for sale are as follows at the periods
ended:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
DECEMBER 31, 1995: COST GAINS LOSSES FAIR VALUE
- ----------------------------------------------------------------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Mortgage-related securities:
Single family residential:
AAA-rated collateralized mortgage obligations................ $ 140,304 $ 9 $ (1,482) $ 138,831
FHLMC interest only.......................................... 2,217 -- (35) 2,182
FNMA interest only........................................... 10,080 -- (488) 9,592
FNMA principal only.......................................... 8,104 114 -- 8,218
Subordinates................................................. 27,410 -- (100) 27,310
Futures contracts............................................ -- 168 (1,766) (1,598)
Planned amortization class (PAC) residuals................... 759 -- (185) 574
REMIC residuals.............................................. 616 -- (144) 472
---------- ----------- ----------- ----------
189,490 291 (4,200) 185,581
---------- ----------- ----------- ----------
Multi-family and commercial:
AAA-rated interest only...................................... 101,110 2,840 (18) 103,932
FNMA interest only........................................... 5,520 16 (275) 5,261
Subordinates................................................. 43,605 845 (1,496) 42,954
Futures contracts............................................ -- -- (248) (248)
---------- ----------- ----------- ----------
150,235 3,701 (2,037) 151,899
---------- ----------- ----------- ----------
$ 339,725 $ 3,992 $ (6,237) $ 337,480
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
Loans:
Single family residential...................................... 221,927 1,736 -- 223,663
Multi-family................................................... 28,694 314 -- 29,008
Consumer....................................................... 1,169 14 -- 1,183
---------- ----------- ----------- ----------
$ 251,790 $ 2,064 $ -- $ 253,854
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
F-17
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
DECEMBER 31, 1994: COST GAINS LOSSES FAIR VALUE
- ----------------------------------------------------------------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury bills.............................................. $ 3,531 $ 2 $ (1) $ 3,532
---------- ----------- ----------- ----------
Mortgage-backed securities:
Single family residential:
AAA-rated.................................................... 19,174 -- (75) 19,099
---------- ----------- ----------- ----------
Mortgage-related securities:
Single family residential:
FNMA interest only........................................... 1,996 -- -- 1,996
FNMA principal only.......................................... 11,663 -- (173) 11,490
Collateralized mortgage obligations.......................... 79,539 -- (4,507) 75,032
Futures contracts............................................ -- 1,143 -- 1,143
---------- ----------- ----------- ----------
93,198 1,143 (4,680) 89,661
---------- ----------- ----------- ----------
Multi-family:
Collateralized mortgage obligations.......................... 54,950 1,535 (2,546) 53,939
Subordinates................................................. 21,334 761 -- 22,095
Futures contracts............................................ -- -- (609) (609)
---------- ----------- ----------- ----------
76,284 2,296 (3,155) 75,425
---------- ----------- ----------- ----------
$ 192,187 $ 3,441 $ (7,911) $ 187,717
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
Loans:
Single family residential mortgages............................ 16,825 -- (562) 16,263
Multi-family................................................... 83,845 1,503 -- 85,348
Futures contracts.............................................. -- -- (121) (121)
Consumer....................................................... 1,623 -- (179) 1,444
---------- ----------- ----------- ----------
$ 102,293 $ 1,503 $ (862) $ 102,934
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
A profile of the maturities of securities available for sale at December 31,
1995 follows. Mortgage-backed securities are included based on their
weighted-average maturities, reflecting anticipated future prepayments based on
a consensus of dealers in the market.
<TABLE>
<CAPTION>
AMORTIZED COST FAIR VALUE
-------------- ----------
<S> <C> <C>
Due within one year............................................... $ 13,977 $ 13,970
Due after 1 through 5 years....................................... 193,207 189,465
Due after 5 through 10 years...................................... 130,988 131,634
Due after 10 years................................................ 22,797 23,655
-------------- ----------
$ 360,969 $ 358,724
-------------- ----------
-------------- ----------
</TABLE>
F-18
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
Gross realized gains and losses, proceeds on sales, premiums amortized
against and discounts accreted to income were as follows during the periods
ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Securities:
Gross realized gains....................................................... $ 1,266 $ 10,654 $ 3,980
Gross realized losses...................................................... (2,079) (7,999) (1,010)
---------- ---------- ----------
Net realized (losses) gains.............................................. $ (813) $ 2,655 $ 2,970
---------- ---------- ----------
---------- ---------- ----------
Proceeds on Sales.......................................................... $ 836,247 $ 877,911 $ 744,636
---------- ---------- ----------
---------- ---------- ----------
Premiums amortized against interest income................................. $ 5,188 $ 2,782 $ 7,578
Discounts accreted to interest income...................................... (3,135) (553) (49)
---------- ---------- ----------
Net premium amortization................................................. $ 2,053 $ 2,229 $ 7,529
---------- ---------- ----------
---------- ---------- ----------
Loans:
Gross realized gains....................................................... $ 1,817 $ 3,399 $ 773
Gross realized losses...................................................... -- (806) --
---------- ---------- ----------
Net realized gains....................................................... $ 1,817 $ 2,593 $ 773
---------- ---------- ----------
---------- ---------- ----------
Proceeds on Sales.......................................................... $ 100,104 $ 383,673 $ 95,936
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
One security in the available for sale portfolio, with a market value of
$10,954, is pledged as collateral to the State of New Jersey in connection with
the Bank's sales of certificates of deposit over $100 to New Jersey
municipalities. Additionally, certain mortgage-related securities are pledged as
collateral for securities sold under agreements to repurchase (see note 15).
NOTE 6 INVESTMENT SECURITIES
The book and fair values and gross unrealized gains and losses on the
Company's investment securities are as follows at the periods ended:
<TABLE>
<CAPTION>
GROSS GROSS
BOOK UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
--------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1995:
U.S. Treasury securities......................................... $ 10,036 $ -- $ (8) $ 10,028
Federal Home Loan Bank stock..................................... 8,520 -- -- 8,520
Limited partnership interests.................................... 109 -- -- 109
--------- ----------- ----- ---------
$ 18,665 $ -- $ (8) $ 18,657
--------- ----------- ----- ---------
--------- ----------- ----- ---------
DECEMBER 31, 1994:
U.S. Treasury securities......................................... $ 10,325 $ -- $ (283) $ 10,042
Federal Home Loan Bank stock..................................... 6,555 -- -- 6,555
Limited partnership interests.................................... 131 -- -- 131
--------- ----------- ----- ---------
$ 17,011 $ -- $ (283) $ 16,728
--------- ----------- ----- ---------
--------- ----------- ----- ---------
</TABLE>
All U.S. Treasury securities held for investment at December 31, 1995 are
due within one year. The FHLB stock is pledged as additional collateral for FHLB
advances, and a portion of the U.S. Treasury securities are pledged as
collateral for the $399 FHLB advance due in 1997 (see note 14).
F-19
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
Premiums amortized against and discounts accreted to income on U.S. Treasury
securities held for investment were as follows for the periods ended December
31:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Premiums amortized against interest income................................................ $ 289 $ 324 $ 286
Discounts accreted to interest income..................................................... -- (12) (7)
--------- --------- ---------
Net premium amortization................................................................ $ 289 $ 312 $ 279
--------- --------- ---------
--------- --------- ---------
</TABLE>
Included in interest income on investment securities and other for the
periods ended December 31, 1995, 1994 and 1993 are $1,388, $5,654 and $2,572,
respectively, of deferred fees accreted on tax residuals (see note 19).
NOTE 7 MORTGAGE-RELATED SECURITIES
In December 1995 the Company transferred all of its mortgage-related
securities held for investment to its available for sale portfolio (see note 1).
The book and market values and gross unrealized gains and losses for the
Company's mortgage-related securities held for investment at December 31, 1994
were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
BOOK UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
--------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Collateralized mortgage obligations................................ $ 90,153 $ -- $ (6,024) $ 84,129
Planned amortization class securities.............................. 994 -- (19) 975
REMIC residuals.................................................... 770 -- (327) 443
--------- ----------- ----------- ---------
$ 91,917 $ -- $ (6,370) $ 85,547
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
</TABLE>
Premiums amortized against and discounts accreted to interest income on
mortgage-related securities were as follows for the periods ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Premiums amortized against interest income............................................ $ 652 $ 1,043 $ 5,094
Discounts accreted to interest income................................................. (36) (277) (1,694)
--------- --------- ---------
Net premium amortization............................................................ $ 616 $ 766 $ 3,400
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-20
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
NOTE 8 LOAN PORTFOLIO
The Company's loan portfolio consists of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Carrying Value:
Single family residential............................................ $ 75,928 $ 31,926
---------- ---------
Multi-family residential
Permanent.......................................................... 41,306 1,800
Construction....................................................... 7,741 --
---------- ---------
Total multi-family residential................................... 49,047 1,800
---------- ---------
Commercial real estate:
Hotel.............................................................. 125,791 19,659
Office............................................................. 61,262 --
Land............................................................... 24,904 1,315
Other.............................................................. 2,494 4,936
---------- ---------
Total commercial real estate..................................... 214,451 25,910
---------- ---------
Consumer............................................................. 3,223 1,558
---------- ---------
Total loans...................................................... 342,649 61,194
Undisbursed loan funds............................................... (39,721) --
Unaccreted discount.................................................. (5,376) (3,078)
Allowance for loan losses............................................ (1,947) (1,071)
---------- ---------
Loans, net....................................................... $ 295,605 $ 57,045
---------- ---------
---------- ---------
</TABLE>
At December 31, 1995 the Company had $7,005 of single family residential
loans, $3,648 of land loans and $1,275 of multi-family residential loans
outstanding, at market interest rates and terms, which were issued to facilitate
the sale of the Company's real estate owned and real estate held for
development.
F-21
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
The following table presents a summary of the Company's non-performing
loans, allowance for loan losses and significant ratios as of and for the years
ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Non-Performing Loans:
Single family residential...................................... $ 2,923 $ 2,478 $ 2,347
Multi-family................................................... 731 152 664
Consumer....................................................... 202 29 556
--------- --------- ---------
$ 3,856 $ 2,659 $ 3,567
--------- --------- ---------
--------- --------- ---------
Allowance for Loan Losses:
Balance, beginning of year..................................... $ 1,071 $ 884 $ 752
Provision for loan losses...................................... 1,121 --
Charge-offs.................................................... (263) (472) (336)
Recoveries..................................................... 18 659 468
--------- --------- ---------
Balance, end of year........................................... $ 1,947 $ 1,071 $ 884
--------- --------- ---------
--------- --------- ---------
Significant Ratios:
Non-performing loans as a percentage of:
Loans........................................................ 1.27% 4.35% 3.71%
Total assets................................................. 0.20% 0.21% 0.26%
Allowance for loan losses as a percentage of:
Loans........................................................ 0.65% 1.84% 0.99%
Non-performing loans......................................... 50.49% 40.28% 24.78%
Net charge-offs (recoveries) as a percentage of average
loans......................................................... 0.19% (0.28)% (0.10)%
</TABLE>
If non-accrual loans had been current in accordance with their original
terms, interest income for the years ended December 31, 1995, 1994 and 1993
would have been approximately $322, $207 and $243 higher, respectively. No
interest has been accrued on loans greater than 90 days past due. At December
31, 1995, the Company had no investment in impaired loans as defined in
accordance with SFAS No. 114, and as amended by SFAS No. 118.
The Company services for other investors mortgage loans which it does not
own. The total amount of such loans serviced for others was $361,608 and
$132,843 at December 31, 1995 and 1994, respectively. Servicing fee income on
such loans amounted to $493, $231 and $548 for the years ended December 31,
1995, 1994 and 1993, respectively. The unamortized balance of purchased mortgage
servicing rights was $3,433 and $41 at December 31, 1995 and 1994, respectively,
and is included in other assets.
F-22
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
The loan portfolio is geographically located throughout the United States.
The following table sets forth the five states in which the largest amount of
properties securing the Company's loans were located at December 31, 1995.
<TABLE>
<CAPTION>
SINGLE
FAMILY MULTI-FAMILY COMMERCIAL
RESIDENTIAL RESIDENTIAL REAL ESTATE CONSUMER TOTAL
------------ ------------ ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
California................. $ 8,392 $ 22,761 $ 42,419 $ -- $ 73,572
New Jersey................. 39,090 -- 15,829 128 55,047
New York................... 9,681 1,876 29,800 2,309 43,666
Florida.................... 182 -- 29,225 -- 29,407
Massachusetts.............. 213 -- 20,047 -- 20,260
Other...................... 18,370 24,410 77,131 786 120,697
------------ ------------ ----------- ----------- ----------
Total.................. $ 75,928 $ 49,047 $ 214,451 $ 3,223 $ 342,649
------------ ------------ ----------- ----------- ----------
------------ ------------ ----------- ----------- ----------
</TABLE>
Certain mortgage loans are pledged as collateral for FHLB advances (see note
14).
NOTE 9 DISCOUNTED LOAN PORTFOLIO
The Company has acquired through private sales and auctions mortgage loans
at a discount on which the borrowers are either not current as to principal and
interest payments or there is doubt as to the borrowers' ability to pay in full
the contractual principal and interest. The Company estimates the amounts it
will realize through foreclosure, collection efforts or other resolution of each
loan and the length of time required to complete the collection process in
determining the amounts it will bid to acquire such loans.
The resolution alternatives applied to the discounted loan portfolio are (i)
the borrower brings the loan current in accordance with original or modified
terms; (ii) the borrower repays the loan or a negotiated amount; (iii) the
borrower agrees to a deed-in-lieu of foreclosure, in which case it is classified
as real estate owned and held for sale by the Company and (iv) the Company
forecloses on the loan and the property is either acquired at the foreclosure
sale by a third party or by the Company, in which case it is classified as real
estate owned and held for sale. The Company periodically reviews the discounted
loan portfolio performance to ensure that the loans are carried at the lower of
amortized cost or net realizable value and the remaining unaccreted discount is
adjusted accordingly. Upon receipt of title to the property, the loans are
transferred to real estate owned.
F-23
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
The Company's discounted loan portfolio consists of the following at
December 31:
<TABLE>
<CAPTION>
CARRYING VALUE
------------------------
1995 1994
----------- -----------
<S> <C> <C>
Loan Type:
Single family residential......................................... $ 376,501 $ 382,165
Multi-family residential.......................................... 176,259 300,220
Commercial real estate............................................ 388,566 102,138
Other............................................................. 2,203 911
----------- -----------
Total discounted loans........................................ 943,529 785,434
Unaccreted discount............................................... (273,758) (255,974)
----------- -----------
Discounted loans, net......................................... $ 669,771 $ 529,460
----------- -----------
----------- -----------
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
----------- -----------
<S> <C> <C>
Loan Status:
Current........................................................... $ 351,630 $ 113,794
Less than 90 days past due........................................ 86,838 57,023
Greater than 90 days past due..................................... 385,112 413,506
Acquired and servicing not yet transferred........................ 119,949 201,111
----------- -----------
$ 943,529 $ 785,434
----------- -----------
----------- -----------
</TABLE>
At December 31, 1995 and 1994 the total accreted and unrealized discount on
discounted loans was $7,505 and $5,306, respectively. A summary of income on
discounted loans is as follows for the years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Interest Income:
Realized................................................... $ 70,807 $ 48,734 $ 25,871
Accreted and unrealized.................................... 5,191 3,826 5,165
--------- --------- ---------
$ 75,998 $ 52,560 $ 31,036
--------- --------- ---------
--------- --------- ---------
Gains on Sales:
Realized gains on sales.................................... $ 6,008 $ 890 $ 3,862
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following table sets forth the activity in the Company's gross
discounted loan portfolio during the years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Principal balance, beginning of year................... $ 785,434 $ 433,516 $ 310,464
Acquisitions........................................... 791,195 826,391 294,359
Resolutions and repayments............................. (300,161) (265,292) (116,890)
Loans transferred to real estate owned................. (281,344) (171,300) (26,887)
Sales.................................................. (51,595) (37,881) (27,530)
----------- ----------- -----------
Principal balance, end of year......................... $ 943,529 $ 785,434 $ 433,516
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-24
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
The discounted loan portfolio is geographically located throughout the
United States. The following table sets forth the five states in which the
largest amount of properties securing the Company's discounted loans were
located at December 31, 1995:
<TABLE>
<CAPTION>
SINGLE COMMERCIAL
FAMILY MULTI-FAMILY REAL ESTATE
RESIDENTIAL RESIDENTIAL AND OTHER TOTAL
------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
California............................. $ 77,988 $ 111,754 $ 210,872 $ 400,614
New Jersey............................. 58,643 774 53,976 113,393
New York............................... 68,483 13,571 12,528 94,582
Florida................................ 17,248 26,464 19,299 63,011
Connecticut............................ 49,705 2,753 10,263 62,721
Other.................................. 104,434 20,943 83,831 209,208
------------ ------------ ----------- ----------
Total.............................. $ 376,501 $ 176,259 $ 390,769 $ 943,529
------------ ------------ ----------- ----------
------------ ------------ ----------- ----------
</TABLE>
NOTE 10 REAL ESTATE OWNED
Real estate owned, net of allowance for losses, is held for sale and
consists of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Discounted loan portfolio:
Single family residential............................................ $ 75,144 $ 86,426
Multi-family residential............................................. 59,932 --
Commercial real estate............................................... 31,218 8,801
---------- ---------
Total discounted loan portfolio.................................... 166,294 95,227
Loan portfolio......................................................... 262 1,440
---------- ---------
$ 166,556 $ 96,667
---------- ---------
---------- ---------
</TABLE>
The following schedule presents the activity, in aggregate, in the valuation
allowances on real estate owned for the years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Balance, beginning of year..................................... $ 3,937 $ 2,455 $ 102
Provision for losses........................................... 10,510 9,074 2,980
Charge-offs and sales.......................................... (9,841) (7,592) (627)
--------- --------- ---------
Balance, end of year........................................... $ 4,606 $ 3,937 $ 2,455
--------- --------- ---------
--------- --------- ---------
</TABLE>
Valuation allowances on real estate owned are established on a specific
property basis.
The following table sets forth the pre-tax results of the Company's
investment in real estate owned, which were primarily related to the discounted
loan portfolio, during the years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
---------- --------- ---------
<S> <C> <C> <C>
Gains on sales.............................................. $ 19,006 $ 21,308 $ 2,541
Provision for losses........................................ (10,510) (9,074) (2,980)
Carrying costs, net of rental income........................ 1,044 (6,239) (719)
---------- --------- ---------
Income (loss)............................................... $ 9,540 $ 5,995 $ (1,158)
---------- --------- ---------
---------- --------- ---------
</TABLE>
F-25
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
NOTE 11 INVESTMENTS IN LOW INCOME HOUSING TAX CREDIT INTERESTS
The carrying value of the Company's investments in low income housing tax
credit interests are as follows at December 31:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Investments solely as a limited partner made prior to May 18, 1995.......................... $ 58,911 $ 47,978
Investments solely as a limited partner made on or after May 18, 1995....................... 4,223 --
Investments as both a limited and, through subsidiaries, general partner.................... 18,228 1,464
--------- ---------
$ 81,362 $ 49,442
--------- ---------
--------- ---------
</TABLE>
The qualified affordable housing projects underlying the Company's
investments in low income housing tax credit interests are geographically
located throughout the United States. At December 31, 1995, the Company's
largest single investment was $16,295 which is in a project located in Fort
Lauderdale, Florida.
Income on the Company's limited partnership investments made prior to May
18, 1995 is recorded under the level yield method as a reduction of income tax
expense, and amounted to $7,715, $5,410 and $2,013 for the years ended December
31, 1995, 1994 and 1993, respectively. Had these investments been accounted for
under the equity method, net income would have been reduced by $2,798, $2,742
and $1,606 for the years ended December 31, 1995, 1994 and 1993, respectively.
For the three years ended December 31, 1995 the Company recorded no income or
expense on its limited partnership investments made after May 18, 1996 or its
investments as a limited and, through subsidiaries, general partner.
Other liabilities include $9,794 and $8,577 at December 31, 1995 and 1994,
respectively, representing contractual obligations to fund certain limited
partnerships which invest in low income housing tax credit interests.
NOTE 12 PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
--------- ----------
<S> <C> <C>
Hotel subsidiaries:
Land................................................................. $ 613 $ 5,178
Building and leasehold improvements.................................. 11,402 16,823
Office and computer equipment........................................ 720 2,485
Less accumulated depreciation and amortization....................... (778) (1,316)
--------- ----------
11,957 23,170
--------- ----------
Subsidiaries other than hotels:
Land................................................................. 485 751
Building and leasehold improvements.................................. 5,672 2,330
Automated banking equipment.......................................... 322 5,317
Office and computer equipment........................................ 12,726 16,425
Manufacturing equipment.............................................. 25 550
Less accumulated depreciation and amortization....................... (5,828) (10,234)
--------- ----------
13,402 15,139
--------- ----------
$ 25,359 $ 38,309
--------- ----------
--------- ----------
</TABLE>
F-26
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
As part of the branch sales, premises and equipment with a net book value of
$1,112 and $4,192 were sold for a gain of $158 and $2,908 in 1995 and 1994,
respectively. Also, all automated banking equipment was sold or otherwise
disposed of during the fourth quarter of 1995, with the exception of $322 of
such equipment which was sold in January 1996 (see note 3).
NOTE 13 DEPOSITS
The Company's deposits consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
------------------------- -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RATE BOOK VALUE RATE BOOK VALUE
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Non-interest bearing deposits......................... -- % $ 48,482 -- % $ 35,943
NOW and money market checking accounts................ 3.37 17,147 2.17 18,934
Savings accounts...................................... 2.30 3,471 2.30 24,007
------------ ------------
69,100 78,884
------------ ------------
Certificates of deposit............................... 1,440,240 950,817
Unamortized deferred fees............................. (7,694) (6,433)
------------ ------------
5.68 1,432,546 5.50 944,384
------------ ------------
5.46 $ 1,501,646 5.17 $ 1,023,268
------------ ------------
------------ ------------
</TABLE>
At December 31, 1995 and 1994 certificates of deposit include $1,123,196 and
$857,770, respectively, of deposits originated through investment banking firms
which solicit deposits from their customers, of which $996,543 and $745,591,
respectively, are non-cancelable. Additionally, at December 31, 1995 and 1994,
$80,045 and $21,124 of certificates of deposit were issued on an uninsured
basis. Non-interest bearing deposits include $37,686 and $7,397 of advance
payments by borrowers for taxes and insurance and principal and interest
collected but not yet remitted in accordance with loan servicing agreements at
December 31, 1995 and 1994, respectively.
The contractual maturity of the Company's certificates of deposit at
December 31, 1995 follows:
<TABLE>
<S> <C>
Contractual Remaining Maturity:
Within one year............................ $ 928,542
Within two years........................... 192,833
Within three years......................... 132,287
Within four years.......................... 109,742
Within five years.......................... 68,721
Thereafter................................. 421
-----------
$ 1,432,546
-----------
-----------
</TABLE>
The amortization of the deferred fees of $4,729, $1,606 and $462 for the
years ended December 31, 1995, 1994 and 1993, respectively, and the accretion of
the purchase accounting discount of $0, $(2,991) and
F-27
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
$(2,999) for the years ended December 31, 1995, 1994 and 1993, respectively, are
computed using the interest method and are included in interest expense on
certificates of deposit. The interest expense by type of deposit account is as
follows for the years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
NOW accounts and money market checking....................... $ 1,031 $ 1,395 $ 1,315
Savings...................................................... 451 2,602 1,982
Certificates of deposit...................................... 70,371 40,964 15,742
--------- --------- ---------
$ 71,853 $ 44,961 $ 19,039
--------- --------- ---------
--------- --------- ---------
</TABLE>
Accrued interest payable on deposits in the amount of $18,994 and $12,061 as
of December 31, 1995 and 1994, respectively, is included in accrued expenses,
payables and other liabilities.
NOTE 14 ADVANCES FROM THE FEDERAL HOME LOAN BANK ("FHLB")
Advances from the FHLB mature as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
---------------------- ----------------------
INTEREST BOOK INTEREST BOOK
DUE DATE RATE VALUE RATE VALUE
- ------------------------------------------------------ ----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
1995.................................................. -- % $ -- 9.80% $ 5,000
1996.................................................. 5.83 70,000 -- --
1997.................................................. 7.02 399 7.02 399
--------- ---------
$ 70,399 $ 5,399
--------- ---------
--------- ---------
</TABLE>
Accrued interest payable on FHLB advances amounted to $297 and $44 as of
December 31, 1995 and 1994, respectively, and is included in accrued expenses,
payables and other liabilities. All interest rates are fixed by contract. Under
the terms of its collateral agreement, the Company is required to maintain
otherwise unencumbered qualifying assets with a fair market value ranging from
105% to 125% of FHLB advances depending on the type of collateral. The Company's
FHLB stock is pledged as additional collateral for these advances.
NOTE 15 SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Company enters into sales of securities under agreements to repurchase
the same securities (reverse repurchase agreements). Fixed coupon reverse
repurchase agreements are treated as financings, and the obligations to
repurchase securities sold are reflected as a liability in the accompanying
consolidated statements of financial condition. All securities underlying
reverse repurchase agreements are reflected as assets in the accompanying
consolidated statements of financial condition and are held in safekeeping by
broker/dealers. For the years ended December 31, 1995, 1994 and 1993, interest
rate swap agreements and
F-28
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
Eurodollar futures contracts used for risk management purposes had the effect of
increasing interest expense on securities sold under agreements to repurchase
and certificates of deposit by $261, $296 and $2,246, respectively.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1995 1994 1993
----------- ------------ ------------
<S> <C> <C> <C>
Other information concerning securities sold under agreements to
repurchase:
Balance, end of year.................................................. $ 84,761 $ -- $ 275,468
Accrued interest payable, end of year................................. 153 -- 610
Weighted average interest rate, end of year........................... 5.70% -- % 3.57%
Average balance during the year....................................... $ 16,754 $ 254,052 $ 195,111
Weighted average interest rate during the year........................ 5.68% 3.98% 3.56%
Maximum month-end balance............................................. $ 84,761 $ 537,629 $ 275,468
</TABLE>
Mortgage-related securities with a book value of $91,085 and a market value
of $90,368 were posted as collateral for securities sold under agreements to
repurchase at December 31, 1995.
NOTE 16 SUBORDINATED DEBENTURES AND OTHER INTEREST BEARING OBLIGATIONS
Subordinated debentures and other interest bearing obligations mature as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
---------- ---------
<S> <C> <C>
1996:
12% subordinated notes due January 2................................. $ 1,012 $ 1,012
10.5% notes due May 1................................................ 7,615 --
---------- ---------
8,627 1,012
2003:
12% mortgage loan due September 1.................................... 7,817 7,939
2005:
12% subordinated debentures due June 15.............................. 100,000 --
2014:
0 - 8.5% subordinated mortgage loan due December 1................... 610 638
2018:
9.65% mortgage loan due April 18..................................... -- 10,522
---------- ---------
$ 117,054 $ 20,111
---------- ---------
---------- ---------
</TABLE>
The notes due in 1996 are payable to current or former shareholders and
executive officers.
On June 12, 1995 the Bank issued $100,000 of 12% Subordinated Debentures due
2005 (the "Debentures") with interest payable semiannually on June 15 and
December 15. The Debentures are unsecured general obligations of the Bank and
are subordinated in right of payment to all existing and future senior debt.
The Debentures may not be redeemed prior to June 15, 2000, except as
described below. On or after such date, the Debentures may be redeemed at any
time at the option of the Bank, in whole or in part,
F-29
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
together with accrued and unpaid interest, if any, on not less than 30 nor more
than 60 days' notice at the following redemption prices (expressed as a
percentage of the principal amount), if redeemed during the twelve month period
beginning June 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ---------------------------------------------- ----------------
<S> <C>
2000.......................................... 105.333%
2001.......................................... 104.000%
2002.......................................... 102.667%
2003.......................................... 101.333%
2004 and thereafter........................... 100.000%
</TABLE>
In addition, the Bank may redeem, at its option, up to $35,000 principal
amount of the Debentures at any time prior to June 15, 1998 with the net cash
proceeds received by the Bank from one or more public equity offerings at a
purchase price of 112.000% of the principal amount thereof, plus accrued and
unpaid interest.
In connection with the issuance of the Debentures, the Bank incurred certain
costs which have been capitalized and are being amortized on a straight-line
basis over the expected life of the Debentures. The unamortized balance of these
issuance costs amounted to $3,170 at December 31, 1995 and is included in other
assets. Accrued interest payable on the Debentures amounted to $500 at December
31, 1995 and is included in accrued expenses, payables and other liabilities.
In 1993, subsequent to the acquisition of Old Berkeley, the Company acquired
loans with an aggregate principal balance of $8,958 that had been made by third
parties to the Company's subsidiary, Berkeley Realty Group, Inc., at a discount
of $2,366. An extraordinary gain of $1,538, after deduction of $828 for related
income taxes, is recognized in the accompanying consolidated statements of
operations for that year. Berkeley Realty Group, Inc. is a subsidiary of Old
Berkeley which was engaged in real estate development and residential
construction activities. The loans acquired by the Company were collateralized
by real estate held for development, which was recorded at fair value at the
effective date of the acquisition.
NOTE 17 INTEREST RATE RISK MANAGEMENT INSTRUMENTS
In managing its interest rate risk, the Company on occasion enters into
interest rate exchange agreements (swaps). Under swaps, the Company agrees with
other parties to exchange, at specified intervals, the difference between
fixed-rate and floating-rate interest amounts calculated by reference to an
agreed notional amount. The terms of the swaps provide for the Company to
receive a floating rate of interest based on the London Interbank Offered Rate
("LIBOR") and to pay fixed interest rates. The Company had no outstanding swaps
at December 31, 1995. The terms of outstanding swaps at December 31, 1994
follows:
<TABLE>
<CAPTION>
FLOATING RATE
LIBOR AT END OF
MATURITY NOTIONAL AMOUNT INDEX FIXED RATE YEAR FAIR VALUE
- ------------------------ ---------------- ---------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
1995.................... $ 40,000 6-Month 5.260% 6.625% $ 491
</TABLE>
The 6-month LIBOR was 7.0% on December 31, 1994. The interest expense or
benefit of the swaps had the effect of increasing (decreasing) net interest
income by $358, $(754) and $(2,246) for the years ended December 31, 1995, 1994
and 1993, respectively. In June 1994 the Company sold certain adjustable rate
mortgage-backed securities and, as a result, also terminated a related $150,000
notional amount swap resulting in a realized gain on termination of the swap of
$1,110.
The Company also enters into short sales of Eurodollar and U.S. Treasury
interest rate futures contracts as part of its overall interest rate risk
management activity. Interest rate futures contracts are commitments to either
purchase or sell designated financial instruments at a future date for a
specified price and may be
F-30
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
settled in cash or through delivery. The Eurodollar futures contracts have been
sold by the Company to hedge the repricing or maturity risk of certain
adjustable rate mortgage-backed securities and short duration mortgage-related
securities. U.S. Treasury futures have been sold by the Company to hedge the
risk of a reduction in the market value of fixed rate multi-family residential
loans and certain fixed rate mortgage-backed and related securities available
for sale in a rising interest rate environment.
Terms and other information on interest rate futures contracts sold short
are as follows:
<TABLE>
<CAPTION>
NOTIONAL
MATURITY PRINCIPAL FAIR VALUE
----------- ----------------- -----------
<S> <C> <C> <C>
December 31, 1995:
Eurodollar futures................................. 1996 $ 386,000 $ (1,598)
1997 26,000 (168)
U.S. Treasury futures.............................. 1996 11,100 (80)
December 31, 1994:
Eurodollar futures................................. 1995 350,000 1,090
1996 117,000 248
1997 26,000 34
U.S. Treasury futures.............................. 1995 222,500 (960)
</TABLE>
The following table summarizes the Company's use of interest rate risk
management instruments.
<TABLE>
<CAPTION>
NOTIONAL AMOUNT
----------------------------------------
SHORT SHORT U.S.
EURODOLLAR TREASURY
SWAPS FUTURES FUTURES
----------- ------------- ------------
<S> <C> <C> <C>
Balance, December 31, 1993......................... $ 254,000 $ 200,000 $ 110,900
Purchases........................................ -- 2,577,000 1,016,800
Maturities....................................... (64,000) -- --
Terminations..................................... (150,000) (2,284,000) (905,200)
----------- ------------- ------------
Balance, December 31, 1994......................... 40,000 493,000 222,500
Purchases........................................ -- 336,000 708,600
Maturities....................................... (40,000)
----
Terminations..................................... -- (417,000) (920,000)
----------- ------------- ------------
Balance, December 31, 1995......................... $ -- $ 412,000 $ 11,100
----------- ------------- ------------
----------- ------------- ------------
</TABLE>
Because interest rate futures contracts are exchange traded, holders of
these instruments look to the exchange for performance under these contracts and
not the entity holding the offsetting futures contract, thereby minimizing the
risk of nonperformance under these contracts. The Company is exposed to credit
loss in the event of nonperformance by the counterparty to the swap and controls
this risk through credit monitoring procedures. The notional principal amount
does not represent the Company's exposure to credit loss.
U.S. Government securities with a carrying value of $1,134 and $7,630 and a
fair value of $1,134 and $7,519 were pledged by the Company as security for the
obligations under these swaps and interest rate futures contracts at December
31, 1995 and 1994, respectively.
F-31
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
NOTE 18 ASSET AND LIABILITY MANAGEMENT
Asset and liability management is concerned with the timing and magnitude of
the repricing of assets and liabilities. The Company's objective is to attempt
to control risks associated with interest rate movements. In general, the
Company's strategy is to match asset and liability balances within maturity
categories to limit its exposure to earnings variations and variations in the
value of assets as interest rates change over time. Additionally, the Company's
strategy has been to acquire and hold assets and liabilities with short
durations which are less subject to interest rate volatility. The Company also
utilizes off-balance sheet financial techniques to assist in the management of
interest rate risk (see note 17).
The Company's methods for evaluating interest rate risk include an analysis
of its interest rate sensitivity "gap", which is defined as the difference
between interest-earning assets and interest-bearing liabilities maturing or
repricing within a given time period. A gap is considered positive when the
amount of interest rate sensitive assets exceeds the amount of interest rate
sensitive liabilities. A gap is considered negative when the amount of interest
rate sensitive liabilities exceeds interest rate sensitive assets. During a
period of rising interest rates, a negative gap would tend to adversely affect
net interest income, while a positive gap would tend to result in an increase in
net interest income. During a period of falling interest rates, a negative gap
would tend to result in an increase in net interest income, while a positive gap
would tend to affect net interest income adversely. Because different types of
assets and liabilities with the same or similar maturities may react differently
to changes in overall market rates or conditions, changes in interest rates may
affect net interest income positively or negatively even if an institution were
perfectly matched in each maturity category.
The following tables, which are unaudited, set forth the estimated maturity
or repricing of the Company's interest-earning assets and interest-bearing
liabilities at December 31, 1995 and 1994. The amounts of assets and liabilities
shown which mature or reprice within a particular period were determined in
accordance with the contractual terms of the assets and liabilities, except (i)
adjustable-rate loans and securities are included in the period in which they
are first scheduled to adjust and not in the period in which they mature, (ii)
fixed-rate, non-residual mortgage-related securities reflect estimated
prepayments, which were based on the average prepayment rate projected by the
ten largest investment banking firms making markets in these specific
securities, (iii) non-performing discounted loans reflect the estimated timing
of resolutions which result in repayment to the Company, (iv) fixed-rate loans
reflect scheduled contractual amortization,
F-32
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
with no estimated prepayments, and (v) NOW and money market checking and savings
deposits, which do not have contractual maturities, reflect estimated levels of
attrition, which are based on detailed studies of each such category of deposit
by the Company.
<TABLE>
<CAPTION>
MORE THAN
ONE
FOUR TO YEAR TO
WITHIN THREE TWELVE THREE THREE YEARS
MONTHS MONTHS YEARS AND OVER TOTAL
------------ ----------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
AT DECEMBER 31, 1995:
Rate-sensitive assets....................... $ 231,652 $ 350,277 $ 263,058 $ 778,756 $ 1,623,743
Rate-sensitive liabilities.................. 355,368 737,908 197,683 434,419 1,725,378
------------ ----------- ------------ ----------- ------------
Interest rate sensitivity gap before off-
balance sheet financial instruments........ (123,716) (387,631) 65,375 344,337 (101,635)
Off-balance sheet financial instruments..... 104,612 (38,518) (34,496) (31,598) --
------------ ----------- ------------ ----------- ------------
Interest rate sensitivity gap............... $ (19,104) $ (426,149) $ 30,879 $ 312,739 $ (101,635)
------------ ----------- ------------ ----------- ------------
------------ ----------- ------------ ----------- ------------
Cumulative interest rate sensitivity gap.... $ (19,104) $ (445,253) $ (414,374) $(101,635)
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Cumulative interest rate sensitivity gap as
a percentage of total rate sensitive
assets..................................... (1.18)% (27.42)% (25.52)% (6.26)%
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
AT DECEMBER 31, 1994:
Rate-sensitive assets....................... $ 164,755 $ 410,339 $ 291,844 $ 122,301 $ 989,239
Rate-sensitive liabilities.................. 182,045 311,463 373,213 146,114 1,012,835
------------ ----------- ------------ ----------- ------------
Interest rate-sensitivity gap before off-
balance sheet financial instruments........ (17,290) 98,876 (81,369) (23,813) (23,596)
Off-balance sheet financial instruments..... 185,535 (127,060) (13,069) (45,406) --
------------ ----------- ------------ ----------- ------------
Interest rate sensitivity gap............... $ 168,245 $ (28,184) $ (94,438) $ (69,219) $ (23,596)
------------ ----------- ------------ ----------- ------------
------------ ----------- ------------ ----------- ------------
Cumulative interest rate sensitivity gap.... $ 168,245 $ 140,061 $ 45,623 $ (23,596)
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Cumulative interest rate sensitivity gap as
a percentage of total rate-sensitive
assets..................................... 17.01% 14.16% 4.61% (2.39)%
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
</TABLE>
Although interest rate sensitivity gap is a useful measurement and
contributes toward effective asset and liability management, it is difficult to
predict the effect of changing interest rates based solely on that measure. As a
result, and as required by OTS regulations, the Company also regularly reviews
interest rate risk by forecasting the impact of alternative interest rate
environments on net interest income and market value of portfolio equity
("MVPE"), which is defined as the net present value of an institution's existing
assets, liabilities and off-balance sheet instruments, and evaluating such
impacts against the maximum potential changes in net interest income and MVPE
that are authorized by the Board of Directors of the Company.
F-33
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
The following table, which is unaudited, sets forth as of December 31, 1995
and 1994 the estimated
percentage change in the Company's net interest income over a four-quarter
period and MVPE based upon the indicated changes in interest rates, assuming an
instantaneous uniform change in interest rates at all maturities.
<TABLE>
<CAPTION>
ESTIMATED CHANGE IN
------------------------------------------
NET INTEREST INCOME
MVPE
CHANGE (IN BASIS POINTS) -------------------- --------------------
IN INTEREST RATES 1995 1994 1995 1994
- --------------------------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
+400....................... (15.54) 24.10 (19.31) 6.19
+300....................... (11.66) 18.07 (14.06) 5.07
+200....................... (7.77) 12.05 (8.02) 4.12
+100....................... (3.89) 6.02 (3.77) 2.15
0....................... -- -- -- --
- -100....................... 3.89 (6.02) 1.58 (1.38)
- -200....................... 7.77 (12.05) 4.93 (2.41)
- -300....................... 11.66 (18.07) 10.96 (2.94)
- -400....................... 15.54 (24.10) 18.06 (5.59)
</TABLE>
The Company believes that the assumptions used by it to evaluate the
vulnerability of the Company's operations to changes in interest rates
approximate actual experience and considers them reasonable; however, the
interest rate sensitivity of the Company's assets and liabilities and the
estimated effects of changes in interest rates on the Company's net interest
income and MVPE indicated in the above tables could vary substantially if
different assumptions were used or actual experience differs from the historical
experience on which they are based.
NOTE 19 INCOME TAXES
Total income tax expense (benefit) was allocated as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Income from continuing operations............................ $ 4,562 $ 29,724 $ 10,325
Discontinued operations...................................... (4,097) (2,227) (1,259)
Extraordinary gains.......................................... -- -- 828
Cumulative effect of a change in accounting principle........ -- -- 1,341
Benefit of tax deduction in excess of amounts recognized for
financial reporting purposes related to employee stock
options reflected in stockholders' equity................... (375) (39) (199)
--------- --------- ---------
$ 90 $ 27,458 $ 11,036
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-34
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
The components of income tax expense (benefit) attributable to income from
continuing operations were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C> <C>
CURRENT: Federal......................................... $ 1,673 $ 26,267 $ 4,269
State........................................... 5,011 2,261 260
--------- --------- ---------
6,684 28,528 4,529
--------- --------- ---------
DEFERRED: Federal......................................... 1,762 1,022 5,742
State........................................... (3,884) 174 54
--------- --------- ---------
(2,122) 1,196 5,796
--------- --------- ---------
Total........................................................ $ 4,562 $ 29,724 $ 10,325
--------- --------- ---------
--------- --------- ---------
</TABLE>
Income tax expense differs from the amounts computed by applying the U.S.
Federal corporate income tax rate of 35% as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Expected income tax expense at statutory rate................ $ 13,196 $ 28,552 $ 13,171
Differences between expected and actual tax:
Effect of tax rate increase on net deferred tax asset...... -- -- (784)
Excess of cost over net assets acquired adjustments........ (76) 3,592 (392)
Tax effect of (utilization) non-utilization of net operating
loss........................................................ (1,380) 23 2,147
Sale of IMI insurance licenses............................... -- -- (1,682)
Utilization of subsidiary's losses........................... -- -- 299
State tax (after Federal tax benefit)........................ 733 2,054 204
Low income housing tax credits............................... (7,715) (5,410) (2,013)
Tax effect of minority interests............................. -- -- (105)
Other........................................................ (196) 913 (520)
--------- --------- ---------
Actual income tax expense................................ $ 4,562 $ 29,724 $ 10,325
--------- --------- ---------
--------- --------- ---------
</TABLE>
The adjustments to the 1993 consolidated statements of financial condition
to adopt SFAS No. 109 netted to a charge of $1,341 and is reflected as a
cumulative effect of a change in accounting principle. It primarily represents
the impact of conversion of the tax bad debt reserve in excess of that at
December 31, 1987 to a temporary rather than a permanent difference. At December
31, 1995, 1994 and 1993 the Bank had statutory bad debt reserves of
approximately $5.7 million for which no provision for Federal income taxes had
been made. If, in the future, this reserve is used for any purpose other than to
absorb bad debt losses, Federal income taxes may be imposed at the then
applicable rate.
F-35
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
The net deferred tax asset was comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Deferred Tax Assets:
Tax residuals and deferred income on tax residuals.................... $ 26,303 $ 22,833
Deferred income on futures gain....................................... -- 1,827
Application of purchase accounting.................................... 566 6,106
Accrued profit sharing................................................ 1,615 3,809
Accrued other liabilities............................................. 406 964
Deferred interest expense on discounted loan portfolio................ 1,170 700
Mark to market and reserves on REO properties......................... 582 --
Other................................................................. -- 154
--------- ---------
30,642 36,393
--------- ---------
Deferred Tax Liabilities:
Bad debt reserves..................................................... 6,790 6,892
Deferred interest income on discounted loan portfolio................. 2,350 5,209
Mark to market and reserves on REO properties......................... -- 3,032
Premises and equipment................................................ -- 736
Cancellation of indebtedness.......................................... 459 899
Other................................................................. 13 --
--------- ---------
9,612 16,768
--------- ---------
21,030 19,625
Mark to market on certain mortgage-backed and related securities
available for sale..................................................... 1,233 1,070
--------- ---------
22,263 20,695
--------- ---------
Deferred tax asset valuation allowance.................................. -- --
--------- ---------
Net deferred tax asset.................................................. $ 22,263 $ 20,695
--------- ---------
--------- ---------
</TABLE>
Deferred tax assets, net of deferred fees, include tax residuals which
result from the ownership of Real Estate Mortgage Investment Conduits ("REMIC").
While a tax residual is anticipated to have little or no future cash flows from
the REMIC from which it has been issued, the tax residual does bear the income
tax liability and benefit resulting from the annual differences between the
interest paid on the debt instruments issued by the REMIC and the interest
received on the mortgage loans held by the REMIC. Typically this difference
generates taxable income to the Company in the first several years of the REMIC
and equal amounts of tax losses thereafter, thus resulting in the deferred tax
asset. As a result of the manner in which REMIC residual interests are treated
for tax purposes, at December 31, 1995, 1994 and 1993, the Company had
approximately $55,000, $12,400 and $1,200, respectively, of net operating loss
carryforwards for tax purposes. The net operating loss carryforwards of $1,200,
$11,200 and $42,600 will expire, if unused, in the years 2008, 2009 and 2010,
respectively.
Prior to 1994, a portion of the fees received by the Company related to the
acquisition of tax residuals were recorded in the statements of operations as
fees on financing transactions at the time of acquisition and the remainder were
deferred and recognized as interest income on a level yield basis over the
expected life of the related deferred tax asset. From time to time, the Company
revises its estimate of its future obligations under the tax residuals and in
1994, due primarily to certain changes in the marketplace, began to defer all
F-36
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
fees received and recognize such fees as interest income on a level yield basis
over the expected life of the related deferred tax asset. The Company also
adjusts, as interest income, the recognition of fees deferred based upon changes
in the actual prepayment rates of the underlying mortgages held by the REMIC and
periodic reassessment of the expected life of the related deferred tax asset.
As a result of the Company's earnings history, current tax position and
taxable income projections, the Company believes that it will generate
sufficient taxable income in future years to realize the net deferred tax asset
position as of December 31, 1995. In evaluating the expectation of sufficient
future taxable income, the Company considered future reversals of temporary
differences and available tax planning strategies that could be implemented, if
required.
A valuation allowance was not required as of December 31, 1995 and 1994 as
it was the Company's assessment that, based on available information, it is more
likely than not that all of the deferred tax asset will be realized. A valuation
allowance will be established in the future to the extent of a change in the
Company's assessment of the amount of the net deferred tax asset that is
expected to be realized.
NOTE 20 RETIREMENT PLAN
The Company maintains a defined contribution 401(k) plan. The Company
matches 50% of each employee's contributions, limited to 2% of the employee's
compensation.
In connection with its acquisition of Old Berkeley, the Bank assumed the
obligations under a noncon-
tributory defined benefit pension plan (the "Plan") covering substantially all
employees upon their eligibility under the terms of the Plan. The Plan has been
frozen for the plan year ended December 31, 1993 and has been fully funded. Old
Berkeley also maintained a defined contribution 401(k) plan in which Old
Berkeley's eligible employees continued to participate until December 31, 1994,
when Old Berkeley's 401(k) plan was merged into the Company's 401(k) Plan.
The Company's combined contributions to its 401(k) plan and the Old Berkeley
401(k) plan in the years ended December 31, 1995, 1994, and 1993 were $248, $163
and $127, respectively.
NOTE 21 STOCKHOLDERS' EQUITY
On July 31, 1996, the Board of Directors approved an increase in the
authorized number of common shares from 20,000,000 shares of $1.00 par value to
200,000,000 shares of $0.01 par value and declared a 10 for 1 stock split for
each share of common stock then outstanding and for all then outstanding options
to purchase shares of the Company's common stock. All references in the
consolidated financial statements to the number of shares and per share amounts
have been adjusted retroactively for the recapitalization and stock split.
During 1995, the Company repurchased from stockholders and retired 8,815,060
shares of common stock for the aggregate price of $41,997.
F-37
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
In December 1991, as part of its annual incentive compensation plan, the
Company adopted a Non-Qualified Stock Option Plan (the 'Stock Plan'). The Stock
Plan provides for the issuance of stock options to key employees to purchase
shares of common stock at prices less than the fair market value of the stock at
the date of grant.
<TABLE>
<CAPTION>
OPTIONS
OPTIONS EXERCISE OPTIONS FORFEITED OR OPTIONS
YEAR GRANTED PRICE EXERCISED REPURCHASED VESTED
- --------- ---------- ----------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
1991 1,133,320 $ .30 450,000 99,990 583,330
1992 826,670 .45 122,220 68,890 635,560
1993 1,003,600 1.74 110,400 135,150 758,050
1994 1,149,320 .79 -- 69,140 1,080,180
1995 297,380 5.76 -- -- --
1995 7,110 .94 -- -- --
</TABLE>
The difference between the fair market value of the stock at the date of
grant and the exercise price is treated as compensation expense; included in
compensation expense is $65, $4,571, and $1,744 for the years ended December 31,
1995, 1994 and 1993, respectively.
NOTE 22 REGULATORY REQUIREMENTS
As a Federal savings bank, the Bank is subject to Federal laws and
regulations including regulations that require institutions to comply with
minimum regulatory capital requirements. A comparison of the Bank's regulatory
capital to its regulatory capital requirements at December 31, 1995 and related
additional discussion is as follows:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK- BASED
CAPITAL CAPITAL CAPITAL
---------- ---------- ----------
<S> <C> <C> <C>
GAAP capital............................................. $ 124,725 $ 124,725 $ 124,725
Implementation of Financial Accounting Standard No.
115..................................................... 1,415 1,415 1,415
Excess qualifying purchased mortgage servicing rights.... (343) (343) (343)
Additional capital items:
Subordinated debentures................................ -- -- 100,000
General valuation allowances........................... -- -- 1,757
Regulatory capital-computed.............................. 125,797 125,797 227,554
Minimum capital requirement.............................. 28,952 57,904 154,324
---------- ---------- ----------
Regulatory capital excess................................ $ 96,845 $ 67,893 $ 73,230
---------- ---------- ----------
---------- ---------- ----------
Capital Ratios:
Required............................................... 1.50% 3.00% 8.00%
Actual................................................. 6.52% 6.52% 11.80%
</TABLE>
The OTS has promulgated a regulation governing capital distributions. The
Bank is considered to be a Tier 1 association under this regulation because it
met or exceeded its fully phased-in capital requirements at December 31, 1995. A
Tier 1 association that before and after a proposed capital distribution meets
or exceeds its fully phased-in capital requirements may make capital
distributions during any calendar year equal to the greater of (i) 100% of net
income for the calendar year to date plus 50% of its "surplus capital ratio" at
the beginning of the year or (ii) 75% of its net income over the most recent
four-quarter period. In order to make these capital distributions, the Bank must
submit written notice to the OTS 30 days in advance
F-38
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
of making the distribution. In addition, the indenture governing the Bank's
Debentures limits the declaration or payment of dividends and the purchase or
redemption of the Bank's common or preferred stock in the aggregate to the sum
of 50% of the Bank's consolidated net income and 100% of all capital
contributions and proceeds from the issuance or sale of common stock, since the
date the Debentures were issued.
NOTE 23 OTHER OPERATING EXPENSES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Other Operating Expenses:
Professional fees................................. $ 2,786 $ 2,928 $ 1,896
Loan related expenses............................. 2,433 1,332 1,207
FDIC insurance.................................... 2,212 2,220 1,255
Marketing......................................... 968 1,305 360
Travel and lodging................................ 925 1,566 994
Corporate insurance............................... 637 501 425
Investment and treasury services.................. 387 681 516
Deposit related expenses.......................... 303 513 459
OTS assessment.................................... 257 393 62
Other............................................. 2,181 2,864 1,481
--------- --------- ---------
$ 13,089 $ 14,303 $ 8,655
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-39
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
NOTE 24 BUSINESS LINE REPORTING
The Company considers itself to be involved in the single business segment
of providing financial services and conducts a variety of business activities
within this segment. Such activities are as follows:
<TABLE>
<CAPTION>
INCOME FROM
CONTINUING
INTEREST OPERATIONS
INCOME BEFORE TAXES ASSETS
---------- ------------ ------------
<S> <C> <C> <C>
DECEMBER 31, 1995:
Asset acquisition and resolution..................... $ 77,143 $ 28,184 $ 910,680
Residential finance.................................. 13,323 1,338 321,350
Commercial finance................................... 23,708 (1,686) 356,690
Investment management................................ 21,855 3,641 328,263
Retail banking....................................... 44 4,053 3,449
Hotel operations..................................... -- 2,593 19,451
Other................................................ 1,202 (422) 33,707
---------- ------------ ------------
$ 137,275 $ 37,701 $ 1,973,590
---------- ------------ ------------
---------- ------------ ------------
DECEMBER 31, 1994:
Asset acquisition and resolution..................... $ 53,357 $ 18,008 $ 656,125
Residential finance.................................. 4,573 (303) 59,513
Commercial finance................................... 21,566 4,550 175,958
Investment management................................ 47,906 7,504 308,530
Retail banking....................................... 121 53,214 27,282
Hotel operations..................................... -- (1,808) 26,149
Other................................................ 3,935 412 12,846
---------- ------------ ------------
$ 131,458 $ 81,577 $ 1,266,403
---------- ------------ ------------
---------- ------------ ------------
DECEMBER 31, 1993:
Asset acquisition and resolution..................... $ 31,036 $ 19,426 $ 341,098
Residential finance.................................. 6,056 447 71,292
Commercial finance................................... 2,135 (882) 101,134
Investment management................................ 36,044 25,145 761,040
Retail banking....................................... -- (7,495) 30,851
Hotel operations..................................... -- (1,278) 26,470
Mortgage insurance operations........................ -- 877 --
Other................................................ 3,652 1,390 64,792
---------- ------------ ------------
$ 78,923 $ 37,630 $ 1,396,677
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
The asset acquisition and resolution business includes the Company's
discounted loan activities, including residential and commercial loans and the
related real estate owned. Residential finance includes the Company's
acquisition of single family residential loans to non-conforming borrowers,
which began in late 1994 and which are recorded as available for sale, and the
Company's historical loan portfolio of single family residential loans held for
investment. The commercial finance activities include the Company's origination
of commercial real estate loans held for investment, the origination and
purchase of multi-family residential loans available for sale, investments in
subordinate securities, and investments in low income housing tax credit
partnerships. Low income housing tax credits of $7,715, $5,410 and $2,013 were
earned as part of the commercial finance activity for the years ended December
31, 1995, 1994 and 1993, respectively, and are not reflected in the above table.
Investment management includes the results of the securities
F-40
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
portfolio, whether available for sale or investment, other than subordinate
interests, and the retail banking operations include the results of the
Company's retail branch network which consists of one branch at December 31,
1995. Included in income from continuing operations for retail banking are gains
on sales of branches, net of profit sharing expense, of $4,344 and $50,080 for
the years ended December 31, 1995 and 1994, respectively.
Interest income and expense has been allocated to each business segment for
the investment of funds raised or funding of investments made at an interest
rate based upon the LIBOR swap yield curve taking into consideration the actual
duration of such liabilities or assets. Allocations of non-interest expense
generated by corporate support services were made to each business segment based
upon management's estimate of time and effort spent in the respective activity.
As such, the resulting income from continuing operations is an estimate of the
contribution margin of each business activity to the Company.
NOTE 25 COMMITMENTS AND CONTINGENCIES
Certain premises are leased under various noncancellable operating leases
with terms expiring at various times through 2005, exclusive of renewal option
periods. The annual aggregate minimum rental commitments under these leases are
summarized as follows:
<TABLE>
<S> <C>
1996........................................ $ 762
1997........................................ 808
1998........................................ 805
1999........................................ 838
2000........................................ 872
2001-2005................................... 4,394
---------
Minimum lease payments...................... $ 8,479
---------
---------
</TABLE>
Rent expense for the years ended December 31, 1995, 1994 and 1993 was
$1,601, $2,402 and $1,757, respectively, which are net of sublease rentals of
$68, $339 and $282, respectively.
At December 31, 1995 the Company was committed to lend up to $9,884 under
outstanding unused lines of credit. The Company also had commitments to (i)
originate multi-family construction loans with aggregate principal balances of
$8,907, (ii) purchase $4,800 of residential discounted loans, (iii) originate
$5,390 of loans secured by office buildings, and (iv) originate $25,424 of
mortgage loans secured by hotel properties. In connection with its acquisition
of Old Berkeley in 1993, the Company has a recourse obligation of $4,163 on
single family residential loans sold to the Federal Home Loan Mortgage
Corporation ("FHLMC"). The Company, through its investment in subordinated
securities which had a book value of $69,156 at December 31, 1995, supports
senior classes of securities having an outstanding principal balance of
$868,835.
At December 31, 1994 the Company was committed to lend up to $8,353 under
outstanding unused lines of credit. The Company also had commitments to (i)
originate multifamily loans with an aggregate principal balance of $25,634; (ii)
purchase and sell mortgage-backed and related securities of $46,578 and $19,483,
respectively; and (iii) purchase an adjustable rate loan with an aggregate
principal balance of $1,493. In connection with its acquisition of Old Berkeley,
the Company had a recourse obligation of $4,163 on single family residential
loans sold to FHLMC. The Company, through its investment in a subordinated
security which had a book value of $22,897 at December 31, 1994, supported
senior classes of the security having an outstanding principal balance of
$362,271.
In order to increase the Savings Association Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation ("FDIC") to its minimum required reserve
ratio of 1.25%, a proposal has been made to impose
F-41
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
a special one-time assessment of 85 to 90 basis points on all SAIF-insured
deposits held as of March 31, 1995. This one-time assessment is intended to
recapitalize the SAIF to the required level of 1.25% of insured deposits and
would be paid during 1996 if the law is enacted as proposed. The Bank's annual
FDIC insurance premium would thereafter be reduced. If the assessment is made at
the currently proposed rate, the effect on the Company would be a pre-tax charge
of approximately $9.4 million (0.85% on deposits of $1.1 billion at March 31,
1995) or $6.0 million after taxes (35.85% assumed tax rate). Should this law be
enacted as proposed, the Company believes that its current capital is sufficient
to enable the Bank to remain a well-capitalized institution.
The Company has guaranteed through December 31, 1996 that the loss reserves
of Investors and Equity, transferred in conjunction with the Company's sale of
their stock, will be sufficient to cover the claims on all policies transferred.
Management does not believe this guarantee will have a material effect on the
consolidated financial statements.
The Company is subject to various pending legal proceedings. Management is
of the opinion that the resolution of these claims will not have a material
effect on the consolidated financial statements.
NOTE 26 PARENT COMPANY ONLY FINANCIAL INFORMATION
CONDENSED STATEMENTS OF FINANCIAL CONDITION:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents............................................. $ 1,028 $ 1,910
Investment in bank subsidiary......................................... 117,300 130,337
Investments in non-bank subsidiaries.................................. 35,660 25,527
Loan portfolio, net................................................... 520 --
Prepaid expenses and other assets..................................... 4,240 1,985
---------- ----------
$ 158,748 $ 159,759
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable......................................................... $ 8,627 $ 1,012
Other liabilities..................................................... 10,574 5,364
---------- ----------
Total liabilities................................................. 19,201 6,376
Total stockholders' equity............................................ 139,547 153,383
---------- ----------
$ 158,748 $ 159,759
---------- ----------
---------- ----------
</TABLE>
F-42
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
CONDENSED STATEMENTS OF OPERATIONS:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Interest income............................................................... $ 401 $ 42 $ 74
Non-interest income........................................................... 8 67 700
---------- ---------- ----------
409 109 774
Interest expense.............................................................. (654) (678) (2,034)
Non-interest expense.......................................................... (277) (401) (459)
---------- ---------- ----------
Loss before income taxes.................................................. (522) (970) (1,719)
Income tax (expense) benefit.................................................. 1,533 1,197 (50)
---------- ---------- ----------
Income (loss) before equity in net income of subsidiaries..................... 1,011 227 (1,769)
Equity in net income of bank subsidiary....................................... 24,773 51,650 22,824
Equity in net income (loss) of non-bank subsidiaries.......................... (317) (4,538) 4,177
---------- ---------- ----------
Net income................................................................ $ 25,467 $ 47,339 $ 25,232
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................................. $ 25,467 $ 47,339 $ 25,232
Adjustments to reconcile net income to net cash provided (used) in operating
activities:
Equity in income of bank subsidiary....................................... (24,773) (51,650) (22,824)
Equity in (income) losses of non-bank subsidiaries........................ 317 4,538 (4,177)
(Increase) decrease in other assets....................................... (2,254) (1,947) 997
Increase (decrease) in accrued expenses, payables and other liabilities... 5,209 2,023 (1,291)
---------- ---------- ----------
Net cash provided (used) by operating activities.............................. 3,966 303 (2,063)
---------- ---------- ----------
Cash flows from investing activities:
Net distributions from (investment in) bank subsidiary...................... 39,216 802 (2,553)
Net (investment in) distributions from non-bank subsidiaries................ (10,450) 11,491 5,537
Purchase of loans held for investment....................................... (520) -- --
---------- ---------- ----------
Net cash provided by investing activities..................................... 28,246 12,293 2,984
---------- ---------- ----------
Cash flows from financing activities:
Issuance of notes payable................................................... 7,615 -- 13,566
Repayment of notes payable.................................................. -- (13,566) (4,605)
Exercise of common stock options............................................ 1,420 -- 450
Repurchase of common stock options and common stock......................... (42,129) (74) (7,892)
---------- ---------- ----------
Net cash (used) provided by financing activities.............................. (33,094) (13,640) 1,519
---------- ---------- ----------
Net (decrease) increase in cash and cash equivalents.......................... (882) (1,044) 2,440
Cash and cash equivalents at beginning of year................................ 1,910 2,954 514
---------- ---------- ----------
Cash and cash equivalents at end of year...................................... $ 1,028 $ 1,910 $ 2,954
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-43
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
NOTE 27 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1995 1995 1995 1995
------------ ------------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income................................... $ 44,916 $ 32,489 $ 33,840 $ 26,030
Interest expense.................................. (26,692) (22,688) (18,110) (16,570)
Provision for loan losses......................... (1,121) -- -- --
------------ ------------- ---------- ----------
Net interest income after provision for loan
losses........................................... 17,103 9,801 15,730 9,460
Gain on sale of branches.......................... 5,430 -- -- --
Gain on sale of hotel............................. 4,658 -- -- --
Non-interest income............................... 8,081 4,084 6,380 2,547
Non-interest expense.............................. (13,407) (10,274) (13,130) (8,762)
------------ ------------- ---------- ----------
Income before income taxes and discontinued
operations....................................... 21,865 3,611 8,980 3,245
Income tax (expense) benefit...................... (4,660) 858 (1,172) 412
Discontinued operations, net...................... -- (4,536) (1,586) (1,550)
------------ ------------- ---------- ----------
Net income (loss)................................. $ 17,205 $ (67) $ 6,222 $ 2,107
------------ ------------- ---------- ----------
------------ ------------- ---------- ----------
Earnings per share:
Earnings before discontinued operations......... $ 0.67 $ 0.17 $ 0.30 $ 0.11
Earnings (loss) after discontinued operations... $ 0.67 $ -- $ 0.24 $ 0.06
</TABLE>
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1994 1994 1994 1994
------------ ------------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income................................... $ 41,931 $ 32,243 $ 31,481 $ 25,803
Interest expense.................................. (21,506) (15,714) (13,744) (11,634)
Provision for loan losses......................... -- -- -- --
------------ ------------- ---------- ----------
Net interest income after provision for loan
losses........................................... 20,425 16,529 17,737 14,169
Gain on sale of branches.......................... 62,600 -- -- --
Non-interest income............................... 4,443 4,908 4,464 5,160
Non-interest expense.............................. (27,701) (13,544) (14,157) (13,456)
------------ ------------- ---------- ----------
Income before income taxes and discontinued
operations....................................... 59,767 7,893 8,044 5,873
Income tax expense................................ (25,202) (1,480) (1,192) (1,850)
Discontinued operations, net...................... (2,164) (928) (437) (985)
------------ ------------- ---------- ----------
Net income........................................ $ 32,401 $ 5,485 $ 6,415 $ 3,038
------------ ------------- ---------- ----------
------------ ------------- ---------- ----------
Earnings per share:
Earnings before discontinued operations......... $ 1.02 $ 0.19 $ 0.20 $ 0.12
Earnings after discontinued operations.......... $ 0.95 $ 0.16 $ 0.19 $ 0.09
</TABLE>
F-44
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1995
JUNE 30, ------------
1996
------------
(UNAUDITED)
<S> <C> <C>
Cash and amounts due from depository institutions.............................. $ 6,196 $ 4,200
Interest bearing deposits...................................................... 57,638 50,432
Federal funds sold and repurchase agreements................................... 187,232 --
Securities available for sale, at market value................................. 263,199 337,480
Loans available for sale, at lower of cost or market........................... 84,078 251,790
Investment securities, net..................................................... 8,902 18,665
Loan portfolio, net............................................................ 312,576 295,605
Discounted loan portfolio, net................................................. 594,634 669,771
Principal, interest and dividends receivable................................... 12,019 12,636
Investments in low income housing tax credit interests......................... 92,273 81,362
Real estate owned, net......................................................... 133,604 166,556
Investment in joint venture.................................................... 63,404 --
Premises and equipment, net.................................................... 28,750 25,359
Income taxes receivable........................................................ 8,606 1,005
Deferred tax asset............................................................. 17,981 22,263
Other assets................................................................... 28,216 36,466
------------ ------------
$ 1,899,308 $1,973,590
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits..................................................................... $ 1,502,175 $1,501,646
Advances from the Federal Home Loan Bank..................................... 70,399 70,399
Securities sold under agreements to repurchase............................... -- 84,761
Subordinated debentures and other interest bearing obligations............... 115,703 117,054
Accrued expenses, payables and other liabilities............................. 56,293 60,183
------------ ------------
Total liabilities.......................................................... 1,744,570 1,834,043
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 20,000,000 shares authorized; 0 shares
issued and outstanding...................................................... -- --
Common stock, $.01 par value; 200,000,000 shares authorized; 23,812,900 and
23,812,270 shares issued and outstanding at June 30, 1996 and December 31,
1995, respectively.......................................................... 238 238
Additional paid-in capital................................................... 10,275 10,449
Retained earnings............................................................ 145,301 130,275
Unrealized loss on securities available for sale, net of taxes............... (1,076) (1,415)
------------ ------------
Total stockholders' equity................................................. 154,738 139,547
------------ ------------
$ 1,899,308 $1,973,590
------------ ------------
------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-45
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
--------------------------
1996 1995
------------ ------------
(UNAUDITED)
<S> <C> <C>
Interest income:
Federal funds sold and repurchase agreements............................... $ 2,098 $ 1,748
Securities available for sale.............................................. 14,064 6,943
Loans available for sale................................................... 11,484 7,154
Mortgage-related securities held for investment............................ -- 2,343
Loans...................................................................... 17,773 3,944
Discounted loans........................................................... 52,058 36,474
Investment securities and other............................................ 1,980 1,264
------------ ------------
99,457 59,870
------------ ------------
Interest expense:
Deposits................................................................... 45,355 31,790
Securities sold under agreements to repurchase............................. 685 199
Advances from the Federal Home Loan Bank................................... 2,032 257
Subordinated debentures and other interest bearing obligations............. 6,964 1,796
Securities sold but not yet purchased...................................... -- 638
------------ ------------
55,036 34,680
------------ ------------
Net interest income before provision for loan losses..................... 44,421 25,190
Provision for loan losses.................................................... 14,370 --
------------ ------------
Net interest income after provision for loan losses...................... 30,051 25,190
------------ ------------
Non-interest income:
Servicing fees and other charges........................................... 787 1,805
Gains on sales of interest earning assets, net............................. 9,601 3,356
(Loss) income on real estate owned, net.................................... (1,028) 2,558
Other income............................................................... 1,996 1,208
------------ ------------
11,356 8,927
------------ ------------
Non-interest expense:
Compensation and employee benefits......................................... 14,562 10,464
Occupancy and equipment.................................................... 4,227 4,795
Hotel operations expense, net.............................................. 57 264
Other operating expenses................................................... 6,703 6,369
------------ ------------
25,549 21,892
------------ ------------
Equity in earnings of investment in joint venture............................ 1,078 --
Income from continuing operations before income taxes...................... 16,936 12,225
Income tax expense........................................................... 1,910 760
------------ ------------
Income from continuing operations.......................................... 15,026 11,465
Discontinued operations:
Loss from operations of discontinued divisions, net of tax benefit of
$1,435 for the period ended June 30, 1995 -- (3,136)
------------ ------------
Net income............................................................... $ 15,026 $ 8,329
------------ ------------
------------ ------------
Earnings per share:
Income from operations..................................................... $ 0.57 $ 0.39
Discontinued operations, net of tax benefit................................ -- (0.11)
------------ ------------
Net income............................................................... $ 0.57 $ 0.28
------------ ------------
------------ ------------
Weighted average common shares outstanding................................... 26,397,920 29,781,510
------------ ------------
------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-46
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND THE YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
UNREALIZED LOSS
ON SECURITIES
COMMON STOCK ADDITIONAL AVAILABLE FOR
------------------------- PAID-IN RETAINED SALE, NET OF
SHARES AMOUNT CAPITAL EARNINGS TAXES TOTAL
------------ ----------- ----------- ---------- ----------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1994............... 32,194,710 $ 322 $ 13,652 $ 142,230 $ (2,821) $ 153,383
Net income................................ -- -- -- 25,467 -- 25,467
Repurchase of common stock options........ -- -- (132) -- -- (132)
Exercise of common stock options.......... 432,620 4 1,416 -- -- 1,420
Repurchase of common stock................ (8,815,060) (88) (4,487) (37,422) -- (41,997)
Change in unrealized loss on securities
available for sale, net of taxes......... -- -- -- -- 1,406 1,406
------------ ----- ----------- ---------- ------- ----------
Balances at December 31, 1995............... 23,812,270 238 10,449 130,275 (1,415) 139,547
Net income (unaudited).................... -- -- -- 15,026 -- 15,026
Repurchase of common stock options
(unaudited).............................. -- -- (176) -- -- (176)
Exercise of common stock options
(unaudited).............................. 630 -- 2 -- -- 2
Change in unrealized loss on securities
available for sale, net of taxes
(unaudited).............................. -- -- -- -- 339 339
------------ ----- ----------- ---------- ------- ----------
Balances at June 30, 1996 (unaudited)....... 23,812,900 $ 238 $ 10,275 $ 145,301 $ (1,076) $ 154,738
------------ ----- ----------- ---------- ------- ----------
------------ ----- ----------- ---------- ------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-47
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
--------------------
1996 1995
--------- ---------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................................... $ 15,026 $ 8,329
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Net cash provided from trading activities.......................................... 4,744 2,865
Proceeds from sales of loans available for sale.................................... 287,233 77,460
Purchases of loans available for sale.............................................. (142,150) (113,676)
Origination of loans available for sale............................................ (720) (2,829)
Maturities of and principal payments received on loans available for sale.......... 21,334 2,774
Premium amortization (discount accretion), net..................................... 3,229 (2,131)
Depreciation and amortization...................................................... 1,997 2,798
Provision for loan losses.......................................................... 14,370 --
Provision for real estate losses................................................... 9,788 5,035
Loss on sales of premises and equipment............................................ 97 --
Gains on sales of interest earning assets, net..................................... (9,601) (3,356)
Gain on sale of real estate owned, net............................................. (7,778) (9,137)
Gain on sale of interest in tax credit partnership interests....................... (990) --
Decrease in principal, interest and dividends receivable........................... 1,366 285
Increase in income taxes receivable................................................ (7,076) (13,583)
Decrease (increase) in other assets................................................ 8,627 (9,449)
Decrease in accrued expenses, payables and other liabilities....................... (6,386) (2,605)
--------- ---------
Net cash provided (used) by operating activities....................................... 193,110 (57,220)
--------- ---------
Cash flows from investing activities:
Proceeds from sales of securities available for sale................................. 137,454 686,628
Purchases of securities available for sale........................................... (85,557) (648,100)
Maturities of and principal payments received on securities available for sale....... 23,021 14,288
Maturities of and principal payments received on securities held for investment...... -- 7,969
Purchases of low income housing tax credit interests................................. (14,427) (9,940)
Proceeds from low income housing tax credit interest................................. 3,704 --
Proceeds from sales of discounted loans and loans held for investment................ 22,152 22,425
Origination of loans held for investment............................................. (80,071) (73,668)
Purchase of loans held for investment................................................ -- (2,608)
Purchase of discounted loans......................................................... (120,590) (124,697)
Investment in joint venture.......................................................... (63,404) --
Principal payments received on discounted loans and loans held for investment........ 198,024 98,864
Proceeds from sales of real estate owned............................................. 75,674 76,533
Purchases of real estate owned in connection with discounted loan purchases.......... (1,434) (13,419)
Proceeds from sale of premises and equipment......................................... 233 --
Additions to premises and equipment.................................................. (5,698) (15,152)
--------- ---------
Net cash provided by investing activities.............................................. 89,081 19,123
--------- ---------
</TABLE>
(continued on next page)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-48
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
--------------------
1996 1995
--------- ---------
(UNAUDITED)
Cash flows from financing activities:
<S> <C> <C>
Increase in deposits................................................................. $ 529 $ 118,650
Proceeds from issuance of subordinated debentures.................................... -- 100,000
Proceeds from issuance of notes payable.............................................. -- 7,615
Decrease in securities sold under agreements to repurchase........................... (84,761) --
Payments and repurchase of notes and mortgages payable............................... (1,351) (147)
Exercise of common stock options..................................................... 2 1,045
Repurchase of common stock options and common stock.................................. (176) (42,127)
--------- ---------
Net cash (used) provided by financing activities....................................... (85,757) 185,036
--------- ---------
--------- ---------
Net increase in cash and cash equivalents.............................................. 196,434 146,939
Cash and cash equivalents at beginning of period....................................... 54,632 36,750
--------- ---------
Cash and cash equivalents at end of period............................................. $ 251,066 $ 183,689
--------- ---------
--------- ---------
Reconciliation of cash and cash equivalents at end of period:
Cash and amounts due from depository institutions.................................... $ 6,196 $ 18,403
Interest bearing deposits............................................................ 57,638 28,928
Federal funds sold and repurchase agreements......................................... 187,232 136,358
--------- ---------
$ 251,066 $ 183,689
--------- ---------
--------- ---------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest........................................................................... $ 54,424 $ 26,818
--------- ---------
--------- ---------
Income taxes....................................................................... $ 1,922 $ 9,608
--------- ---------
--------- ---------
Supplemental schedule of non-cash investing and financing activities:
Exchange of loans available for sale for securities.................................. $ 134,785 $ 83,875
--------- ---------
--------- ---------
Real estate owned acquired through foreclosure....................................... $ 43,299 $ 114,835
--------- ---------
--------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-49
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(DOLLARS IN THOUSANDS)
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Ocwen Financial Corporation (the "Company") and its subsidiaries and
have been prepared in conformity with the instructions to Form 10-Q and Article
10, Rule 10-01 of Regulation S-X for interim financial statements. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles ("GAAP") for complete financial statements.
In the opinion of management, the accompanying financial statements contain
all adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the Company's results for the interim periods. The result of
operations and other data for the six month period ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 1996. The unaudited consolidated financial statements
presented herein should be read in conjunction with the audited consolidated
financial statements and related notes thereto included elsewhere in this
Offering Circular.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities at the dates of the balance sheets and revenues and expenses for the
periods covered. Actual results could differ significantly from those estimates
and assumptions.
NOTE 2 VALUATION ALLOWANCES ON ASSETS HELD FOR DISPOSITION AND RESOLUTION
As a result of the historical and expected future growth in the discounted
loan portfolio and associated real estate owned, particularly in the commercial
segment, and as requested by the Office of Thrift Supervision ("OTS"), the
Company has modified its methodology for valuing its assets held for disposition
and resolution beginning in the first quarter of 1996. This methodology results
in a valuation allowance which supplements the Company's practice of adjusting
these assets to the net present value of expected cash flows discounted at the
effective interest rate in the case of discounted loans and fair value less
estimated disposition costs in the case of real estate owned. Beginning in 1996
the Company has recorded charge-offs on discounted loans against the allowance
for loan losses. Previously these amounts were deducted from interest income.
NOTE 3 DISCONTINUED OPERATIONS
In September 1995, the Company announced its decision to dispose of its
automated banking division and related activities. The sale and disposition of
this division was substantially complete at December 31, 1995. The Company's
Consolidated Statement of Operations have been restated for the six months ended
June 30, 1995 to reflect the discontinuance of these operations.
NOTE 4 ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" on January 1,
1996. The adoption of SFAS No. 121 did not have a material effect on the
Company's financial condition or results of operations.
On January 1, 1996 the Company adopted SFAS No. 122, "Accounting for
Mortgage Servicing Rights", which requires that an institution engaged in
mortgage banking activities recognize as a separate asset rights to service
mortgage loans for others, regardless of the manner in which those servicing
rights are acquired. Upon sale or securitization of loans with servicing rights
retained, the Company is required to capitalize the cost associated with the
mortgage servicing rights based on their relative fair values. SFAS No. 122 also
F-50
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(DOLLARS IN THOUSANDS)
requires that an institution assess its capitalized mortgage servicing rights
for impairment based on the fair value of those rights. Impairment is recognized
through a valuation allowance. See note 7 for disclosures regarding capitalized
mortgage servicing rights as required by SFAS No. 122.
As provided in SFAS No. 123, "Accounting for Stock-Based Compensation", the
Company has elected to retain the intrinsic value method of accounting for
stock-based compensation, which it currently uses.
NOTE 5 INTEREST RATE RISK MANAGEMENT INSTRUMENTS
The Company enters into short sales of Eurodollar and U.S. Treasury interest
rate futures contracts as part of its overall interest rate risk management
activity. Interest rate futures contracts are commitments to either purchase or
sell designated financial instruments at a future date for a specified price and
may be settled in cash or through delivery. Terms and other information on the
interest rate futures sold short are as follows:
<TABLE>
<CAPTION>
NOTIONAL
JUNE 30, 1996: MATURITY PRINCIPAL FAIR VALUE
----------- ----------------- -----------
<S> <C> <C> <C>
Eurodollar futures................................... 1996 $ 188,000 $ (206)
1997 365,000 (37)
1998 40,000 (35)
U.S. Treasury futures................................ 1996 306,600 (1,135)
<CAPTION>
DECEMBER 31, 1995:
<S> <C> <C> <C>
Eurodollar futures................................... 1996 $ 386,000 $ (1,598)
1997 26,000 (168)
U.S. Treasury futures................................ 1996 11,100 (80)
</TABLE>
Because futures contracts are exchange traded, holders of these instruments
look to the exchange for performance under these contracts and not the entity
holding the offsetting futures contract, thereby minimizing the risk of
nonperformance under these contracts.
NOTE 6 INVESTMENT IN JOINT VENTURE
On March 22, 1996, the Company was notified by the U.S. Department of
Housing and Urban Development ("HUD") that BCBF, L.L.C., a newly-formed limited
liability company ("LLC") in which the Company and a co-investor each have a 50%
interest, was the successful bidder to purchase 16,196 single-family residential
loans offered by HUD at an auction and on April 10, 1996 the LLC consummated the
acquisition of the HUD loans.
The Company's investment in the LLC is accounted for under the equity method
of accounting. Under the equity method of accounting, an investment in the
shares or other interests of an investee is initially recorded at the cost of
the shares or interests acquired and thereafter is periodically increased
(decreased) by the investor's proportionate share of the earnings (losses) of
the investee and decreased by all dividends received by the investor from the
investee. The Company services all loans on behalf of the LLC for a fee, and all
intercompany transactions between the Company and the LLC are eliminated for
financial reporting purposes, to the extent of the Company's ownership in the
LLC. At June 30, 1996, the Company's investment in the LLC amounted to $63,404.
Because the LLC is a pass-through entity for federal income tax purposes,
provisions for income taxes will be established by each of the Company and its
co-investor and not the LLC.
F-51
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(DOLLARS IN THOUSANDS)
Set forth below is an unaudited statement of financial condition of the LLC
at June 30, 1996 and a statement of operations for the period from the date of
acquisition of the HUD Loans through June 30, 1996.
BCBF, L.L.C.
STATEMENT OF FINANCIAL CONDITION
JUNE 30, 1996
<TABLE>
<CAPTION>
Assets:
<S> <C>
Cash............................................................ $ 3,426
Discounted loans, net........................................... 559,374
Real estate owned, net.......................................... 88
Other assets.................................................... 29,159
---------
Total assets.................................................. $ 592,047
---------
---------
Liabilities:
Note payable.................................................... $ 462,937
Other liabilities............................................... 2,302
---------
Total liabilities............................................. 465,239
---------
---------
Equity:
The Company..................................................... 63,404
Co-investor..................................................... 63,404
---------
Total equity.................................................. 126,808
---------
Total liabilities and equity.................................. $ 592,047
---------
---------
</TABLE>
BCBF, L.L.C.
STATEMENT OF OPERATIONS
FOR THE PERIOD APRIL 10, 1996 THROUGH JUNE 30, 1996
<TABLE>
<S> <C>
Interest income.................................................... $ 12,222
Interest expense................................................... 8,279
---------
Net interest income before provision for loan losses........... 3,943
Provision for loan losses.......................................... 2,913
---------
Net interest income after provision for loan losses............ 1,030
Non-interest income:
Gain on sale of discounted loans................................. 1,324
Loan fees........................................................ 7
---------
1,331
---------
Operating expenses:
Loan servicing fees.............................................. 2,003
Other loan expenses.............................................. 204
---------
2,207
---------
Net income..................................................... $ 154
---------
---------
</TABLE>
F-52
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(DOLLARS IN THOUSANDS)
The Company's equity in earnings of the LLC of $1,078 includes 50% of the
net income of the LLC before deduction of the loan servicing fees which are paid
100% to the Company. The Company has recognized the 50% of the loan servicing
fee not eliminated in consolidation in servicing fees and other charges.
NOTE 7 MORTGAGE SERVICING RIGHTS
The unamortized balance of mortgage servicing rights which are included in
other assets is as follows:
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
<S> <C> <C>
Unamortized balance......................................... $ 3,585 $ 3,433
Valuation allowance......................................... (928) --
------ ------
$ 2,657 $ 3,433
------ ------
------ ------
</TABLE>
Periodically, the Company evaluates the recoverability of mortgage servicing
rights based on the projected value of future net servicing income. Future
prepayment rates are estimated based on current interest rates and various
portfolio characteristics, including loan type, interest rate, and market
prepayment estimates. If the estimated recovery is lower than the current amount
of mortgage servicing rights, a reduction to mortgage servicing rights is
recorded through an increase in the valuation allowance. A valuation allowance
was established during the first quarter of 1996 in the amount of $928 primarily
as a result of higher than projected prepayment rates.
NOTE 8 REGULATORY REQUIREMENTS
The Company's primary subsidiary, Berkeley Federal Bank & Trust FSB
("Berkeley") is a federally chartered savings bank regulated by the OTS and is
subject to Federal laws and regulations including regulations that require
institutions to comply with minimum regulatory capital requirements.
A comparison of Berkeley's regulatory capital to its regulatory capital
requirements as of June 30, 1996 and related additional discussion follows:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
---------- ---------- -----------
<S> <C> <C> <C>
GAAP capital............................................. $ 140,159 $ 140,159 $ 140,159
Nonallowable assets:
Implementation of Financial Accounting Standard No.
115................................................... 1,076 1,076 1,076
Excess qualifying purchased mortgage servicing
rights................................................ (266) (266) (266)
Additional capital items:
Subordinated debentures................................ -- -- 100,000
General valuation allowances........................... -- -- 11,741
---------- ---------- -----------
Regulatory capital-computed.............................. 140,969 140,969 252,710
Minimum capital requirement.............................. 31,367 62,735 148,525
---------- ---------- -----------
Regulatory capital excess................................ $ 109,602 $ 78,234 $ 104,185
---------- ---------- -----------
---------- ---------- -----------
Capital ratios:
Required............................................... 1.50% 3.00% 8.00%
Actual................................................. 6.74% 6.74% 13.61%
</TABLE>
F-53
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(DOLLARS IN THOUSANDS)
The OTS has promulgated a regulation governing capital distributions.
Berkeley is considered to be a Tier 1 association under this regulation because
it met or exceeded its fully phased-in capital requirements at June 30, 1996. A
Tier 1 association that before and after a proposed capital distribution meets
or exceeds its fully phased-in capital requirements may make capital
distributions during any calendar year equal to the greater of (i) 100% of net
income for the calendar year to date plus 50% of its "surplus capital ratio" at
the beginning of the year or (ii) 75% of its net income over the most recent
four-quarter period. In order to make these capital distributions, Berkeley must
submit written notice to the OTS thirty days in advance of making the
distribution. In addition, the indenture governing Berkeley's Debentures limits
the declaration or payment of dividends and the purchase or redemption of
Berkeley's common or preferred stock in the aggregate to the sum of 50% of
Berkeley's consolidated net income and 100% of all capital contributions and
proceeds from the issuance or sale of common stock, since the date the
Debentures were issued. At June 30, 1996, taking into account the foregoing
restrictions, Berkeley could have distributed $18.7 million to the Company.
NOTE 9 COMMITMENTS AND CONTINGENCIES
At June 30, 1996 the Company had (i) commitments to fund an additional
$25,087 on multi-family residential loans, (ii) commitments to fund an
additional $6,768 on loans secured by office buildings, (iii) commitments to
fund $32,028 of loans secured by hotel properties and (iv) a commitment to fund
an additional $4,886 on a loan secured by land. In connection with its
acquisition of Berkeley Federal Savings Bank in 1993, the Company has a recourse
obligation of $4,519 on single-family residential loans sold to the Federal Home
Loan Mortgage Corporation. The Company, through its investment in subordinated
securities which had a book value of $51,906 at June 30, 1996, supports senior
classes of securities having an outstanding principal balance of $664,696.
The Company is subject to various pending legal proceedings. Management,
after reviewing these claims with legal counsel, is of the opinion that the
resolution of these claims will not have a material effect on the Company's
financial position, results of operations, cash flows or liquidity.
NOTE 10 SUBSEQUENT EVENT
On July 31, 1996 the Board of Directors of the Company approved an increase
in the authorized number of common shares from 20,000,000 shares of $1.00 par
value to 200,000,000 shares of $0.01 par value and declared a 10 for 1 stock
split for each share of common stock then outstanding and for all then
outstanding options to purchase shares of the Company's common stock. All
references in the interim consolidated financial statements to the number of
shares and per share amounts have been adjusted retroactively for the
recapitalization and stock split.
F-54
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND ANY INFORMATION OR
REPRESENTATION NOT CONTAINED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT
RELATES OR AN OFFER TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER WOULD
BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
------------------------
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Available Information.......................... 2
Summary........................................ 3
Selected Consolidated Financial and Other
Data.......................................... 7
Risk Factors................................... 10
The Company.................................... 17
Use of Proceeds................................ 18
Capitalization................................. 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 20
Business....................................... 42
Regulation..................................... 71
Taxation....................................... 78
Management..................................... 80
Beneficial Ownership of Common Stock........... 87
Description of Notes........................... 88
Underwriting................................... 105
Legal Matters.................................. 105
Experts........................................ 105
Index to Consolidated Financial Statements..... F-1
</TABLE>
UNTIL NOVEMBER 4, 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE NOTES,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A
PROSPECTUS WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
$125,000,000
[LOGO]
OCWEN FINANCIAL
CORPORATION
11 7/8% NOTES DUE 2003
---------------------
PROSPECTUS
---------------------
FRIEDMAN, BILLINGS,
RAMSEY & CO., INC.
SEPTEMBER 25, 1996
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PROSPECTUS
OCWEN FINANCIAL CORPORATION
[LOGO]
2,000,000 SHARES OF COMMON STOCK
Certain stockholders of Ocwen Financial Corporation (the "Company") are
offering hereby 2,000,000 shares of common stock, par value $0.01 per share (the
"Common Stock"), of the Company (the "Common Stock Offering"). See "Selling
Stockholders." Prior to this offering, there has been no public trading market
for the Common Stock. See "Underwriting" for information relating to the factors
considered in determining the initial public offering price. The Common Stock
has been approved for quotation on the Nasdaq National Market under the symbol
"OCWN." The Company will not receive any of the proceeds from the Common Stock
Offering.
The Underwriters have reserved 10% of the shares of Common Stock offered
hereby for sale at the initial public offering price to directors, officers and
employees of the Company and its subsidiaries and to certain other persons. See
"Underwriting."
In addition, the Company is concurrently offering $125 million principal
amount of 11 7/8% Notes due 2003 (the "Notes") of the Company (plus up to an
additional $18.75 million aggregate principal amount of Notes that may be issued
pursuant to the Note underwriter's over-allotment option, the "Notes Offering").
See "Description of Notes Offering." The shares of Common Stock offered hereby
and the Notes offered by the Company are being offered separately and not as
units, and neither offering is conditioned on the completion of the other
offering.
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 9 HEREOF FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED CAREFULLY BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK
OFFERED HEREBY.
------------------
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR SAVINGS DEPOSITS AND
ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, ANY OTHER GOVERNMENTAL AGENCY OR OTHERWISE.
--------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING SELLING
PUBLIC DISCOUNT(1) STOCKHOLDERS(2)
<S> <C> <C> <C>
Per Share............................. $15.00 $1.05 $13.95
Total(3).............................. $30,000,000 $2,100,000 $27,900,000
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Expenses in connection with the offering, estimated at $132,000, will be
payable by the Company.
(3) The Selling Stockholders have granted the several Underwriters a 30-day
option to purchase up to 300,000 additional shares of Common Stock to cover
over-allotments. If all such shares of Common Stock are purchased, the total
Price to Public, Underwriting Discount and Proceeds to Selling Stockholders
will be $34,500,000, $2,415,000 and $32,085,000, respectively. See
"Underwriting."
The shares of Common Stock are offered by the Underwriters, subject to
receipt and acceptance by the Underwriters, approval of certain legal matters by
counsel for the Underwriters and certain other conditions. The Underwriters
reserve the right to withdraw, cancel or modify such offers and to reject orders
in whole or in part. It is expected that delivery of the shares of Common Stock
will be made in New York, New York on or about September 30, 1996.
--------------------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
The date of this Prospectus is September 25, 1996
<PAGE>
IN CONNECTION WITH THE COMMON STOCK OFFERING, THE UNDERWRITERS MAY
OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE
OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), a Registration Statement on Form S-1 under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the Common Stock
Offering and the Notes Offering. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Common Stock and the Notes, reference is hereby made to such Registration
Statement and the exhibits and schedules thereto. The Registration Statement,
including exhibits thereto, may be inspected and copied at the public reference
facilities maintained by the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549 and at the Commission's Regional Offices
located at Suite 1400, 500 West Madison Street, Chicago, Illinois 60661 and
Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of such
materials may be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The
Commission maintains a World Wide Web site on the Internet that contains
reports, proxy and information statements and other information regarding
registrants such as the Company that file electronically with the Commission.
The address of such site is: http://www.sec.gov.
In connection with the Common Stock Offering, the Company will register the
Common Stock pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Upon such registration, the Company will be subject to the
informational requirements of the Exchange Act and, in accordance therewith,
will file reports, proxy statements and other information with the Commission.
Such reports, proxy statements and other information can be inspected and copied
at the addresses set forth above. In addition, as long as the Common Stock is
quoted on the Nasdaq National Market, reports, proxy statements and other
information covering the Company also will be available for inspection at the
National Association of Securities Dealers, Inc. ("NASD"), 1735 K Street, N.W.,
Washington, D.C. 20006.
The Company intends to furnish to holders of Common Stock annual reports
containing financial statements of the Company audited by its independent
accountants and quarterly reports containing unaudited condensed financial
statements for each of the first three quarters of each fiscal year.
2
<PAGE>
SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION
AND CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN
THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL SHARE DATA CONTAINED IN THIS
PROSPECTUS RELATING TO THE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING ASSUMES
NO EXERCISE OF OUTSTANDING EMPLOYEE STOCK OPTIONS TO PURCHASE AN AGGREGATE OF
282,340 SHARES OF COMMON STOCK AS OF THE DATE HEREOF AND DOES NOT GIVE EFFECT TO
THE ISSUANCE OF 2,928,200 SHARES OF COMMON STOCK UPON THE EXERCISE OF STOCK
OPTIONS BETWEEN JUNE 30, 1996 AND THE DATE HEREOF. THE SHARE DATA CONTAINED
HEREIN GIVES RETROACTIVE EFFECT TO A TEN-FOR-ONE SPLIT OF THE OUTSTANDING SHARES
OF COMMON STOCK AS OF JULY 31, 1996.
THE COMPANY
GENERAL
The Company is a financial services company which is primarily engaged in
the acquisition and resolution of troubled loans and in diverse mortgage lending
activities. The activities of the Company are primarily conducted through
Berkeley Federal Bank & Trust FSB (the "Bank"), a federally-chartered savings
bank and a wholly-owned subsidiary of the Company, which is in the process of
being renamed "Ocwen Federal Bank FSB." At June 30, 1996, the Company had $1.9
billion of total assets and stockholders' equity of $154.7 million.
The Company's business strategy focuses on the identification and
development of selected business lines that provide the highest return
consistent with prudent risk management. Exclusive of gains from the sale of
branch offices and related income taxes and profit sharing expense, the
Company's income from continuing operations before extraordinary gain and
cumulative effect of a change in accounting principle resulted in returns on
average assets of 1.56%, 2.00%, 1.40% and 2.37% during the six months ended June
30, 1996 and the years ended December 31, 1995, 1994 and 1993, respectively, and
returns on average equity of 20.67%, 25.02%, 20.06% and 27.89% during the same
respective periods. Although the Company has experienced significant
profitability, because the Company operates in areas which involve more
uncertainties and risks than the single-family residential lending activities
historically emphasized by savings institutions, there can be no assurance that
its profitability will continue at historical levels or that there will not be
significant inter-period variations in the profitability of the Company's
operations in future periods.
BUSINESS ACTIVITIES
DISCOUNTED LOAN ACQUISITION AND RESOLUTION ACTIVITIES. The Company has
established a core expertise in the acquisition and resolution of non-performing
or underperforming single-family residential, multi-family residential and
commercial real estate loans, which generally are purchased at a discount to
both the unpaid principal amount of the loan and the estimated value of the
security property ("discounted loans"). The Company acquires discounted loans
from a wide variety of sources, which in recent years have been primarily
private sector sellers and, to a lesser extent, governmental agencies. The
Company believes that its experience in the acquisition and resolution of
discounted loans, its investment in a state-of-the-art computer infrastructure
and related technology which is utilized in this business and its national
reputation in this area make it one of the leaders in this relatively new and
evolving business. Between commencing these activities in mid-1991 and June 30,
1996, the Company acquired over $2.4 billion of gross principal amount of
discounted loans, including $161.8 million, $791.2 million and $826.4 million
during the six months ended June 30, 1996 and the years ended December 31, 1995
and 1994, respectively. In addition, the Company recently acquired a 50%
interest in a newly-formed joint venture that acquired discounted single-family
residential loans having an aggregate unpaid principal balance at acquisition of
$741.2 million from the Federal Housing Administration ("FHA") of the U.S.
Department of Housing and Urban Development ("HUD"). At June 30, 1996, the
Company's discounted loan acquisition and resolution activities included its
discounted loan portfolio, which amounted to $594.6 million (net of $226.2
million of unaccreted discount and a $9.5 million allowance for loan losses),
$132.0 million of related real estate owned and a $63.4 million investment in
the above-referenced joint venture, which in the aggregate amounted to $790.0
million or 41.6% of the Company's total assets. Inclusive of the Company's pro
rata interest in the discounted loans
3
<PAGE>
held by the joint venture, at June 30, 1996 the Company's discounted loans, net
would amount to $874.3 million and its total assets related to discounted loan
acquisition and resolution activities would amount to $1.0 billion.
Recent discounted loan activity of the Company includes the acquisition in
July and August 1996 of an aggregate of $410.0 million of discounted loans,
which consist primarily of multi-family residential and commercial real estate
loans, and the receipt in September 1996 of a notification from HUD that the
Company and a co-investor were the successful bidder to purchase single-family
residential loans with an aggregate unpaid principal balance of $258.8 million
auctioned by HUD, which will result in the Company's acquisition of $113.3
million of such loans and the right to service all of such loans upon closing of
this transaction in late September 1996. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Changes in Financial
Condition--Discounted Loan Portfolio, Net."
MULTI-FAMILY RESIDENTIAL AND COMMERCIAL REAL ESTATE LENDING ACTIVITIES. The
Company's lending activities emphasize loans secured by multi-family residential
and commercial real estate located nationwide. In conducting these activities,
the Company generally seeks to emphasize types of loans and/or lending in
geographic areas which, for various reasons, may not be currently emphasized by
other lenders and which thus offer attractive returns to the Company relative to
other investments. The loans currently emphasized by the Company include loans
secured by hotels and office buildings. The Company has developed expertise in
the securitization of assets, which, among other benefits, enhances the
liquidity of the Company's assets. The Company securitized multi-family
residential loans with an aggregate principal amount of $83.9 million, $346.6
million and $67.1 million during 1995, 1994 and 1993, respectively, and
subsequently sold substantially all of the securities backed by these loans. At
June 30, 1996, the Company's multi-family residential and commercial real estate
loans (including construction loans) available for sale and held for investment
aggregated $265.4 million, net, or 14.0% of the Company's total assets. The
Company also utilizes its multi-family residential lending and other expertise
to make investments in low-income housing tax credit partnerships which own
projects which have been allocated tax credits under the Internal Revenue Code
of 1986, as amended (the "Code"). Such investments amounted to $92.3 million or
4.9% of the Company's total assets at June 30, 1996.
SINGLE-FAMILY RESIDENTIAL LENDING ACTIVITIES. During 1995, the Company
established a program which focuses on the origination or purchase on a
nationwide basis of single-family residential loans made to borrowers who have
substantial equity in the properties which secure the loans but who, because of
prior credit problems, the absence of a credit history or other factors, are
unable or unwilling to qualify as borrowers from traditional sources. The
Company utilizes the expertise, technology and other resources which it has
developed in connection with the acquisition and resolution of discounted loans
in conducting these activities, and believes that the higher risk of default
generally associated with these loans, as compared to loans which conform to the
requirements established by federal agencies, is more than offset by the higher
yields on these loans and the higher amount of equity which the borrowers have
in the properties which secure these loans. The Company purchased or originated
$132.4 million of single-family residential loans to non-conforming borrowers
during the six months ended June 30, 1996 and $240.3 million of such loans
during 1995, $158.6 million of which was acquired during the last half of the
year. The Company classifies its single-family residential loans to
non-conforming borrowers as available for sale because, subject to market
conditions, it generally intends to sell such loans or to securitize such loans
and sell substantially all of the securities backed by such loans. During the
six months ended June 30, 1996, the Company sold $285.2 million of such loans
for a pre-tax gain of $6.8 million. At June 30, 1996, the Company's
single-family residential loans to non-conforming borrowers amounted to $40.9
million or 2.2% of the Company's total assets.
OTHER INVESTMENT ACTIVITIES. The Company invests in a wide variety of
mortgage-related securities based on its capital position, interest rate risk
profile, the market for such securities and other factors. At June 30, 1996, the
carrying value of the Company's mortgage-related securities, all of which were
classified as available for sale, amounted to $263.2 million or 13.9% of the
Company's total assets.
4
<PAGE>
THE COMMON STOCK OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Selling
Stockholders...................... 2,000,000 shares (plus up to 300,000 shares pursuant
to the Common Stock underwriters' over-allotment
option)
Common Stock currently 26,741,100(1)
outstanding.......................
Nasdaq National Market Symbol...... OCWN
Dividend policy.................... The Company has no current intention to pay cash
dividends on the Common Stock. See "Dividend Policy."
Proceeds........................... The Company will not receive any proceeds from the
Common Stock Offering.
</TABLE>
- ------------------------
(1) Includes 2,928,200 shares of Common Stock issued upon the exercise of stock
options subsequent to June 30, 1996.
THE NOTES OFFERING
Concurrently with the Common Stock Offering, the Company is separately
offering $125 million principal amount of Notes (plus up to an additional $18.75
million principal amount of Notes that may be issued pursuant to the Note
underwriter's over-allotment option), which will mature on October 1, 2003. The
Notes will be unsecured obligations of the Company and will rank PARI PASSU in
right of payment with all existing and future general unsecured indebtedness of
the Company. Interest on the Notes will accrue at a rate of 11 7/8% per annum
and will be payable in cash semi-annually on April 1 and October 1 of each year,
commencing on April 1, 1997. For information regarding the anticipated use of
proceeds from the Notes Offering by the Company and the Notes generally, see
"Use of Proceeds" and "Description of Notes Offering," respectively.
The Notes Offering is not conditioned upon the consummation of the Common
Stock Offering.
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered carefully by prospective purchasers of shares of Common Stock.
5
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following tables present selected consolidated financial and other data
of the Company at the dates and for the periods indicated. The historical
operations and balance sheet data at and for the years ended December 31, 1995,
1994, 1993, 1992 and 1991 have been derived from financial statements audited by
Price Waterhouse LLP, independent certified public accountants. The historical
operations and balance sheet data at and for the six months ended June 30, 1996
and 1995 have been derived from unaudited consolidated financial statements and
include all adjustments, consisting only of normal recurring accruals, which the
Company considers necessary for a fair presentation of the Company's results of
operations for these periods. Operating results for the six months ended June
30, 1996 are not necessarily indicative of the results that may be expected for
any other interim period or the entire year ending December 31, 1996. The
selected consolidated financial and other data should be read in conjunction
with, and is qualified in its entirety by reference to, the information in the
Consolidated Financial Statements and related notes set forth elsewhere herein.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- --------------------------------------------
1996 1995 1995(1) 1994(1) 1993(2) 1992
--------- --------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS DATA:
Interest income............................................. $ 99,457 $ 59,870 $ 137,275 $ 131,458 $ 78,923 $ 71,723
Interest expense............................................ 55,036 34,680 84,060 62,598 35,306 28,148
--------- --------- --------- --------- ----------- ---------
Net interest income before provision for loan losses...... 44,421 25,190 53,215 68,860 43,617 43,575
Provision for loan losses................................... 14,370(3) -- 1,121 -- -- --
--------- --------- --------- --------- ----------- ---------
Net interest income after provision for loan losses....... 30,051 25,190 52,094 68,860 43,617 43,575
--------- --------- --------- --------- ----------- ---------
Gains on sales of interest-earning assets, net.............. 9,601 3,356 6,955 5,727 8,386 8,842
Gain from sale of branch offices(1)......................... -- -- 5,430 62,600 -- --
Income (loss) on real estate owned, net..................... (1,028 (3) 2,558 9,540 5,995 (1,158) 1,050
Fees on financing transactions(4)........................... -- -- -- -- 15,340 6,760
Other non-interest income................................... 2,783 3,013 9,255 7,253 13,304 8,130
--------- --------- --------- --------- ----------- ---------
Total non-interest income................................... 11,356 8,927 31,180 81,575 35,872 24,782
--------- --------- --------- --------- ----------- ---------
Non-interest expense........................................ 25,549 21,892 45,573 68,858 41,859 32,468
--------- --------- --------- --------- ----------- ---------
Equity in earnings of investment in joint venture(5)........ 1,078 -- -- -- -- --
--------- --------- --------- --------- ----------- ---------
Income tax expense.......................................... 1,910 760 4,562 29,724 10,325 11,552
--------- --------- --------- --------- ----------- ---------
Income from continuing operations........................... 15,026 11,465 33,139 51,853 27,305 24,337
Discontinued operations, net of tax......................... -- (3,136) (7,672) (4,514) (2,270) (1,946)
Extraordinary gains......................................... -- -- -- -- 1,538 2,963
Cumulative effect of a change in accounting principle....... -- -- -- -- (1,341) --
--------- --------- --------- --------- ----------- ---------
Net income................................................ $ 15,026 $ 8,329 $ 25,467 $ 47,339 $ 25,232 $ 25,354
--------- --------- --------- --------- ----------- ---------
--------- --------- --------- --------- ----------- ---------
Income per share from continuing operations................. $ 0.57 $ 0.39 $ 1.19 $ 1.52 $ 0.80 $ 0.68
Net income per share........................................ $ 0.57 0.28 0.91 1.39 0.73 0.71
<CAPTION>
1991
---------
<S> <C>
OPERATIONS DATA:
Interest income............................................. $ 54,036
Interest expense............................................ 32,858
---------
Net interest income before provision for loan losses...... 21,178
Provision for loan losses................................... --
---------
Net interest income after provision for loan losses....... 21,178
---------
Gains on sales of interest-earning assets, net.............. 2,108
Gain from sale of branch offices(1)......................... --
Income (loss) on real estate owned, net..................... --
Fees on financing transactions(4)........................... 8,486
Other non-interest income................................... 14,638
---------
Total non-interest income................................... 25,232
---------
Non-interest expense........................................ 20,986
---------
Equity in earnings of investment in joint venture(5)........ --
---------
Income tax expense.......................................... 7,002
---------
Income from continuing operations........................... 18,422
Discontinued operations, net of tax......................... (1,699)
Extraordinary gains......................................... 10,824
Cumulative effect of a change in accounting principle....... --
---------
Net income................................................ $ 27,547
---------
---------
Income per share from continuing operations................. $ 0.54
Net income per share........................................ 0.80
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED -----------------------------------------------------
JUNE 30, 1996 1995 1994 1993 1992 1991
--------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
LOAN ACQUISITION DATA:
Discounted Loans(6):
Single-family residential................................. $ 6,065 $ 272,800 $ 395,882 $ 291,198 $ 297,169 $ 49,996
Multi-family residential.................................. 32,911 141,159 315,454 -- -- --
Commercial real estate.................................... 122,835 377,236 115,055 3,161 -- --
Other Loans(6):
Single-family residential................................. 139,970 284,896 7,119 477,908 70,239 85,123
Multi-family residential.................................. 55,705 83,530 378,400 290,702 -- --
Commercial real estate and other.......................... 52,916 214,875 22,486 19,575 1,014 --
Consumer.................................................. -- 2,173 -- 31,175 130 --
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
JUNE 30, 1996 1995(1) 1994(1) 1993(2) 1992
-------------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets............................................. $ 1,899,308 $ 1,973,590 $ 1,226,403 $ 1,396,677 $ 833,117
Securities available for sale(7)......................... 263,199 337,480 187,717 527,183 340,404
Loans available for sale(6)(7)........................... 84,078 251,790 102,293 101,066 754
Investment securities, net............................... 8,902 18,665 17,011 32,568 30,510
Mortgage-related securities held for investment, net..... -- -- 91,917 121,550 114,046
Loan portfolio, net(6)................................... 312,576 295,605 57,045 88,288 41,015
Discounted loan portfolio(6):
Total loans............................................ 830,321 943,529 785,434 433,516 310,464
Unaccreted discount.................................... (226,217) (273,758) (255,974) (129,882) (97,426)
Allowance for loan losses.............................. (9,470) -- -- -- --
-------------- ----------- ----------- ----------- ---------
Discounted loans, net................................ 594,634 669,771 529,460 303,634 213,038
Investments in low-income housing tax credit interests... 92,273 81,362 49,442 16,203 --
Real estate owned(8)..................................... 133,604 166,556 96,667 33,497 4,710
Investment in joint venture(5)........................... 63,404 -- -- -- --
Excess of cost over net assets acquired, net............. -- -- -- 10,467 11,825
Deposits................................................. 1,502,175 1,501,646 1,023,268 871,879 339,622
Borrowings and other interest- bearing obligations....... 186,102 272,214 25,510 373,792 361,799
Stockholders' equity..................................... 154,738 139,547(9) 153,383 111,831 94,396
Book value per common share.............................. 6.50(10) 5.86 4.76 3.47 2.71
<CAPTION>
1991
---------
<S> <C>
BALANCE SHEET DATA:
Total assets............................................. $ 623,854
Securities available for sale(7)......................... 65,124
Loans available for sale(6)(7)........................... 2,058
Investment securities, net............................... 9,100
Mortgage-related securities held for investment, net..... 343,911
Loan portfolio, net(6)................................... 49,260
Discounted loan portfolio(6):
Total loans............................................ 47,619
Unaccreted discount.................................... (21,908)
Allowance for loan losses.............................. --
---------
Discounted loans, net................................ 25,711
Investments in low-income housing tax credit interests... --
Real estate owned(8)..................................... 528
Investment in joint venture(5)........................... --
Excess of cost over net assets acquired, net............. 13,189
Deposits................................................. 292,263
Borrowings and other interest- bearing obligations....... 209,615
Stockholders' equity..................................... 68,998
Book value per common share.............................. 1.99
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE
SIX MONTHS ENDED AT OR FOR THE
JUNE 30, YEAR ENDED DECEMBER 31,
------------------------ ------------------------------------------------
1996 1995 1995 1994 1993 1992
----------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA(11):
Average assets..................................... $ 1,924,701 $ 1,344,117 $ 1,521,368 $ 1,714,953 $ 1,152,655 $ 712,542
Average equity..................................... 145,399 139,602 121,291 119,500 97,895 82,460
Return on average assets(12):
Income from continuing operations................ 1.56% 1.71% 2.18% 3.02% 2.37% 3.42%
Net income....................................... 1.56 1.24 1.67 2.76 2.19 3.56
Return on average equity(12):
Income from continuing operations................ 20.67 16.43 27.32 43.39 27.89 29.51
Net income....................................... 20.67 11.93 21.00 39.61 25.77 30.75
Average equity to average assets................... 7.55 10.39 7.97 6.97 8.49 11.57
Net interest spread................................ 6.16 5.36 5.25 4.86 4.05 4.66
Net interest margin................................ 5.65 4.83 4.54 4.75 4.30 6.06
Efficiency ratio(13)............................... 45.81 64.17 56.34 64.14 52.66 47.50
Ratio of earnings to fixed charges(14):
Including interest on deposits................... 1.31 1.35 1.45 2.28 2.04 2.25
Excluding interest on deposits................... 2.71 4.82 3.95 5.40 3.22 3.88
Non-performing loans to loans at end of
period(15)........................................ 0.77 2.33 1.27 4.35 3.71 8.32
Allowance for loan losses to loans at end of
period(6)......................................... 0.91 0.69 0.65 1.84 0.99 1.80
Allowance for loan losses to discounted loans at
end of period(6).................................. 1.57 -- -- -- -- --
Bank regulatory capital ratios at end of period:
Tangible......................................... 6.74 7.59 6.52 11.28 5.25 6.94
Core (leverage).................................. 6.74 7.59 6.52 11.28 6.00 7.94
Risk-based....................................... 13.61 18.85 11.80 14.74 13.31 21.29
Number of full-service offices at end of
period(1)......................................... 1 3 1 3 28 15
<CAPTION>
1991
---------
<S> <C>
OTHER DATA(11):
Average assets..................................... $ 573,857
Average equity..................................... 54,876
Return on average assets(12):
Income from continuing operations................ 3.21%
Net income....................................... 4.80
Return on average equity(12):
Income from continuing operations................ 33.57
Net income....................................... 50.20
Average equity to average assets................... 9.56
Net interest spread................................ 1.43
Net interest margin................................ 3.60
Efficiency ratio(13)............................... 45.22
Ratio of earnings to fixed charges(14):
Including interest on deposits................... 1.77
Excluding interest on deposits................... 2.41
Non-performing loans to loans at end of
period(15)........................................ 7.39
Allowance for loan losses to loans at end of
period(6)......................................... 1.86
Allowance for loan losses to discounted loans at
end of period(6).................................. --
Bank regulatory capital ratios at end of period:
Tangible......................................... 6.09
Core (leverage).................................. 7.59
Risk-based....................................... 26.67
Number of full-service offices at end of
period(1)......................................... 11
</TABLE>
- ------------------------------
(1) Financial data at December 31, 1995 reflects the Company's sale of two
branch offices and $111.7 million of related deposits effective November 17,
1995, and financial data at December 31, 1994 reflects the sale of 23 branch
offices and $909.3 million of related deposits effective December 31, 1994.
Operations data for 1995 and 1994 reflects the gains from these
transactions. Exclusive of gains from the sale of branch offices in 1995 and
1994 and related income taxes and profit sharing expense, the Company's
income from continuing operations amounted to $30.3 million and $24.0
million during 1995 and 1994, respectively.
7
<PAGE>
(2) Balance sheet data at December 31, 1993 reflects the merger of Berkeley
Federal Savings Bank ("Old Berkeley") into the Bank on June 3, 1993, upon
which the Bank changed its name to "Berkeley Federal Bank & Trust FSB," and
operations data for the year ended December 31, 1993 reflects the operations
of Old Berkeley from the date of merger. This transaction was accounted for
using the purchase method of accounting.
(3) The provision for loan losses consists primarily of $9.5 million related to
the Company's discounted loan portfolio, which was provided pursuant to a
change in methodology which was adopted January 1, 1996 as a result of
discussions between the Bank and the Office of Thrift Supervision ("OTS")
following an examination of the Bank by the OTS. As a result of these
discussions, the Company also increased its provision for losses in fair
value on real estate owned by approximately $3.8 million during the six
months ended June 30, 1996. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-- Results of
Operations--Provision for Loan Losses" and "--Non-Interest Income."
(4) Represents a portion of the amounts paid to the Company in connection with
the Company's acquisition of certain mortgage-related securities which
generate taxable income in the first several years of the instrument's life
and tax losses of an equal amount thereafter, but have minimal or no cash
flows. Commencing in 1994, such amounts are deferred and recognized in
interest income on a level yield basis over the expected life of that
portion of the deferred tax asset which relates to tax residuals. See Note
19 to the Consolidated Financial Statements.
(5) Relates to the Company's 50% interest in a newly-formed company which
acquired discounted single-family residential loans from HUD in April 1996.
At June 30, 1996, the net discounted loans held by such company amounted to
$559.4 million. See "Business-- Investment in Joint Venture."
(6) The discounted loan portfolio consists of mortgage loans which were
non-performing or under-performing at the date of acquisition and purchased
at a discount. The loan portfolio and loans available for sale consist of
other loans which were originated or purchased by the Company for investment
or for potential sale, respectively. See "Business--Lending Activities" and
"--Discounted Loan Acquisition and Resolution Activities," respectively.
Data related to discounted loans does not include discounted loans held by
the above-referenced joint venture.
(7) Securities available for sale were carried at market value at June 30, 1996
and at December 31, 1995, 1994 and 1993, and such securities were carried at
amortized cost at December 31, 1992 and 1991. Loans available for sale are
carried at the lower of cost or market value.
(8) Real estate owned is primarily attributable to the Company's discounted
loan acquisition and resolution business.
(9) Reflects the Company's repurchase of 8,815,060 shares of Common Stock
during 1995 for an aggregate of $42.0 million.
(10) On a fully-diluted basis, book value per common share amounted to $6.27 at
June 30, 1996.
(11) Ratios for periods subsequent to 1992 are based on average daily balances
during the periods and ratios for 1991 and 1992 are based on month-end
balances during the periods. Ratios are annualized where appropriate.
(12) Exclusive of gains from the sale of branch offices in 1995 and 1994 and
related income taxes and profit sharing expense, (i) return on average
assets on income from continuing operations amounted to 2.00% and 1.40%
during 1995 and 1994, respectively, and (ii) return on average equity on
income from continuing operations amounted to 25.02% and 20.06% during 1995
and 1994, respectively.
(13) The efficiency ratio represents non-interest expense divided by the sum of
net interest income before provision for loan losses and non-interest
income. Non-interest income and non-interest expense for this purpose
exclude gains from the sale of branches and related profit-sharing expense,
respectively.
(14) The ratios of earnings to fixed charges were computed by dividing (x)
income from continuing operations before income taxes, extraordinary gains
and cumulative effect of a change in accounting principle plus fixed charges
by (y) fixed charges. Fixed charges represent total interest expense,
including and excluding interest on deposits, as applicable, as well as the
interest component of rental expense.
(15) Non-performing loans do not include loans in the Company's discounted loan
portfolio or loans available for sale.
8
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS, AS
WELL AS THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, BEFORE DECIDING TO
MAKE AN INVESTMENT IN SHARES OF COMMON STOCK. THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE SECURITIES ACT AND THE
EXCHANGE ACT. THE COMPANY'S RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED
IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF FACTORS DESCRIBED BELOW AND
ELSEWHERE IN THIS PROSPECTUS.
NO ASSURANCES AS TO CONSISTENCY OF EARNINGS OR FUTURE GROWTH; CHANGING NATURE OF
RISKS
GENERAL. The Company's corporate strategy emphasizes the identification,
development and management of specialized businesses which the Company believes
are not accurately evaluated and priced by the marketplace due to market,
economic and competitive conditions. This strategy can result in the entry into
or development of businesses and investment in assets which produce substantial
initial returns, which generally can be expected to decrease as markets become
more efficient in the evaluation and pricing of such businesses and assets. In
recent years these businesses have included the Company's discounted loan
acquisition and resolution business and investment in various types of
mortgage-related securities. The consistency of the operating results of certain
of the Company's businesses also can be significantly affected by inter-period
variations in the amount of assets acquired, as well as, in the case of the
Company's discounted loan acquisition activities, variations in the amount of
loan resolutions from period to period, particularly in the case of large
multi-family residential and commercial real estate loans. In addition, many of
the Company's businesses are relatively young and still evolving and involve
greater uncertainties and risks of loss than the activities traditionally
conducted by savings institutions. As a result, there can be no assurance that
there will not be significant inter-period variations in the profitability of
the Company's operations.
FLUCTUATIONS IN NON-INTEREST INCOME. In recent years the Company's
operating results have been significantly affected by certain non-recurring
items of non-interest income. In addition to $5.4 million and $62.6 million of
gains from sales of branch offices in 1995 and 1994, respectively, in recent
periods the Company has earned significant non-interest income from gains on
sales of interest-earning assets and real estate owned. Gains on sales of
interest-earning assets amounted to $9.6 million, $3.4 million, $7.0 million,
$5.7 million and $8.4 million during the six months ended June 30, 1996 and 1995
and the years ended December 31, 1995, 1994 and 1993, respectively, and gains on
the sale of real estate owned, which are a component of income (loss) on real
estate owned, net, amounted to $7.8 million, $9.1 million, $19.0 million $21.3
million and $2.5 million during the same respective periods. Gains on sales of
interest-earning assets and real estate owned generally are dependent on various
factors which are not within the control of the Company, including market and
economic conditions. As a result, there can be no assurance that the level of
gains on sales of interest-earning assets and real estate owned reported by the
Company in prior periods will be repeated in future periods or that there will
not be substantial inter-period variations in the results from such activities.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Non-Interest Income."
NO ASSURANCES OF EXPANSION. A substantial amount of the net proceeds from
the Notes Offering will be invested by the Company in the Bank to support future
expansion and growth of its discounted loan acquisition and resolution
activities and its lending activities. The Company also may use a significant
portion of the net proceeds retained by it for similar purposes. There can be no
assurance that the Bank or the Company will be able to increase these activities
in a manner which is consistent with management's business goals and objectives
or otherwise successfully expand their operations.
CHANGING NATURE OF RISKS. The nature of the risks associated with the
Company's operations have changed and are likely to continue to change over time
due to a corporate strategy which emphasizes the entry into and exit from
business lines based on market, economic or competitive conditions. As a result,
there can be no assurance that the risks associated with an investment in the
Company described herein will not materially change in the future or that there
will not be additional risks associated with the Company's future operations not
described herein.
9
<PAGE>
RISKS RELATED TO NON-TRADITIONAL OPERATING ACTIVITIES
As discussed below, the Company is engaged in a variety of businesses which
generally involve more uncertainties and risks than the single-family
residential lending activities historically emphasized by savings institutions.
In addition, many of the Company's business activities, including its lending
activities, are conducted on a nationwide basis, which reduces the risks
associated with concentration in any one particular market area but involves
other risks because, among other things, the Company may not be as familiar with
market conditions and other relevant factors as it would be in the case of
activities which are conducted in the market areas in which its executive
offices and branch office are located.
DISCOUNTED LOAN ACQUISITION AND RESOLUTION ACTIVITIES. The Company's
lending activities include the acquisition and resolution of non-performing or
underperforming single-family (one to four units) residential loans,
multi-family (over four units) residential loans and commercial real estate
loans which are purchased at a discount. At June 30, 1996, the Company's
discounted loan portfolio amounted to $594.6 million (net of $226.2 million of
unaccreted discount and a $9.5 million allowance for loan losses) or 31.3% of
the Company's total assets and the $830.3 million gross principal amount of
discounted loans consisted of $262.5 million, $145.3 million, $421.1 million and
$1.4 million gross principal amount of single-family residential loans,
multi-family residential loans, commercial real estate loans and other loans,
respectively. In addition, at the same date the Company had a $63.4 million
investment in a joint venture that recently acquired a portfolio of discounted
single-family residential loans, which amounted to $559.4 million, net at June
30, 1996. Commencing in June 1991, the Company began purchasing at a discount
non-performing single-family residential loans from the Federal Deposit
Insurance Corporation ("FDIC") and the Resolution Trust Corporation ("RTC"),
which acquired such loans primarily as a result of the unprecedented number of
failed savings institutions and failed banks during the early 1990s, as well as
from private sector sellers. During the early 1990s, the Company benefited from
the availability of discounted single-family residential loans as a result of
the large number of failed and troubled financial institutions. Due to the
general improvement in the financial condition of the savings industry in recent
years (reflected in part by the RTC's cessation of operations) and the
increasingly competitive nature of the market for discounted single-family
residential loans, the Company expanded into the acquisition and resolution of
discounted non-performing and underperforming multi-family residential and
commercial real estate loans in mid-1994 and has developed various sources for
the acquisition of all types of discounted loans in the private sector (which
represent approximately 92.4% of the Company's total discounted loan portfolio
at June 30, 1996). Although the Company has been actively involved in the
acquisition and resolution of discounted non-performing or underperforming
single-family residential loans since mid-1991 and discounted multi-family
residential and commercial real estate loans since early 1994, this business
involves certain uncertainties and risks, including without limitation the risk
that the discount on the loans acquired by the Company may not be sufficient in
order for the Company to resolve the loans as profitably as in prior periods and
the risk that the Company may not be able to acquire the desired amount and type
of discounted loans in future periods. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Changes in Financial
Condition--Discounted Loan Portfolio," "Business--Discounted Loan Acquisition
and Resolution Activities" and "Business--Investment in Joint Venture."
MULTI-FAMILY RESIDENTIAL, COMMERCIAL REAL ESTATE AND CONSTRUCTION LENDING
ACTIVITIES. The Company's lending activities currently include nationwide loans
secured by existing commercial real estate, particularly hotels and office
buildings, and, to a lesser extent, existing multi-family residential real
estate. In addition, from time to time the Company originates loans for the
construction of multi-family residential real estate and land acquisition and
development loans. At June 30, 1996, multi-family residential, commercial real
estate and construction loans (including land acquisition and development loans)
available for sale and held for investment aggregated $265.4 million, net, or
14.0% of the Company's total assets. Multi-family residential, commercial real
estate and construction lending generally is considered to involve a higher
degree of risk than single-family residential lending due to a variety of
factors, including generally larger loan balances, the dependency on successful
completion or operation of the project for repayment, the difficulties in
estimating construction costs and loan terms which often do not require full
amortization of the loan over its
10
<PAGE>
term and, instead, provide for a balloon payment at stated maturity. There can
be no assurance that the Company's multi-family residential, commercial real
estate and construction lending activities will not be adversely affected by
these and the other risks related to such activities. See "Business--Lending
Activities."
NON-CONFORMING BORROWER AND REDUCED DOCUMENTATION LENDING ACTIVITIES. The
Company's lending activities also currently emphasize the origination or
purchase on a nationwide basis of single-family residential loans made to
borrowers who have substantial equity in the properties which secure the loans
but who, because of prior credit problems, the absence of a credit history or
other factors, are unable or unwilling to qualify as borrowers under federal
agency guidelines ("non-conforming borrowers"). At June 30, 1996, the Company's
loans to non-conforming borrowers aggregated $40.9 million or 2.2% of the
Company's total assets. These loans are offered pursuant to various programs,
including programs which provide for reduced or no documentation for verifying a
borrower's income and employment. Loans to non-conforming borrowers present a
higher level of risk of default than conforming loans because of the increased
potential for default by borrowers who may have had previous credit problems or
who do not have any credit history, and may not be as saleable as loans which
conform to the guidelines established by various federal agencies.
INVESTMENTS IN LOW-INCOME HOUSING TAX CREDIT INTERESTS. The Company invests
in low-income housing tax credit interests (generally limited partnerships) in
order to obtain federal income tax credits which are allocated pursuant to
Section 42 of the Code. At June 30, 1996, the Company's investments in such
interests amounted to $92.3 million or 4.9% of total assets. There are many
uncertainties and risks associated with an investment in low-income housing tax
credit interests, including the risks involved in the construction, lease-up and
operation of multi-family residential real estate, the investor's ability to
earn sufficient income to utilize the tax credits resulting from such
investments in accordance with the requirements of the Code and the possibility
of required recapture of previously-earned tax credits. In addition, there are
numerous tax risks associated with tax credits resulting from potential changes
to the Code. See "Business--Investment Activities--Investment in Low-Income
Housing Tax Credit Interests."
INVESTMENTS IN MORTGAGE-RELATED SECURITIES. From time to time the Company
invests in a variety of mortgage-related securities, such as senior and
subordinate regular interests and residual interests in collateralized mortgage
obligations ("CMOs"), including CMOs which have qualified as Real Estate
Mortgage Investment Conduits ("REMICs"). These investments include so-called
stripped mortgage-related securities, in which interest coupons may be stripped
from a mortgage security to create an interest-only ("IO") strip, where the
investor receives all of the interest cash flows and none of the principal, and
a principal-only ("PO") strip, where the investor receives all of the principal
cash flows and none of the interest. At June 30, 1996, the Company's
mortgage-related securities available for sale amounted to $263.2 million or
13.9% of the Company's total assets and included $106.8 million and $6.9 million
of IO strips and PO strips, respectively, all of which were either issued by the
Federal Home Loan Mortgage Corporation ("FHLMC") or the Federal National
Mortgage Association ("FNMA") or rated AAA by national rating agencies, as well
as $52.5 million of subordinate interests in mortgage-related securities. Some
mortgage-related securities, such as IO strips and PO strips, exhibit
considerably more price volatility than mortgages or ordinary mortgage
pass-through securities, due in part to the uncertain cash flows that result
from changes in the prepayment rates of the underlying mortgages. Other
mortgage-related securities, such as subordinated interests, also involve
substantially more credit risk than other securities. The Company has sought to
offset the risk of changing interest rate environments on certain of its
mortgage-related securities by selling U.S. Treasury futures contracts and other
hedging techniques, and believes that the resulting interest-rate sensitivity
profile compliments the Company's overall exposure to changes in interest rates.
See "--Economic Conditions" below. Although generally intended to reduce the
effects of changing interest rate environments on the Company, investments in
certain mortgage-related securities and hedging transactions could cause the
Company to recognize losses depending on the terms of the instrument and the
interest rate environment. See "Business--Investment Activities."
11
<PAGE>
RISKS RELATED TO REAL ESTATE OWNED
At June 30, 1996, the Company's real estate owned, net amounted to $133.6
million or 7.0% of total assets and consisted almost entirely of single-family
residential real estate and multi-family residential and commercial real estate
acquired by foreclosure or deed-in-lieu thereof on loans in the Company's
discounted loan portfolio. The growth in the Company's real estate owned in
recent years reflects the expansion of the Company's discounted loan acquisition
and resolution activities. Real estate owned properties generally are
non-earning assets, although multi-family residential and commercial real estate
owned may provide some operating income to the Company depending on the
circumstances. Moreover, the value of real estate owned properties can be
significantly affected by the economies and markets for real estate in which
they are located and require the establishment of provisions for losses to
ensure that they are carried at the lower of cost or fair value, less estimated
costs to dispose of the properties. Real estate owned also require increased
allocation of resources and expense to the management and work out of the asset,
which also can adversely affect operations. Although the Company's real estate
owned, net decreased by $33.0 million or 19.8% during the six months ended June
30, 1996, there can be no assurance that the amount of the Company's real estate
owned will not increase in the future as a result of the Company's discounted
loan acquisition and resolution activities and the Company's single-family
residential, multi-family residential, commercial real estate and construction
lending activities. In addition, there can be no assurance that in the future
the Company's real estate owned will not have environmental problems which could
materially adversely affect the Company's financial condition or operations. See
"Business--Asset Quality--Real Estate Owned."
RISK OF FUTURE ADJUSTMENTS TO ALLOWANCES FOR LOSSES
The Company believes that it has established adequate allowances for losses
for each of its loan portfolio and discounted loan portfolio in accordance with
generally accepted accounting principles. Future additions to these allowances,
in the form of provisions for losses on loans and discounted loans, may be
necessary, however, due to changes in economic conditions, increases in loans
and discounted loans and the performance of the Company's loan and discounted
loan portfolios. In addition, the OTS, as an integral part of its examination
process, periodically reviews the Company's allowances for losses and the
carrying value of its assets. During the six months ended June 30, 1996, the
Company established $9.5 million of provisions for losses on discounted loans,
which were established pursuant to a change in methodology which was adopted
beginning in 1996 as a result of discussions between the Bank and the OTS
following an examination of the Bank (which also resulted in an increase in the
Company's provision for losses in fair value on real estate owned by
approximately $3.8 million during this period). There can be no assurance that
the OTS, which continues to evaluate the adequacy of the Company's allowances
for losses, will not request the Company to further increase its allowances for
losses on loans and discounted loans or adjust the carrying value of its real
estate owned or other assets. Based on the types of lending activities currently
emphasized by the Company and its recent decision to maintain an allowance for
losses in connection with its discounted loan portfolio, the Company anticipates
that in the future it will establish provisions for losses on its loan
portfolios on a quarterly basis. Increases in the Company's provisions for
losses on loans would adversely affect the Company's results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations."
RISK OF FUTURE ADJUSTMENTS TO CARRYING VALUE OF MORTGAGE SERVICING RIGHTS
From time to time the Company acquires rights to service mortgage loans for
other investors in order to increase its non-interest income. In addition,
mortgage servicing rights can provide a hedge against increases in interest
rates because such assets generally increase in market value as interest rates
increase, which can offset decreases in the market values of certain
interest-earning assets, such as fixed-rate loans and securities, which decline
in value in an increasing interest rate environment. In accordance with
Statement of Financial Accounting Standards ("SFAS") No. 122, "Accounting for
Mortgage Servicing Rights," which was adopted by the Company on January 1, 1996,
the Company amortizes mortgage servicing rights on an accelerated method over
the estimated weighted average life of the loans and periodically evaluates its
capitalized mortgage servicing rights for impairment based on the fair value of
those rights, which is recognized through a valuation allowance. Mortgage
servicing rights generally are adversely affected by accelerated prepayments of
loans resulting from decreasing interest rates, which affect the estimated
12
<PAGE>
average life of the loans serviced for others. During the six months ended June
30, 1996, accelerated prepayments of loans resulted in a $928,000 valuation
adjustment to the Company's mortgage servicing rights, which amounted to $2.7
million, net, at the end of such period. There can be no assurance that loan
prepayments, as a result of decreases in interest rates or otherwise, will not
adversely affect the carrying value of the Company's existing mortgage servicing
rights or mortgage servicing rights which may be acquired by it in the future.
RISKS RELATED TO RELIANCE ON BROKERED AND OTHER WHOLESALE DEPOSITS
The Company currently utilizes as a primary source of funds certificates of
deposit obtained through national investment banking firms which obtain funds
from their customers for deposit with the Company ("brokered deposits") and, to
a lesser extent, certificates of deposit obtained from customers of regional and
local investment banking firms and direct solicitation efforts by the Company of
institutional investors and high net worth individuals. At June 30, 1996,
certificates of deposit obtained through national investment banking firms which
solicit deposits for the Company from their customers amounted to $1.02 billion
or 67.9% of total deposits, certificates of deposit obtained through regional
and local investment banking firms amounted to $267.7 million or 17.8% of total
deposits and certificates of deposits obtained from the Company's direct
solicitation of institutional investors and high net worth individuals amounted
to $109.2 million or 7.3% of total deposits. The Company believes that the
effective cost of brokered and other wholesale deposits, as well as other
non-branch dependent sources of funds, such as securities sold under agreements
to repurchase ("reverse repurchase agreements") and advances from the Federal
Home Loan Bank ("FHLB") of New York, generally is more attractive to the Company
than deposits obtained through branch offices after the general and
administrative costs associated with operating a branch office network are taken
into account. However, such funding sources, when compared to retail deposits
attracted through a branch network, are generally more sensitive to changes in
interest rates and volatility in the capital markets and are more likely to be
compared by the investor to competing investments. In addition, such funding
sources may be more sensitive to significant changes in the financial condition
of the Company. There are also regulatory limitations on an insured
institution's ability to solicit and obtain brokered deposits in certain
circumstances, which currently are not applicable to the Bank because of its
status as a "well capitalized" institution under applicable laws and
regulations. See "Regulation--The Bank--Brokered Deposits." As a result of the
Company's reliance on brokered and other wholesale deposits, significant changes
in the prevailing interest rate environment, in the availability of alternative
investments for individual and institutional investors or in the Company's
financial condition, among other factors, could affect the Company's liquidity
and results of operations much more significantly than might be the case with an
institution that obtained a greater portion of its funds from retail or core
deposits attracted through a branch network.
RISKS RELATED TO CHANGING ECONOMIC CONDITIONS
GENERAL. The success of the Company is dependent to a certain extent upon
the general economic conditions in the geographic areas in which it conducts
substantial business activities. Adverse changes in national economic conditions
or in the economic conditions of regions in which the Company conducts
substantial business likely would impair the ability of the Company to collect
loans and would otherwise have an adverse effect on its business, including the
demand for new loans, the ability of customers to repay loans and the value of
both the collateral pledged to the Company to secure its loans and its real
estate owned. Moreover, earthquakes and other natural disasters could have
similar effects. Although such disasters have not significantly adversely
affected the Company to date, the availability of insurance for such disasters
in California, in which the Company conducts substantial business activities, is
severely limited. At June 30, 1996, the Company had loans with an unpaid
principal balance aggregating $448.5 million (including loans available for
sale) secured by properties located in California and $73.2 million of the
Company's real estate owned was located in California.
EFFECTS OF CHANGES IN INTEREST RATES. The Company's operating results
depend to a large extent on its net interest income, which is the difference
between the interest income earned on interest-earning assets and the interest
expense incurred in connection with its interest-bearing liabilities. Changes in
the general level of interest rates can affect the Company's net interest income
by affecting the spread between the
13
<PAGE>
Company's interest-earning assets and interest-bearing liabilities, as well as,
among other things, the ability of the Company to originate loans; the value of
the Company's interest-earning assets and its ability to
realize gains from the sale of such assets; the average life of the Company's
interest-earning assets; the value of the Company's mortgage servicing rights;
and the Company's ability to obtain deposits in competition with other available
investment alternatives. Interest rates are highly sensitive to many factors,
including governmental monetary policies, domestic and international economic
and political conditions and other factors beyond the control of the Company.
The Company actively monitors its assets and liabilities and employs a hedging
strategy which seeks to limit the effects of changes in interest rates on its
operations. Although management believes that the maturities of the Company's
assets currently are well balanced in relation to its liabilities (which
involves various estimates as to how changes in the general level of interest
rates will impact its assets and liabilities), there can be no assurance that
the profitability of the Company would not be adversely affected during any
period of changes in interest rates. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Asset and Liability
Management" and Note 18 to the Consolidated Financial Statements.
RISKS RELATED TO RECAPITALIZATION OF SAIF
The deposits of the Bank are insured by the Savings Association Insurance
Fund ("SAIF") administered by the FDIC, which, due to the large number of
savings institutions which failed in the late 1980s and early 1990s, has been
unable to attain a statutorily-required reserve ratio of 1.25% of insured
deposits. The Balanced Budget Act of 1995 provided that all SAIF member
institutions would pay a special one-time assessment on their deposits as of
March 31, 1995 in an amount which in the aggregate would be sufficient to bring
the reserve ratio in the SAIF to the required level, as well as for an eventual
merger of the SAIF and the Bank Insurance Fund ("BIF") administered by the FDIC,
which insures the deposits of commercial banks and has attained the reserve
ratio required by law. Based on the level of reserves of the SAIF at June 30,
1996, the FDIC recently estimated that the amount of the special assessment
required to recapitalize the SAIF is approximately 68 basis points of
SAIF-assessable deposits at March 31, 1995. Although the Balanced Budget Act of
1995 was vetoed by the President of the United States in December 1995 for
reasons which were unrelated to the recapitalization of SAIF, legislative
proposals containing similar provisions to recapitalize the SAIF continue to be
made. Based on the Bank's deposits as of March 31, 1995, a one-time special
assessment of 68 basis points would result in the Bank incurring a pre-tax
charge of approximately $7.4 million ($4.7 million on an after-tax basis), which
management believes would not affect the Bank's status as a "well-capitalized"
institution under applicable laws and regulations. See "Regulation--The
Bank--Regulatory Capital Requirements." Management of the Company currently is
unable to predict whether there will be legislation to recapitalize the SAIF
and, if so, whether and to what extent the Bank may be assessed in order to
recapitalize the SAIF.
Unless and until the SAIF is recapitalized and the insurance premiums of
SAIF-insured institutions are reduced to levels which are comparable to those
currently being assessed members of the BIF, SAIF-insured institutions will have
a significant competitive disadvantage to BIF-insured institutions with respect
to the pricing of loans and deposits and the ability to achieve lower operating
costs. In order to reduce this competitive advantage, a number of SAIF-insured
institutions have established or are seeking to establish affiliated BIF-insured
institutions, which could attract deposits formerly maintained at the related
SAIF-insured institution, thus reducing the institutions' overall effective rate
for deposit insurance. The transfer of insured deposits from SAIF-insured
institutions to BIF-insured institutions could materially reduce the deposits at
SAIF-insured institutions, which could reduce the insurance assessments obtained
by the SAIF and, thus, adversely affect the ability of the SAIF to resolve
troubled savings institutions and to meet its other obligations. Such reduction
in the assessable deposit base of SAIF could result in an increase in the amount
of any one-time assessment of SAIF-insured institutions which may be imposed in
order to recapitalize the SAIF. See "Regulation--The Bank--Insurance of
Accounts."
POSSIBLE ELIMINATION OF THE THRIFT CHARTER AND RECENT ELIMINATION OF RELATED TAX
BENEFITS
In recent periods there have been various legislative proposals in the U.S.
Congress to eliminate the thrift charter. If enacted, such legislation would
require the Bank, as a federally-chartered savings bank, to convert to a bank
charter, which likely would be regulated by the Office of the Comptroller of the
Currency
14
<PAGE>
("OCC") and not the OTS, which would go out of existence, and likely would
require the Company to register as a bank holding company under the Bank Holding
Company Act of 1956, as amended ("BHCA") and be subject to regulation by the
Board of Governors of the Federal Reserve System (the "Federal Reserve Board").
Management currently does not believe that such regulation would have a material
adverse effect on the Company or the Bank, although there can be no assurance
that this would be the case. See "Regulation."
In anticipation of the possible elimination of the thrift charter through
future legislation, the U.S. Congress recently enacted legislation which
provides for the repeal of a provision of the Code which permits thrift
institutions, such as the Bank, which meet certain definitional tests to
establish a tax reserve for bad debts and to make annual additions thereto based
on a percentage of net income rather than actual loss experience. See
"Taxation--Federal." It is anticipated that this legislation will not have a
material adverse effect on the Company's financial condition or operations.
REGULATION
Each of the Company, as a registered savings and loan holding company, and
the Bank, as a federally-chartered savings association, is subject to extensive
governmental supervision and regulation, which is intended primarily for the
protection of depositors. In addition, each of the Company and the Bank is
subject to changes in federal and state laws, including changes in tax laws
which could materially affect the real estate industry, such as repeal of the
federal mortgage interest deduction and the federal affordable housing tax
credit program, as well as changes in regulations, governmental policies and
accounting principles. Recently enacted, proposed and future legislation and
regulations have had and will continue to have significant impact on the
financial services industry. Some of the legislative and regulatory changes may
benefit the Company and the Bank; other changes, however, may increase their
costs of doing business and assist competitors of the Company and the Bank.
COMPETITION
Although there currently is no single competitor which competes directly
with the Company in all aspects of its business activities, the businesses in
which the Company is engaged generally are highly competitive. The acquisition
of discounted loans is particularly competitive, as acquisitions of such loans
are often based on competitive bidding. In addition, competitors of the Company
may seek to establish relationships with the correspondent mortgage banking
firms which currently are a primary source of the Company's loans to
non-conforming borrowers and, from time to time, other loans, and which
generally are not obligated to continue to do business with the Company. The
Company also encounters significant competition in connection with its other
lending activities, its investment activities and in its deposit-gathering
activities. Many of the Company's competitors are significantly larger than the
Company and have access to greater capital and other resources. In addition,
many of the Company's competitors are not subject to the same extensive federal
regulation that govern federally-insured institutions such as the Bank and their
holding companies. As a result, many of the Company's competitors have
advantages over the Company in conducting certain businesses and providing
certain services.
IMPORTANCE OF THE CHIEF EXECUTIVE OFFICER
William C. Erbey, Chairman, President and Chief Executive Officer of the
Company, has had, and will continue to have, a significant role in the
development and management of the Company's business. The loss of his services
could have an adverse effect on the Company. The Company currently does not
maintain key man life insurance relating to Mr. Erbey or any of its other
officers. See "Business--Management."
CONTROL OF CURRENT STOCKHOLDERS
After giving effect to the Common Stock Offering (assuming no exercise of
the Common Stock underwriters' over-allotment option), the Company's directors
and executive officers and their affiliates will in the aggregate beneficially
own or control 63.2% of the outstanding Common Stock, including 36.8% owned or
controlled by William C. Erbey, Chairman, President and Chief Executive Officer
of the Company, and 19.4% owned or controlled by Barry N. Wish, Chairman,
Emeritus, of the Company (and one of the selling stockholders in the Common
Stock Offering). As a result, these stockholders, acting together, would
15
<PAGE>
be able to effectively control virtually all matters requiring approval by the
stockholders of the Company, including amendment of the Company's Articles of
Incorporation, the approval of mergers or similar transactions and the election
of all directors. In addition, Messrs. Erbey and Wish are two of the four
current directors of the Company. See "Management" and "Beneficial Ownership of
Common Stock."
LIMITED SOURCES FOR PAYMENTS ON NOTES AND DIVIDENDS ON COMMON STOCK
As a holding company, the ability of the Company to make payments of
interest and principal on the Notes and to pay dividends on the Common Stock
will depend primarily on the receipt of dividends or other distributions from
the Bank, as well as any cash reserves and other liquid assets held by the
Company and any proceeds from any subsequent securities offering or bank
financing. There are various regulatory restrictions on the ability of the Bank
to pay dividends or make other distributions to the Company. See "Regulation--
The Bank--Restrictions on Capital Distributions" and "--Affiliate Transactions."
In addition, there are certain contractual restrictions on the Bank's ability to
pay dividends set forth in the Indenture, dated as of June 12, 1995, between the
Bank and the Bank of New York, as trustee, relating to the Bank's issuance of
$100 million of 12% Subordinated Debentures due 2005 (the "Debentures") in June
1995.
ABSENCE OF A PRIOR MARKET FOR THE COMMON STOCK
Prior to the Common Stock Offering, there has been no public market for the
Common Stock. The Company has received conditional approval for quotation of the
Common Stock on the Nasdaq National Market under the symbol "OCWN." Such
approval is subject to the Company's compliance with certain requirements of the
NASD, including a requirement that there be at least two market makers for the
Common Stock and at least 400 stockholders of record. Although the Company will
use its best efforts to encourage and assist market makers in establishing and
maintaining a market for the Common Stock in the over-the-counter market, there
can be no assurance that there will be two or more market makers for the Common
Stock, or that the Company will be able to comply with the number of
stockholders and other requirements of the NASD for quotation of the Common
Stock on the Nasdaq National Market. Moreover, even if such requirements are
met, there can be no assurance that an established and liquid trading market
will develop or that, if developed, it will be sustained. The initial public
offering price of the Common Stock offered in the Common Stock Offering will be
determined by negotiations among the Company, the Selling Stockholders and the
Underwriters of the Common Stock Offering and may not be indicative of the
prices at which the Common Stock will trade after the offering. See
"Underwriting." Moreover, there may be significant volatility in the market
price for the Common Stock after the Common Stock Offering. Quarterly operating
results of the Company, changes in conditions in the economy or the financial
services industry or other developments affecting the Company could cause the
market price of the Common Stock to fluctuate substantially.
SHARES AVAILABLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public market
following the Common Stock Offering, including shares issued upon exercise of
options, as discussed below, could adversely affect the market price of the
Common Stock. As of the date hereof, there were 26,741,100 shares of Common
Stock outstanding held by 86 stockholders. The number of outstanding shares of
Common Stock will not be affected by the Common Stock Offering as all shares
offered hereby are outstanding shares held by the Selling Stockholders. The
2,000,000 shares of Common Stock offered on behalf of the Selling Stockholders
(plus up to 300,000 shares which may be sold pursuant to the Common Stock
underwriters' overallotment option) will be freely transferable without
restriction or further registration under the Securities Act. All other
outstanding shares of Common Stock will be "restricted securities" as that term
is defined in Rule 144 promulgated under the Securities Act and may not be sold
except pursuant to the registration requirements of the Securities Act or
pursuant to an applicable exemption therefrom, including pursuant to Rule 144.
Management of the Company believes that approximately 6,821,920 of these shares
of Common Stock may be eligible for resale pursuant to Rule 144 without
limitation. The Company, the Selling Stockholders, certain other stockholders of
the Company and the directors and executive officers of the Company (who
collectively own all outstanding shares of Common Stock prior to consummation of
the Common Stock Offering) have generally agreed not to offer, sell or otherwise
dispose of any shares of Common Stock for a period of 120 days (or 365 days in
the case of Messrs. Erbey and Wish) after the date of this Prospectus
16
<PAGE>
without the prior written consent of Friedman, Billings, Ramsey & Co., Inc. on
behalf of the Common Stock underwriters. After such restricted periods, there
will be no restrictions on the sale of these shares by such directors and
officers of the Company (other than those imposed by Rule 144) or on the
issuance of additional shares of Common Stock by the Company. After the closing
of the Common Stock Offering, the Company may file a Registration Statement on
Form S-8 under the Securities Act to register the issuance of approximately
6,388,550 shares of Common Stock currently authorized for issuance under the
Company's 1991 Non-Qualified Stock Option Plan, as amended (the "Stock Option
Plan") and 250,000 shares under the Company's 1996 Stock Plan for Directors (the
"Directors Stock Plan"). See "Management--Stock Option Plan" and "--Directors
Stock Plan." As of the date hereof, 282,340 shares of Common Stock were subject
to outstanding options under the Stock Option Plan at an average exercise price
of $5.64 per share. After the above-mentioned restricted periods, shares issued
upon the exercise of options after the effective date of such Registration
Statement will be eligible for sale in the public market, subject in the case of
shares held by affiliates of the Company to the volume and certain other
limitations of Rule 144. See "Shares Available for Future Sale" and
"Underwriting."
THE COMPANY
The Company is a financial services holding company which conducts business
primarily through the Bank and subsidiaries of the Bank. Unless the context
otherwise requires, the "Company" refers to the Company and its subsidiaries on
a consolidated basis.
The Company is a Florida corporation which was organized in February 1988 in
connection with its acquisition of the Bank. During the early 1990s, the Company
sought to take advantage of the general decline in asset quality of financial
institutions in many areas of the country and the large number of failed savings
institutions during this period by establishing its discounted loan acquisition
and resolution program. This program commenced with the acquisition of
discounted single-family residential loans for resolution in mid-1991 and was
expanded to cover the acquisition and resolution of discounted multi-family
residential and commercial real estate loans in 1994.
During the early 1990s, the Company also acquired assets and liabilities of
three failed savings institutions and merged Old Berkeley, a troubled financial
institution, into the Bank. The Company subsequently sold substantially all of
the assets and liabilities acquired in connection with these acquisitions at
substantial gains.
The Company is a registered savings and loan holding company subject to
regulation by the OTS. The Bank is subject to regulation by the OTS, as its
chartering authority, and by the FDIC as a result of its membership in the SAIF,
which insures the Bank's deposits up to the maximum extent permitted by law. The
Bank also is subject to certain regulation by the Federal Reserve Board and
currently is a member of the FHLB of New York, one of the 12 regional banks
which comprise the FHLB System.
The Company's executive offices are located at 1675 Palm Beach Lakes
Boulevard, West Palm Beach, Florida 33401, and the telephone number of its
executive offices is (561) 681-8000.
17
<PAGE>
USE OF PROCEEDS
Net proceeds from the Notes Offering currently are estimated to be
approximately $119.6 million, after deducting the underwriting discount and
estimated offering expenses payable by the Company (and assuming no excercise of
the Note underwriter's over-allotment option). The Company will not receive any
of the proceeds from the Common Stock Offering. See "Selling Stockholders."
The Company plans to contribute approximately $50 million of the net
proceeds from the Notes Offering to the capital of the Bank to support future
growth. Such proceeds will be available for use by the Bank for general
corporate purposes, including without limitation acquisitions of discounted and
other loans. The net proceeds from the Notes Offering retained by the Company
will be available for general corporate purposes. Although the Company does not
have any specific plans for the investment of the net proceeds to be retained by
it at this time, such net proceeds will give the Company increased flexibility
in conducting the businesses in which it is engaged, particularly the
acquisition and resolution of discounted loans and the acquisition of
single-family residential loans to non-conforming borrowers.
The net proceeds from the Notes Offering available to the Company and the
Bank also could be used to acquire other businesses, such as a financial
institution or a mortgage banking company, which the Company evaluates from time
to time as a means of enhancing its ability to acquire loans and otherwise
expand and enhance its operations. Currently, there are no agreements,
arrangements or understandings with regard to any such transaction.
DIVIDEND POLICY
The Company has no current intention to pay cash dividends on the Common
Stock following the Common Stock Offering. In the future, the timing and amount
of dividends will be determined by the Board of Directors of the Company and
will depend, among other factors, upon the Company's earnings, financial
condition, cash requirements, the capital requirements of the Bank and other
subsidiaries and investment opportunities at the time any such payment is
considered. In addition, the Indenture will contain certain limitations on the
payment of dividends by the Company. See "Description of Notes."
As a holding company, the payment of any dividends by the Company will be
primarily dependent on dividends and other payments received by the Company from
its subsidiaries, including the Bank, which is subject to various regulatory and
contractual restrictions on the payment of dividends and other payments to the
Company. See "Risk Factors--Limited Sources for Payments on Notes and Dividends
on Common Stock."
18
<PAGE>
CAPITALIZATION
The following table presents the consolidated capitalization of the Company
and the regulatory capital ratios of the Bank at June 30, 1996, and as adjusted
to give effect to the issuance of the Notes offered in the Notes Offering
(assuming no exercise of the Note underwriter's over-allotment option) and the
contribution by the Company to the capital of the Bank of a portion of the
estimated net proceeds therefrom, respectively, as set forth under "Use of
Proceeds."
<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------------
ACTUAL AS ADJUSTED
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deposits............................................................................ $ 1,502,175 $ 1,502,175
------------ ------------
------------ ------------
Borrowings and other interest-bearing obligations:
The Company:
11 7/8% Notes due 2003.......................................................... $ -- $ 125,000
Short-term notes................................................................ 7,365 7,365
The Bank:
FHLB advances................................................................... 70,399 70,399
Subordinated debentures......................................................... 100,000 100,000
Other subsidiaries:
Hotel mortgages payable......................................................... 8,338 8,338
------------ ------------
Total borrowings and other interest-bearing obligations....................... $ 186,102 $ 311,102
------------ ------------
------------ ------------
Stockholders' equity:
Preferred Stock, $0.01 par value: 20,000,000 shares authorized; none
outstanding...................................................................... $ -- $ --
Common Stock, $0.01 par value: 200,000,000 shares authorized; 23,812,900 shares
outstanding(1)(2)................................................................ 238 238
Additional paid-in capital........................................................ 10,275 10,275
Retained earnings................................................................. 145,301 145,301
Unrealized loss on securities available for sale, net of taxes.................... (1,076) (1,076)
------------ ------------
Total stockholders' equity.................................................... $ 154,738(2) $ 154,738(2)
------------ ------------
------------ ------------
Regulatory capital ratios of the Bank(3):
Tangible capital.................................................................. 6.74% 8.92%
Core (leverage) capital........................................................... 6.74 8.92
Risk-based capital................................................................ 13.61 15.93
</TABLE>
- ------------------------
(1) Does not include 6,388,550 additional shares of Common Stock reserved for
issuance as of the date hereof upon the exercise of options granted or which
may be granted pursuant to the Company's Stock Option Plan. See
"Management--Stock Option Plan."
(2) Does not reflect 2,928,200 shares of Common Stock issued upon the exercise
of stock options subsequent to June 30, 1996, which increased total
stockholders' equity by $6.4 million, net. Inclusive of the exercise of such
stock options, total stockholders' equity, as adjusted, would amount to
$161.1 million. See "Management--Stock Option Plan" and "--Transactions with
Affiliates."
(3) The calculations assume that $50 million of the estimated net proceeds from
the Notes Offering is contributed by the Company to the capital of the Bank.
The calculation of the risk-based regulatory capital ratio, as adjusted,
assumes that 25% of the estimated net proceeds from the Notes Offering which
are contributed to the capital of the Bank by the Company are invested in
loans with a risk-weight of 50%, that the remainder of such proceeds are
invested in loans with a risk weight of 100% and that such net proceeds had
been received and so applied at June 30, 1996.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE COMPANY'S CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS AND CAPITAL RESOURCES AND LIQUIDITY SHOULD BE READ IN
CONJUNCTION WITH SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA AND THE
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE HEREIN.
PROSPECTIVE INVESTORS ARE URGED TO CAREFULLY CONSIDER THIS RELATED INFORMATION
IN CONNECTION WITH A REVIEW OF THE FOLLOWING DISCUSSION.
RESULTS OF OPERATIONS
GENERAL. In recent years, the Company has emphasized discounted loan
acquisition and resolution activities and a variety of other mortgage lending
activities, which generally reflect the Company's opportunistic approach to new
business lines which offer the potential for significant returns. As a result of
the Company's business strategy, the average balance of the Company's discounted
loan portfolio increased from $193.7 million or 16.8% of total average assets
during 1993 to $483.2 million or 31.8% of total average assets during 1995 and
to $616.4 million or 32.0% of total average assets during the six months ended
June 30, 1996, and the average balance of the Company's other loans, including
loans available for sale, increased from $119.6 million or 10.4% of total
average assets to $297.9 million or 19.6% of total average assets and to $539.3
million or 28.0% of total average assets during the same respective periods. The
growth in the Company's lending activities, particularly its discounted loan
acquisition and resolution activities, has substantially contributed to the
Company's profitability in recent periods.
As a result of the historical and expected future growth in the discounted
loan portfolio, particularly in the commercial component, and as requested by
the OTS, the Company modified its methodology for valuing discounted loans in
the first quarter of 1996. This methodology resulted in provisions for losses
which modified the Company's practice of adjusting discounted loans to the lower
of the recorded investment or net present value of expected cash flow discounted
at the effective yield through direct charges to interest income. The Company
established an aggregate of $9.5 million of provisions for losses on discounted
loans during the first half of 1996 pursuant to this change in methodology.
During this period, the Company also increased its provision for losses in fair
value on real estate owned by $3.8 million as a result of discussions between
the Bank and the OTS following an examination of the Bank.
The Company's operating results in recent periods also have been
significantly affected by the acquisition of Old Berkeley in mid-1993 and the
effects of the sale of branch offices at the end of 1994 and 1995, which
resulted in $62.6 million and $5.4 million of gains (excluding related income
taxes and profit sharing expense) during these respective periods. As a result
of these sales, the Company's average assets decreased during 1995 and the
Company's principal source of deposits is brokered and other wholesale deposits.
The Company's operating results in recent periods also have been affected by
losses from discontinued operations, which, net of applicable tax effect,
amounted to $3.1 million, $7.7 million, $4.5 million and $2.3 million during the
six months ended June 30, 1995 and the years ended December 31, 1995, 1994 and
1993, respectively.
The Company's income from continuing operations amounted to $15.0 million or
$0.57 per share and $11.5 million or $0.39 per share during the six months ended
June 30, 1996 and 1995, respectively. Exclusive of gains from the sale of branch
offices and related profit sharing expense, the Company's income from continuing
operations amounted to $30.3 million, $24.0 million and $27.3 million during
1995, 1994 and 1993, respectively. These amounts represented returns on average
assets of 1.56% and 1.71% during the six months ended June 30, 1996 and 1995,
respectively, and 2.00%, 1.40% and 2.37% during 1995, 1994 and 1993,
respectively, and returns on average equity of 20.67% and 16.43% during the six
months ended June 30, 1996 and 1995, respectively, and 25.02%, 20.06% and 27.89%
during 1995, 1994 and 1993, respectively.
NET INTEREST INCOME. The operations of the Company are substantially
dependent on its net interest income, which is the difference between the
interest income received from its interest-earning assets and the interest
expense paid on its interest-bearing liabilities. Net interest income is
determined by an institution's net interest spread (i.e., the difference between
the yield earned on its interest-earning assets and the rates paid on its
interest-bearing liabilities), the relative amount of interest-earning assets
and interest-bearing liabilities and the degree of mismatch in the maturity and
repricing characteristics of its interest-earning assets and interest-bearing
liabilities.
20
<PAGE>
The following tables set forth, for the periods indicated, information
regarding the total amount of income from interest-earning assets and the
resultant average yields, the interest expense associated with interest-bearing
liabilities, expressed in dollars and rates, and the net interest spread and net
interest margin. Information is based on daily balances during the indicated
periods.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------------
1996 1995
--------------------------------------- ----------------------
AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE(1) BALANCE INTEREST
--------- ----------- --------------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
AVERAGE ASSETS:
Federal funds sold and repurchase agreements.......... $ 72,875 $ 2,098 5.76% $ 61,108 $ 1,748
Securities available for sale(2)...................... 299,487 14,064 9.39 169,639 6,943
Loans available for sale(3)........................... 240,009 11,484 9.57 142,069 7,154
Mortgage-related securities held for investment....... -- -- -- 99,295 2,342
Loan portfolio(3)..................................... 299,243 17,773 11.88 77,303 3,944
Discounted loan portfolio............................. 616,350 52,058 16.89 460,741 36,474
Investment securities and other(4).................... 44,457 1,980 8.91 33,369 1,265
--------- ----------- --------- -----------
Total interest-earning assets, interest income...... 1,572,421 99,457 12.65 1,043,524 59,870
----------- -----------
Non-interest earning cash............................. 6,549 23,767
Allowance for loan losses............................. (7,307) (1,196)
Investments in low-income housing tax credit
interests............................................ 94,825 60,113
Other assets(2)....................................... 258,213 217,909
--------- ---------
Total assets........................................ $1,924,701 $1,344,117
--------- ---------
--------- ---------
AVERAGE LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing demand deposits...................... $ 23,668 360 3.04 $ 49,722 477
Savings deposits...................................... 3,434 40 2.33 21,975 255
Certificates of deposit............................... 1,450,536 44,955 6.20 1,000,383 31,058
--------- ----------- --------- -----------
Total interest-bearing deposits..................... 1,477,638 45,355 6.14 1,072,080 31,790
Reverse repurchase agreements......................... 23,793 685 5.76 6,680 199
Securities sold but not yet purchased................. -- -- -- 18,834 638
FHLB advances......................................... 70,399 2,032 5.77 5,399 257
Subordinated debentures and other interest-bearing
obligations.......................................... 123,726 6,964 11.26 31,858 1,796
--------- ----------- --------- -----------
Total interest-bearing liabilities, interest
expense............................................ 1,695,556 55,036 6.49 1,134,851 34,680
----------- -----------
Non-interest bearing deposits......................... 4,039 17,077
Escrow deposits....................................... 38,773 10,178
Other liabilities(2).................................. 40,934 42,409
--------- ---------
Total liabilities................................... 1,779,302 1,204,515
Stockholders' equity(2)............................... 145,399 139,602
--------- ---------
Total liabilities and stockholders' equity.......... $1,924,701 $1,344,117
--------- ---------
--------- ---------
Net interest income................................... $ 44,421 $ 25,190
----------- -----------
----------- -----------
Net interest spread................................... 6.16%
-----
-----
Net interest margin................................... 5.65%
-----
-----
Ratio of interest-earning assets to interest-bearing
liabilities.......................................... 93% 92%
--------- ---------
--------- ---------
<CAPTION>
AVERAGE
YIELD/RATE(1)
---------------
<S> <C>
AVERAGE ASSETS:
Federal funds sold and repurchase agreements.......... 5.72%
Securities available for sale(2)...................... 8.19
Loans available for sale(3)........................... 10.07
Mortgage-related securities held for investment....... 4.72
Loan portfolio(3)..................................... 10.20
Discounted loan portfolio............................. 15.83
Investment securities and other(4).................... 7.58
Total interest-earning assets, interest income...... 11.47
Non-interest earning cash.............................
Allowance for loan losses.............................
Investments in low-income housing tax credit
interests............................................
Other assets(2).......................................
Total assets........................................
AVERAGE LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing demand deposits...................... 1.92
Savings deposits...................................... 2.32
Certificates of deposit............................... 6.21
Total interest-bearing deposits..................... 5.93
Reverse repurchase agreements......................... 5.96
Securities sold but not yet purchased................. 6.77
FHLB advances......................................... 9.52
Subordinated debentures and other interest-bearing
obligations.......................................... 11.28
Total interest-bearing liabilities, interest
expense............................................ 6.11
Non-interest bearing deposits.........................
Escrow deposits.......................................
Other liabilities(2)..................................
Total liabilities...................................
Stockholders' equity(2)...............................
Total liabilities and stockholders' equity..........
Net interest income...................................
Net interest spread................................... 5.36%
-----
-----
Net interest margin................................... 4.83%
-----
-----
Ratio of interest-earning assets to interest-bearing
liabilities..........................................
</TABLE>
- ------------------------------
(1) Presented on an annualized basis.
(2) Excludes effect of unrealized gains or losses on securities available for
sale, net of taxes.
(3) The average balances of loans available for sale and the loan portfolio
include non-performing loans, interest on which is recognized on a cash
basis.
(4) Interest income from investment securities and other includes interest
income attributable to that portion of the Company's deferred tax asset
which relates to tax residuals. If the average balance of the deferred tax
asset related to tax residuals was included in the average balance of
investment securities and other, the weighted average yield would have been
6.87% and 4.62% during the six months ended June 30, 1996 and 1995,
respectively. See "--Non-interest Income" below, "Taxation--Federal
Taxation--Tax Residuals" and Note 19 to the Consolidated Financial
Statements.
21
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1995 1994 1993
----------------------------------- ----------------------------------- ---------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE BALANCE
--------- --------- ------------- --------- --------- ------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
AVERAGE ASSETS:
Federal funds sold and repurchase
agreements........................... $ 55,256 $ 3,502 6.34% $ 166,592 $ 8,861 5.32% $ 24,333
Securities available for sale(1)...... 211,559 18,391 8.69 449,654 27,988 6.22 435,541
Loans available for sale(2)........... 167,011 15,608 9.35 179,962 19,353 10.75 45,757
Mortgage-related securities held for
investment........................... 77,257 4,313 5.58 140,321 6,930 4.94 192,052
Loan portfolio(2)..................... 130,901 15,430 11.79 81,070 5,924 7.31 73,854
Discounted loan portfolio............. 483,204 75,998 15.73 352,633 52,560 14.91 193,652
Investment securities and other(3).... 46,440 4,033 8.68 79,895 9,842 12.32 48,255
--------- --------- --------- --------- ---------
Total interest-earning assets,
interest income.................... 1,171,628 137,275 11.72 1,450,127 131,458 9.07 1,013,444
--------- ---------
Non-interest earning cash............. 17,715 27,717 22,146
Allowance for loan losses............. (1,180) (2,689) (1,050)
Investments in low-income housing tax
credit interests..................... 63,925 39,135 10,693
Other assets(1)....................... 269,280 200,663 107,422
--------- --------- ---------
Total assets........................ $1,521,368 $1,714,953 $1,152,655
--------- --------- ---------
--------- --------- ---------
AVERAGE LIABILITIES AND STOCKHOLDERS'
EQUITY:
Interest-bearing demand deposits...... $ 31,373 1,031 3.29 $ 77,433 1,396 1.80 $ 99,201
Savings deposits...................... 20,370 451 2.21 138,434 2,602 1.88 142,053
Certificates of deposit............... 1,119,836 70,371 6.28 928,209 40,963 4.41 416,658
--------- --------- --------- --------- ---------
Total interest-bearing deposits..... 1,171,579 71,853 6.13 1,144,076 44,961 3.93 657,912
Reverse repurchase agreements......... 16,754 951 5.68 254,457 10,416 4.09 195,745
Securities sold but not yet
purchased............................ 17,149 1,142 6.66 39,526 2,780 7.03 --
FHLB advances......................... 14,866 1,126 7.57 26,476 1,232 4.65 64,130
Subordinated debentures and other
interest-bearing obligations......... 78,718 8,988 11.42 25,041 3,209 12.81 26,572
--------- --------- --------- --------- ---------
Total interest-bearing liabilities,
interest expense................... 1,299,066 84,060 6.47 1,489,576 62,598 4.20 944,359
--------- ---------
Non-interest bearing deposits......... 19,960 69,276 30,181
Escrow deposits....................... 4,073 2,430 4,007
Other liabilities(1).................. 76,978 34,171 76,213
--------- --------- ---------
Total liabilities................... 1,400,077 1,595,453 1,054,760
Stockholders' equity(1)............... 121,291 119,500 97,895
--------- --------- ---------
Total liabilities and stockholders'
equity............................. $1,521,368 $1,714,953 $1,152,655
--------- --------- ---------
--------- --------- ---------
Net interest income................... $ 53,215 $ 68,860
--------- ---------
--------- ---------
Net interest spread................... 5.25% 4.86%
----- -----
----- -----
Net interest margin................... 4.54% 4.75%
----- -----
----- -----
Ratio of interest-earning assets to
interest-bearing liabilities......... 90% 97% 107%
--------- --------- ---------
--------- --------- ---------
<CAPTION>
AVERAGE
INTEREST YIELD/RATE
----------- -------------
<S> <C> <C>
AVERAGE ASSETS:
Federal funds sold and repurchase
agreements........................... $ 873 3.59%
Securities available for sale(1)...... 19,714 4.53
Loans available for sale(2)........... 5,376 11.75
Mortgage-related securities held for
investment........................... 9,379 4.88
Loan portfolio(2)..................... 6,232 8.44
Discounted loan portfolio............. 31,036 16.03
Investment securities and other(3).... 6,313 13.08
-----------
Total interest-earning assets,
interest income.................... 78,923 7.79
-----------
Non-interest earning cash.............
Allowance for loan losses.............
Investments in low-income housing tax
credit interests.....................
Other assets(1).......................
Total assets........................
AVERAGE LIABILITIES AND STOCKHOLDERS'
EQUITY:
Interest-bearing demand deposits...... 1,056 1.06
Savings deposits...................... 1,982 1.40
Certificates of deposit............... 16,001 3.84
-----------
Total interest-bearing deposits..... 19,039 2.89
Reverse repurchase agreements......... 9,340 4.77
Securities sold but not yet
purchased............................ -- --
FHLB advances......................... 2,834 4.42
Subordinated debentures and other
interest-bearing obligations......... 4,093 15.40
-----------
Total interest-bearing liabilities,
interest expense................... 35,306 3.74
-----------
Non-interest bearing deposits.........
Escrow deposits.......................
Other liabilities(1)..................
Total liabilities...................
Stockholders' equity(1)...............
Total liabilities and stockholders'
equity.............................
Net interest income................... $ 43,617
-----------
-----------
Net interest spread................... 4.05%
-----
-----
Net interest margin................... 4.30%
-----
-----
Ratio of interest-earning assets to
interest-bearing liabilities.........
</TABLE>
- ------------------------------
(1) Excludes effect of unrealized gains or losses on securities available for
sale, net of taxes.
(2) The average balances of loans available for sale and the loan portfolio
include non-performing loans, interest on which is recognized on a cash
basis.
(3) Interest income from investment securities and other includes interest
income attributable to that portion of the Company's deferred tax asset
which relates to tax residuals. See "--Non-interest Income" below,
"Taxation--Federal Taxation--Tax Residuals" and Note 19 to the Consolidated
Financial Statements. If the average balance of the deferred tax asset
related to tax residuals was included in the average balance of investment
securities and other, the weighted average yield would have been 6.16%,
11.48% and 10.67% during 1995, 1994 and 1993, respectively.
22
<PAGE>
The following table describes the extent to which changes in interest rates
and changes in volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and expense during the
periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (change in volume multiplied by prior rate), (ii) changes
in rate (change in rate multiplied by prior volume) and (iii) total change in
rate and volume. Changes attributable to both volume and rate have been
allocated proportionately to the change due to volume and the change due to
rate.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
SIX MONTHS ENDED ------------------------------------------
JUNE 30, 1996 VS.
SIX MONTHS ENDED 1994 VS.
JUNE 30, 1995 1995 VS. 1994 1993
------------------------------- ------------------------------- ---------
INCREASE (DECREASE) INCREASE (DECREASE) INCREASE
(DECREASE)
DUE TO DUE TO DUE TO
-------------------- -------------------- ---------
RATE VOLUME TOTAL RATE VOLUME TOTAL RATE
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Federal funds sold and repurchase agreements.. $ 11 $ 339 $ 350 $ 1,445 $ (6,804) $ (5,359) $ 609
Securities available for sale................. 1,150 5,971 7,121 8,584 (18,181) (9,597) 7,616
Loans available for sale...................... (1,037) 5,367 4,330 (2,417) (1,328) (3,745) (493)
Mortgage-related securities held for
investment................................... (1,171) (1,171) (2,342) 812 (3,429) (2,617) 105
Loan portfolio................................ 748 13,081 13,829 4,747 4,759 9,506 (882)
Discounted loan portfolio..................... 2,577 13,007 15,584 3,041 20,397 23,438 (2,312)
Investment securities and other............... 247 468 715 (2,401) (3,408) (5,809) (388)
--------- --------- --------- --------- --------- --------- ---------
Total interest-earning assets............... 2,525 37,062 39,587 13,811 (7,994) 5,817 4,255
--------- --------- --------- --------- --------- --------- ---------
Interest-Bearing Liabilities:
Interest-bearing demand deposits.............. 466 (583) (117) 752 (1,117) (365) 610
Savings deposits.............................. 3 (218) (215) 395 (2,546) (2,151) 672
Certificates of deposit....................... (162) 14,059 13,897 19,777 9,631 29,408 2,704
--------- --------- --------- --------- --------- --------- ---------
Total interest-bearing deposits............. 307 13,258 13,565 20,924 5,968 26,892 3,986
Reverse repurchase agreements................. (20) 506 486 2,926 (12,391) (9,465) (1,455)
Securities sold but not yet purchased......... (319) (319) (638) (141) (1,497) (1,638) --
FHLB advances................................. (336) 2,111 1,775 574 (680) (106) 143
Subordinated debentures and other interest-
bearing obligations.......................... (9) 5,177 5,168 (386) 6,165 5,779 (658)
--------- --------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities.......... (377) 20,733 20,356 23,897 (2,435) 21,462 2,016
--------- --------- --------- --------- --------- --------- ---------
Increase (decrease) in net interest income...... $ 2,902 $ 16,329 $ 19,231 $ (10,086) $ (5,559) $ (15,645) $ 2,239
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
VOLUME TOTAL
--------- ---------
<S> <C> <C>
Interest-Earning Assets:
Federal funds sold and repurchase agreements.. $ 7,379 $ 7,988
Securities available for sale................. 658 8,274
Loans available for sale...................... 14,470 13,977
Mortgage-related securities held for
investment................................... (2,554) (2,449)
Loan portfolio................................ 574 (308)
Discounted loan portfolio..................... 23,836 21,524
Investment securities and other............... 3,917 3,529
--------- ---------
Total interest-earning assets............... 48,280 52,535
--------- ---------
Interest-Bearing Liabilities:
Interest-bearing demand deposits.............. (270) 340
Savings deposits.............................. (52) 620
Certificates of deposit....................... 22,258 24,962
--------- ---------
Total interest-bearing deposits............. 21,936 25,922
Reverse repurchase agreements................. 2,531 1,076
Securities sold but not yet purchased......... 2,780 2,780
FHLB advances................................. (1,745) (1,602)
Subordinated debentures and other interest-
bearing obligations.......................... (226) (884)
--------- ---------
Total interest-bearing liabilities.......... 25,276 27,292
--------- ---------
Increase (decrease) in net interest income...... $ 23,004 $ 25,243
--------- ---------
--------- ---------
</TABLE>
SIX MONTHS ENDED JUNE 30, 1996 VERSUS SIX MONTHS ENDED JUNE 30, 1995
The Company's net interest income increased by $19.2 million or 76.3% during
the six months ended June 30, 1996, as compared to the comparable period in the
prior year. This increase resulted from a $39.6 million or 66.1% increase in
interest income due to a $528.9 million or 50.7% increase in average
interest-earning assets from period to period and, to a lesser extent, a 118
basis point increase in the weighted average yield on such assets. The increase
in interest income was offset in part by a $20.4 million or 58.7% increase in
interest expense due to a $560.7 million or 49.4% increase in average
interest-bearing liabilities, primarily certificates of deposit and subordinated
debentures, and, to a lesser extent, a 38 basis point increase in the weighted
average rate paid on interest-bearing liabilities.
The increase in interest income during the six months ended June 30, 1996,
as compared to the comparable period in the prior year, reflects substantial
increases in the average balances of the discounted loan portfolio and the loan
portfolio as a result of the Company's increased emphasis on multi-family
residential and commercial real estate loans in recent periods, as well as an
increase in the average balance of loans available for sale as a result of the
Company's recent emphasis on single-family residential loans to non-conforming
borrowers. The Company's increased emphasis on multi-family residential and
commercial
23
<PAGE>
real estate loans also was a significant factor in the increase in the weighted
average yields on the discounted loan portfolio and the loan portfolio during
the six months ended June 30, 1996, as compared to the comparable period in the
prior year, which in the case of the loan portfolio was enhanced during 1996 by
$2.1 million of fees earned in connection with the repayment of hotel loans. See
"Business--Lending Activities."
The average balance of the Company's interest-bearing liabilities increased
substantially during the six months ended June 30, 1996, as compared to the
comparable period in the prior year, as a result of a $450.2 million or 45.0%
increase in the average balance of certificates of deposit and a $91.9 million
or 288.4% increase in the average balance of subordinated debentures and other
interest-bearing obligations, which reflect the Company's continued reliance on
brokered and other wholesale certificates of deposit as a source of funds and
the Bank's issuance of the Debentures in mid-1995, respectively.
1995 VERSUS 1994
The Company's net interest income decreased by $15.6 million or 22.7% during
1995 as a result of a $21.5 million or 34.3% increase in interest expense, which
was primarily attributable to the Company's use of brokered and other wholesale
deposits as a principal source of funds following the branch sale in 1994. The
Company believes that the increase in interest expense in 1995 was substantially
offset by the decrease in non-interest expense during this period as a result of
the branch sales at the end of 1995 and 1994. The Company's interest income
increased by $5.8 million or 4.4% during 1995, but was adversely affected by a
decrease in the average balance of interest-earning assets during the period as
a result of the branch sales. The Company's net interest margin decreased from
4.75% during 1994 to 4.54% during 1995.
The weighted average yield on interest-earning assets increased from 9.07%
in 1994 to 11.72% in 1995 primarily as a result of an increase in the weighted
average yield on the Company's loan portfolio and discounted loan portfolio. The
weighted average yield on the Company's loan portfolios increased during 1995
because commercial real estate loans, which have higher interest rates than
single-family residential loans, comprised a significantly larger proportion of
such portfolios during this period. Average interest-earning assets decreased by
$278.5 million or 19.2% during 1995 as increases in the outstanding balances of
the Company's loan portfolios were more than offset by decreases in the average
balances of all other categories of interest-earning assets as a result of the
sales of branch offices at the end of 1995 and 1994.
The weighted average rate paid on interest-bearing liabilities increased
from 4.20% in 1994 to 6.47% in 1995 as a result of the Company's increased
utilization of brokered and other wholesale deposits, as noted above. Average
interest-bearing liabilities decreased by $190.5 million or 12.8% in 1995 as
increases in the average balances of certificates of deposit and subordinated
debentures and other interest-bearing obligations, due to the Bank's issuance of
$100 million principal amount of Debentures in June 1995, were offset by
decreases in the average balances of all other categories of interest-bearing
liabilities.
1994 VERSUS 1993
The Company's net interest income increased by $25.2 million or 57.9% during
1994 as a result of a $52.5 million or 66.6% increase in interest income, which
was primarily attributable to substantial growth in the Company's discounted
loan portfolio and the Company's multi-family residential lending activities.
The Company's net interest margin increased from 4.30% in 1993 to 4.75% in 1994.
The weighted average yield on the Company's interest-earning assets
increased to 9.07% in 1994 from 7.79% in 1993 as a result of several factors,
including a higher interest rate environment, the commencement of the
acquisition of discounted multi-family residential and commercial real estate
loans and substantial multi-family residential lending activities, the effects
of the latter of which were reflected in interest income on loans available for
sale and, as a result of the Company's securitization of its multi-family
residential loans, interest income on securities available for sale. The
weighted average yield on the Company's interest-earning assets also increased
in 1994 because, effective January 1, 1994, the Company ceased recognizing a
portion of the fees received in connection with the acquisition of tax residuals
immediately into non-interest income and began to recognize all fees received on
a level-yield basis as interest income over the expected life of that portion of
the deferred tax asset which relates to tax residuals. See "--Results of
Operations--
24
<PAGE>
Non-Interest Income" below. Deferred fees accreted into interest income on tax
residuals amounted to $5.7 million during 1994, as compared to $2.6 million in
1993, and significantly increased the weighted average yield on "investment
securities and other" during this period.
The weighted average rate paid on the Company's interest-bearing liabilities
increased to 4.20% in 1994 from 3.74% in 1993, reflecting the increasing
interest rate environment and increased utilization of brokered certificates of
deposit. The average rates paid by the Company on its reverse repurchase
agreements decreased from 4.77% in 1993 to 4.09% in 1994 as a result of interest
rate exchange agreements intended to hedge the cost of such agreements.
Exclusive of the effects of such interest rate exchange agreements, the weighted
average rate on reverse repurchase agreements was 3.56% and 3.98% during 1993
and 1994, respectively. See Note 15 to the Consolidated Financial Statements.
PROVISIONS FOR LOAN LOSSES. Provisions for losses on loans are charged to
operations to maintain an allowance for losses on each of the loan portfolio and
the discounted loan portfolio at a level which management considers adequate
based upon an evaluation of known and inherent risks in such loan portfolios.
Management's periodic evaluation is based upon an analysis of each of the
discounted loan portfolio and the loan portfolio, historical loss experience,
current economic conditions and other relevant factors.
Prior to the six months ended June 30, 1996, provisions for losses on loans
were not established in connection with the discounted loan portfolio because
adjustments to reduce the carrying value of discounted loans to the lower of
amortized cost or the fair market value of the properties securing the loans
discounted at the effective interest rate, which amounted to $5.0 million during
1995, were recorded in interest income on discounted loans. Moreover, because
discounted loans generally are acquired at discounts from both the stated value
of the loans and the values of the underlying collateral, management of the
Company did not believe that it was necessary to maintain an allowance for loan
losses for the discounted loan portfolio. As a result of discussions between the
Bank and the OTS following an examination of the Bank by the OTS, the Company
changed this policy, which resulted in the establishment of a $9.5 million
provision for losses on the discounted loan portfolio during the six months
ended June 30, 1996. In addition, beginning in 1996 the Company has recorded all
charge-offs on the discounted loan portfolio against the allowance for losses on
discounted loans. During the six months ended June 30, 1996, the Company also
established a $1.1 million provision for losses related to its loan portfolio,
which was primarily general in nature. Based on the types of lending activities
currently emphasized by the Company, the Company anticipates that in the future
it will establish provisions for loan losses on each of its loan portfolios on a
quarterly basis.
Provisions for loan losses relating to the loan portfolio amounted to $1.1
million in 1995 and reflect both the substantial increase in the amount and the
change in the type of loans in the Company's loan portfolio in 1995 and the
Company's policy to maintain reserves based, among other factors, on the level
of its classified assets. See "Business--Lending Activities" and "--Asset
Quality." Provisions for losses on loans were not deemed necessary in 1994 and
1993 in light of the relatively small size of the loan portfolio, the
composition of the loan portfolio, which was primarily single-family residential
loans to non-conforming borrowers, the level of the allowance for loan losses
and management's assessment of the credit risks inherent in such portfolio.
Although management utilizes its best judgment in providing for possible
loan losses, changing economic and business conditions, fluctuations in local
markets for real estate, future changes in nonperforming asset trends, large
upward movements in market interest rates or other factors could affect the
Company's future provisions for loan losses. In addition, as noted above, the
OTS, as an integral part of its examination process, periodically reviews the
adequacy of the Bank's allowances for losses on loans and discounted loans and
such agency may require the Company to recognize changes to such allowances for
losses based on its judgment about information available to it at the time of
examination.
25
<PAGE>
NON-INTEREST INCOME. Non-interest income increased by $2.4 million or 27.2%
during the six months ended June 30, 1996, as compared to the comparable period
in the prior year. Exclusive of the $5.4 million and $62.6 million gains from
the sale of branch offices in 1995 and 1994, respectively, non-interest income
increased by $6.8 million or 35.7% in 1995 and decreased by $16.9 million or
47.1% in 1994. The increase in non-interest income during the six months ended
June 30, 1996, as compared to the comparable period in the prior year, was
primarily attributable to gains from the sale of interest-earning assets, which
more than offset a loss on real estate owned, net due to valuation adjustments
related to real estate owned, and a decrease in servicing fees and other charges
due to a write-down of mortgage servicing rights. The increase in non-interest
income in 1995 was primarily attributable to income on real estate owned and
gains from the sale of interest-earning assets, and the decrease in non-interest
income in 1994 was primarily attributable to a decrease in fees on financing
transactions, as discussed below, and, to a lesser extent, a decrease in gains
from the sale of interest-earning assets.
The following table sets forth the principal components of the Company's
non-interest income during the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Servicing fees and other charges............................ $ 787 $ 1,805 $ 2,870 $ 4,786 $ 3,800
Gains on sales of interest-earning assets, net.............. 9,601 3,356 6,955 5,727 8,386
Fees on financing transactions.............................. -- -- -- -- 15,340
Gain on sale of subsidiary's stock.......................... -- -- -- -- 3,835
Income (loss) on real estate owned, net..................... (1,028) 2,558 9,540 5,995 (1,158)
Gain on sale of hotel....................................... -- -- 4,658 -- --
Other income................................................ 1,996 1,208 1,727 2,467 5,669
--------- --------- --------- --------- ---------
Subtotal.................................................. 11,356 8,927 25,750 18,975 35,872
Gain from sale of branch offices............................ -- -- 5,430 62,600 --
--------- --------- --------- --------- ---------
Total..................................................... $ 11,356 $ 8,927 $ 31,180 $ 81,575 $ 35,872
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Servicing fees and other charges decreased during the six months ended June
30, 1996, as compared to the comparable period in the prior year, because in the
six months ended June 30, 1995 the Company received $783,000 of servicing fees
from the purchaser of the branch offices sold at the end of 1994 for servicing
deposits subsequent to the sale but prior to their effective transfer and no
such fees were received during the six months ended June 30, 1996. In addition,
during the six months ended June 30, 1996 the Company recorded a $928,000
valuation adjustment to mortgage servicing rights which were acquired by the
Company in 1995 in connection with its acquisition of the right to service all
of the loans which backed a REMIC in which the Company acquired a subordinate
interest. The valuation adjustment to mortgage servicing rights was due to a
significant increase in prepayments of the underlying loans due primarily to
refinancings, which resulted in a decrease in the number of underlying loans
(which consist primarily of jumbo adjustable-rate loans) from 1,000 to 550.
Mortgage servicing rights, net, amounted to $2.7 million at June 30, 1996. The
foregoing effects on servicing fees and other charges during the six months
ended June 30, 1996 more than offset $1.0 million of loan servicing fees earned
by the Bank from the joint venture which acquired discounted single-family
residential loans from HUD in April 1996. Servicing fees and other charges
decreased in 1995 primarily as a result of a $2.3 million decrease in
deposit-related fees, which decreased as a result of the branch sales at the end
of 1995 and 1994, and a $121,000 decrease in loan fees, primarily as a result of
a decrease in late charges on loans, which was offset in part by a $783,000
servicing fee received by the Company from the purchaser of the branch offices
sold at the end of 1994 for servicing deposits subsequent to the sale but prior
to their effective transfer. Servicing fees and other charges increased in 1994
primarily as a result of a $1.0 million increase in deposit-related fees as a
result of the inclusion of Old Berkeley's deposit base for all of 1994.
26
<PAGE>
Net gains on sales of interest-earning assets during the six months ended
June 30, 1996 were primarily comprised of $6.8 million of gains on the sale of
single-family residential loans to non-conforming borrowers available for sale
and $5.3 million of gains on the sale of performing single-family residential
loans in the Company's discounted loan portfolio, which were offset in part by a
$1.6 million adjustment to record delinquent single-family residential loans to
non-conforming borrowers available for sale to the lower of cost or market and a
$748,000 net loss on the sale of securities available for sale. Net gains on
sales of interest-earning assets in 1995 were primarily comprised of a $6.0
million gain from the sale of performing single-family residential loans in the
Company's discounted loan portfolio and a $1.6 million gain from the
securitization of $83.9 million of multi-family residential loans and subsequent
sale of the FNMA mortgage-backed securities backed by such loans, net of related
hedges. Net gains on sales of interest-earning assets in 1994 were primarily
comprised of $7.2 million of gains from the sale of multi-family residential
loans and mortgage-backed securities, net of related hedges, $1.8 million of
gains from trading activities, $890,000 of gains from the sale of performing
single-family residential loans in the Company's discounted loan portfolio and
$2.1 million of gains from the sale of timeshare and other consumer loans, which
more than offset $6.3 million of losses from the sale of mortgage-backed and
related securities backed by single-family residential loans, net of related
hedges. Net gains on sales of interest-earning assets in 1993 were primarily
comprised of $3.9 million and $773,000 of gains from the sale of discounted
loans and other loans, respectively, and a $2.3 million gain from the sale of
mortgage-backed and related securities.
Through 1993, the Company recorded a portion of the fees received by it in
connection with the acquisition of tax residuals as fees on financing
transactions. Effective January 1, 1994, the Company ceased recognizing a
portion of the fees received upon acquisition of tax residuals immediately into
income and began to defer all fees received and recognize such fees in interest
income on a level yield basis over the expected life of that portion of the
deferred tax asset which relates to tax residuals. See "Taxation--Federal
Taxation--Tax Residuals."
The $3.8 million gain on sale of subsidiary's stock in 1993 was recorded in
connection with the Company's sale of all of the stock of two subsidiaries which
were engaged in the private mortgage insurance business. For additional
information relating to this transaction, see Note 2 to the Consolidated
Financial Statements.
The following table sets forth information relating to the Company's income
(loss) on real estate owned, net during the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- --------------------------------
1996 1995 1995 1994 1993
--------- --------- ---------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Gains on sales............................................. $ 7,778 $ 9,137 $ 19,006 $ 21,308 $ 2,541
Provision for losses in fair value......................... (9,788) (5,035) (10,510) (9,074) (2,980)
Carrying costs, net of rental income....................... 982 (1,544) 1,044 (6,239) (719)
--------- --------- ---------- --------- ---------
Income (loss) on real estate owned, net.................... $ (1,028) $ 2,558 $ 9,540 $ 5,995 $ (1,158)
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
</TABLE>
Income (loss) on real estate owned, net primarily relates to real estate
owned acquired by foreclosure or deed-in-lieu thereof on loans in the Company's
discounted loan portfolio. The provision for losses in fair value on real estate
owned during the six months ended June 30, 1996 included $3.8 million which was
established as a result of discussions between the Bank and the OTS following an
examination of the Bank by the OTS. For additional information relating to the
Company's real estate owned, see "Business--Asset Quality--Real Estate Owned."
In October 1995, the Company sold one of the two hotels owned by the Company
for a gain of $4.7 million.
Other income increased during the six months ended June 30, 1996, as
compared to the comparable period in 1995, as a result of a $990,000 gain from
the sale of low-income housing tax credit interests and the Company's receipt of
an additional premium of $335,000 which was earned in accordance with the
original
27
<PAGE>
agreement to sell 23 branch offices at the end of 1994. See
"Business--Investment Activities--Investments in Low-Income Housing Tax Credit
Interests." Other income decreased in 1995 primarily because other income in
1994 included $627,000 of servicing fees received in connection with the
servicing of the private mortgage insurance business of subsidiaries of
Investors Mortgage Insurance Holding Company ("IMI"), which were sold in 1993,
and $858,000 of fees received by Ocwen Asset Management, Inc. ("OAM"), a
subsidiary of the Company which has managed mortgage-backed and related
securities as a discretionary asset manager for an unaffiliated party since May
1992. These decreases were partially offset by a $1.0 million litigation
settlement received from a broker-dealer relating to a tax residual transaction.
Other income decreased in 1994 primarily because other income in 1993 included
$1.7 million of insurance premiums received in connection with the private
mortgage insurance business of subsidiaries of IMI and a decrease of $1.2
million of fees received by OAM. At June 30, 1996, OAM had under management
approximately $37.6 million of loans and mortgage related securities for the
unaffiliated account.
The Company realized a $5.4 million gain from the sale of two branch offices
and $111.7 million of related deposits at the end of 1995 and a $62.6 million
gain from the sale of 23 branch offices and $909.3 million of related deposits
at the end of 1994. For a breakdown of the components of the gains from these
branch sales, see Note 2 to the Consolidated Financial Statements.
NON-INTEREST EXPENSE. Non-interest expense increased by $3.7 million or
16.7% during the six months ended June 30, 1996, as compared to the comparable
period in the prior year, decreased by $23.3 million or 33.8% during 1995 and
increased by $27.0 million or 64.5% during 1994.
The increase in non-interest expense during the six months ended June 30,
1996, as compared to the comparable period in the prior year, was primarily
attributable to increases in compensation and employee benefits. The decrease in
non-interest expense in 1995 reflects the sale of 23 of the Company's branch
offices at the end of 1994 and, to a lesser extent, the sale of two of the
Company's other branch offices at the end of 1995. The increase in non-interest
expense in 1994 was attributable in part to the inclusion of the operations of
Old Berkeley, which was acquired in mid-1993, in the operations of the Company
for all of 1994, increased profit sharing expense as a result of the gain from
the sale of branch offices in 1994 and the substantial expansion of certain of
the Company's business lines, including its discounted loan acquisition and
resolution activities and its multi-family residential lending activities.
The following table sets forth the principal components of the Company's
non-interest expense during the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Compensation and employee benefits......................... $ 14,562 $ 10,464 $ 23,787 $ 42,395 $ 23,507
Occupancy and equipment.................................... 4,227 4,795 8,360 11,537 9,106
Amortization of goodwill................................... -- -- -- 1,346 1,301
Hotel operations expense (income), net..................... 57 264 337 (723) (710)
Other operating expenses................................... 6,703 6,369 13,089 14,303 8,655
--------- --------- --------- --------- ---------
Total.................................................... $ 25,549 $ 21,892 $ 45,573 $ 68,858 $ 41,859
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The increase in compensation and employee benefits during the six months
ended June 30, 1996, as compared to the comparable period in the prior year, was
primarily attributable to a $2.4 million increase in the accrual for profit
sharing expense, as well as normal salary adjustments. The decrease in
compensation and employee benefits in 1995 reflected a decrease in the average
number of full-time equivalent employees from 548 in 1994 to 344 in 1995 as a
result of the sales of branch offices and other reduction in work force
measures, as well as a $10.7 million decrease in profit sharing expense. The
increase in compensation and employee benefits in 1994 was primarily
attributable to increases in salary, the largest component of compensation and
employee benefits, which increased by $8.3 million or 78% during this period.
This increase was primarily attributable to an increase in the average number of
full-time equivalent employees
28
<PAGE>
from 362 in 1993 to 548 in 1994, reflecting the inclusion of the operations of
Old Berkeley in the Company's operations for the entire year in 1994 and the
expansion of new business activities, particularly discounted loan acquisition
and resolution activities and multi-family residential lending activities.
Compensation and employee benefits also increased in 1994 as a result of a $10.9
million increase in profit sharing expense, the majority of which was
attributable to the large gain recorded in connection with the sale of branch
offices at the end of 1994.
The decrease in occupancy and equipment expense during the six months ended
June 30, 1996, as compared to the comparable period in the prior year, was
primarily attributable to expenses incurred in the first half of 1995 to
relocate the Company's executive offices. The decrease in occupancy and
equipment expense in 1995 reflected the sale of branch offices at the end of
1994 and lower occupancy costs as a result of the Company's move to new
executive offices in 1995. The increase in occupancy and equipment expense in
1994 was primarily attributable to the acquisition of Old Berkeley in mid-1993,
the expansion of the executive offices of the Company to accommodate increases
in personnel and the increased use of technology to support the Company's
activities.
The changes in hotel operations expense (income), net in recent periods
generally reflect the Company's acquisition of two hotels for investment in
mid-1993 and the significant renovation and sale of one of these hotels in 1995.
Other expenses increased during the six months ended June 30, 1996, as
compared to the comparable period in the prior year, primarily as a result of a
$596,000 increase in FDIC insurance expense, a $249,000 increase in loan fees, a
$238,000 increase in professional fees and a $183,000 increase in amortized
costs related to the Debentures, which more than offset decreases in various
other expenses. Other expenses decreased in 1995 primarily as a result of a
$641,000 decrease in travel and lodging expenses, a $337,000 decrease in
marketing expenses and a $683,000 decrease in miscellaneous other expenses,
which were offset in part by a $1.1 million increase in loan related expenses.
Other expenses increased in 1994 primarily as a result of a $965,000 increase in
FDIC insurance expense, a $945,000 increase in marketing expense, a $572,000
increase in travel and lodging expense and a $1.4 million increase in
miscellaneous other expenses. Many of these expenses were directly attributable
to the inclusion of a full year of operations of Old Berkeley in the Company's
operations in 1994 and the expansion of the Company's business lines. For a
detailed breakout of other operating expenses, see Note 23 to the Consolidated
Financial Statements.
EQUITY IN EARNINGS OF JOINT VENTURE. Equity in earnings of joint venture
relates to the recently-formed joint venture to acquire discounted single-family
residential loans from HUD in April 1996. The Company's $1.1 million of earnings
from this joint venture during the six months ended June 30, 1996 consisted of
50% of the joint venture's net income during this period plus 50% of the loan
servicing fee received by the Bank from the joint venture during this period.
(The remainder of the loan servicing fee received by the Bank from the joint
venture during this period has been included in servicing fees and other
charges, as discussed above.) Income of the joint venture is primarily
attributable to interest on discounted loans, which had an annualized weighted
average yield of 9.43% during the period from the date of acquisition by the
joint venture to June 30, 1996. See "Business--Investment in Joint Venture" and
Note 6 to the Interim Consolidated Financial Statements.
INCOME TAX EXPENSE. Income tax expense amounted to $1.9 million and
$760,000 during the six months ended June 30, 1996 and 1995, respectively, and
$4.6 million, $29.7 million and $10.3 million during 1995, 1994 and 1993,
respectively. The Company's effective tax rate amounted to 11.3% and 6.2% during
the six months ended June 30, 1996 and 1995, respectively, and to 12.1%, 36.4%
and 27.4% during 1995, 1994 and 1993, respectively. The Company's low effective
tax rates in recent periods were primarily attributable to the benefits of tax
credits and tax benefits resulting from the Company's investment in low-income
housing tax credit interests, which amounted to $4.1 million and $3.8 million
during the six months ended June 30, 1996 and 1995, respectively, and $7.7
million, $5.3 million and $2.0 million during the years ended December 31, 1995,
1994 and 1993, respectively. Exclusive of such amounts, the Company's effective
tax rate amounted to 35.3% and 37.1% during the six months ended June 30, 1996
and 1995, respectively, and 32.6%, 43.1% and 32.8% during 1995, 1994 and 1993,
respectively. The increase in the Company's effective tax rate in 1994 was
29
<PAGE>
primarily attributable to the write-off of the remaining goodwill in connection
with the sale of branch offices which was not deductible for tax purposes, and
an increase in state taxes, which more than offset the benefits of tax credits
resulting from the Company's investment in low-income housing tax credit
interests. For additional information regarding the Company's effective tax
rates and information regarding net operating loss carryforwards of the Company
resulting from the manner in which tax residuals are treated for federal income
tax purposes, see Note 19 to the Consolidated Financial Statements.
DISCONTINUED OPERATIONS. In September 1995, the Company announced its
decision to dispose of its automated banking division and related activities. As
a result of this decision, an after-tax loss on disposal of $3.2 million was
recorded, which consisted of a net loss of $2.0 million on the sale of assets
and a loss of $1.2 million (net of income of $1.2 million) incurred from related
operations until the sale and disposition, which was substantially completed at
December 31, 1995. Losses from the operations of the discontinued division prior
to discontinuance, net of tax, amounted to $3.1 million, $4.5 million, $4.5
million and $2.3 million during the six months ended June 30, 1995 and the years
ended December 31, 1995, 1994 and 1993, respectively.
The Company's automated banking division generally emphasized the
installation of automated teller machines and automated banking centers in a
wide variety of locations which were not associated with branch offices of the
Company, such as colleges and universities, business establishments and other
high-density locations, as well as the development and installation of an
automated multi-application card system for the distribution of financial
products and services to members of a college or university population. The
discontinuance of the operations of the automated banking division did not
adversely affect the revenues of the Company or otherwise have a material
adverse effect on its financial condition, capital resources or liquidity.
The Company's statements of operations have been restated for all periods
presented to reflect the discontinuance of the above-described operations. See
Note 3 to the Consolidated Financial Statements.
EXTRAORDINARY GAIN. In October and December 1993, the Company purchased at
a discount loans which had been made by third parties to Berkeley Realty Group,
Inc. ("BRG"), a wholly-owned subsidiary of the Company which was acquired in
connection with the acquisition of Old Berkeley. BRG was engaged in real estate
development and residential construction activities prior to its acquisition by
the Company and was a mortgagor on loans collateralized by real estate held for
development. The loans of BRG purchased by the Company and the related discount
totalled $9.0 million and $2.4 million, respectively, which resulted in an
extraordinary gain of $1.5 million after deduction of $828,000 for applicable
income taxes.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE. In February 1992,
the Financial Accounting Standards Board ("FASB") issued SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 requires reporting entities to take
into account changes in tax rates when valuing the deferred income tax amounts
recorded on the balance sheet. SFAS No. 109 also requires that deferred taxes be
provided for all temporary differences between financial statement amounts and
the tax basis of assets and liabilities. The Company adopted SFAS No. 109 on a
prospective basis effective January 1, 1993, and recorded a $1.3 million charge
in connection therewith.
30
<PAGE>
CHANGES IN FINANCIAL CONDITION
The following table sets forth certain information relating to the Company's
assets and liabilities at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------
1996 1995 1994
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Assets:
Securities available for sale......................................... $ 263,199 $ 337,480 $ 187,717
Loans available for sale.............................................. 84,078 251,790 102,293
Investment securities, net............................................ 8,902 18,665 17,011
Mortgage-related securities held for investment....................... -- -- 91,917
Loan portfolio, net................................................... 312,576 295,605 57,045
Discounted loan portfolio, net........................................ 594,634 669,771 529,460
Investments in low-income housing tax credit interests................ 92,273 81,362 49,442
Investment in joint venture........................................... 63,404 -- --
Real estate owned, net................................................ 133,604 166,556 96,667
Premises and equipment, net........................................... 28,750 25,359 38,309
Deferred tax asset.................................................... 17,981 22,263 20,695
Total assets.......................................................... 1,899,308 1,973,590 1,266,403
Liabilities:
Deposits.............................................................. 1,502,175 1,501,646 1,023,268
FHLB advances......................................................... 70,399 70,399 5,399
Reverse repurchase agreements......................................... -- 84,761 --
Subordinated debentures and other interest-bearing obligations........ 115,703 117,054 20,111
Total liabilities..................................................... 1,744,570 1,834,043 1,113,020
Stockholders' equity.................................................... 154,738 139,547 153,383
</TABLE>
SECURITIES AVAILABLE FOR SALE. Securities available for sale decreased by
$74.3 million during the six months ended June 30, 1996 primarily as a result of
the sale and repayment of $52.9 million of CMOs. The proceeds from these sales
and repayments, as well as the proceeds from the sale of loans available for
sale, as discussed below, contributed to the $194.4 million increase in
interest-bearing deposits, federal funds sold and repurchase agreements during
the six months ended June 30, 1996. Securities available for sale increased by
$149.8 million during 1995 primarily as a result of a $115.7 million increase in
the Company's investment in IO strips and PO strips and a $48.2 million increase
in the Company's investment in subordinated classes of mortgage-related
securities. From time to time the Company invests in these and other types of
mortgage-related securities based on its capital position, interest rate risk
profile, the market for such securities and other factors. For additional
information relating to these investments, see "Business-- Investment
Activities--Mortgage-Backed and Related Securities" and Note 5 to the
Consolidated Financial Statements. The Company's investment in CMOs decreased by
$79.2 million during 1995 prior to the transfer of $73.7 million of
mortgage-related securities held by the Company for investment to available for
sale pursuant to a guide to the implementation of SFAS No. 115 issued by the
FASB in November 1995. See Note 1 to the Consolidated Financial Statements.
LOANS AVAILABLE FOR SALE. Loans available for sale decreased by $167.7
million or 66.6% during the six months ended June 30, 1996 primarily because
during this period the Company sold $285.2 million of single-family residential
loans to non-conforming borrowers, which substantially offset the purchase and
origination of $132.4 million of such loans. Loans available for sale increased
by $149.5 million during 1995 primarily as a result of the Company's successful
implementation of a program to acquire single-family residential loans to
non-conforming borrowers, which resulted in the acquisition of $240.3 million of
single-family residential loans to non-conforming borrowers during the year. The
increase in single-family residential loans more than offset a $55.2 million
decrease in multi-family residential loans available for sale during
31
<PAGE>
1995, which was due to the Company's exchange of $83.9 million of multi-family
residential loans classified as available for sale for FNMA securities backed by
such loans, all of which were subsequently sold by the Company. See
"Business--Lending Activities."
At June 30, 1996, loans available for sale which were past due 90 days or
more ("non-performing loans") amounted to $15.6 million or 18.5% of total loans
available for sale, as compared to $7.9 million or 3.2% at December 31, 1995. At
June 30, 1996 and December 31, 1995, non-performing loans available for sale
consisted primarily of $15.4 million and $7.8 million of single-family
residential loans to non-conforming borrowers, reflecting the higher risks
associated with such loans and the recent sales of performing single-family
residential loans to non-conforming borrowers available for sale. During the six
months ended June 30, 1996, the Company recorded a $1.6 million reduction in the
carrying value of these loans to record them at the lower of cost or fair value.
INVESTMENT SECURITIES. Investment securities, which are held by the Company
for investment purposes, decreased by $9.8 million during the six months ended
June 30, 1996 due to the maturity of $10.0 million of U.S. Government
securities. At June 30, 1996, investment securities consisted almost entirely of
required holdings of FHLB stock.
MORTGAGE-RELATED SECURITIES HELD FOR INVESTMENT. The Company did not have
any mortgage-related securities held for investment at June 30, 1996 or at
December 31, 1995 because of its decision at the end of 1995 to reclassify $73.7
million of securities in this portfolio to available for sale.
LOAN PORTFOLIO, NET. The Company's net loan portfolio increased by $17.0
million during the six months ended June 30, 1996 primarily as a result of
increased investment in multi-family residential loans, particularly
construction loans, and commercial real estate loans secured by hotels and
office buildings. The Company's net and gross loan portfolio increased by $238.6
million and $281.5 million, respectively, during 1995 primarily as a result of
the Company's multi-family residential and commercial real estate lending
activities. From December 31, 1994 to December 31, 1995, multi-family
residential loans, including construction loans, increased by $47.2 million, and
commercial real estate and land loans increased by $188.5 million, including a
$106.1 million and a $61.3 million increase in loans secured by hotels and
office buildings, respectively. In addition to the increases in multi-family
residential and commercial real estate loans, single-family residential loans
increased by $44.0 during 1995, primarily as a result of the Company's purchase
of a pool of loans which were primarily secured by properties located in the
Company's market area in northern New Jersey. See "Business--Lending
Activities."
Non-performing loans in the Company's loan portfolio amounted to $2.5
million or 0.8% of total loans at June 30, 1996, as compared to $3.9 million or
1.27% of total loans at December 31, 1995 and $2.7 million or 4.35% of total
loans at December 31, 1994. At June 30, 1996, non-performing loans consisted
primarily of $2.3 million of single-family residential loans. The Company's
allowance for losses on its loan portfolio amounted to 0.9%, 0.7% and 1.8% of
total loans at June 30, 1996 and December 31, 1995 and 1994, respectively, and
115.2%, 50.5% and 40.3% of nonperforming loans at the same dates, respectively.
See "Business--Asset Quality" and Note 8 to the Consolidated Financial
Statements. The foregoing amounts and ratios do not include non-performing loans
in the discounted loan portfolio, as discussed under "--Discounted Loan
Portfolio" below, or non-performing loans available for sale, as discussed under
"--Loans Available for Sale" above.
DISCOUNTED LOAN PORTFOLIO, NET. The Company's net discounted loan portfolio
decreased by $75.1 million during the six months ended June 30, 1996 because
discounted loan acquisitions having an unpaid principal balance of $161.8
million were more than offset by resolutions and repayments, loans transferred
to real estate owned and sales of discounted loans. Acquisitions of discounted
loans during this period consisted primarily of commercial real estate loans and
do not reflect the Company's acquisition of a 50% interest in a joint venture
which acquired discounted single-family residential loans from HUD in April
1996. See "--Investment in Joint Venture" below. The Company's net discounted
loan portfolio increased by $140.3 million during 1995 primarily as a result of
the acquisition of $374.9 million gross principal amount of discounted
commercial real estate loans. These acquisitions more than offset a $124.0
million decrease in gross principal amount of discounted multi-family
residential loans during 1995, which was due to decreased
32
<PAGE>
acquisitions and substantial resolutions of such loans during this period, as
well as a $5.7 million decrease in gross principal amount of discounted
single-family residential loans. Discounted loans having an unpaid principal
balance of $791.2 million were acquired during 1995, as compared to $826.4
million during 1994. See "Business--Discounted Loan Acquisition and Resolution
Activities" and Notes 1 and 9 to the Consolidated Financial Statements.
In August 1996, the Company acquired discounted multi-family residential
loans with an unpaid principal balance of $225 million from HUD and discounted
commercial real estate loans with an unpaid principal balance of $150 million
from another third party. Together with an additional $35 million gross
principal amount of discounted loans acquired during July and August 1996 from a
variety of other sources, these acquisitions bring the Company's total
acquisitions of gross discounted loans through the eight months ended August 31,
1996 to $572 million (exclusive of interests in loans acquired as a result of
the Company's investment in joint venture). In addition to the foregoing, in
September 1996 the Company was notified that it and a co-investor were the
successful bidder to purchase 4,591 single-family residential loans with an
aggregate unpaid principal balance of $258.8 million auctioned by HUD. Upon
closing of this transaction in late September 1996, the Company will acquire
$113.3 million of such loans and the right to service all of such loans.
At June 30, 1996, discounted loans which were performing in accordance with
original or modified terms amounted to $500.7 million or 60.3% of the gross
discounted loan portfolio, as compared to $351.6 million or 37.3% of the gross
discounted loan portfolio at December 31, 1995 and $113.8 million or 14.5% of
the gross discounted loan portfolio at December 31, 1994. Management of the
Company generally considers the discounted loan portfolio to be performing in
accordance with the expectations and assumptions employed by the Company in
acquiring and managing such portfolio. The Company's allowance for losses on its
discounted loan portfolio amounted to 1.6% of the net discounted loan portfolio
at June 30, 1996. See "Business--Asset Quality."
INVESTMENTS IN LOW-INCOME HOUSING TAX CREDIT INTERESTS. In 1993, the
Company commenced a multi-family residential lending program which includes
indirect investments in multi-family residential projects which have been
allocated low-income housing tax credits under Section 42 of the Code by a state
tax credit allocating agency. At June 30, 1996, the Company had $92.3 million of
investments in low-income housing tax credit interests, as compared to $81.4
million at December 31, 1995.
Investments by the Company in low-income housing tax credit interests made
on or after May 18, 1995 in which the Company invests solely as a limited
partner, which amounted to $8.7 million at June 30, 1996, are accounted for
using the equity method in accordance with the consensus of the Emerging Issues
Task Force through issue number 94-1. Income attributable to such investments,
of which there was none in 1995 and $13,500 in the six months ended June 30,
1996, is recorded as non-interest income and the associated tax credits and tax
benefits result in a reduction to income tax expense. Limited partnership
investments made prior to May 18, 1995, which amounted to $57.6 million at June
30, 1996, are accounted for under the effective yield method as a reduction of
income tax expense. Low-income housing tax credit partnerships in which the
Company invests as both a limited and, through a subsidiary, a general partner
amounted to $22.5 million at June 30, 1996 and are presented on a consolidated
basis. See "Business--Investment Activities--Investments in Low-Income Housing
Tax Credit Interests" and Note 11 to the Consolidated Financial Statements.
INVESTMENT IN JOINT VENTURE. The $63.4 million investment in joint venture
at June 30, 1996 represented the Company's investment in a newly-formed company
in which the Company and a co-investor each have a 50% interest. The Company's
investment, along with the contribution of the Company's co-investor, enabled
this joint venture to purchase discounted single-family residential loans from
HUD in April 1996. These loans had a net balance of $559.4 million at June 30,
1996. See "Business--Investment in Joint Venture."
REAL ESTATE OWNED, NET. Real estate owned, net consists almost entirely of
properties acquired by foreclosure or deed-in-lieu thereof on loans in the
Company's discounted loan portfolio. Such properties amounted to $132.0 million
or 98.8% of total real estate owned at June 30, 1996 and consisted of $66.0
million, $37.4 million and $28.6 million of properties attributable to
single-family residential loans, multi-family
33
<PAGE>
residential loans and commercial real estate loans, respectively. Real estate
owned decreased by $33.0 million or 19.8% during the six months ended June 30,
1996 as a result of decreases in all categories of real estate owned
attributable to the discounted loan portfolio. The $69.9 million increase in the
Company's net real estate owned during 1995 was entirely attributable to
increases in real estate owned related to the Company's discounted loan
portfolio, which reflects the growth in the Company's discounted loan
acquisition and resolution activities in recent periods.
The Company actively manages its real estate owned. During the six months
ended June 30, 1996, the Company sold 508 properties of real estate owned
related to its discounted loan portfolio with a carrying value of $72.5 million.
During 1995, the Company sold 1,221 properties of real estate owned related to
its discounted loan portfolio with a carrying value of $138.5 million, as
compared to the sale of 1,386 and 347 properties of real estate owned related to
its discounted loan portfolio with carrying values of $111.7 million and $10.9
million during 1994 and 1993, respectively. See "Business--Asset Quality" and
Note 10 to the Consolidated Financial Statements.
PREMISES AND EQUIPMENT, NET. Premises and equipment, net, which consists of
premises and equipment related to the Company's hotel subsidiaries and premises
and equipment related to its other subsidiaries, decreased during 1995 primarily
as a result of the Company's sale of one of the two hotels acquired by it in
1993. Net premises and equipment related to the Company's other subsidiaries
also decreased during 1995 as a result of the Company's sale of two branch
offices and the disposition of its automated banking division during 1995, which
offset increased investment in leasehold improvements as a result of the
Company's move to new executive offices during this period. See
"Business--Offices" and Note 12 to the Consolidated Financial Statements.
DEPOSITS. Deposits increased by $478.4 million during 1995 primarily as a
result of brokered deposits obtained through national investment banking firms
which solicit deposits from their customers, which amounted to $1.12 billion at
December 31, 1995, as compared to $857.8 million at December 31, 1994. The
Company's deposits also increased during 1995 as a result of deposits obtained
through regional and local investment banking firms and the Company's direct
solicitation of institutional investors and high net worth individuals, which in
the aggregate amounted to $273.4 million at December 31, 1995; no such deposits
were outstanding at December 31, 1994. See "Business--Sources of
Funds--Deposits" and Note 13 to the Consolidated Financial Statements.
FHLB ADVANCES AND REVERSE REPURCHASE AGREEMENTS. FHLB advances and reverse
repurchase agreements decreased by $84.8 million during the six months ended
June 30, 1996 as a result of the repayment of reverse repurchase agreements.
FHLB advances and reverse repurchase agreements increased by $149.8 million in
the aggregate during 1995 because they are utilized as sources of funds from
time to time. See "Business--Sources of Funds--Borrowings" and Notes 14 and 15
to the Consolidated Financial Statements.
SUBORDINATED DEBENTURES AND OTHER INTEREST-BEARING
OBLIGATIONS. Subordinated debentures and other interest-bearing obligations
increased by $96.9 million during 1995 as a result of the Bank's issuance of
$100 million principal amount of Debentures in June 1995 and, to a lesser
extent, $7.6 million of notes which were privately issued to certain
stockholders of the Company. These increases more than offset a $10.7 million
decrease in hotel mortgages payable, which was primarily attributable to the
sale of one of the two hotels owned by the Company in 1995. See Note 16 to the
Consolidated Financial Statements.
DEFERRED TAX ASSET. At June 30, 1996, the Company had a net deferred tax
asset of $18.0 million. At the same date, the gross deferred tax asset amounted
to $37.6 million and consisted primarily of $16.1 million related to tax
residuals and deferred income thereon, $3.7 million related to accrued profit
sharing, $2.6 million of mark-to-market adjustments and reserves related to real
estate owned and $2.6 million of deferred interest expense on the discounted
loan portfolio, and the gross deferred tax liability amounted to $19.6 million
and consisted primarily of $6.5 million of bad debt reserves established for tax
purposes in excess of book reserves and $6.2 million of deferred interest income
on the discounted loan portfolio. At December 31, 1995, the Company had a net
deferred tax asset of $22.3 million. At the same date, the gross deferred tax
asset amounted to $30.6 million, of which $26.3 million related to tax residuals
and deferred
34
<PAGE>
income therein, and the gross deferred liability amounted to $9.6 million and
consisted primarily of $6.8 million of bad debt reserves established for tax
purposes in excess of book reserves and $2.4 million of deferred interest income
on the discounted loan portfolio.
As a result of the Company's earnings history, current tax position and
taxable income projections, management believes that the Company will generate
sufficient taxable income in future years to realize the deferred tax assets
which existed at June 30, 1996. In evaluating the expectation of sufficient
future taxable income, management considered future reversals of temporary
differences and available tax planning strategies that could be implemented, if
required. A valuation allowance was not required as of June 30, 1996 because it
was management's assessment that, based on available information, it is more
likely than not that all of the deferred tax asset will be realized. A valuation
allowance will be established in the future to the extent of a change in
management's assessment of the amount of the net deferred tax asset that is
expected to be realized. See Note 19 to the Consolidated Financial Statements.
STOCKHOLDERS' EQUITY. Stockholders' equity increased during the six months
ended June 30, 1996 primarily as a result of the Company's net income during the
period. Stockholders' equity decreased during 1995 primarily as a result of the
Company's repurchase of 8,815,060 shares of Common Stock at a price of $4.76 per
share, or an aggregate of $42.0 million, pursuant to an offer made to all
stockholders of the Company during 1995, which more than offset the Company's
$25.5 million of net income during 1995.
ASSET AND LIABILITY MANAGEMENT
Asset and liability management is concerned with the timing and magnitude of
the repricing of assets and liabilities. It is the objective of the Company to
attempt to control risks associated with interest rate movements. In general,
management's strategy is to match asset and liability balances within maturity
categories to limit the Company's exposure to earnings variations and variations
in the value of assets and liabilities as interest rates change over time. The
Company's asset and liability management strategy is formulated and monitored by
the Asset/Liability Committee, which is composed of directors and officers of
the Company and the Bank, in accordance with policies approved by the Board of
Directors of the Bank. The Asset/Liability Committee meets regularly to review,
among other things, the sensitivity of the Company's assets and liabilities to
interest rate changes, the book and market values of assets and liabilities,
unrealized gains and losses, including those attributable to hedging
transactions, purchase and sale activity, and maturities of investments and
borrowings. The Asset/Liability Committee also approves and establishes pricing
and funding decisions with respect to overall asset and liability composition.
The Asset/Liability Committee is authorized to utilize a wide variety of
off-balance sheet financial techniques to assist it in the management of
interest rate risk. These techniques include interest rate exchange agreements,
pursuant to which the parties exchange the difference between fixed-rate and
floating-rate interest payments on a specified principal amount (referred to as
the "notional amount") for a specified period without the exchange of the
underlying principal amount. Interest rate exchange agreements are utilized by
the Company to protect against the decrease in value of a fixed-rate asset or
the increase in borrowing cost from a short-term, fixed-rate liability, such as
reverse repurchase agreements, in an increasing interest rate environment.
Although the Company had no interest rate exchange agreements outstanding during
1996, interest rate exchange agreements had the effect of increasing the
Company's net interest income by $303,000 and $358,000 during the six months
ended June 30, 1995 and the year ended December 31, 1995, respectively, and
decreasing the Company's net interest income by $754,000 and $2.2 million during
1994 and 1993, respectively. For additional information see Note 17 to the
Consolidated Financial Statements.
In recent periods, the Company also entered into interest rate futures
contracts, which are commitments to either purchase or sell designated financial
instruments at a future date for a specified price and may be settled in cash or
through delivery. Eurodollar futures contracts have been sold by the Company to
hedge the repricing or maturity risk of certain adjustable-rate mortgage-backed
securities and short duration mortgage-related securities, and U.S. Treasury
futures contracts have been sold by the Company to offset declines in the market
value of its fixed-rate multi-family residential loans and certain fixed-rate
mortgage-backed and related securities available for sale in the event of an
increasing interest rate environment. At
35
<PAGE>
June 30, 1996, the Company had entered into Eurodollar futures (short) contracts
with an aggregate notional amount of $593.0 million and U.S. Treasury futures
(short) contracts with an aggregate notional amount of $306.6 million. Futures
contracts had the effect of decreasing the Company's net interest income by
$381,000 and $619,000 during the six months ended June 30, 1996 and the year
ended December 31, 1995, respectively, and increasing the Company's net interest
income by $7,000 and $650,000 during the six months ended June 30, 1995 and the
year ended December 31, 1994, respectively. Futures contracts had no effect on
the Company's net interest income in 1993. For additional information, see Note
17 to the Consolidated Financial Statements.
The Asset/Liability Committee's methods for evaluating interest rate risk
include an analysis of the Company's interest rate sensitivity "gap," which is
defined as the difference between interest-earning assets and interest-bearing
liabilities maturing or repricing within a given time period. A gap is
considered positive when the amount of interest-rate sensitive assets exceeds
the amount of interest-rate sensitive liabilities. A gap is considered negative
when the amount of interest-rate sensitive liabilities exceeds interest-rate
sensitive assets. During a period of rising interest rates, a negative gap would
tend to adversely affect net interest income, while a positive gap would tend to
result in an increase in net interest income. During a period of falling
interest rates, a negative gap would tend to result in an increase in net
interest income, while a positive gap would tend to affect net interest income
adversely. Because different types of assets and liabilities with the same or
similar maturities may react differently to changes in overall market rates or
conditions, changes in interest rates may affect net interest income positively
or negatively even if an institution were perfectly matched in each maturity
category.
36
<PAGE>
The following table sets forth the estimated maturity or repricing of the
Company's interest-earning assets and interest-bearing liabilities at June 30,
1996. The amounts of assets and liabilities shown within a particular period
were determined in accordance with the contractual terms of the assets and
liabilities, except (i) adjustable-rate loans, performing discounted loans,
securities and FHLB advances are included in the period in which they are first
scheduled to adjust and not in the period in which they mature, (ii) fixed-rate
mortgage-related securities reflect estimated prepayments, which were estimated
based on analyses of broker estimates, the results of a prepayment model
utilized by the Company and empirical data, (iii) non-performing discounted
loans reflect the estimated timing of resolutions which result in repayment to
the Company, (iv) fixed-rate loans reflect scheduled contractual amortization,
with no estimated prepayments, (v) NOW and money market checking deposits and
savings deposits, which do not have contractual maturities, reflect estimated
levels of attrition, which are based on detailed studies of each such category
of deposit by the Company, and (vi) escrow deposits and other non-interest
bearing checking accounts, which amounted to $55.6 million at June 30, 1996, are
excluded. Management believes that these assumptions approximate actual
experience and considers them reasonable; however, the interest rate sensitivity
of the Company's assets and liabilities in the table could vary substantially if
different assumptions were used or actual experience differs from the historical
experience on which the assumptions are based.
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------------------------------------------------
FOUR TO MORE THAN
WITHIN THREE TWELVE ONE YEAR TO THREE YEARS
MONTHS MONTHS THREE YEARS AND OVER TOTAL
------------- ------------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Rate-Sensitive Assets:
Interest-earning cash............................ $ 244,870 $ -- $ -- $ -- $ 244,870
Securities available for sale.................... 14,870 55,427 66,383 126,519 263,199
Loans available for sale(1)...................... 3,773 34,479 5,044 40,782 84,078
Investment securities, net....................... -- -- -- 8,902 8,902
Loan portfolio, net(1)........................... 106,170 46,472 30,375 129,559 312,576
Discounted loan portfolio, net................... 206,856 193,890 89,537 104,351 594,634
------------- ------------- ----------- ----------- ---------
Total rate-sensitive assets.................... 576,539 330,268 191,339 410,113 1,508,259
------------- ------------- ----------- ----------- ---------
Rate-Sensitive Liabilities:
NOW and money market checking deposits........... 12,835 835 940 4,775 19,385
Savings deposits................................. 191 513 563 2,253 3,520
Certificates of deposit.......................... 247,620 525,400 302,963 347,684 1,423,667
------------- ------------- ----------- ----------- ---------
Total interest-bearing deposits................ 260,646 526,748 304,466 354,712 1,446,572
FHLB advances.................................... 70,000 -- 399 -- 70,399
Subordinated notes and other interest-bearing
obligations..................................... -- 7,365 -- 108,338 115,703
------------- ------------- ----------- ----------- ---------
Total rate-sensitive liabilities............... 330,646 534,113 304,865 463,050 1,632,674
------------- ------------- ----------- ----------- ---------
Interest rate sensitivity gap before off-balance
sheet financial instruments..................... 245,893 (203,845) (113,526) (52,937) (124,415)
Off-Balance Sheet Financial Instruments:
Futures contracts................................ 437,631 (108,126) (81,732) (247,773) --
------------- ------------- ----------- ----------- ---------
Interest rate sensitivity gap...................... $ 683,524 $(311,971) $(195,258) $(300,710) $(124,415)
------------- ------------- ----------- ----------- ---------
------------- ------------- ----------- ----------- ---------
Cumulative interest rate sensitivity gap........... $ 683,524 $ 371,553 $ 176,295 $(124,415)
------------- ------------- ----------- -----------
------------- ------------- ----------- -----------
Cumulative interest rate sensitivity gap as a
percentage of total rate-sensitive assets......... 45.32% 24.63% 11.69% (8.25)%
------------- ------------- ----------- -----------
------------- ------------- ----------- -----------
</TABLE>
- ------------------------------
(1) Balances have not been reduced for non-performing loans.
The Company's rate-sensitive liabilities exceeded its rate-sensitive assets
at June 30, 1996 primarily because rate-sensitive assets do not include $92.3
million of investments in low-income housing tax credit interests, a $63.4
million investment in joint venture and $133.6 million of real estate owned.
Exclusive of futures contracts, the Company's one-year cumulative interest
rate sensitivity gap was $42.0 million or 2.8% of total rate-sensitive assets at
June 30, 1996. The Company's futures contracts
37
<PAGE>
generally are intended to maintain the values of certain assets, primarily
securities available for sale, in increasing interest rate environments. Also
included in off-balance sheet financial instruments is $171.3 million of futures
contracts related to the Company's investment in a joint venture formed to
acquire discounted loans.
Although interest rate sensitivity gap is a useful measurement and
contributes toward effective asset and liability management, it is difficult to
predict the effect of changing interest rates based solely on that measure. As a
result, and as required by OTS regulations, the Asset/Liability Committee also
regularly reviews interest rate risk by forecasting the impact of alternative
interest rate environments on net interest income and market value of portfolio
equity ("MVPE"), which is defined as the net present value of an institution's
existing assets, liabilities and off-balance sheet instruments, and evaluating
such impacts against the maximum potential changes in net interest income and
MVPE that is authorized by the Board of Directors of the Bank. At June 30, 1996,
management estimates that the estimated percentage change in the Company's net
interest income over the ensuing four quarter period as a result of a 200 basis
point increase or decrease in interest rates would be an approximately 5.9%
increase or decrease, respectively. In addition, at June 30, 1996, management
estimates that the estimated percentage change in the Company's MVPE over the
ensuing four quarter period as a result of a 200 basis point increase or
decrease in interest rates would be an approximate 5.0% increase and 6.6%
decrease, respectively. The maximum potential changes in MVPE and net interest
income authorized by the Board of Directors of the Company in the event of a 200
basis point change in interest rates is 30% and, thus, the Company's asset and
liability position currently is in compliance with the policy adopted by its
Board of Directors. For a detailed presentation in this regard, see Note 18 to
the Consolidated Financial Statements.
Management of the Company believes that the assumptions used by it to
evaluate the vulnerability of the Company's operations to changes in interest
rates approximate actual experience and considers them reasonable; however, the
interest rate sensitivity of the Company's assets and liabilities and the
estimated effects of changes in interest rates on the Company's net interest
income and MVPE could vary substantially if different assumptions were used or
actual experience differs from the historical experience on which they are
based.
LIQUIDITY
Liquidity is a measurement of the Company's ability to meet potential cash
requirements, including ongoing commitments to fund deposit withdrawals, repay
borrowings, fund investment, discounted loan and lending activities and for
other general business purposes. The primary sources of funds for liquidity
consist of deposits, FHLB advances, reverse repurchase agreements and maturities
and principal payments on loans and securities and proceeds from sales thereof.
The Company's liquidity is actively managed on a daily basis, monitored
regularly by the Asset/Liability Committee and reviewed periodically with the
Board of Directors. This process is intended to ensure the maintenance of
sufficient funds to meet the needs of the Company, including adequate cash flows
for off-balance sheet instruments.
Sources of liquidity include certificates of deposit which are obtained
primarily from wholesale sources. At June 30, 1996, the Company had $1.42
billion of certificates of deposit, including $1.02 billion of brokered
certificates of deposit obtained through national investment banking firms, of
which $925.4 million were non-cancelable. At the same date, scheduled maturities
of certificates of deposit during the 12 months ending June 30, 1997 and 1998
and thereafter amounted to $768.8 million, $306.0 million and $348.9 million,
respectively. Brokered and other wholesale deposits generally are more
responsive to changes in interest rates than core deposits and, thus, are more
likely to be withdrawn from the Company upon maturity as changes in interest
rates and other factors are perceived by investors to make other investments
more attractive. Management of the Company believes that it can adjust the rates
paid on certificates of deposit to retain deposits in changing interest rate
environments, however, and that brokered and other wholesale deposits can be
both a relatively cost-effective and stable source of funds. There can be no
assurance that this will continue to be the case in the future.
38
<PAGE>
Sources of borrowings include FHLB advances, which are required to be
secured by single-family and/ or multi-family residential loans or other
acceptable collateral, and reverse repurchase agreements. At June 30, 1996, the
Company had $70.4 million of FHLB advances outstanding, was eligible to borrow
up to an aggregate of $465.2 million from the FHLB of New York (subject to
availability of acceptable collateral) and had $10.6 million of single-family
residential loans, $27.5 million of multi-family residential loans and $45.4
million of hotel loans which could be pledged as security for such advances. At
the same date, the Company had contractual relationships with 12 brokerage firms
and the FHLB of New York pursuant to which it could obtain funds from reverse
repurchase agreements and had $228.2 million of unencumbered investment
securities and mortgage-backed and related securities which could be used to
secure such borrowings.
The Company's operating activities provided cash flows of $193.1 million
during the six months ended June 30, 1996 and $14.8 million during the year
ended December 31, 1993, while during the six months ended June 30, 1995 and the
years ended December 31, 1995 and 1994, net cash used in operating activities
totalled $57.2 million, $189.4 million and $108.8 million, respectively. During
the foregoing periods cash resources were provided primarily by net income and
proceeds from sales of loans available for sale, and cash resources were used
primarily to purchase and originate loans available for sale, which in the
aggregate amounted to $142.9 million and $116.5 million during the six months
ended June 30, 1996 and 1995, respectively, and $274.0 million, $549.9 million
and $74.6 million during the years ended December 31, 1995, 1994 and 1993,
respectively.
The Company's investing activities provided cash flows totalling $89.1
million and $19.1 million during the six months ended June 30, 1996 and 1995,
respectively, and $234.5 million and $130.8 million during the years ended
December 31, 1994 and 1993, respectively, while during the year ended December
31, 1995 cash flows from investing activities utilized $474.5 million. During
the foregoing periods, cash flows from investing activities were provided
primarily by principal payments on discounted loans and loans held for
investment, maturities of and principal payments received on securities
available for sale and proceeds from sales of securities available for sale,
discounted loans, loans held for investment and real estate owned, and cash
flows from investing activities were primarily utilized to purchase and
originate discounted loans and loans held for investment and purchase securities
available for sale. During 1995, purchases and originations of discounted loans
and loans held for investment and purchases of securities available for sale
aggregated $818.6 million and $934.2 million, respectively, and were the
principal reasons why net cash was used in investing activities during this
period.
The Company's financing activities used $85.8 million, $127.9 million and
$140.6 million during the six months ended June 30, 1996 and the years ended
December 31, 1994 and 1993, respectively, and provided cash flows of $185.0
million and $681.8 million during the six months ended June 30, 1995 and the
year ended December 31, 1995, respectively. Cash flows from financing activities
primarily relate to changes in the Company's deposits and, to a lesser extent,
borrowings. Cash was provided by financing activities during the year ended
December 31, 1995 as increases in deposits and reverse repurchase agreements, a
net increase in FHLB advances and proceeds from the issuance of the Debentures
more than offset the transfer of deposits in connection with the sale of branch
offices at the end of 1995.
On a parent-only basis, the principal source of funds of the Company has
been and will continue to be the receipt of dividends and other distributions
from the Bank. The Bank is permitted, subject to certain limitations under
federal regulations and restrictions contained in the indenture related to the
Bank's issuance of the Debentures, to pay dividends to the Company. At June 30,
1996, taking into account the foregoing restrictions, the Bank could have
distributed $18.7 million to the Company with 30 day's notice to the OTS, which
amount will be increased by the amount of the net proceeds from the Notes
Offering contributed by the Company to the Bank. See "Use of Proceeds."
Immediately following consummation of the Offerings, the principal assets of the
Company will consist primarily of all of the outstanding capital stock of the
Bank, investments in non-bank subsidiaries and the portion of the estimated net
proceeds from the Notes Offering retained by it. See "Use of Proceeds." Other
than the Notes, the Company will have no material liquidity requirements
immediately following consummation of the offerings on a parent-only basis. The
Company has no current intention to pay cash dividends on the Common Stock. See
"Dividend Policy."
39
<PAGE>
The Bank is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of U.S. Government,
federal agency and other investments having maturities of five years or less.
Current OTS regulations require that a savings association maintain liquid
assets of not less than 5% of its average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less, of which short-term
liquid assets must consist of not less than 1%. Monetary penalties may be
imposed for failure to meet applicable liquidity requirements. The Bank's
liquidity, as measured for regulatory purposes, amounted to 11.6% at June 30,
1996 and averaged 8.2%, 12.9%, 14.2% and 11.4% during the six months ended June
30, 1996 and the years ended December 31, 1995, 1994 and 1993, respectively. The
high level of liquidity during 1994 was attributable to the Bank's efforts to
increase cash, interest-bearing deposits and other liquid sources of funds to
fund the transfer of deposits in connection with the sale of 23 offices
consummated at year end.
COMMITMENTS AND OFF-BALANCE SHEET RISKS
At June 30, 1996, the Company had commitments to fund (i) $25.1 million of
multi-family residential loans, (ii) $32.0 million of hotel loans, (iii) $6.8
million of office building loans and (iv) $4.9 million on a loan secured by
land. Management of the Company believes that the Company has adequate resources
to fund all of its commitments to the extent required and that substantially all
of such commitments will be funded during 1996. For additional information
relating to commitments and contingencies, see Note 9 to the interim
Consolidated Financial Statements.
In addition to commitments to extend credit, the Company is party to various
off-balance sheet financial instruments entered into in the normal course of
business to manage its interest rate risk. See "--Asset and Liability
Management" above and Note 18 to the Consolidated Financial Statements.
The Company conducts business with a variety of financial institutions and
other companies in the normal course of business, including counterparties to
its off-balance sheet financial instruments. The Company is subject to potential
financial loss if the counterparty is unable to complete an agreed upon
transaction. The Company seeks to limit counterparty risk through financial
analysis, dollar limits and other monitoring procedures.
REGULATORY CAPITAL REQUIREMENTS
Federally-insured savings associations such as the Bank are required to
maintain minimum levels of regulatory capital. These standards generally must be
as stringent as the comparable capital requirements imposed on national banks.
The OTS also is authorized to impose capital requirements in excess of these
standards on individual associations on a case-by-case basis.
The following table sets forth the regulatory capital ratios of the Bank at
June 30, 1996.
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------------------------------------------------------------
REQUIRED ACTUAL(1) EXCESS(1)
------------------------- ----------------------- -------------------------
PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT
------------- ---------- ----------- ---------- ------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital............................ 1.50% $ 31,367 6.74% $ 140,969 5.24% $ 109,602
Core (leverage) capital..................... 3.00 62,735 6.74 140,969 3.74 78,234
Risk-based capital(2)....................... 8.00 148,525 13.61 252,710 5.61 104,185
</TABLE>
- ------------------------
(1) For a presentation of the Bank's regulatory capital position on a pro forma
basis at June 30, 1996 after giving effect to the Notes Offering and the
Company's contribution of a portion of the net proceeds therefrom to the
Bank, see "Capitalization."
(2) At June 30, 1996, the Bank's supplementary capital included $100 million
attributable to the Debentures and $11.7 million of general allowances for
loan losses. The regulatory capital of the Bank will not include any amount
attributable to the Notes, except to the extent that a portion of the net
proceeds from the issuance thereof is contributed by the Company to the
Bank. See "Use of Proceeds" and "Capitalization."
40
<PAGE>
For a reconciliation of the Bank's regulatory capital and its stockholders'
equity under generally accepted accounting principles at June 30, 1996, see Note
8 to the interim Consolidated Financial Statements.
In August 1993, the OTS promulgated regulations which incorporate an
interest rate risk component into the OTS' risk-based capital requirements, and
in August 1995 the OTS postponed the effectiveness of this regulation after
having previously deferred the effective date several times. Because only
institutions whose measured interest rate risk exceeds certain parameters will
be subject to the interest rate risk capital requirement, management of the
Company does not believe that this regulation will increase the Bank's risk-
based regulatory capital requirement if it becomes effective in its current
form. For additional information relating to regulatory capital requirements,
see "Regulation--The Bank--Regulatory Capital Requirements" and Note 22 to the
Consolidated Financial Statements.
RECENT ACCOUNTING DEVELOPMENTS
For information relating to the effect of recent accounting standards on the
Company, see Note 1 to the Consolidated Financial Statements and Note 4 to the
Interim Consolidated Financial Statements.
41
<PAGE>
BUSINESS
GENERAL
The Company considers itself to be involved in a single business segment of
providing financial services and conducts a wide variety of business activities
within this segment. The Company's primary business activities currently consist
of its discounted loan acquisition and resolution activities, multi-family
residential and commercial real estate lending activities, single-family
residential lending activities involving non-conforming borrowers and various
investment activities, including investments in a wide variety of mortgage-
related securities and investments in low-income housing tax credit interests.
In addition, until recently the Company operated an automated banking division,
the operations of which were discontinued in September 1995. See
"Business--Discontinued Operations." The Company obtains funds for investment in
the foregoing and other business activities primarily from brokered and other
wholesale certificates of deposit, as well as retail deposits obtained through
its office in northern New Jersey, FHLB advances, reverse repurchase agreements,
structured financings, maturities and principal repayments on securities and
loans and proceeds from the sale of securities and loans held for sale.
Substantially all of the Company's business activities are conducted through the
Bank and subsidiaries of the Bank.
At June 30, 1996, the only significant subsidiary of the Company other than
the Bank was Investors Mortgage Insurance Holding Company, which currently is
engaged, directly and indirectly through subsidiaries, in the servicing of
certain private mortgage insurance policies which were formerly owned by it
through its ownership of two subsidiaries sold by it in 1993, as well as
management of the hotel in Columbus, Ohio which was purchased by the Company for
investment in mid-1993.
DISCOUNTED LOAN ACQUISITION AND RESOLUTION ACTIVITIES
The Company believes that under appropriate circumstances the acquisition of
non-performing and underperforming mortgage loans (collectively, "non-performing
loans") at discounts offers significant opportunities to the Company. Because
discounted loans generally have collateral coverage which is in excess of the
purchase price of the loan, successful resolutions can produce total returns
which are in excess of an equivalent investment in performing mortgage loans.
The Company began its discounted loan operations in 1991 and initially
focused on the acquisition of single-family residential loans. In 1994 the
Company expanded this business to include the acquisition and resolution of
discounted multi-family residential and commercial real estate loans (together,
unless the context otherwise requires, "commercial real estate loans"). Prior to
entering the discounted loan business, management of the Company had substantial
loan resolution experience through former subsidiaries of the Company which had
been engaged in the business of providing private mortgage insurance for
residential loans since 1986. This experience assisted the Company in developing
the procedures, facilities and systems which are necessary to appropriately
evaluate and acquire discounted loans and to resolve such loans in a timely and
profitable manner. Management of the Company believes that the resources
utilized by the Company in connection with the acquisition and resolution of
discounted real estate loans, which include proprietary technology and software,
allow the Company to effectively manage an extremely data-intensive business and
that, as discussed below, these resources have substantial applications in other
areas. See "Business--Computer Systems and Other Equipment."
COMPOSITION OF THE DISCOUNTED LOAN PORTFOLIO. At June 30, 1996, the
Company's net discounted loan portfolio amounted to $594.6 million or 31.3% of
the Company's total assets. Virtually all of the Company's discounted loan
portfolio is secured by first mortgage liens on real estate.
42
<PAGE>
The following table sets forth the composition of the Company's discounted
loan portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------------------------------------
1996 1995 1994 1993 1992 1991
-------------- ---------- ---------- ---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Single-family residential loans........... $ 262,468(1) $ 376,501 $ 382,165 $ 430,355 $ 306,401 $ 34,549
Multi-family residential loans............ 145,310 176,259 300,220 -- -- --
Commercial real estate loans.............. 421,101(2) 388,566 102,138 1,845 2,227 5,362
Other loans............................... 1,442 2,203 911 1,316 1,836 7,708
-------------- ---------- ---------- ---------- --------- ---------
Total discounted loans................ 830,321 943,529 785,434 433,516 310,464 47,619
Unaccreted discount....................... (226,217)(3) (273,758) (255,974) (129,882) (97,426) (21,908)
Allowance for loan losses................. (9,470) -- -- -- -- --
-------------- ---------- ---------- ---------- --------- ---------
Discounted loans, net..................... $ 594,634(1) $ 669,771 $ 529,460 $ 303,634 $ 213,038 $ 25,711
-------------- ---------- ---------- ---------- --------- ---------
-------------- ---------- ---------- ---------- --------- ---------
</TABLE>
- --------------------------
(1) Does not include the Company's $63.4 million investment in a 50% interest in
a newly-formed company which held $559.4 million of discounted single-family
residential loans, net at June 30, 1996. See "Business-- Investment in Joint
Venture." Inclusive of the Company's pro rata interest in such loans, the
Company's discounted loans, net would amount to $874.3 million at June 30,
1996.
(2) Consists of $141.4 million of loans secured by office buildings, $80.4
million of loans secured by hotels, $106.1 million of loans secured by
retail properties or shopping centers and $93.2 million of loans secured by
other properties.
(3) Consists of $57.8 million, $39.8 million, $128.3 million and $300,000
attributable to single-family residential loans, multi-family residential
loans, commercial real estate loans and other loans, respectively.
The properties which secure the Company's discounted loans are located
throughout the United States. At June 30, 1996, the five states with the
greatest concentration of properties securing the Company's discounted loans
were California, New Jersey, New York, Illinois and Florida, which had $343.6
million, $91.8 million, $86.8 million, $66.9 million and $48.6 million principal
amount of discounted loans (before unaccreted discount), respectively. The
Company believes that the broad geographic distribution of its discounted loan
portfolio reduces the risks associated with concentrating such loans in limited
geographic areas, and that, due to its expertise and procedures, the geographic
diversity of its discounted loan portfolio does not place greater burdens on the
Company's ability to resolve such loans.
At June 30, 1996, the discounted loan portfolio included two loans with a
carrying value equal to or more than $15 million and less than $25 million and
one loan with a carrying value greater than $25 million.
ACQUISITION OF DISCOUNTED LOANS. In the early years of the program, the
Company acquired discounted loans primarily from the FDIC and the Resolution
Trust Corporation, primarily in auctions of pools of loans acquired by them from
the large number of financial institutions which failed during the late 1980s
and early 1990s. Although governmental agencies, such as the FDIC and HUD,
continue to be potential sources of discounted loans, as indicated by the large
acquisition of discounted loans from HUD by the Company and a co-investor in
April 1996, as discussed under "Business--Investment in Joint Venture," in
recent years the Company has obtained discounted loans primarily from various
private sector sellers, such as banks, savings institutions, mortgage companies
and insurance companies. At June 30, 1996, approximately 92.4% of the loans in
the Company's discounted loan portfolio had been acquired from the private
sector.
Although the Company believes that a permanent market for the acquisition of
discounted loans has emerged in recent years within the private sector, there
can be no assurance that the Company will be able to acquire the desired amount
and type of discounted loans in future periods or that there will not be
significant inter-period variations in the amount of such acquisitions.
Discounted real estate loans generally are acquired in pools, although
discounted commercial real estate loans may be acquired individually. These
pools generally are acquired in auctions or competitive bid
43
<PAGE>
circumstances in which the Company faces substantial competition. Although many
of the Company's competitors have access to greater capital and have other
advantages, the Company believes that it has a competitive advantage relative to
many of its competitors as a result of its experience in managing and resolving
discounted loans, its large investment in the computer systems, technology and
other resources which are necessary to conduct this business, its national
reputation and the strategic relationships and contacts which it has developed
in connection with these activities.
The Company generally acquires discounted loans solely for its own
portfolio. From time to time, however, the Company and a co-investor may submit
a joint bid to acquire a pool of discounted loans in order to enhance the
prospects of submitting a successful bid. If successful, the Company and the
co-investor generally split up the acquired loans in an agreed upon manner,
although in certain instances the Company and the co-investor may continue to
have a joint interest in the acquired loans. See "Business--Investment in Joint
Venture."
Prior to making an offer to purchase a portfolio of discounted loans, the
Company conducts an extensive investigation and evaluation of the loans in the
portfolio. Evaluations of potential discounted loans are conducted primarily by
the Company's employees who specialize in the analysis of non-performing loans,
often with further specialization based on geographic or collateral specific
factors. The Company's employees regularly use third parties, such as brokers
who are familiar with the property's type and location, to assist them in
conducting an evaluation of the value of the collateral property, and depending
on the circumstances, particularly in the case of commercial real estate loans,
may use subcontractors, such as local counsel and engineering and environmental
experts, to assist in the evaluation and verification of information and the
gathering of other information not previously made available by the potential
seller.
The Company determines the amount to be offered by it to acquire potential
discounted loans by using a proprietary modeling system and loan information
database which focuses on the anticipated recovery amount, timing and cost of
the resolution of the loans. The amount offered by the Company generally is at a
discount from both the stated value of the loan and the value of the underlying
collateral which the Company estimates is sufficient to generate an acceptable
return on its investment.
RESOLUTION OF DISCOUNTED LOANS. After a discounted loan is acquired, the
Company utilizes its proprietary computer software system to resolve the loan in
accordance with specified procedures as expeditiously as possible. The various
resolution alternatives generally include the following: (i) the borrower brings
the loan current in accordance with original or modified terms, (ii) the
borrower repays the loan or a negotiated amount of the loan, (iii) the borrower
agrees to deed the property to the Company in lieu of foreclosure, in which case
it is classified as real estate owned and held for sale by the Company, and (iv)
the Company forecloses on the loan and the property is acquired at the
foreclosure sale either by a third party or by the Company, in which case it is
classified as real estate owned and held for sale by the Company.
The general goal of the Company's asset resolution process is to maximize in
a timely manner cash recovery on each loan in the discounted loan portfolio. The
Company generally anticipates a longer period (approximately 12 to 30 months) to
resolve discounted commercial real estate loans than discounted single-family
residential loans because of their complexity and the wide variety of issues
that may occur in connection with such loans.
The Bank's credit manager and the Credit Committee of the Board of Directors
of the Bank actively monitor the asset resolution process to identify discounted
loans which have exceeded their expected foreclosure period and real estate
owned which has been held longer than anticipated. Plans of action are developed
for each of these assets to remedy the cause for delay and are reviewed by the
Credit Committee.
44
<PAGE>
ACTIVITY IN THE DISCOUNTED LOAN PORTFOLIO. The following table sets forth
the activity in the Company's gross discounted loan portfolio during the periods
indicated.
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED ----------------------------------------------------------------------
JUNE 30,
1996 1995 1994 1993
---------------------- ---------------------- ---------------------- ----------------------
NO. OF NO. OF NO. OF NO. OF
BALANCE LOANS BALANCE LOANS BALANCE LOANS BALANCE LOANS
--------- ----------- --------- ----------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of
period...................... $ 943,529 4,543 $ 785,434 3,894 $ 433,516 5,160 $ 310,464 5,358
Acquisitions(1).............. 161,811 144 791,195 2,972 826,391 2,781 294,359 2,412
Resolutions and
repayments(2)............... (188,780) (642) (300,161) (960) (265,292) (2,153) (116,890) (1,430)
Loans transferred to real
estate owned................ (59,613) (444) (281,344) (984) (171,300) (1,477) (26,887) (602)
Sales(3)..................... (26,626) (257) (51,595) (379) (37,881) (417) (27,530) (578)
--------- ----- --------- ----- --------- ----------- --------- -----------
Balance at end of period..... $ 830,321 3,344 $ 943,529 4,543 $ 785,434 3,894 $ 433,516 5,160
--------- ----- --------- ----- --------- ----------- --------- -----------
--------- ----- --------- ----- --------- ----------- --------- -----------
<CAPTION>
1992 1991
---------------------- ------------------------
NO. OF NO. OF
BALANCE LOANS BALANCE LOANS
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at beginning of
period...................... $ 47,619 590 $ -- --
Acquisitions(1).............. 297,169 5,380 49,996 620
Resolutions and
repayments(2)............... (28,194) (473) (2,377) (30)
Loans transferred to real
estate owned................ (6,130) (139) -- --
Sales(3)..................... -- -- -- --
--------- ----- ----------- ---
Balance at end of period..... $ 310,464 5,358 $ 47,619 590
--------- ----- ----------- ---
--------- ----- ----------- ---
</TABLE>
- ------------------------------
(1) In the six months ended June 30, 1996, acquisitions consisted of $6.1
million of single-family residential loans, $32.9 million of multi-family
residential loans and $122.8 million of commercial real estate loans. In
1995, acquisitions consisted of $272.8 million of single-family residential
loans, $141.2 million of multi-family residential loans, $374.9 million of
commercial real estate loans and $2.3 million of other loans. In 1994,
acquisitions consisted of $395.8 million of single-family residential loans,
$315.5 million of multi-family residential loans and $115.1 million of
commercial real estate loans. In 1993, 1992 and 1991 substantially all of
the acquisitions were of single-family residential loans.
(2) Consists of loans which were resolved in a manner which resulted in partial
or full repayment of the loan to the Bank, as well as payments on loans
which have been brought current in accordance with their original or
modified terms or on other loans which have not been resolved.
(3) The Company realized $5.3 million of gains from the sale of discounted loans
during the six months ended June 30, 1996 and $6.0 million, $890,000 and
$3.9 million of gains from the sale of discounted loans during 1995, 1994
and 1993, respectively. The terms of these sales did not provide for any
recourse to the Company based on the subsequent performance of the loans.
For information relating to the activity in the Company's real estate owned
which is attributable to the Company's discounted loan acquisitions, see
"Business--Asset Quality--Real Estate Owned."
PAYMENT STATUS OF DISCOUNTED LOANS. The following table sets forth certain
information relating to the payment status of loans in the Company's discounted
loan portfolio at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------------------------------------------------
1996 1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loan status:
Current.................................. $ 500,726 $ 351,630 $ 113,794 $ 23,629 $ 25,463 $ --
Past due less than 90 days............... 13,212 86,838 57,023 15,175 4,063 --
Past due 90 days or more................. 316,383 385,112 413,506 254,413 31,808 47,619
Acquired and servicing not yet
transferred............................. -- 119,949 201,111 140,299 249,130 --
----------- ----------- ----------- ----------- ---------- ----------
830,321 943,529 785,434 433,516 310,464 47,619
Unaccreted discount........................ (226,217) (273,758) (255,974) (129,882) (97,426) (21,908)
Allowance for loan losses.................. (9,470) -- -- -- -- --
----------- ----------- ----------- ----------- ---------- ----------
$ 594,634 $ 669,771 $ 529,460 $ 303,634 $ 213,038 $ 25,711
----------- ----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ----------- ---------- ----------
</TABLE>
ACCOUNTING FOR DISCOUNTED LOANS. The discount associated with single-family
residential loans is recognized as a yield adjustment and is accreted into
interest income using the interest method applied on a loan-by-loan basis to the
extent the timing and amount of cash flows can be reasonably determined. The
45
<PAGE>
remaining unamortized discount which is associated with a single-family
residential loan which is subsequently brought current by the borrower in
accordance with the loan terms is accreted into the Company's interest income as
a yield adjustment using the interest method over the contractual maturity of
the loan. For all other loans interest is earned as cash is received.
Gains on the repayment and discharge of loans are recorded in interest
income on discounted loans. Upon receipt of title to property securing a
discounted loan, the loans are transferred to real estate owned and accretion of
the related discount is discontinued.
Beginning in 1996, adjustments to reduce the carrying value of discounted
loans to the fair value of the property securing the loan are charged against
the allowance for loan losses on the discounted loan portfolio. Prior to the
first quarter of 1996, such adjustments were charged against interest income on
discounted loans.
During the six months ended June 30, 1996 and the years ended December 31,
1995, 1994 and 1993, 88.9%, 93.2%, 92.7% and 83.4%, respectively, of the
Company's income on discounted loans was comprised of realized discount. For
additional information, see Note 9 to the Consolidated Financial Statements.
OTHER DISCOUNTED LOAN ACTIVITIES. The Company believes that the procedures,
facilities and systems which it has developed in connection with the acquisition
and resolution of discounted loans may be applied in other areas. Recently, the
Company commenced a program to utilize this experience by financing the
acquisition of discounted loans by other institutions. During 1995, the Company
originated $41.7 million of portfolio finance loans, which had an aggregate
balance of $39.5 million at June 30, 1996. Portfolio finance loans generally
have two-year terms, floating interest rates which adjust in accordance with a
designated reference rate and a loan-to-value ratio which does not exceed the
lesser of 90% of the purchase price or the estimated value of the collateral as
determined by the Company, and may include terms which provide the Company with
a participation interest in the profits from the resolution of the discounted
loan collateral. Portfolio finance loans are included in the Company's
non-discounted loan portfolio under the category of loan which is represented by
the properties which secure the discounted loans which collateralize the
Company's portfolio finance loans. See "Business--Lending Activities."
The Company also currently is developing a program to provide asset
management and resolution services to third parties pursuant to contracts with
the owner or purchaser of non-performing assets. It is anticipated that
servicing contracts entered into by the Company will provide for the payment to
the Company of specified fees and include terms which allow the Company to
participate in the profits resulting from the successful resolution of the
assets. There can be no assurance that the Company will be able to successfully
implement this program in the near term or at all.
INVESTMENT IN JOINT VENTURE
GENERAL. On March 22, 1996, the Company was notified by HUD that BCBF,
L.L.C., a newly-formed limited liability company ("LLC") in which the Bank and a
co-investor each have a 50% interest, was the successful bidder to purchase
16,196 single-family residential loans offered by HUD at an auction (the "HUD
Loans"), and on April 10, 1996 the LLC consummated the acquisition of the HUD
Loans. Many of the loans, which had an aggregate unpaid principal balance of
$741.2 million at the date of acquisition, were not performing in accordance
with the terms of the loans or an applicable forbearance agreement. The
aggregate purchase price paid to HUD amounted to $616.0 million and was paid
with the proceeds from $53.3 million of equity contributions to the LLC by each
of the Bank and its co-investor, $36.3 million of proceeds from the LLC's
concurrent sale of 1,631 HUD Loans with an aggregate unpaid principal balance of
$61.9 million and the proceeds of a $473.0 million loan to the LLC from an
unaffiliated party (the "LLC Loan"). The LLC Loan has a term of nine months,
bears interest at a rate which is equal to the one-month LIBOR plus 2.25% and is
collateralized by the HUD Loans. At June 30, 1996, the HUD Loans held by the LLC
had a net balance of $559.4 million.
In connection with the LLC's acquisition of the HUD Loans the Company
entered into an agreement with the LLC to service the HUD Loans in accordance
with its loan servicing and loan default resolution procedures. In return for
such servicing, the Company receives specified fees which are payable on a
monthly
46
<PAGE>
basis. The Company did not pay any additional amount to acquire these servicing
rights and, as a result, the acquisition of the right to service the HUD Loans
for the LLC did not result in the Company's recording capitalized mortgage
servicing rights for financial reporting purposes.
DESCRIPTION OF THE HUD LOANS. All of the HUD Loans are secured by first
mortgage liens on single-family residences. Of the $660.9 million gross
principal amount of the HUD Loans as of June 30, 1996, $648.8 million had fixed
interest rates and $12.1 million had adjustable rates. As of the same date, the
HUD Loans had a weighted average rate of 10.06% and a weighted average maturity
of 19 years.
The properties which secure the HUD Loans are located in 31 states, the
District of Columbia and Puerto Rico. As of June 30, 1996, the five
jurisdictions with the greatest concentration of properties securing the HUD
Loans were Texas, California, Colorado, Tennessee and Georgia, which had $155.4
million, $87.1 million, $67.1 million $32.8 million and $32.4 million gross
principal amount of loans, respectively.
The HUD Loans were acquired by HUD pursuant to various assignment programs
of the FHA. Under programs of the FHA, a lending institution may assign a
FHA-insured loan to HUD because of an economic hardship on the part of the
borrower which precludes the borrower from making the scheduled principal and
interest payment on the loan. FHA-insured loans also are automatically assigned
to HUD upon the 20th anniversary of the mortgage loan. In most cases, loans
assigned to HUD after this 20-year period are performing under the original
terms of the loan. Once a loan is assigned to HUD, the FHA insurance has been
paid and the loan is no longer insured. As a result, none of the HUD Loans are
insured by the FHA.
HUD assistance to borrowers is provided in the form of forbearance
agreements under which the borrower either makes a monthly payment less than or
equal to the original monthly payment or makes a monthly payment more than the
original monthly payment to make up for arrearages. Forbearance agreements are
12 months in duration and the borrower may be granted up to a maximum of three
consecutive 12-month plans. Under the terms of the contract governing the sale
of the HUD Loans, the LLC and the Company, as the servicer of the HUD Loans, are
obligated to comply with the terms of the forbearance agreements, which may be
written or oral in nature, until the term of the forbearance agreement expires
or there is a default under the forbearance agreement.
The following table sets forth information relating to the payment status of
the HUD Loans as of the date indicated, which is subject to change as a result
of information obtained by the Company in connection with its servicing
activities.
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------
% OF HUD
AMOUNT LOANS
---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
HUD Loans without Forbearance Agreements:
Current............................................................................... $ 65,270 9.9%
Past due less than 90 days............................................................ 4,727 0.7
Past due 90 days or more.............................................................. 276,418 41.8
---------- -----
Total............................................................................... 346,415 52.4
---------- -----
HUD Loans with Forbearance Agreements:
Current............................................................................... 11,540 1.7
Past due less than 90 days............................................................ 3,857 0.6
Past due 90 days or more.............................................................. 299,134 45.3
---------- -----
Total............................................................................... 314,531 47.6
---------- -----
Total............................................................................... $ 660,946 100.0%
---------- -----
---------- -----
</TABLE>
In connection with the acquisition of the HUD Loans, the LLC established an
allowance for loan losses, which amounted to $2.8 million at June 30, 1996. The
allowance for loan losses is based primarily on the Company's evaluation of the
credit risk inherent in the HUD Loans and the methodology adopted by the
47
<PAGE>
Company during the six months ended June 30, 1996 for establishing an allowance
for loan losses related to its discounted loan portfolio. Provisions for loan
losses are based on numerous factors, including the state of national and
regional economies, real estate values in the areas in which the properties
which secure the HUD Loans are located and the performance of the HUD Loans.
SECURITIZATION OF THE HUD LOANS. The Company and its co-investor intend to
securitize a substantial amount of the HUD Loans within approximately six to
nine months and to repay the LLC Loan out of the proceeds therefrom.
Securitization would involve the creation of a special purpose entity to acquire
the HUD Loans which are to be securitized from the LLC, with payment being made
from the proceeds of the issuance of the REMIC securities backed by such loans.
The amount of the HUD Loans to be securitized will be dependent in part on the
Company's ability to enhance the performance of the HUD Loans by, among other
things, resolving existing delinquencies, documenting verbal forbearance
agreements and bringing loans which are subject to forbearance agreements into
compliance with such agreements. Any securitization of the HUD Loans also will
be dependent on market conditions for REMICs of this nature and other factors
which are not necessarily within the control of the LLC and its members. As a
result, there can be no assurance that the LLC will be able to securitize the
HUD Loans in the manner contemplated by the Company and its co-investor. In the
event that the LLC is unable to securitize or otherwise sell an amount of the
HUD Loans which would enable it to repay the LLC Loan at maturity, it could
attempt to renegotiate an extension of the LLC Loan from the current lender,
seek financing from another lender and/or sell the loans held by the joint
venture to the joint venturers or third parties. In the event of default on the
LLC Loan, the lender's sole recourse would be against the loans and related
collateral which secures the LLC Loan.
In the event of a securitization of the HUD Loans, the REMIC securities
backed by the HUD Loans likely will consist of a senior class and one or more
subordinated classes which provide credit enhancement to the senior class. See
"Business--Investment Activities--Mortgage-Backed and Related Securities."
Depending on the circumstances, the Company may acquire the subordinated class
or classes of the REMIC securities backed by the HUD Loans. The Company also may
seek to retain the rights to service the HUD Loans which back the REMIC, which
would result in the Company recording capitalized mortgage servicing rights for
financial reporting purposes.
ACCOUNTING FOR INVESTMENT IN THE LLC. The Company's investment in the LLC
is accounted for under the equity method of accounting. Under the equity method
of accounting, an investment in the shares or other interests of an investee is
initially recorded at the cost of the shares or interests acquired and
thereafter is periodically increased (decreased) by the investor's proportionate
share of the earnings (losses) of the investee and decreased by all dividends
received by the investor from the investee. As of June 30, 1996, the Company's
investment in the LLC amounted to $63.4 million under the equity method of
accounting. Because the LLC is a pass-through entity for federal income tax
purposes, provisions for income taxes will be established by each of the Company
and its co-investor and not the LLC. For additional information, see Note 6 to
the interim Consolidated Financial Statements.
LENDING ACTIVITIES
COMPOSITION OF LOAN PORTFOLIO. At June 30, 1996, the Company's net loan
portfolio amounted to $312.6 million or 16.5% of the Company's total assets.
Loans held for investment in the Company's loan portfolio are carried at
amortized cost, less an allowance for loan losses, because the Company has the
ability and presently intends to hold them to maturity.
48
<PAGE>
The following table sets forth the composition of the Company's loan
portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ----------------------------------------------------------
1996 1995 1994 1993 1992 1991
-------------- -------------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Single-family residential loans............... $ 77,724 $ 75,928 $ 31,926 $ 30,385 $ 33,799 $ 41,895
Multi-family residential loans................ 86,295(1) 49,047(1) 1,800 39,352 5,563 7,305
Commercial real estate and land loans:
Hotels...................................... 132,005(2) 125,791 19,659 14,237 -- --
Office buildings............................ 74,939 61,262 -- -- -- --
Land........................................ 16,575 24,904 1,315 4,448 -- --
Other....................................... 1,093 2,494 4,936 4,059 1,908 2,009
-------------- -------------- --------- --------- --------- ---------
Total..................................... 224,612 214,451 25,910 22,744 1,908 2,009
Consumer and other loans...................... 493 3,223 1,558 3,639 2,395 2,195
-------------- -------------- --------- --------- --------- ---------
Total loans............................... 389,124 342,649 61,194 96,120 43,665 53,404
Undisbursed loan proceeds..................... (68,769) (39,721) -- -- -- --
Unaccreted discount........................... (4,924) (5,376) (3,078) (6,948) (1,898) (3,210)
Allowance for loan losses..................... (2,855) (1,947) (1,071) (884) (752) (934)
-------------- -------------- --------- --------- --------- ---------
Loans, net.................................. $ 312,576 $ 295,605 $ 57,045 $ 88,288 $ 41,015 $ 49,260
-------------- -------------- --------- --------- --------- ---------
-------------- -------------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) At June 30, 1996 and December 31, 1995, multi-family residential loans
included $42.8 million and $7.7 million of construction loans, respectively.
(2) At June 30, 1996, hotel loans included $7.0 million of construction loans.
The Company's lending activities are conducted on a nationwide basis and, as
a result, the properties which secure its loan portfolio are geographically
located throughout the United States. At June 30, 1996, the five states in which
the largest amount of properties securing the loans in the Company's loan
portfolio were located were New York, California, New Jersey, Illinois and
Florida, which had $85.5 million, $84.8 million, $50.4 million, $31.2 million
and $30.9 million of principal amount of loans, respectively. As noted above,
the Company believes that the broad geographic distribution of its loan
portfolio reduces the risks associated with concentrating such loans in limited
geographic areas.
At June 30, 1996, the Company's loan portfolio included seven loans with a
balance equal to $15 million or more and less than $25 million and no loans with
a balance equal to $25 million or more.
49
<PAGE>
CONTRACTUAL PRINCIPAL REPAYMENTS. The following table sets forth certain
information at December 31, 1995 regarding the dollar amount of loans maturing
in the Company's loan portfolio based on their contractual terms to maturity and
includes scheduled payments but not potential prepayments, as well as the dollar
amount of loans which have fixed or adjustable interest rates. Demand loans,
loans having no stated schedule of repayments and no stated maturity and
overdrafts are reported as due in one year or less. Loan balances have not been
reduced for (i) undisbursed loan proceeds, unearned discounts and the allowance
for loan losses and (ii) non-performing loans.
<TABLE>
<CAPTION>
MATURING IN
---------------------------------------------
AFTER AFTER
ONE YEAR FIVE YEARS
ONE YEAR THROUGH THROUGH AFTER TEN
OR LESS FIVE YEARS TEN YEARS YEARS
--------- ---------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Single-family residential loans............................ $ 8,533 $ 8,203 $ 3,245 $ 55,947
Multi-family residential loans............................. 2,357 44,582 2,040 68
Commercial real estate and land loans...................... 32,742 151,902 25,143 4,664
Consumer and other loans................................... 88 228 527 2,380
--------- ---------- ----------- ---------
Total.................................................... $ 43,720 $ 204,915 $ 30,955 $ 63,059
--------- ---------- ----------- ---------
--------- ---------- ----------- ---------
Interest rate terms on amounts due after one year:
Fixed.................................................... $ 42,150 $ 146,777 $ 27,328 $ 47,204
--------- ---------- ----------- ---------
--------- ---------- ----------- ---------
Adjustable............................................... $ 1,570 $ 58,138 $ 3,627 $ 15,855
--------- ---------- ----------- ---------
--------- ---------- ----------- ---------
</TABLE>
Scheduled contractual principal repayments do not reflect the actual
maturities of loans because of prepayments and, in the case of conventional
mortgage loans, due-on-sale clauses. The average life of mortgage loans,
particularly fixed-rate loans, tends to increase when current mortgage loan
rates are substantially higher than rates on existing mortgage loans and,
conversely, decrease when rates on existing mortgages are substantially higher
than current mortgage loan rates.
50
<PAGE>
ACTIVITY IN THE LOAN PORTFOLIO. The following table sets forth the activity
in the Company's gross loan portfolio during the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, -----------------------------------
1996 1995 1994 1993
----------------- ---------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at beginning of period........................... $ 342,649 $ 61,194 $ 96,120 $ 43,665
-------- ---------- ---------- -----------
Originations:
Single-family residential loans........................ 7,556 14,776 7,119 32,668
Multi-family residential loans......................... 45,249 48,664 -- 23,696
Commercial real estate and land loans.................. 52,916 212,630 22,486 18,586
Consumer loans......................................... -- 207 -- 2,299
-------- ---------- ---------- -----------
Total loans originated............................... 105,721 276,277 29,605 77,249
-------- ---------- ---------- -----------
Purchases:
Single-family residential loans........................ -- 29,833 -- --
Multi-family residential loans......................... -- -- -- 126,506
Commercial real estate loans........................... -- 2,245 -- --
Consumer loans......................................... -- 1,966 -- --
Purchase of a savings institution...................... -- -- -- 475,105
-------- ---------- ---------- -----------
Total loans purchased................................ -- 34,044 -- 601,611
-------- ---------- ---------- -----------
Sales.................................................... -- -- (1,078) (418,812)
-------- ---------- ---------- -----------
Loans transferred from (to) available for sale........... 6 4,353 (24,380) (139,297)
-------- ---------- ---------- -----------
Principal repayments, net of capitalized interest........ (58,694) (33,168) (39,073) (68,296)
-------- ---------- ---------- -----------
Transfer to real estate owned............................ (558) (51) -- --
-------- ---------- ---------- -----------
Net increase (decrease) in net loans................... 46,475 281,455 (34,926) 52,455
-------- ---------- ---------- -----------
Balance at end of period................................. $ 389,124 $ 342,649 $ 61,194 $ 96,120
-------- ---------- ---------- -----------
-------- ---------- ---------- -----------
</TABLE>
LOANS AVAILABLE FOR SALE. In addition to loans acquired for investment and
held in the Company's loan portfolio, the Company originates and purchases loans
which it presently does not intend to hold to maturity. Such loans are
designated as loans available for sale upon origination or purchase and are
carried at the lower of cost or aggregate market value.
The following table sets forth the composition of the Company's loans
available for sale by type of loan at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------------------------------------
1996 1995 1994 1993 1992 1991
--------- ---------- ---------- ---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Single-family residential loans.................. $ 54,583 $ 221,927 $ 16,825 $ 30,217 $ 754 $ 2,059
Multi-family residential loans................... 28,611 28,694 83,845 44,919 -- --
Consumer loans................................... 884 1,169 1,623 25,930 -- --
--------- ---------- ---------- ---------- --------- ---------
$ 84,078 $ 251,790 $ 102,293 $ 101,066 $ 754 $ 2,059
--------- ---------- ---------- ---------- --------- ---------
--------- ---------- ---------- ---------- --------- ---------
</TABLE>
Although the Company's loans available for sale are secured by properties
located nationwide, currently a substantial majority of such loans are
single-family residential loans to non-conforming borrowers originated primarily
in the western states, particularly California. As a result, $20.1 million or
23.9% of the Company's loans available for sale at June 30, 1996 were secured by
properties located in California.
SINGLE-FAMILY RESIDENTIAL LOANS. The Company's lending activities include
the origination and purchase of single-family residential loans to borrowers
who, because of prior credit problems, the absence of a
51
<PAGE>
credit history or other factors, are unable or unwilling to qualify as borrowers
for a single-family residential loan under FHLMC/FNMA guidelines ("conforming
loans") and who have substantial equity in the properties which secure the
loans. Loans to non-conforming borrowers are perceived by the Company's
management as being advantageous to the Company because they generally have
higher interest rates and origination and servicing fees and generally lower
loan-to-value ratios than conforming loans and because the Company's expertise
in the resolution of non-performing loans can be utilized in underwriting such
loans, as well as to address loans acquired pursuant to this program which
become non-performing after acquisition. The Company commenced development of
this program in late 1994 and fully implemented it by mid-1995.
In recent periods the Company has acquired single-family residential loans
to non-conforming borrowers primarily through a correspondent relationship with
an established mortgage banking firm which is headquartered in California and
conducts business in eleven western states, and to a lesser extent correspondent
relationships with three other financial services companies. Correspondent
institutions originate loans based on guidelines provided by the Company and
promptly sell the loans to the Company on a servicing-released basis.
The Company's current strategy is to continue to solidify and expand its
wholesale sources, which are subject to a thorough due diligence and approval
process to ensure quality sources of new business. In addition, in order to
diversify its sources, the Company currently is developing the ability to
directly originate loans to non-conforming borrowers on a retail basis.
Recently, the Company established a loan production office for this purpose in
Edison, New Jersey. The Company currently is in the process of staffing this
office, as well as its full-service office located in Fort Lee, New Jersey, with
experienced originators of non-conforming single-family residential loans.
Although the Company is evaluating sites for additional loan production offices,
there can be no assurance that the Company will establish other offices or that
its loan production office or offices will be able to successfully originate
single-family residential loans to non-conforming borrowers.
The Company has adopted policies that set forth the specific lending
requirements of the Company as they relate to the processing, underwriting,
property appraisal, closing, funding and delivery of loans to non-conforming
borrowers. These policies include program descriptions which set forth four
classes of non-conforming loans, designated A, B, C and D. Class A loans
generally relate to borrowers who have no or limited adverse incidents in their
credit histories, whereas Class B, C and D loans relate to increasing degrees of
non-conforming borrowers. Factors which are considered in evaluating a borrower
in this regard are the presence or absence of a credit history, prior
delinquencies in the payment of mortgage and consumer credit and personal
bankruptcies.
The terms of the loan products offered by the Company directly or through
correspondents to non-conforming borrowers emphasize real estate loans which
generally are underwritten with significant reliance on a borrower's level of
equity in the property securing the loan, which may be an owner-occupied or,
depending on the class of loan and its terms, a non-owner occupied property.
Although the Company's guidelines require information in order to enable the
Company to evaluate a borrower's ability to repay a loan by relating the
borrower's income, assets and liabilities to the proposed indebtedness, because
of the significant reliance on the ratio of the principal amount of the loan to
the appraised value of the security property, each of the four principal classes
of loans identified by the Company include products which permit reduced or no
documentation for verifying a borrower's income and employment. Loans which
permit reduced documentation in this regard generally require documentation of
employment and income for the most recent six-month period, as opposed to the
two-year period required in the case of full documentation loans. Loans which
permit no documentation require only an oral or written verification of
employment and do not require independent verification of a borrower's income or
assets and liabilities as represented by the borrower in the application.
Although the Company reserves the right to verify a borrower's income, assets
and liabilities and employment history, other than as set forth above, it
generally does not verify such information through other sources.
52
<PAGE>
The Company's strategy is to offer a broad range of products to its
borrowers and its origination sources. Loans may have principal amounts which
conform to the guidelines set by FHLMC or FNMA for conforming loans, or
principal amounts which significantly exceed these amounts (so called "jumbo
loans"). Loans may have fixed or adjustable interest rates and terms ranging up
to 30 years.
The Company purchased and originated a total of $132.4 million of
single-family residential loans to non-conforming borrowers during the six
months ended June 30, 1996 and $240.3 million of such loans during 1995,
including $158.6 million during the last six months of the year. At June 30,
1996, the Company had $40.9 million of single-family residential loans to
non-conforming borrowers, which had a weighted average yield of 9.75%.
The Company generally intends to sell or securitize its single-family
residential loans to non-conforming borrowers and, as a result, all of such
loans were classified as available for sale at June 30, 1996. During the six
months ended June 30, 1996, the Company sold $285.2 million of single-family
residential loans to non-conforming borrowers for a gain of $6.8 million, and
during 1995 the Company sold $25.3 million of such loans for a gain of $188,000.
Of the loans sold during the six months ended June 30, 1996, $134.8 million were
securitized and sold in an underwritten public offering managed by an
unaffiliated investment banking firm. The Company received a residual security
in the REMIC which was formed in connection with this transaction as partial
payment for the loans sold by it, which had a carrying value of $10.7 million at
June 30, 1996.
Although non-conforming loans generally have higher levels of default than
conforming loans, the Company believes that the borrower's equity in the
security property and its expertise in the area of resolution of non-performing
loans will continue to make its non-conforming borrower loan program a
profitable one notwithstanding such defaults and any resulting losses. There can
be no assurance that this will be the case, however.
In addition to the Company's single-family residential loan programs to
non-conforming borrowers, from time to time the Company purchases pools of
single-family residential loans for investment purposes. During 1995, the
Company purchased $29.8 million of loans which were primarily secured by
properties located in the Company's market area in northern New Jersey.
MULTI-FAMILY RESIDENTIAL LOANS. The Company's lending activities include
the acquisition of conventional loans secured by existing multi-family
residences located nationwide. The Company commenced these activities in
mid-1993 and acquired $34.9 million, $378.4 million and $140.5 million of loans
secured by existing multi-family residences during 1995, 1994 and 1993,
respectively. Originations of these loans have declined since mid-1994 as a
result of decreases in the volume of refinances of mortgage loans and increased
competition, which resulted in a decrease in available yields and a general
increase in the values of multi-family residential properties. At June 30, 1996,
the Company's permanent multi-family residential loans originated or purchased
under this program amounted to $28.6 million, all of which were classified as
available for sale.
Originations of multi-family residential loans are obtained through the
Company's direct marketing efforts to mortgage brokers, mortgage bankers and
other institutional sources. From time to time the Company also may utilize
independent contractors or brokers who for a fee identify lending opportunities
for the Company.
The Company's permanent multi-family residential loans may have adjustable
or fixed rates of interest, generally have terms of three to seven years and are
amortized over a period of up to 30 years, thus requiring a balloon payment at
maturity. The maximum loan-to-value ratio generally does not exceed the lesser
of 75% of appraised value of the security property and 80% of the purchase
price. Loans secured by existing multi-family residences generally are made on a
non-recourse basis except for standard FNMA requirements and environmental
matters.
During 1995, 1994 and 1993, the Company exchanged multi-family residential
loans with an aggregate principal amount of $83.9 million, $346.6 million and
$67.1 million, respectively, for FNMA mortgage-
53
<PAGE>
backed securities backed by such loans. With the exception of a subordinate
interest resulting from a related securitization, which had a carrying value of
$10.7 million at June 30, 1996, the Company has sold all of the securities
acquired in connection with these securitizations.
In addition to loans secured by existing multi-family residences, which are
available for sale, from time to time the Company originates loans for the
construction of multi-family residences located nationwide, as well as bridge
loans to finance the acquisition and rehabilitation of distressed multi-family
residential properties. At June 30, 1996, the Company had $42.8 million of
multi-family residential construction loans, of which $18.6 million had been
funded, and $43.5 million of acquisition and rehabilitation loans, of which
$42.6 million had been funded.
Construction loans generally have terms of three years and interest rates
which float on a monthly basis in accordance with a designated reference rate.
Payments during the term of the loan may be made to the Company monthly on an
interest-only basis. The loan amount may include an interest reserve which is
maintained by the Company and utilized to pay interest on the loan during its
term. In addition to stated interest, and in order to compensate the Company for
the greater risk which generally is associated with construction loans, the
Company's multi-family residential construction loans may include provisions
pursuant to which the borrower agrees to pay the Company as additional interest
on the loan an amount based on specified percentages (generally between 25-50%)
of the net proceeds from the sale of the property and the net economic value of
the property upon refinancing or maturity of the loan.
Construction loans are secured by a first priority lien on the real
property, all improvements thereon and all fixtures and equipment used in
connection therewith, as well as a first priority assignment of all apartment
revenues and gross receipts generated in connection with the property.
Construction loans are made without pre-leasing requirements or any requirement
of a commitment by another lender to "take-out" the construction loan by making
a permanent loan secured by the property upon completion of construction.
Disbursements on a construction loan are subject to a retainage percentage of
10% and are made only after evidence that available funds have been utilized by
the borrower and are sufficient to pay for all construction costs through the
date of the construction advance and funds remain in the construction budget and
from sources other than the loan to complete construction of the project.
The Company generally requires the general contractor selected by the
borrower, which along with the general construction contract is subject to the
Company's review and approval, to provide payment and performance bonds issued
by a surety approved by the Company in an amount at least equal to the
construction contract costs which are estimated to be necessary to complete
construction of the project in accordance with the construction contract.
Moreover, the Company generally conducts site inspections of projects under
construction at least bi-monthly and of completed projects at least
semi-annually.
The Company's multi-family residential lending program also includes
investments in low-income housing tax credit partnerships which own multi-family
residential properties which have been allocated tax credits under the Code, as
well as loans to such partnerships for the purpose of construction of such
properties. See "Business--Investment Activities--Investment in Low-Income
Housing Tax Credit Interests."
COMMERCIAL REAL ESTATE AND LAND LOANS. The Company's lending activities
include the acquisition of loans secured by commercial real estate, particularly
loans secured by hotels and office buildings, which the Company began
originating in late 1994 and late 1995, respectively. Commercial real estate
loans currently are made to finance the purchase and refinance of properties,
the refurbishment of distressed properties and, recently, the construction of
hotels. At June 30, 1996, the Company's loans secured by commercial real estate
(and land) amounted to $224.6 million and consisted primarily of $132.0 million
and $74.9 million of loans secured by hotels and office buildings, respectively.
In the future, the Company may expand the types of commercial loans originated
by it, including without limitation loans secured by various special purpose
health care properties.
54
<PAGE>
Commercial real estate loans are obtained directly by the Company through
its marketing efforts to mortgage brokers, mortgage bankers, developers and
other sources. Such loans generally have terms of five to seven years and are
amortized over 15 to 25 year periods. The maximum loan-to-value ratio generally
does not exceed the lesser of 85% of appraised value or the purchase price of
the property.
Commercial real estate loans generally have fixed rates of interest. In
addition to stated interest, commercial real estate loans may include provisions
pursuant to which the borrower agrees to pay the Company as additional interest
on the loan an amount based on specified percentages (generally between 25-50%)
of the net cash flow from the property during the term of the loan and/or the
net proceeds from the sale or refinance of the property upon maturity of the
loan. Alternatively, participating interests may be obtained in the form of
additional fees which must be paid by the borrower in connection with a
prepayment of the loan, generally after an initial lock-out period during which
prepayments are prohibited. The fees which could be payable by a borrower during
specified periods of the loan consist either of fixed exit fees or yield
maintenance payments, which are required to be paid over a specified number of
years after the prepayment and are intended to increase the yield of the Company
on the proceeds from the loan payoff to a level which is comparable to the yield
on the prepaid loan.
Commercial real estate loans are secured by a first priority lien on the
real property, all improvements thereon and, in the case of hotel loans, all
fixtures and equipment used in connection therewith, as well as a first priority
assignment of all revenues and gross receipts generated in connection with the
property. The liability of a borrower on a commercial real estate loan generally
is limited to the borrower's interest in the property, except with respect to
certain specified circumstances.
At June 30, 1996, the Company's commercial real estate loans included $7.0
million of hotel construction loans. These loans generally have the same terms
as the Company's multi-family residential construction loans, as discussed
above.
Also included in the Company's commercial real estate lending activities are
land loans, including land acquisition and development loans. At June 30, 1996,
the Company had $16.6 million of land loans. The Company's largest land loan at
June 30, 1996 was a $13.7 million five-year loan to finance the acquisition and
development of lots, as well as the construction of seven model homes, in a
planned community in Florida, of which $4.9 million was unfunded at such date.
The remainder of the Company's land loans at June 30, 1996 consisted of two
loans which aggregated $2.9 million and which were made to finance the sale of
real estate which was held by a subsidiary of the Company acquired in connection
with the acquisition of Old Berkeley.
Multi-family residential, commercial real estate and construction lending
generally is considered to involve a higher degree of risk than single-family
residential lending because such loans involve larger loan balances to a single
borrower or group of related borrowers. In addition, the payment experience on
multi-family residential and commercial real estate loans typically is dependent
on the successful operation of the project, and thus such loans may be adversely
affected to a greater extent by adverse conditions in the real estate markets or
in the economy generally. Risk of loss on a construction loan is dependent
largely upon the accuracy of the initial estimate of the property's value at
completion of construction or development and the estimated cost (including
interest) of construction, as well as the availability of permanent take-out
financing. During the construction phase, a number of factors could result in
delays and cost overruns. If the estimate of value proves to be inaccurate, the
Company may be confronted, at or prior to the maturity of the loan, with a
project which, when completed, has a value which is insufficient to ensure full
repayment. In addition to the foregoing, multi-family residential and commercial
real estate loans which are not fully amortizing over their maturity and which
have a balloon payment due at their stated maturity, as is generally the case
with the Company's multi-family residential and commercial real estate loans,
involve a greater degree of risk than fully amortizing loans because the ability
of a borrower to make a balloon payment typically will depend on its ability
either to timely refinance the loan or to timely sell the security property. The
ability of a borrower to accomplish these results will be affected by a number
of factors, including the level of available mortgage rates at the time of sale
or refinancing, the financial condition and operating history of the borrower
and the property which secures the loan, tax laws, prevailing economic
conditions and the availability of financing for multi-family residential and
commercial real estate generally.
55
<PAGE>
ASSET QUALITY
The Company, like all financial institutions, is exposed to certain credit
risks related to the value of the collateral that secures its loans and the
ability of borrowers to repay their loans. Management of the Company closely
monitors the Company's loan and investment portfolios and the Company's real
estate owned for potential problems on a periodic basis and reports to the Board
of Directors at regularly scheduled meetings.
NON-PERFORMING LOANS. It is the Company's policy to establish an allowance
for uncollectible interest on loans in its loan portfolio and loans available
for sale which are past due 90 days or more and to place such loans on
non-accrual status. As a result, the Company currently does not have any loans
which are accruing interest but are past due 90 days or more. Loans also may be
placed on non-accrual status when, in the judgment of management, the
probability of collection of interest is deemed to be insufficient to warrant
further accrual. When a loan is placed on non-accrual status, previously accrued
but unpaid interest is reversed by a charge to interest income.
The following table sets forth certain information relating to the Company's
non-performing loans in its loan portfolio at the dates indicated. For
information relating to the payment status of loans in the Company's discounted
loan portfolio, see "Business--Discounted Loan Acquisition and Resolution
Activities," and for information concerning non-performing loans available for
sale, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Changes in Financial Condition-- Loans Available for
Sale."
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -----------------------------------------------------
1996 1995 1994 1993 1992 1991
----------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Non-performing loans(1):
Single-family residential loans....................... $ 2,334 $ 2,923 $ 2,478 $ 2,347 $ 2,955 $ 712
Multi-family residential loans........................ 106 731 152 664 269 1,006
Commercial real estate and land loans................. -- -- -- -- -- 1,710
Consumer and other loans.............................. 38 202 29 556 407 517
----------- --------- --------- --------- --------- ---------
Total............................................... $ 2,478 $ 3,856 $ 2,659 $ 3,567 $ 3,631 $ 3,945
----------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- ---------
Non-performing loans as a percentage of:
Total loans(2)........................................ 0.77% 1.27% 4.35% 3.71% 8.32% 7.39%
Total assets.......................................... 0.13 0.20 0.21 0.26 0.44 0.63
Allowance for loan losses as a percentage of:
Total loans(3)........................................ 0.91 0.65(4) 1.84 0.99 1.80 1.86
Non-performing loans.................................. 115.21 50.49 40.28 24.78 20.71 23.68
</TABLE>
- ------------------------
(1) The Company did not have any non-performing loans in its loan portfolio
which were deemed troubled debt restructurings at the dates indicated.
(2) Total loans is exclusive of undisbursed loan proceeds, unaccreted discount
and allowance for loan losses.
(3) Total loans is exclusive of the allowance for loan losses.
(4) The decrease in the allowance for loan losses as a percentage of total loans
from 1994 was due to the significant increase in the loan portfolio in 1995
as a result of the purchase of single-family residential loans and the
origination of multi-family residential and commercial real estate loans.
56
<PAGE>
REAL ESTATE OWNED. Properties acquired through foreclosure or by
deed-in-lieu thereof are valued at the lower of amortized cost or fair value.
Properties included in the Company's real estate owned are periodically
re-evaluated to determine that they are being carried at the lower of cost or
fair value less estimated costs to sell. Holding and maintenance costs related
to properties are recorded as expenses in the period incurred. Deficiencies
resulting from valuation adjustments to real estate owned subsequent to
acquisition are recognized as a valuation allowance. Subsequent increases
related to the valuation of real estate owned are reflected as a reduction in
the valuation allowance, but not below zero. Increases and decreases in the
valuation allowance are charged or credited to income, respectively. Accumulated
specific valuation allowances amounted to $9.7 million at June 30, 1996.
The following table sets forth certain information relating to the Company's
real estate owned at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ------------------------------------------------------
1996 1995 1994 1993 1992 1991
---------- ---------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Discounted loan portfolio:
Single-family residential........................ $ 65,988 $ 75,144 $ 86,426 $ 33,369 $ 4,390 $ 93
Multi-family residential......................... 37,438 59,932 -- -- -- --
Commercial real estate........................... 28,580 31,218 8,801 -- -- --
---------- ---------- --------- --------- --------- ---------
Total.......................................... 132,006 166,294 95,227 33,369 4,390 93
Loan portfolio..................................... 522 262 1,440 128 320 435
Loans available for sale portfolio................. 1,076 -- -- -- -- --
---------- ---------- --------- --------- --------- ---------
Total.......................................... $ 133,604 $ 166,556 $ 96,667 $ 33,497 $ 4,710 $ 528
---------- ---------- --------- --------- --------- ---------
---------- ---------- --------- --------- --------- ---------
</TABLE>
The following table sets forth certain geographical information at June 30,
1996 related to the Company's real estate owned attributable to the Company's
discounted loan acquisitions.
<TABLE>
<CAPTION>
JUNE 30, 1996
---------------------------------------------------------------------------------
MULTI-FAMILY RESIDENTIAL
SINGLE-FAMILY RESIDENTIAL AND COMMERCIAL TOTAL
--------------------------- --------------------------- -----------------------
NO. OF NO. OF NO. OF
AMOUNT PROPERTIES AMOUNT PROPERTIES AMOUNT PROPERTIES
------------ ------------- ------------ ------------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
California............................ $ 17,586 116 $ 55,644 53 $ 73,230 169
New York.............................. 21,624 334 2,357 15 23,981 349
New Jersey............................ 5,857 94 2,996 21 8,853 115
Connecticut........................... 6,883 127 567 11 7,450 138
Florida............................... 1,194 19 2,378 2 3,572 21
Other................................. 12,844(1) 199 2,076(2) 13 14,920 212
------------ --- ------------ --- ---------- -----
$ 65,988 889 $ 66,018 115 $ 132,006 1,004
------------ --- ------------ --- ---------- -----
------------ --- ------------ --- ---------- -----
</TABLE>
- ------------------------
(1) Consists of properties located in 27 other states, none of which aggregated
over $1.7 million in any one state.
(2) Consists of properties located in four other states, none of which
aggregated over $2.0 million in any one state.
57
<PAGE>
The following table sets forth the activity in the real estate owned related
to the Company's discounted loan portfolio during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30, 1996 1995 1994 1993
------------------------ ---------------------- ---------------------- ------------------------
NO. OF NO. OF NO. NO. OF
AMOUNT PROPERTIES AMOUNT PROPERTIES AMOUNT PROPERTIES AMOUNT PROPERTIES
--------- ------------- --------- ----------- --------- ----------- --------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of
period......................... $ 166,294 1,065 $ 95,227 1,005 $ 33,369 516 $ 3,812 93
Properties acquired............. 38,244 447 209,567 1,281 173,556 1,875 40,457 770
Sales........................... (72,532) (508) (138,500) (1,221) (111,698) (1,386) (10,900) (347)
--------- ----- --------- ----------- --------- ----------- --------- ---
Balance at end of period........ $ 132,006 1,004 $ 166,294 1,065 $ 95,227 1,005 $ 33,369 516
--------- ----- --------- ----------- --------- ----------- --------- ---
--------- ----- --------- ----------- --------- ----------- --------- ---
</TABLE>
The following table sets forth the amount of time that the Company had held
its real estate owned related to its discounted loan acquisitions at the dates
indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ---------------------
1996 1995 1994
---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
One to two months.............................................................. $ 18,724 $ 25,398 $ 20,989
Three to four months........................................................... 10,415 22,672 22,985
Five to six months............................................................. 6,025 25,742 16,369
Seven to 12 months............................................................. 43,010 76,782 29,499
Over 12 months................................................................. 53,832 15,700 5,385
---------- ---------- ---------
$ 132,006 $ 166,294 $ 95,227
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
The average period during which the Company held the $72.5 million, $138.5
million and $111.7 million of real estate owned related to its discounted loan
acquisitions which was sold during the six months ended June 30, 1996 and the
years ended December 31, 1995 and 1994, respectively, was ten months, eight
months and seven months, respectively.
Although the Company evaluates the potential for significant environmental
problems prior to acquiring a loan, there is a risk for any mortgage loan,
particularly a multi-family residential and commercial real estate loan, that
hazardous substances or other environmentally restricted substances could be
discovered on the related real estate. In such event, the Company might be
required to remove such substances from the affected properties or to engage in
abatement procedures at its sole cost and expense. There can be no assurance
that the cost of such removal or abatement will not substantially exceed the
value of the affected properties or the loans secured by such properties, that
the Company would have adequate remedies against the prior owners or other
responsible parties or that the Company would be able to resell the affected
properties either prior to or following completion of any such removal or
abatement procedures. If such environmental problems are discovered prior to
foreclosure, the Company generally will not foreclose on the related loan;
however, the value of such property as collateral will generally be
substantially reduced and the Company may suffer a loss upon collection of the
loan as a result.
From time to time the Company makes loans to finance the sale of real estate
owned. At June 30, 1996, such loans amounted to $11.7 million and consisted of
$6.9 million of single-family residential loans, $1.9 million of multi-family
residential loans and $2.9 million of land loans. The land loans were made to
finance the sale of real estate held by a subsidiary of the Company acquired in
connection with the acquisition of Old Berkeley. All of the Company's loans to
finance the sale of real estate owned were performing in accordance with their
terms at June 30, 1996.
CLASSIFIED ASSETS. OTS regulations require that each insured savings
association classify its assets on a regular basis. In addition, in connection
with examinations of insured associations, OTS examiners have authority to
identify problem assets and, if appropriate, require them to be classified.
There are three
58
<PAGE>
classifications for problem assets: "substandard," "doubtful" and "loss."
Substandard assets have one or more defined weaknesses and are characterized by
the distinct possibility that the insured institution will sustain some loss if
the deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. An
asset classified loss is considered uncollectible and of such little value that
continuance as an asset of the institution is not warranted. Another category
designated "special mention" also must be established and maintained for assets
which do not currently expose an insured institution to a sufficient degree of
risk to warrant classification as substandard, doubtful or loss but do possess
credit deficiencies or potential weaknesses deserving management's close
attention. Assets classified as substandard or doubtful require the institution
to establish general allowances for loan losses. If an asset or portion thereof
is classified loss, the insured institution must either establish specific
allowances for loan losses in the amount of 100% of the portion of the asset
classified loss or charge off such amount. In this regard, the Company
establishes required reserves and charges off loss assets as soon as
administratively practicable. General loss allowances established to cover
possible losses related to assets classified substandard or doubtful may be
included in determining an institution's regulatory capital, while specific
valuation allowances for loan losses do not qualify as regulatory capital.
Based upon recent discussions with the OTS, the Company has modified its
policy for classifying non-performing discounted loans and real estate owned
related to its discounted loan portfolio ("non-performing discounted assets") to
take into account both the holding period of such assets from the date of
acquisition and the ratio of book value to market value of such assets. Under
the new policy, all non-performing discounted assets which are held 15 months or
more after the date of acquisition are classified substandard; non-performing
discounted assets held 12 months to less than 15 months from the date of
acquisition are classified as special mention if they have a ratio of book value
to market value of less than 80% and substandard if such ratio is 80% or more;
non-performing discounted assets held 90 days to less than 12 months from the
date of acquisition are classified as special mention if they have a ratio of
book value to market value of more than 80% and less than 85% and substandard if
such ratio is equal to or greater than 85%; and non-performing discounted assets
held less than 90 days from the date of acquisition are classified substandard
if they have a ratio of book value to market value equal to or greater than 85%.
In addition, non-performing discounted assets which are performing for a period
of time subsequent to acquisition by the Company are classified as substandard
at the time such loans become non-performing. The Company's past experience
indicates that the resulting classified discounted assets do not necessarily
correlate to probability of loss.
Excluding assets which have been classified loss and fully reserved by the
Company, the Company's classified assets at June 30, 1996 under the new policy
consisted of $178.1 million of assets classified as substandard and $12,000 of
assets classified as doubtful. In addition, at the same date $30.7 million of
assets was designated as special mention.
Substandard assets at June 30, 1996 under the new policy consisted primarily
of $113.5 million of loans and real estate owned related to the Company's
discounted single-family residential loan program, $49.8 million of loans and
real estate owned related to the Company's discounted commercial real estate
loan program and $14.4 million of single-family residential loans to
non-conforming borrowers. Special mention assets at June 30, 1996 under the new
policy consisted primarily of loans and real estate owned related to the
Company's discounted loan programs, consisting of $16.0 million and $3.7 million
of assets related to the Company's discounted single-family residential and
discounted commercial real estate loan programs, respectively.
ALLOWANCES FOR LOSSES. The Company maintains an allowance for losses for
each of its loan portfolio and discounted loan portfolio at a level which
management considers adequate to provide for potential losses based upon an
evaluation of known and inherent risks in such portfolios.
59
<PAGE>
The following table sets forth the breakdown of the Company's allowances for
losses on the Company's loan portfolio and discounted loan portfolio by category
of loan and the percentage of loans in each category to total loans in the
respective portfolios at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------
JUNE 30,
1996 1995 1994 1993
---------------------- ---------------------- ---------------------- -----------
AMOUNT % AMOUNT % AMOUNT % AMOUNT
----------- --------- ----------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Loan portfolio:
Single-family residential loans.... $ 297 20.0% $ 346 22.2% $ 615 52.2% $ 174
Multi-family residential loans..... 682 22.2 683 14.3 -- 2.9 333
Commercial real estate and land
loans............................. 1,876 57.7 875 62.6 218 42.3 218
Consumer and other loans........... -- 0.1 43 0.9 238 2.6 159
----------- --------- ----------- --------- ----------- --------- -----
Total............................ $ 2,855 100.0% $ 1,947 100.0% $ 1,071 100.0% $ 884
----------- --------- ----------- --------- ----------- --------- -----
----------- --------- ----------- --------- ----------- --------- -----
Discounted loan portfolio(1):
Single-family residential loans.... $ 4,233 31.6%
Multi-family residential loans..... 1,659 17.5
Commercial real estate loans....... 3,578 50.7
Other loans........................ -- 0.2
----------- ---------
Total............................ $ 9,470 100.0%
----------- ---------
----------- ---------
<CAPTION>
1992 1991
---------------------- ----------------------
% AMOUNT % AMOUNT %
--------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Loan portfolio:
Single-family residential loans.... 31.6% $ 20 77.3% $ 28 78.4%
Multi-family residential loans..... 40.9 281 12.7 272 13.7
Commercial real estate and land
loans............................. 23.7 220 4.6 399 3.8
Consumer and other loans........... 3.8 231 5.4 235 4.1
--------- ----- --------- ----- ---------
Total............................ 100.0% $ 752 100.0% $ 934 100.0%
--------- ----- --------- ----- ---------
--------- ----- --------- ----- ---------
Discounted loan portfolio(1):
Single-family residential loans....
Multi-family residential loans.....
Commercial real estate loans.......
Other loans........................
Total............................
</TABLE>
- ----------------------------------
(1) Not applicable at or prior to December 31, 1995.
The allocation of the allowance to each category is not necessarily
indicative of future losses and does not restrict the use of the allowance to
absorb losses in any other category.
The following table sets forth an analysis of activity in the allowance for
losses relating to the Company's loan portfolio during the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, -----------------------------------------------------
1996 1995 1994 1993 1992 1991
----------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of period........................ $ 1,947 $ 1,071 $ 884 $ 752 $ 934 $ 1,170
Provision for loan losses........................... 1,132 1,121 -- -- -- --
Charge-offs:
Single-family residential loans................... (188) (131) (302) (150) (138) (8)
Multi-family residential loans.................... (7) -- -- (170) (3) (96)
Commercial real estate and land loans............. -- (40) -- -- -- (135)
Consumer loans.................................... (29) (92) (170) (16) (88) (37)
----------- --------- --------- --------- --------- ---------
Total charge-offs............................... (224) (263) (472) (336) (229) (276)
Recoveries:
Single-family residential loans................... -- 3 410 346 29 35
Multi-family residential loans.................... -- -- -- -- -- --
Commercial real estate and land loans............. -- 15 -- -- -- --
Consumer loans.................................... -- -- 249 122 18 5
----------- --------- --------- --------- --------- ---------
Total recoveries................................ -- 18 659 468 47 40
----------- --------- --------- --------- --------- ---------
Net (charge-offs) recoveries.................... (224) (245) 187 132 (182) (236)
----------- --------- --------- --------- --------- ---------
Balance, end of period.............................. $ 2,855 $ 1,947 $ 1,071 $ 884 $ 752 $ 934
----------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- ---------
Net (charge-offs) recoveries as a percentage of
average loan portfolio............................. (0.07)% (0.19)% 0.28% 0.10% (0.37) (0.46)%
</TABLE>
60
<PAGE>
During the six months ended June 30, 1996, the activity in the allowance for
losses related to the discounted loan portfolio consisted of $13.2 million of
general provisions for losses, $3.8 million of charge-offs (consisting of $2.4
million, $448,000 and $929,000 related to single-family residential loans,
multi-family residential loans and commercial real estate loans, respectively)
and $43,000 of recoveries.
INVESTMENT ACTIVITIES
GENERAL. The investment activities of the Company currently include
investments in mortgage-related securities, investment securities and low-income
housing tax credit interests. The investment policy of the Company, which is
established by the Investment Committee and approved by the Board of Directors,
is designed primarily to provide a portfolio of high quality, diversified
instruments while seeking to optimize net interest income within acceptable
limits of interest rate risk, credit risk and liquidity.
MORTGAGE-BACKED AND RELATED SECURITIES. From time to time the Company
invests in mortgage-backed and related securities. Although mortgage-backed and
related securities generally yield less than the loans that back such securities
because of costs associated with their payment guarantees or credit
enhancements, such securities are more liquid than individual loans and may be
used to collateralize borrowings of the Company. See Note 15 to the Consolidated
Financial Statements.
Mortgage-related securities include regular and residual interests in
REMICs. The regular interests of some REMICs are like traditional debt
instruments because they have stated principal amounts and traditionally defined
interest-rate terms. Purchasers of certain other REMICs are entitled to the
excess, if any, of the issuer's cash inflows, including reinvestment earnings,
over the cash outflows for debt service and administrative expenses. These
REMICs may include instruments designated as residual interests, which represent
an equity ownership interest in the underlying collateral, subject to the first
lien of the investors in the other classes of the REMIC.
A senior-subordinated structure often is used with REMICs to provide credit
enhancement for securities which are backed by collateral which is not
guaranteed by FNMA, FHLMC or GNMA. These structures divide mortgage pools into
two risk classes: a senior class and one or more subordinated classes. The
subordinated classes provide protection to the senior class. When cash flow is
impaired, debt service goes first to the holders of senior classes. In addition,
incoming cash flows also may go into a reserve fund to meet any future
shortfalls of cash flow to holders of senior classes. The holders of
subordinated classes may not receive any funds until the holders of senior
classes have been paid and, when appropriate, until a specified level of funds
has been contributed to the reserve fund.
61
<PAGE>
The following table sets forth the Company's mortgage-related securities
available for sale at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31
JUNE 30, ----------------------------------
1996 1995 1994 1993
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage-backed securities:
Single-family residential:
Privately issued-AAA rated................................... $ -- $ -- $ 19,099 $ 162,392
FHLMC........................................................ -- -- -- 63,475
FNMA......................................................... -- -- -- 42,990
---------- ---------- ---------- ----------
Total...................................................... -- -- 19,099 268,857
Multi-family residential....................................... -- -- -- 69,701
Futures contracts.............................................. -- -- -- 756
---------- ---------- ---------- ----------
Total...................................................... -- -- -- 70,457
Mortgage-related securities:
Single-family residential:
Interest only................................................ 10,685 11,774 1,996 --
Principal only............................................... 6,922 8,218 11,490 --
CMOs-AAA rated............................................... 86,606 138,831 75,032 187,059
PAC securities............................................... -- 574 -- --
REMIC residuals.............................................. 10,688 472 -- --
Subordinates................................................. 29,119 27,310 -- --
Futures contracts............................................ (381) (1,598) 1,143 --
---------- ---------- ---------- ----------
Total...................................................... 143,639 185,581 89,661 187,059
Multi-family residential and commercial:
CMOs........................................................... -- -- 53,939 --
Interest only.................................................. 96,100 109,193 -- --
Subordinates................................................... 23,409 42,954 22,095 --
Futures contracts.............................................. 51 (248) (609) --
---------- ---------- ---------- ----------
Total...................................................... 119,560 151,899 75,425 --
---------- ---------- ---------- ----------
Total.................................................... $ 263,199 $ 337,480 $ 184,185 $ 526,373
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The following table sets forth the Company's mortgage-related securities
held for investment at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31
JUNE 30, -----------------------------------
1996 1995 1994 1993
------------ ------------ --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CMOs.......................................................... $ -- $ -- $ 90,153 $ 114,884
PAC securities................................................ -- -- 994 4,844
REMIC residuals............................................... -- -- 770 1,186
------------ ------------ --------- ----------
Total..................................................... $ -- (1) $ -- (1) $ 91,917 $ 120,914
------------ ------------ --------- ----------
------------ ------------ --------- ----------
</TABLE>
- ------------------------
(1) Reflects the transfer of $73.7 million of securities to available for sale
pursuant to guidance issued by the FASB in November 1995.
62
<PAGE>
The following table sets forth certain information relating to each
mortgage-related security held by the Company which had a carrying value which
exceeded 10% of the Company's stockholders' equity at June 30, 1996, all of
which were classified as available for sale.
<TABLE>
<CAPTION>
TYPE OF MARKET
ISSUER SECURITY VALUE
- -------------------------------------------- ----------------------- -------------
(IN
THOUSANDS)
<S> <C> <C>
Single-family
ITT Federal Bank, FSB 1994-P1, 1B subordinate $ 29,119
Securitized Asset Sales, Inc. 1993-3, A1 Single-family CMO 21,589
Merrill Lynch Mortgage Investor, Inc. 1993 Multi-family
M1 B subordinate 19,031
Countrywide Funding Corporation 1993-7, A1 Single-family CMO 17,761
Countrywide Funding Corporation 1993-3, A1 Single-family CMO 17,001
FBS Mortgage Corporation 1993-E, A1 Single-family CMO 16,772
</TABLE>
At June 30, 1996, $22.4 million of the Company's securities available for
sale were issued by FHLMC or FNMA and $240.8 million of such securities were
privately issued. Of the $240.8 million of securities available for sale which
were privately issued at June 30, 1996, $176.0 million were rated AAA by
national rating agencies, $4.4 million were rated investment grade by national
rating agencies below this level and $60.4 million (amortized cost of $59.9
million) were unrated.
At June 30, 1996, the carrying value of the Company's investment in IO
strips and PO strips amounted to $113.7 million. The Company invests in IO
strips and PO strips from time to time based on its capital position, interest
rate risk profile and the market for such securities. IO strips and PO strips
exhibit considerably more price volatility than mortgages or ordinary mortgage
pass-through securities, due in part to the uncertain cash flows that result
from changes in the prepayment rates of the underlying mortgages. In the case of
IO strips in particular, increased prepayments of the underlying mortgages as a
result of decreases in market interest rates can result in a loss of all or part
of the purchase price of such security, although IO strips relating to
mortgage-related securities backed by multi-family residential and commercial
real estate loans (which amounted to $96.1 million of the $106.8 million of IO
strips owned by the Company at June 30, 1996) generally have provisions which
prohibit and/or provide economic disincentives to prepayments for specified
periods. The Company generally attempts to offset the interest rate risk
associated with a particular IO strip or PO strip by purchasing other securities
and/or hedging against such risk through futures contracts. The Company believes
that these investments complement its overall interest rate sensitivity profile
and, in the case of IO strips from securities backed by multi-family residential
and commercial real estate loans, provide some hedge against the risk that the
Company's multi-family residential and commercial real estate loans, which
generally do not fully amortize over the term of the loan and require balloon
payments at maturity, may not be repaid or refinanced at maturity at market
rates or at all due to increases in interest rates subsequent to origination of
the loan. At June 30, 1996, all of the Company's IO strips and PO strips were
either issued by FHLMC or FNMA or rated AAA by national rating agencies, with
the exception of two IO securities with an aggregate carrying value of $1.7
million, which were rated investment grade below this level.
At June 30, 1996, the carrying value of the Company's investment in
subordinate classes of mortgage-related securities amounted to $52.5 million.
The Company invests in subordinate classes of mortgage-related securities from
time to time based on its capital position, interest rate risk profile, the
market for such securities and other factors. During 1995, in connection with
its acquisition of $28.0 million of subordinate interests in a CMO backed by
single-family residential loans, the Company acquired the rights to service the
loans which backed all classes of the CMO for approximately $3.8 million. This
transaction was primarily responsible for the increase in the amount of loans
serviced by the Company for others from $132.8 million at December 31, 1994 to
$361.6 million at December 31, 1995. At June 30, 1996, the Company's subordinate
securities supported senior classes of securities having an aggregate
outstanding principal balance of $664.7 million. Because of their subordinate
position, subordinate classes of mortgage-related securities involve
substantially more risk than the other classes.
63
<PAGE>
Under a regulatory bulletin issued by the OTS, a federally-chartered savings
institution such as the Bank generally may invest in "high risk" mortgage
securities only to reduce its overall interest rate risk and after it has
adopted various policies and procedures, although under specified circumstances
such securities also may be acquired for trading purposes. A "high risk"
mortgage security for this purpose generally is any mortgage-related security
which meets one of three tests which are intended to measure the average life or
price volatility of the security in relation to a benchmark fixed rate, 30-year
mortgage-backed pass-through security. At June 30, 1996, the Company held
mortgage-related securities with a carrying value of $30.8 million (amortized
cost of $31.3 million) which were classified as "high-risk" mortgage securities
by the OTS, all of which were utilized to reduce the Company's overall interest
rate risk.
The expected actual maturity of a mortgage-backed and related security is
shorter than its stated maturity due to prepayments of the underlying mortgages.
Prepayments that are faster than anticipated may shorten the life of the
security and adversely affect its yield to maturity. The yield is based upon the
interest income and the amortization of any premium or accretion of any discount
related to the mortgage-backed and related security. Prepayments on
mortgage-backed and related securities have the effect of accelerating the
amortization of premiums and accretion of discounts, which decrease and increase
interest income, respectively. Although prepayments of underlying mortgages
depend on many factors, including the type of mortgages, the coupon rate, the
age of mortgages, the geographical location of the underlying real estate
collateralizing the mortgages and general levels of market interest rates, the
difference between the interest rates on the underlying mortgages and the
prevailing mortgage interest rates generally is the most significant determinant
of the rate of prepayments. During periods of falling mortgage interest rates,
if the coupon rate of the underlying mortgages exceeds the prevailing market
interest rates offered for mortgage loans, refinancing generally increases and
accelerates the prepayment of the underlying mortgages and the related security.
Similarly, during periods of increasing interest rates, refinancing generally
decreases, thus lengthening the estimated maturity of mortgage loans.
For additional information relating to the Company's mortgage-related
securities, see Notes 5 and 7 to the Consolidated Financial Statements.
INVESTMENT SECURITIES. Investment securities currently consist primarily of
U.S. Government securities and required investment in FHLB stock.
The following table sets forth the Company's investment securities available
for sale and held for investment at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31
JUNE 30, -------------------------------
1996 1995 1994 1993
----------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Available for sale:
U.S. Government securities........................................... $ -- $ -- $ 3,532 $ 692
Municipal obligations................................................ -- -- -- 118
----------- --------- --------- ---------
Total.............................................................. -- -- 3,532 810
Held for investment:
U.S. Government securities........................................... -- 10,036 10,325 20,041
FHLB stock(1)........................................................ 8,798 8,520 6,555 12,396
Limited partnership interests........................................ 104 109 131 131
----------- --------- --------- ---------
Total.............................................................. 8,902 18,665 17,011 32,568
----------- --------- --------- ---------
Total investment securities........................................ $ 8,902 $ 18,665 $ 20,543 $ 33,378
----------- --------- --------- ---------
----------- --------- --------- ---------
</TABLE>
- ------------------------
(1) As a member of the FHLB of New York, the Bank is required to purchase and
maintain stock in the FHLB of New York in an amount equal to at least 1% of
its aggregate unpaid residential mortgage loans, home purchase contracts and
similar obligations at the beginning of each year or 5% of borrowings,
whichever is greater.
64
<PAGE>
TRADING SECURITIES. From time to time the Company purchases investment and
mortgage-backed and related securities for trading purposes. In addition,
securities resulting from the exchange of loans are also accounted for as the
purchase of trading securities.
When securities are purchased with the intent to resell in the near term,
they are classified as trading securities and carried on the Company's
consolidated balance sheet as a separately identified trading account.
Securities in this account are carried at current market value and any increase
or decrease in unrealized appreciation or depreciation is included in the
Company's consolidated statements of operations.
Under guidelines approved by the Board of Directors of the Company, the
Company is authorized to hold a wide variety of securities as trading
securities, including U.S. Government and agency securities and mortgage-backed
and related securities. The Company also is authorized by such guidelines to use
various hedging techniques in connection with its trading activities, as well as
to effect short sales of securities, pursuant to which the Company sells
securities which are to be acquired by it at a future date. Under current
guidelines, the amount of securities held by the Company in a trading account
may not exceed on a gross basis the greater of $200 million or 15% of the
Company's total assets, and the total net amount of securities (taking into
account any related hedge or buy/sell agreement relating to similar securities)
may not exceed the greater of $150 million or 10% of total assets.
The Company traded assets on a short-term basis (generally within a day)
totalling $10.1 million, $275.4 million and $78.6 million during 1995, 1994 and
1993, respectively, resulting in net gains of $84,000, $1.8 million and $1.2
million during these respective periods.
INVESTMENTS IN LOW-INCOME HOUSING TAX CREDIT INTERESTS. The Company invests
in low-income housing tax credit interests (generally limited partnerships) for
the purpose of obtaining income tax credits pursuant to Section 42 of the Code,
which provides a tax credit to investors in qualified low-income rental housing
that is constructed, rehabilitated or acquired after December 31, 1986. To be
eligible for housing tax credits, a property generally must first be allocated
an amount of tax credits by the state tax credit allocating agency, which in
most cases also serves as the state housing finance agency, of the state in
which the property is located. If the property is to be constructed or
rehabilitated, it must be completed and placed in service within a specified
time, generally within two years after the year in which the tax credit
allocation is received. A specified portion of the apartment units in a
qualifying project may only be rented to qualified tenants for a period of 15
years, or a portion of any previously claimed tax credits will be subject to
recapture, as discussed below.
At June 30, 1996, the Company's investments in low-income housing tax credit
interests amounted to $92.3 million, as compared to $81.4 million and $49.4
million at December 31, 1995 and 1994, respectively. The Company's investments
in low-income housing tax credit interests are made by the Company indirectly
through subsidiaries of the Bank, which may be a general partner and/or a
limited partner in the partnership.
In accordance with a recent pronouncement of the Emerging Issues Task Force,
the Company's accounting for investments in low-income housing tax credit
partnerships in which it acts solely as a limited partner, which amounted to
$66.9 million in the aggregate at June 30, 1996, depends on whether the
investment was made on or after May 18, 1995. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Changes in Financial
Condition--Investments in Low-Income Housing Tax Credit Interests."
Low-income housing tax credit partnerships in which the Company, through a
subsidiary, acts as a general partner, are presented on a consolidated basis. At
June 30, 1996, the Company's investments in low-income housing tax credit
interests included $22.5 million of assets related to low-income housing tax
credit partnerships in which a subsidiary of the Company acts as a general
partner. At the same date, the amount of the Company's equity investments in
such partnerships amounted to $16.2 million and the Company had commitments to
make $18.0 million of additional equity investments in such partnerships. The
Company's equity investments in its consolidated partnerships and, as discussed
below, loans by the Company to such partnerships, are eliminated from inclusion
in the Company's investments and loan portfolio, respectively, upon
consolidation of such partnerships with the Company for financial reporting
purposes.
65
<PAGE>
The Company also makes loans to low-income housing tax credit partnerships
in which it has invested to construct the affordable housing project owned by
the partnership. At June 30, 1996, the Company had $19.2 million of construction
loans outstanding to low-income housing tax credit partnerships and commitments
to fund an additional $44.4 million of such loans. Approximately $6.3 million of
such funded construction loans at June 30, 1996 were made to partnerships in
which subsidiaries of the Company acted as a general partner and which thus were
consolidated with the Company for financial reporting purposes. The risks
associated with these construction loans are the same as those made by the
Company to unaffiliated third parties. See "Business--Lending Activities."
The affordable housing projects owned by the low-income housing tax credit
partnerships in which the Company had invested at June 30, 1996 are
geographically located throughout the United States. At June 30, 1996, the
Bank's largest funded investment in a low-income housing tax credit partnership
was a $16.5 million investment in a partnership which owned a 408-unit
qualifying project in Fort Lauderdale, Florida, and the Bank's largest funded
and unfunded investment in such a partnership was a $28.2 million commitment to
fund equity and debt investments in a partnership which will construct a
240-unit qualifying project in Greece, New York, of which $236,000 of equity and
$4.1 million of debt was funded as of such date.
At June 30, 1996, the Company had invested in or had commitments to invest
in 22 low-income housing tax credit partnerships, all of which had been
allocated tax credits. The Company estimates that its investment in low-income
housing tax credit interests at June 30, 1996 will provide approximately $173.6
million of tax credits.
During the six months ended June 30, 1996, the Company sold $6.7 million of
its investments in low-income housing tax credit interests for a pre-tax gain of
$990,000. In addition, the Company has entered into an agreement to sell
additional low-income tax credit interests with a carrying value of $11.7
million, which will not be recognized as a sale under generally accepted
accounting principles until certain construction and other obligations of the
Company are substantially completed. Depending on available prices, its ability
to utilize tax credits and other factors, the Company may seek to sell other of
its low-income housing tax credit interests in the future.
The ownership of low-income housing tax credit interests produce two types
of tax benefits. The primary tax benefit flows from the low-income housing tax
credits under the Code which are generated by the ownership and operation of the
real property in the manner required to obtain such tax credits. These credits
may be used to offset Federal income tax on a dollar for dollar basis but may
not offset the alternative minimum tax; tax credits thus may reduce the overall
federal income tax to an effective rate of 20%. At December 31, 1995, the
Company could recover $8.7 million and $1.4 million of taxes paid in 1994 and
1993, respectively, through the carryback of tax credits realized in the current
year which would not otherwise be deductible due to the alternative minimum tax.
In addition, the operation of the rental properties produces tax losses in the
early years and sometimes throughout the anticipated ownership period. These tax
losses may be used to offset taxable income from other operations and thereby
reduce the income tax which would otherwise be paid on such taxable income.
Tax credits can be claimed over a ten-year period on a straight-line basis
once the underlying multi-family residential properties are placed in service to
reduce the tax payments computed based upon taxable income to not less than the
alternative minimum tax computed for that year or any year not more than three
years before or 15 years after the year the tax credit is earned. Tax credits
are realized regardless of whether units in the project continue to be occupied
once the units in the project have been initially rented to a qualifying tenant,
and tax credits are not dependent on a project's operating income or
appreciation. Tax credits can be claimed over a ten-year period and generally
can be lost or recaptured only if non-qualifying tenants are placed in units,
ownership of the project is transferred or the project is destroyed and not
rebuilt during a 15-year compliance period for the project. The Company has
established specific investment criteria for investment in multi-family
residential projects which have been allocated tax credits, which require, among
other things, a third party developer of the project and/or the seller of the
interest therein to provide a guarantee against loss or recapture of tax credits
and to maintain appropriate insurance to fund rebuilding in case of destruction
of the project. Notwithstanding the Company's efforts, there can be no
66
<PAGE>
assurance that the multi-family residential projects owned by the low-income
housing tax credit partnerships in which it has invested will satisfy applicable
criteria during the 15-year compliance period and that there will not be loss or
recapture of the tax credits associated therewith.
Investments made pursuant to the affordable housing tax credit program of
the Code are subject to numerous risks resulting from changes in the Code. For
example, the Balanced Budget Act of 1995, which was vetoed by the President of
the United States in December 1995 for reasons which were unrelated to the tax
credit program, generally would have established a sunset date for the
affordable housing tax credit program of the Code for housing placed in service
after December 31, 1997 and would have repealed, effective December 31, 1995,
provisions which generally permitted a state's unused low-income housing tax
credits to be reallocated for use by other states through a "national pool" of
unused housing credit carryovers. Although these changes would not have impacted
the Company's existing investments, other potential changes in the Code which
have been discussed from time to time could reduce the benefits associated with
the Company's existing investments in low-income housing tax credit interests,
including the replacement of the current graduated income taxation provisions of
the Code with a "flat tax" based system and increases in the alternative minimum
tax, which cannot be reduced by tax credits. Management of the Company is unable
to predict whether any of the foregoing or other changes to the Code which may
directly or indirectly affect the affordable housing tax credit program of the
Code will be the subject of future legislation and, if so, what the contents of
such legislation will be and its effects, if any, on the Company.
SOURCES OF FUNDS
GENERAL. Deposits, FHLB advances, reverse repurchase agreements, structured
financings, maturities and principal repayments on securities and loans and
proceeds from the sale of securities and loans held for sale currently are the
principal sources of funds for use in the Company's investment and lending
activities and for other general business purposes. Management of the Company
closely monitors rates and terms of competing sources of funds on a regular
basis and generally utilizes the source which is the most cost effective.
DEPOSITS. The primary source of deposits for the Company currently is
brokered certificates of deposit obtained through national investment banking
firms which, pursuant to agreements with the Company, solicit funds from their
customers for deposit with the Bank. Such deposits amounted to $1.02 billion or
67.9% of the Company's total deposits at June 30, 1996. In addition, during 1995
the Company commenced a program to obtain certificates of deposit from customers
of regional and local investment banking firms which are made aware of the
Company's products by the Company's direct solicitation and marketing efforts.
These deposits generally are obtained on more economically attractive terms to
the Company than the brokered deposits obtained through national investment
banking firms. At June 30, 1996, $267.7 million or 17.8% of the Company's
deposits were obtained in this manner through over 100 regional and local
investment banking firms. During 1995, the Company also expanded its wholesale
deposit program to directly solicit certificates of deposit from institutional
investors and high net worth individuals identified by the Company. At June 30,
1996, $109.2 million or 7.3% of the Company's total deposits consisted of
deposits obtained by the Company from such efforts. Ultimately, it is
anticipated that these efforts will increase the Company's internally-generated
deposits and reduce the costs associated with and its dependence on brokered
deposits.
During 1996, the Company intends to expand its direct deposit solicitation
efforts to solicit certificates of deposit on behalf of other financial
institutions. These activities will be conducted through Ocwen Capital Markets
Inc., a Florida corporation and a wholly-owned subsidiary of the Company which,
subject to the receipt of required regulatory approvals, will be a registered
broker-dealer under the Exchange Act. It is currently anticipated that Ocwen
Capital Markets Inc. will commence these activities in the second half of 1996.
The Company's brokered deposits at June 30, 1996 were net of $7.6 million of
unamortized deferred fees. The amortization of deferred fees is computed using
the interest method and is included in interest expense on certificates of
deposit.
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<PAGE>
The Company believes that the effective cost of brokered and other wholesale
deposits is more attractive to the Company than deposits obtained on a retail
basis from branch offices after the general and administrative expense
associated with the maintenance of branch offices is taken into account.
Moreover, brokered and other wholesale deposits may include provisions which
make them non-cancelable during their terms. At June 30, 1996, $925.4 million or
90.8% of the Company's $1.02 billion of brokered deposits obtained through
national investment banking firms were non-cancelable. The remainder of the
Company's brokered and other wholesale deposits at such date were cancelable by
the depositor only upon the payment of a substantial penalty. Brokered and other
wholesale deposits also generally give the Company more flexibility than retail
sources of funds in structuring the maturities of deposits. At June 30, 1996,
approximately 54.0% of the Company's certificates of deposit were scheduled to
mature within one year.
There are various limitations on the ability of all but well-capitalized
insured financial institutions to obtain brokered deposits. See "Regulation--The
Bank--Brokered Deposits." These limitations currently are not applicable to the
Company because the Bank is a well-capitalized financial institution under
applicable laws and regulations. See "Regulation--The Bank--Regulatory Capital
Requirements."
In addition to brokered and other wholesale deposits, the Company obtains
deposits from its office located in Bergen County, New Jersey. These deposits
include non-interest bearing checking accounts, NOW and money market checking
accounts, savings accounts and certificates of deposit and are obtained through
advertising, walk-ins and other traditional means. At June 30, 1996, the
deposits which were allocated to this office amounted to $49.0 million or 3.3%
of the Company's deposits.
The following table sets forth information relating to the Company's
deposits at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------
JUNE 30,
1996 1995 1994 1993
---------------------- ---------------------- ---------------------- ---------
AMOUNT AVG. RATE AMOUNT AVG. RATE AMOUNT AVG. RATE AMOUNT
--------- ----- --------- ----- --------- ----- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing checking accounts......... $ 55,603 --% $ 48,482 --% $ 35,943 --% $ 45,096
NOW and money market checking accounts......... 19,385 4.05 17,147 3.37 18,934 2.17 115,402
Savings accounts............................... 3,520 2.30 3,471 2.30 24,007 2.30 167,026
--------- --------- --------- ---------
78,508 69,100 78,884 327,524
--------- --------- --------- ---------
Certificates of deposit(1)..................... 1,431,221 1,440,240 950,817 537,147
Unamortized (deferred fees) purchase accounting
discount...................................... (7,554) (7,694) (6.433) 7,208
--------- --------- --------- ---------
1,423,667 5.84 1,432,546 5.68 944,384 5.50 544,355
--------- --------- --------- ---------
Total deposits............................. $1,502,175 5.60 $1,501,646 5.46 $1,023,268 5.17 $ 871,879
--------- --------- --------- ---------
--------- --------- --------- ---------
<CAPTION>
AVG. RATE
-----
<S> <C>
Non-interest bearing checking accounts......... --%
NOW and money market checking accounts......... 1.07
Savings accounts............................... 1.20
Certificates of deposit(1).....................
Unamortized (deferred fees) purchase accounting
discount......................................
4.22
Total deposits............................. 3.01
</TABLE>
- ------------------------------
(1) At June 30, 1996 and December 31, 1995 and 1994, certificates of deposit
issued on an uninsured basis amounted to $110.6 million, $80.0 million and
$21.1 million, respectively.
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<PAGE>
The following table sets forth by various interest rate categories the
certificates of deposit in the Company at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ------------------------------------
1996 1995 1994 1993
------------ ------------ ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
2.99% or less................................................ $ 382 $ 222 $ 3,613 $ 121,266
3.00-3.50%................................................... 3 39 642 194,650
3.51-4.50.................................................... 3,869 42,751 221,459 165,862
4.51-5.50.................................................... 535,304 454,653 242,383 42,206
5.51-6.50.................................................... 646,270 660,745 310,898 6,251
6.51-7.50.................................................... 237,348 273,655 165,197 6,460
7.51-8.50.................................................... 491 481 192 3,794
8.51-9.50.................................................... -- -- -- 3,866
------------ ------------ ---------- ----------
$ 1,423,667 $ 1,432,546 $ 944,384 $ 544,355
------------ ------------ ---------- ----------
------------ ------------ ---------- ----------
</TABLE>
The following table sets forth the amount and maturities of the certificates
of deposit in the Company at June 30, 1996.
<TABLE>
<CAPTION>
OVER SIX MONTHS ONE YEAR
SIX MONTHS AND LESS THAN THROUGH OVER TWO
AND LESS ONE YEAR TWO YEARS YEARS TOTAL
----------- ---------------- ---------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
2.99% or less.............................. $ 217 $ 122 $ -- $ 43 $ 382
3.00-3.50%................................. -- -- -- 3 3
3.51-4.50.................................. 3,187 555 107 20 3,869
4.51-5.50.................................. 247,179 96,558 87,051 104,516 535,304
5.51-6.50.................................. 279,731 85,131 151,283 130,125 646,270
6.51-7.50.................................. 38,589 17,561 67,543 113,655 237,348
7.51-8.50.................................. -- -- -- 491 491
----------- -------- ---------- ------------ ------------
5$68,903... $ 199,927 $ 305,984 $ 348,853 $ 1,423,667
----------- -------- ---------- ------------ ------------
----------- -------- ---------- ------------ ------------
</TABLE>
At June 30, 1996, the Company had $110.6 million of certificates of deposit
in amounts of $100,000 or more outstanding maturing as follows: $35.8 million
within three months; $24.5 million over three months through six months; $22.3
million over six months through 12 months; and $28.0 million thereafter.
For additional information relating to the Company's deposits, see Note 13
to the Consolidated Financial Statements.
BORROWINGS. Through the Bank the Company obtains advances from the FHLB of
New York upon the security of certain of its residential first mortgage loans,
mortgage-backed and related securities and other assets, including FHLB stock,
provided certain standards related to the creditworthiness of the Bank have been
met. FHLB advances are available to member financial institutions such as the
Bank for investment and lending activities and other general business purposes.
FHLB advances are made pursuant to several different credit programs, each of
which has its own interest rate, which may be fixed or adjustable, and range of
maturities.
The Company also obtains funds pursuant to securities sold under reverse
repurchase agreements. Under these agreements, the Company sells securities
(generally mortgage-backed and related securities) under an agreement to
repurchase such securities at a specified price at a later date. Reverse
repurchase agreements have short-term maturities (typically 90 days or less) and
are deemed to be financing transactions. All securities underlying reverse
repurchase agreements are reflected as assets in the Company's Consolidated
Financial Statements and are held in safekeeping by broker-dealers.
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<PAGE>
The Company's borrowings also include subordinated debentures and notes. At
June 30, 1996, this category of borrowings consisted primarily of $100 million
principal amount of the Debentures issued by the Bank in June 1995. At June 30,
1996, this category of borrowings also included $7.4 million of short-term notes
which are privately issued by the Company from time to time to certain
stockholders of the Company.
At June 30, 1996, borrowings also included a hotel mortgage payable in
connection with a hotel in Columbus, Ohio which is owned by the Company.
The following table sets forth information relating to the Company's
borrowings and other interest-bearing obligations at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ---------------------------------
1996 1995 1994 1993
---------- ---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
FHLB advances..................................................... $ 70,399 $ 70,399 $ 5,399 $ 57,399
Reverse repurchase agreements..................................... -- 84,761 -- 275,468
Subordinated debentures and other interest-bearing obligations:
Debentures...................................................... 100,000 100,000 -- --
Short-term notes................................................ 7,365 8,627 1,012 14,578
Hotel mortgages payable......................................... 8,338 8,427 19,099 26,347
---------- ---------- --------- ----------
115,703 117,054 20,111 40,925
---------- ---------- --------- ----------
$ 186,102 $ 272,214 $ 25,510 $ 373,792
---------- ---------- --------- ----------
---------- ---------- --------- ----------
</TABLE>
The following table sets forth certain information relating to the Company's
short-term borrowings having average balances during the period of greater than
30% of stockholders' equity at the end of the period. During each reported
period, FHLB advances and reverse repurchase agreements are the only categories
of borrowings meeting this criteria.
<TABLE>
<CAPTION>
AT OR FOR THE AT OR FOR THE YEAR ENDED DECEMBER
SIX MONTHS ENDED 31,
JUNE 30, ---------------------------------
1996 1995 1994 1993
----------------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FHLB advances:
Average amount outstanding during the period............. $ 70,399 $ 14,866 $ 26,476 $ 64,130
Maximum month-end balance outstanding during the
period.................................................. 70,399 100,399 57,399 67,399
Weighted average rate:
During the period...................................... 5.77% 7.57% 4.65% 4.42%
At end of period....................................... 5.55 5.84 9.59 4.02
Reverse repurchase agreements:
Average amount outstanding during the period............. $ 23,793 $ 16,754 $ 254,052 $ 195,111
Maximum month-end balance outstanding during the
period.................................................. 84,321 84,761 537,629 275,468
Weighted average rate:
During the period...................................... 5.76% 5.68% 3.98% 3.56%
At end of period....................................... -- 5.70 -- 3.57
</TABLE>
For additional information relating to the Company's borrowings, see Notes
14, 15 and 16 to the Consolidated Financial Statements.
DISCONTINUED OPERATIONS
Until recently, the Company's business activities included an automated
banking division which generally emphasized the installation of automated teller
machines and automated banking centers in a wide variety of locations which were
not associated with branch offices of the Company, as well as the development
and
70
<PAGE>
installation of an automated multi-application card system for the distribution
of financial products and services to members of a college or university
population. For further information relating to this division, which was
discontinued in September 1995, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of
Operations--Discontinued Operations."
OFFICES
At June 30, 1996, the Company conducted business from its executive offices
located in West Palm Beach, Florida, a full-service banking office located in
northern New Jersey and a loan production office located in New Jersey.
The following table sets forth information relating to the Company's
executive, main and other offices at June 30, 1996.
<TABLE>
<CAPTION>
NET BOOK VALUE OF
PROPERTY OR LEASEHOLD
LOCATION OWNED/LEASED IMPROVEMENTS
- ----------------------------------- --------------- -------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Executive Offices:
1675 Palm Beach Lakes Blvd. Leased $ 5,824
West Palm Beach, FL
Main Office:
1350 Sixteenth Street Leased 7
Fort Lee, NJ
Loan Production Office:
100 Menlo Park Drive Leased 13
Suite 200
Edison, New Jersey
</TABLE>
COMPUTER SYSTEMS AND OTHER EQUIPMENT
The Company believes that its use of information technology is a key factor
in achieving competitive advantage in the servicing of nonperforming loans,
improving servicing efficiencies to minimize operating costs and increasing
overall profitability. The Company has invested in a state-of-the-art computer
infrastructure, and uses an IBM AS400 and NetFRAME file servers as its primary
hardware platforms. In addition to its standard industry software applications,
the Company has internally developed fully integrated proprietary applications
designed to provide decision support, automation of decision execution and
tracking and exception reporting. The Company's systems have significant
capacity for expansion or upgrade.
The proprietary software packages developed for asset resolution use
advanced financial models to predict the resolution strategy with the highest
returns and to route the loan or property through the resolution process, as
well as track performance against specified timelines for each procedure. These
activities are linked with automated communications, including FAX, e-mail or
letter with the borrower or outside vendors, such as attorneys and brokers. The
systems also are integrated with a document imaging system which currently
stores two million images on magnetic media with a 50 gigabyte optical juke box
for additional storage. This system permits the immediate access to pertinent
loan documents and the automatic preparation of foreclosure packages. The
Company also has implemented a data warehouse strategy which provides corporate
data on a centralized basis for decision support.
EMPLOYEES
At June 30, 1996, the Company had 325 full-time equivalent employees
(exclusive of the employees of the hotel owned by the Company). The employees
are not represented by a collective bargaining agreement, and management
believes that it has good relations with its employees.
LEGAL PROCEEDINGS
The Company is involved in various legal proceedings occurring in the
ordinary course of business which management of the Company believes will not
have a material adverse effect on the financial condition or operations of the
Company.
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<PAGE>
REGULATION
Financial institutions and their holding companies are extensively regulated
under federal and state laws. As a result, the business, financial condition and
prospects of the Company and the Bank can be materially affected not only by
management decisions and general economic conditions, but also by applicable
statutes and regulations and other regulatory pronouncements and policies
promulgated by regulatory agencies with jurisdiction over the Company and the
Bank, such as the OTS and the FDIC. The effect of such statutes, regulations and
other pronouncements and policies can be significant, cannot be predicted with a
high degree of certainty and can change over time. Moreover, such statutes,
regulations and other pronouncements and policies are intended to protect
depositors and the insurance funds administered by the FDIC, and not
stockholders or holders of indebtedness which is not insured by the FDIC.
The enforcement powers available to federal banking regulators is
substantial and includes, among other things, the ability to assess civil
monetary penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties, as defined. In general, these enforcement actions must be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with regulatory authorities.
The following discussion and other references to and descriptions of the
regulation of financial institutions contained herein constitute brief summaries
thereof as in effect on the date of this Prospectus. This discussion is not
intended to constitute and does not purport to be a complete statement of all
legal restrictions and requirements applicable to the Company and the Bank and
all such descriptions are qualified in their entirety by reference to applicable
statutes, regulations and other regulatory pronouncements.
As noted under "Risk Factors--Regulation," in recent periods there have been
various legislative proposals in the U.S. Congress to eliminate the thrift
charter and the OTS. Although the Company currently is unable to predict whether
the existence of the thrift charter and the OTS may be the subject of future
legislation and, if so, what the final contents of such legislation will be and
their effects, if any, on the Company and the Bank, such legislation could
result in, among other things, the Company becoming subject to the same
regulatory capital requirements, activities limitations and other requirements
which are applicable to bank holding companies under the BHCA. Unlike savings
and loan holding companies, bank holding companies are subject to regulatory
capital requirements, which generally are comparable to the regulatory capital
requirements which are applicable to the Bank (see "Regulation--The
Bank--Regulatory Capital Requirements"), and unlike unitary savings and loan
holding companies such as the Company, which generally are not subject to
activities limitations, bank holding companies generally are prohibited from
engaging in activities or acquiring or controlling, directly or indirectly, the
voting securities or assets of any company engaged in any activity other than
banking, managing or controlling banks and bank subsidiaries or other activities
that the Federal Reserve Board has determined, by regulation or otherwise, to be
so closely related to banking or managing or controlling banks as to be a proper
incident thereto.
THE COMPANY
GENERAL. The Company is a registered savings and loan holding company under
the Home Owners' Loan Act ("HOLA"). As such, the Company is subject to
regulation, supervision and examination by the OTS.
ACTIVITIES RESTRICTIONS. There are generally no restrictions on the
activities of a savings and loan holding company, such as the Company, which
holds only one subsidiary savings institution. However, if the Director of the
OTS determines that there is reasonable cause to believe that the continuation
by a savings and loan holding company of an activity constitutes a serious risk
to the financial safety, soundness or stability of its subsidiary savings
institution, the Director may impose such restrictions as deemed necessary to
address such risk, including limiting (i) payment of dividends by the savings
institution; (ii) transactions between the savings institution and its
affiliates; and (iii) any activities of the savings institution that might
create a serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings
72
<PAGE>
institution. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
institution subsidiary of such a holding company fails to meet a qualified
thrift lender ("QTL") test set forth in OTS regulations, then such unitary
holding company shall become subject to the activities restrictions applicable
to multiple savings and loan holding companies and, unless the savings
institution requalifies as a QTL within one year thereafter, shall register as,
and become subject to the restrictions applicable to, a bank holding company.
See "--The Bank--Qualified Thrift Lender Test."
If the Company were to acquire control of another savings institution, other
than through merger or other business combination with the Bank, the Company
would thereupon become a multiple savings and loan holding company. Except where
such acquisition is pursuant to the authority to approve emergency thrift
acquisitions and where each subsidiary savings institution meets the QTL test,
as set forth below, the activities of the Company and any of its subsidiaries
(other than the Bank or other subsidiary savings institutions) would thereafter
be subject to further restrictions. Among other things, no multiple savings and
loan holding company or subsidiary thereof which is not a savings institution
generally shall commence or continue for a limited period of time after becoming
a multiple savings and loan holding company or subsidiary thereof any business
activity, other than: (i) furnishing or performing management services for a
subsidiary savings institution; (ii) conducting an insurance agency or escrow
business; (iii) holding, managing, or liquidating assets owned by or acquired
from a subsidiary savings institution; (iv) holding or managing properties used
or occupied by a subsidiary savings institution; (v) acting as trustee under
deeds of trust; (vi) those activities authorized by regulation as of March 5,
1987 to be engaged in by multiple savings and loan holding companies; or (vii)
unless the Director of the OTS by regulation prohibits or limits such activities
for savings and loan holding companies, those activities authorized by the
Federal Reserve Board as permissible for bank holding companies. Those
activities described in clause (vii) above also must be approved by the Director
of the OTS prior to being engaged in by a multiple savings and loan holding
company.
RESTRICTIONS ON ACQUISITIONS. Except under limited circumstances, savings
and loan holding companies are prohibited from acquiring, without prior approval
of the Director of the OTS, (i) control of any other savings institution or
savings and loan holding company or substantially all the assets thereof or (ii)
more than 5% of the voting shares of a savings institution or holding company
thereof which is not a subsidiary. Except with the prior approval of the
Director of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock, may acquire control of any savings institution, other than
a subsidiary savings institution, or of any other savings and loan holding
company.
The Director of the OTS may approve acquisitions resulting in the formation
of a multiple savings and loan holding company which controls savings
institutions in more than one state only if (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office located in the state of the institution to be acquired as of March
5, 1987; (ii) the acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act ("FDIA"); or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by state-chartered savings institutions located in the state where the
acquiring entity is located (or by a holding company that controls such
state-chartered savings institutions).
RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between the
Company or any of its non-bank subsidiaries and the Bank are subject to various
restrictions, which are described below under "--The Bank--Affiliate
Transactions" below.
THE BANK
GENERAL. The Bank is a federally-chartered savings bank organized under the
HOLA. As such, the Bank is subject to regulation, supervision and examination by
the OTS. The deposit accounts of the Bank are insured up to applicable limits by
the SAIF administered by the FDIC and, as a result, the Bank also is subject to
regulation, supervision and examination by the FDIC.
73
<PAGE>
The business and affairs of the Bank are regulated in a variety of ways.
Regulations apply to, among other things, insurance of deposit accounts, capital
ratios, payment of dividends, liquidity requirements, the nature and amount of
the investments that the Bank may make, transactions with affiliates, community
and consumer lending laws, internal policies and controls, reporting by and
examination of the Bank and changes in control of the Bank.
INSURANCE OF ACCOUNTS. As an FDIC-insured institution, the Bank is required
to pay deposit insurance premiums to the FDIC. In 1993, the FDIC adopted a
transitional risk-based deposit insurance system, which became permanent
effective January 1, 1994. Under current FDIC regulations, institutions are
assigned to one of three capital groups which are based solely on the level of
an institution's capital--"well capitalized," "adequately capitalized," and
"undercapitalized"--which are defined in the same manner as the regulations
establishing the prompt corrective action system under Section 38 of the FDIA,
as discussed below. These three groups are then divided into three subgroups
which are based on supervisory evaluations by the institution's primary federal
regulator, resulting in nine assessment classifications. Assessment rates
currently range from .23% for well capitalized, healthy institutions to .31% for
undercapitalized institutions with substantial supervisory concerns.
On November 14, 1995, the FDIC adopted a new assessment rate schedule of
zero to 27 basis points (subject to a $2,000 annual minimum) for BIF members
beginning on or about January 1, 1996 while retaining the existing assessment
rate schedule for SAIF member institutions. In announcing this new schedule, the
FDIC noted that the premium differential may have adverse consequences for SAIF
members, including reduced earnings and an impaired ability to raise funds in
the capital markets. In addition, as a result of this differential SAIF members,
such as the Bank, could be placed at a competitive disadvantage to BIF members
with respect to the pricing of loans and deposits and the ability to achieve
lower operating costs. For information concerning proposed legislation which is
intended to address this competitive disadvantage and, among other things,
recapitalize the SAIF, see "Risk Factors--Recapitalization of SAIF."
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the Bank's deposit insurance.
REGULATORY CAPITAL REQUIREMENTS. Federally-insured savings associations are
required to maintain minimum levels of regulatory capital. These standards
generally must be as stringent as the comparable capital requirements imposed on
national banks. The OTS also is authorized to impose capital requirements in
excess of these standards on individual associations on a case-by-case basis. At
June 30, 1996, the Bank's regulatory capital substantially exceeded applicable
requirements. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Regulatory Capital Requirements."
Federally-insured savings associations are subject to three capital
requirements: a tangible capital requirement, a core or leverage capital
requirement and a risk-based capital requirement. All savings associations
currently are required to maintain tangible capital of at least 1.5% of adjusted
total assets (as defined in the regulations), core capital equal to 3% of
adjusted total assets and total capital (a combination of core and supplementary
capital) equal to 8% of risk-weighted assets. For purposes of the regulation,
tangible capital is core capital less all intangibles other than qualifying
mortgage servicing rights, of which the Bank had $2.7 million at June 30, 1996.
Core capital includes common stockholders' equity, non-cumulative perpetual
preferred stock and related surplus, minority interests in the equity accounts
of fully consolidated subsidiaries and certain nonwithdrawable accounts and
pledged deposits. Core capital generally is reduced by the amount of a savings
association's intangible assets, other than qualifying mortgage servicing
rights.
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<PAGE>
A savings association is allowed to include both core capital and
supplementary capital in the calculation of its total capital for purposes of
the risk-based capital requirements, provided that the amount of supplementary
capital included does not exceed the savings association's core capital.
Supplementary capital consists of certain capital instruments that do not
qualify as core capital, including subordinated debt (such as the Debentures)
which meets specified requirements, and general valuation loan and lease loss
allowances up to a maximum of 1.25% of risk-weighted assets. In determining the
required amount of risk-based capital, total assets, including certain
off-balance sheet items, are multiplied by a risk weight based on the risks
inherent in the type of assets. The risk weights assigned by the OTS for
principal categories of assets currently range from 0% to 100%, depending on the
type of asset.
OTS policy imposes a limitation on the amount of net deferred tax assets
under SFAS No. 109 that may be included in regulatory capital. (Net deferred tax
assets represent deferred tax assets, reduced by any valuation allowances, in
excess of deferred tax liabilities). Application of the limit depends on the
possible sources of taxable income available to an institution to realize
deferred tax assets. Deferred tax assets that can be realized from the following
generally are not limited: taxes paid in prior carryback years and future
reversals of existing taxable temporary differences. To the extent that the
realization of deferred tax assets depends on an institution's future taxable
income (exclusive of reversing temporary differences and carryforwards), or its
tax-planning strategies, such deferred tax assets are limited for regulatory
capital purposes to the lesser of the amount that can be realized within one
year of the quarter-end report date or 10% of core capital. The foregoing
considerations did not affect the calculation of the Bank's regulatory capital
at June 30, 1996.
In August 1993, the OTS adopted a final rule incorporating an interest-rate
risk component into the risk-based capital regulation. Under the rule, an
institution with a greater than "normal" level of interest rate risk will be
subject to a deduction of its interest rate risk component from total capital
for purposes of calculating the risk-based capital requirement. As a result,
such an institution will be required to maintain additional capital in order to
comply with the risk-based capital requirement. Although the final rule was
originally scheduled to be effective as of January 1994, the OTS has indicated
that it will delay invoking its interest rate risk rule requiring institutions
with above normal interest rate risk exposure to adjust their regulatory capital
requirement until appeal procedures are implemented and evaluated. The OTS has
not yet established an effective date for the capital deduction. Management of
the Bank does not believe that the OTS' adoption of an interest rate risk
component to the risk-based capital requirement will adversely affect the Bank
if it becomes effective in its current form.
In April 1991, the OTS proposed to modify the 3% of adjusted total assets
core capital requirement in the same manner as was done by the Comptroller of
the Currency for national banks. Under the OTS proposal, only savings
associations rated composite 1 under the CAMEL rating system will be permitted
to operate at the regulatory minimum core capital ratio of 3%. For all other
savings associations, the minimum core capital ratio will be 3% plus at least an
additional 100 to 200 basis points, which thus will increase the core capital
ratio requirement to 4% to 5% of adjusted total assets or more. In determining
the amount of additional capital, the OTS will assess both the quality of risk
management systems and the level of overall risk in each individual savings
association through the supervisory process on a case-by-case basis.
PROMPT CORRECTIVE ACTION. Federal law provides the federal banking
regulators with broad power to take "prompt corrective action" to resolve the
problems of undercapitalized institutions. The extent of the regulators' powers
depends on whether the institution in question is "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized"
or "critically undercapitalized." Under regulations adopted by the federal
banking regulators, an institution shall be deemed to be (i) "well capitalized"
if it has a total risk-based capital ratio of 10.0% or more, has a Tier I
risk-based capital ratio of 6.0% or more, has a Tier I leverage capital ratio of
5.0% or more and is not subject to specified requirements to meet and maintain a
specific capital level for any capital measure; (ii) "adequately capitalized" if
it has a total risk-based capital ratio of 8.0% or more, a Tier I risk-based
capital ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0% or
more (3.0% under certain circumstances) and does not meet the definition of
"well capitalized," (iii) "undercapitalized" if it has a total risk-based
capital ratio that is less than 8.0%, a Tier I risk-based capital ratio that is
less than 4.0% or a Tier I leverage capital ratio that is less than 4.0% (3.0%
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under certain circumstances), (iv) "significantly undercapitalized" if it has a
total risk-based capital ratio that is less than 6.0%, a Tier I risk-based
capital ratio that is less than 3.0% or a Tier I leverage capital ratio that is
less than 3.0%, and (v) "critically undercapitalized" if it has a ratio of
tangible equity to adjusted total assets that is equal to or less than 2.0%. The
regulations also permit the appropriate federal banking regulator to downgrade
an institution to the next lower category (provided that a significantly
undercapitalized institution may not be downgraded to critically
undercapitalized) if the regulator determines (i) after notice and opportunity
for hearing or response, that the institution is in an unsafe or unsound
condition or (ii) that the institution has received (and not corrected) a
less-than-satisfactory rating for any of the categories of asset quality,
management, earnings or liquidity in its most recent exam. At June 30, 1996, the
Bank was a "well capitalized" institution under the prompt corrective action
regulations of the OTS.
Depending upon the capital category to which an institution is assigned, the
regulators' corrective powers, many of which are mandatory in certain
circumstances, include prohibition on capital distributions; prohibition on
payment of management fees to controlling persons; requiring the submission of a
capital restoration plan; placing limits on asset growth; limiting acquisitions,
branching or new lines of business; requiring the institution to issue
additional capital stock (including additional voting stock) or to be acquired;
restricting transactions with affiliates; restricting the interest rates that
the institution may pay on deposits; ordering a new election of directors of the
institution; requiring that senior executive officers or directors be dismissed;
prohibiting the institution from accepting deposits from correspondent banks;
requiring the institution to divest certain subsidiaries; prohibiting the
payment of principal or interest on subordinated debt; and, ultimately,
appointing a receiver for the institution.
QUALIFIED THRIFT LENDER TEST. All savings associations are required to meet
a QTL Test set forth in the HOLA and regulations of the OTS thereunder to avoid
certain restrictions on their operations. A savings association that does not
meet the QTL Test set forth in the HOLA and implementing regulations must either
convert to a bank charter or comply with the following restrictions on its
operations: (i) the association may not engage in any new activity or make any
new investment, directly or indirectly, unless such activity or investment is
permissible for a national bank; (ii) the branching powers of the association
shall be restricted to those of a national bank; (iii) the association shall not
be eligible to obtain any advances from its FHLB; and (iv) payment of dividends
by the association shall be subject to the rules regarding payment of dividends
by a national bank. Upon the expiration of three years from the date the
association ceases to be a QTL, it must cease any activity and not retain any
investment not permissible for a national bank and immediately repay any
outstanding FHLB advances (subject to safety and soundness considerations).
Currently, the QTL test requires that 65% of an institution's "portfolio
assets" (as defined) consist of certain housing and consumer-related assets on a
monthly basis in at least nine out of every 12 months. At June 30, 1996, the
qualified thrift investments of the Bank were approximately 70% of its portfolio
assets.
RESTRICTIONS ON CAPITAL DISTRIBUTIONS. The OTS has promulgated a regulation
governing capital distributions by savings associations, which include cash
dividends, stock redemptions or repurchases, cash-out mergers, interest payments
on certain convertible debt and other transactions charged to the capital
account of a savings association as a capital distribution. Generally, the
regulation creates three tiers of associations based on regulatory capital, with
the top two tiers providing a safe harbor for specified levels of capital
distributions from associations so long as such associations notify the OTS and
receive no objection to the distribution from the OTS. Associations that do not
qualify for the safe harbor provided for the top two tiers of associations are
required to obtain prior OTS approval before making any capital distributions.
Tier 1 associations may make the highest amount of capital distributions,
and are defined as savings associations that before and after the proposed
distribution meet or exceed their fully phased-in regulatory capital
requirements. Tier 1 associations may make capital distributions during any
calendar year equal to the greater of (i) 100% of net income for the calendar
year-to-date plus 50% of its "surplus capital ratio" at the beginning of the
calendar year and (ii) 75% of its net income over the most recent four-quarter
period. The "surplus capital ratio" is defined to mean the percentage by which
the association's ratio of total capital to assets exceeds the ratio of its
fully phased-in capital requirement to assets, and "fully phased-in capital
requirement" is defined to mean an association's capital requirement under the
statutory and regulatory
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standards applicable on December 31, 1994, as modified to reflect any applicable
individual minimum capital requirement imposed upon the association. At June 30,
1996, the Bank was a Tier 1 association under the OTS capital distribution
regulation.
In December 1994, the OTS published a notice of proposed rulemaking to amend
its capital distribution regulation. Under the proposal, the three tiered
approach contained in existing regulations would be replaced and institutions
would be permitted to make capital distributions that would not result in their
capital being reduced below the level required to remain "adequately
capitalized," as defined above under "--The Bank--Prompt Corrective Action."
LOANS-TO-ONE BORROWER. Under applicable laws and regulations, the amount of
loans and extensions of credit which may be extended by a savings institution
such as the Bank to any one borrower, including related entities, generally may
not exceed the greater of $500,000 or 15% of the unimpaired capital and
unimpaired surplus of the institution. Loans in an amount equal to an additional
10% of unimpaired capital and unimpaired surplus also may be made to a borrower
if the loans are fully secured by readily marketable securities. An
institution's "unimpaired capital and unimpaired surplus" includes, among other
things, the amount of its core capital and supplementary capital included in its
total capital under OTS regulations.
At June 30, 1996, the Bank's unimpaired capital and surplus amounted to
$252.7 million, resulting in a general loans-to-one borrower limitation of $37.9
million under applicable laws and regulations. See "Business--Discounted Loan
Acquisition and Resolution Activities--Composition of the Discounted Loan
Portfolio" and "--Lending Activities--Composition of Loan Portfolio."
BROKERED DEPOSITS. Under applicable laws and regulations, an insured
depository institution may be restricted in obtaining, directly or indirectly,
funds by or through any "deposit broker," as defined, for deposit into one or
more deposit accounts at the institution. The term "deposit broker" generally
includes any person engaged in the business of placing deposits, or facilitating
the placement of deposits, of third parties with insured depository institutions
or the business of placing deposits with insured depository institutions for the
purpose of selling interests in those deposits to third parties. Under FDIC
regulations, well-capitalized institutions are subject to no brokered deposit
limitations, while adequately capitalized institutions are able to accept, renew
or roll over brokered deposits only (i) with a waiver from the FDIC and (ii)
subject to the limitation that they do not pay an effective yield on any such
deposit which exceeds by more than (a) 75 basis points the effective yield paid
on deposits of comparable size and maturity in such institution's normal market
area for deposits accepted in its normal market area or (b) by 120% for retail
deposits and 130% for wholesale deposits, respectively, of the current yield on
comparable maturity U.S. treasury obligations for deposits accepted outside the
institution's normal market area. Undercapitalized institutions are not
permitted to accept brokered deposits and may not solicit deposits by offering
an effective yield that exceeds by more than 75 basis points the prevailing
effective yields on insured deposits of comparable maturity in the institution's
normal market area or in the market area in which such deposits are being
solicited. At June 30, 1996, the Bank was a well-capitalized institution which
was not subject to restrictions on brokered deposits, which otherwise would be
applicable to all of its brokered and wholesale deposits. See "Business--Sources
of Funds--Deposits."
LIQUIDITY REQUIREMENTS. All savings associations are required to maintain
an average daily balance of liquid assets, which include specified short-term
assets and certain long-term assets, equal to a certain percentage of the sum of
its average daily balance of net withdrawable deposit accounts and borrowings
payable in one year or less. The liquidity requirement may vary from time to
time (between 4% and 10%) depending upon economic conditions and savings flows
of all savings associations. At the present time, the required liquid asset
ratio is 5%. Historically, the Bank has operated in compliance with these
requirements. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity."
POLICY STATEMENT ON NATIONWIDE BRANCHING. Current OTS policy generally
permits a federally-chartered savings association to establish branch offices
outside of its home state if the association meets the domestic building and
loan test in Section 7701(a)(19) of the Code or the asset composition test of
subparagraph (c) of that section for institutions seeking to so qualify, and if,
with respect to each state outside of its home state where the association has
established branches, the assets attributable to the branches, taken alone, also
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would qualify them as a domestic building and loan association were they
otherwise eligible (which restrictions are not applicable in the event that a
state-chartered association organized under the laws of the federal
association's home state would be permitted under relevant state law to operate
in the other state). See "Taxation--Federal Taxation." An association seeking to
take advantage of this authority would have to have a branching application
approved by the OTS, which would consider the regulatory capital of the
association and its record under the Community Reinvestment Act of 1977, as
amended ("CRA"), among other things.
AFFILIATE TRANSACTIONS. Under federal law and regulation, transactions
between a savings association and its affiliates are subject to quantitative and
qualitative restrictions. Affiliates of a savings association include, among
other entities, companies that control, are controlled by or are under common
control with the savings association. As a result, the Company and its non-bank
subsidiaries are affiliates of the Bank.
Savings associations are restricted in their ability to engage in "covered
transactions" with their affiliates. In addition, covered transactions between a
savings association and an affiliate, as well as certain other transactions with
or benefiting an affiliate, must be on terms and conditions at least as
favorable to the savings association as those prevailing at the time for
comparable transactions with non-affiliated companies. Savings associations are
required to make and retain detailed records of transactions with affiliates.
Notwithstanding the foregoing, a savings association is not permitted to
make a loan or extension of credit to any affiliate unless the affiliate is
engaged only in activities the Federal Reserve Board has determined to be
permissible for bank holding companies. Savings associations also are prohibited
from purchasing or investing in securities issued by an affiliate, other than
shares of a subsidiary.
Savings associations are also subject to various limitations and reporting
requirements on loans to insiders. These limitations require, among other
things, that all loans or extensions of credit to insiders (generally executive
officers, directors or 10% stockholders of the institution) or their "related
interests" be made on substantially the same terms (including interest rates and
collateral) as, and follow credit underwriting procedures that are not less
stringent than, those prevailing for comparable transactions with the general
public and not involve more than the normal risk of repayment or present other
unfavorable features.
COMMUNITY INVESTMENT AND CONSUMER PROTECTION LAWS. In connection with its
lending activities, the Bank is subject to a variety of federal laws designed to
protect borrowers and promote lending to various sectors of the economy and
population. Included among these are the federal Home Mortgage Disclosure Act,
Real Estate Settlement Procedures Act, Truth-in-Lending Act, the Equal Credit
Opportunity Act, Fair Credit Reporting Act and the CRA.
SAFETY AND SOUNDNESS. Other regulations which were recently adopted or are
currently proposed to be adopted pursuant to recent legislation include: (i)
real estate lending standards for insured institutions, which provide guidelines
concerning loan-to-value ratios for various types of real estate loans; (ii)
revisions to the risk-based capital rules to account for interest rate risk,
concentration of credit risk and the risks posed by "non-traditional
activities;" (iii) rules requiring depository institutions to develop and
implement internal procedures to evaluate and control credit and settlement
exposure to their correspondent banks: and (iv) rules addressing various "safety
and soundness" issues, including operations and managerial standards, standards
for asset quality, earnings and stock valuations, and compensation standards for
the officers, directors, employees and principal stockholders of the insured
institution.
TAXATION
FEDERAL TAXATION
GENERAL. The Company and, with one exception, its subsidiaries currently
file, and expect to continue to file, a consolidated federal income tax return
based on a calendar year. Consolidated returns have the effect of eliminating
inter-company transactions, including dividends, from the computation of taxable
income.
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Savings institutions such as the Bank, which meet certain definitional tests
primarily relating to their assets and the nature of their businesses,
historically have been permitted to establish a reserve for bad debts and to
make annual additions to the reserve. These additions may, within specified
formula limits, be deducted in arriving at the Bank's taxable income. For
purposes of computing the deductible addition to its bad debt reserve, the
Bank's loans are separated into "qualifying real property loans" (I.E.,
generally those loans secured by certain interests in real property) and all
other loans ("non-qualifying loans"). The deduction with respect to
nonqualifying loans must be computed under the experience method, while a
deduction with respect to qualifying loans may be computed using a percentage
based on actual loss experience or a percentage of taxable income.
Under the percentage of taxable income method, the bad debt deduction equals
8% of taxable income determined without regard to that deduction and with
certain adjustments. The availability of the percentage of taxable income method
has permitted a qualifying savings institution to be taxed at a lower maximum
effective marginal federal income tax rate than that applicable to corporations
in general. This resulted generally in a maximum effective marginal federal
income tax rate payable by a qualifying savings institution fully able to use
the maximum deduction permitted under the percentage of taxable income method,
in the absence of other factors affecting taxable income, of 32.2% exclusive of
any minimum tax or environmental tax (as compared to 35% for corporations
generally). Any savings institution at least 60% of whose assets are qualifying
assets, as described in Section 7701(a)(19)(c) of the Code, generally will be
eligible for the full deduction of 8% of taxable income, subject to certain
limitations on the amount of the bad debt deduction that a savings association
may claim with respect to additions to its reserve for bad debts under the
percentage of income method. As of December 31, 1995, approximately 71% of the
Bank's assets were "qualifying assets" described in Section 7701(a)(19)(C) of
the Code.
Legislation adopted by the U.S. Congress in August 1996 (i) repeals the
provision of the Code which authorizes use of the percentage of taxable income
method by qualifying savings institutions to determine deductions for bad debts,
effective for taxable years beginning after 1995, and (ii) requires that a
savings institution recapture for tax purposes (i.e. take into income) over a
six-year period its applicable excess reserves, which for a thrift institution
such as the Bank which becomes a "large bank," as defined in Section 585(c)(2)
of the Code, generally is the excess of the balance of its bad debt reserves as
of the close of its last taxable year beginning before January 1, 1996 over the
balance of such reserves as of the close of its last taxable year beginning
before January 1, 1988, which recapture would be suspended for any tax year that
begins after December 31, 1995 and before January 1, 1998 (thus a maximum of two
years) in which a savings institution originates an amount of residential loans
which is not less than the average of the principal amount of such loans made by
a savings institution during its six most recent taxable years beginning before
January 1, 1996. In part because the Bank has provided for deferred taxes with
respect to the excess of its bad debt reserves as of December 31, 1995 over the
balance of such reserves as of December 31, 1987, the Company does not believe
that these provisions will have a material adverse effect on the Company's
financial condition or operations.
The above-referenced legislation also repeals certain provisions of the Code
that only apply to thrift institutions to which Section 593 applies: (i) the
denial of a portion of certain tax credits to a thrift institution (Section
50(d)(1)); (ii) the special rules with respect to the foreclosure of property
securing loans of a thrift institution (Section 595); (iii) the reduction in the
dividends received deduction of a thrift institution (Section 596); and (iv) the
ability of a thrift institution to use a net operating loss to offset its income
from a residual interest in a REMIC (Section 860(E)(a)(2)). It is not
anticipated that the repeal of these provisions will have a material adverse
effect on the Company's financial condition or operations.
ALTERNATIVE MINIMUM TAX. In addition to regular income taxes, corporations
may be subject to an alternative minimum tax which is generally equal to 20% of
alternative minimum taxable income (taxable income, increased by tax preference
items and adjusted for certain regular tax items). The preference items
generally applicable to savings associations include (i) 100% of the excess of a
savings association's bad debt deduction computed under the percentage of
taxable income method over the amount that would have been allowable under the
experience method and (ii) an amount equal to 75% of the amount by which a
savings
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association's adjusted current earnings (alternative minimum taxable income
computed without regard to this preference, adjusted for certain items) exceeds
its alternative minimum taxable income without regard to this preference.
Alternative minimum tax paid can be credited against regular tax due in later
years.
TAX RESIDUALS. From time to time the Company invests in tax residuals,
which, net of deferred fees, are included in the Company's deferred tax assets.
Although a tax residual has little or no future economic cash flows from the
REMIC from which it has been issued, the tax residual does bear the income tax
liability or benefit resulting from the difference between the interest rate
paid on the securities issued by the REMIC and the interest rate received on the
mortgage loans held by the REMIC. This generally results in taxable income for
the Company in the first several years of the REMIC and equal amounts of tax
deductions thereafter. The Company receives cash payments in connection with the
purchase of tax residuals to compensate the Company for the time value of money
associated with the tax payments related to these securities and the costs of
modeling, recording, monitoring and reporting the securities; thus, the Company
in effect receives payments in connection with its acquisition of the security
and acceptance of the related tax liabilities. Prior to 1994, a portion of the
fees received by the Company related to the acquisition of tax residuals were
recorded in the Company's non-interest income as fees on financing transactions
at the time of acquisition and the remainder were deferred and recognized in
interest income (under "investment securities and other") on a level yield basis
over the expected life of the deferred tax asset related to tax residuals. From
time to time, the Company revises its estimate of its future obligations under
the tax residuals, and in 1994, due primarily to certain changes in the
marketplace, consisting of a significant decrease in the availability of new tax
residuals and an increase in the number of purchasers of such securities, the
Company began to defer all fees received and recognize such fees in interest
income on a level yield basis over the expected life of the deferred tax asset
related to tax residuals. The Company also adjusts the recognition in interest
income of fees deferred based upon changes in the actual prepayment rates of the
underlying mortgages held by the REMIC and periodic reassessments of the
expected life of the deferred tax asset related to tax residuals. At June 30,
1996, the Company's gross deferred tax assets included $16.1 million which was
attributable to the Company's tax residuals and related deferred income. The
Company's current portfolio of tax residuals generally have a negative tax basis
and are not expected to generate future taxable income. Because of the manner in
which REMIC residual interests are treated for tax purposes, at June 30, 1996,
the Company had approximately $46.8 million of net operating loss carryforwards
for federal income tax purposes which were attributable to sales of tax
residuals. See Notes 1 and 19 to the Consolidated Financial Statements.
INVESTMENTS IN LOW-INCOME HOUSING TAX CREDIT INTERESTS. For a discussion of
the tax effects of investments in low-income housing tax credit interests, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Income Tax Expense" and "Business--
Investment Activities--Investment in Low--Income Housing Tax Credit Interests."
EXAMINATIONS. The most recent examination by the Internal Revenue Service
of the Company's federal income tax returns was of the tax returns filed for
1989 and 1990. The statute of limitations has run with respect to all tax years
prior to those years. Thus, the federal income tax returns for the years 1991
through 1994 (due to a waiver of the statute of limitations) are open for
examination. The Internal Revenue Service currently is completing an examination
of the Company's federal income tax returns for 1992 and 1991 and commencing an
examination of the returns for 1994 and 1993; management of the Company does not
anticipate any material adjustments as a result of these examinations, although
there can be no assurances in this regard. No state return of the Company has
been examined, and no notification has been received by the Company that any
state intends to examine any of the tax returns with respect to which the
statute of limitations has not run.
STATE TAXATION
The Company's income, property and wages are apportioned to Florida to
determine taxable income based on certain apportionment factors, which has a
statutory tax rate of 5.5%. The Company is taxed in New Jersey on income, net of
expenses, earned in New Jersey at a statutory rate of 3.0%.
For additional information regarding taxation, see Note 19 to the
Consolidated Financial Statements.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following tables set forth certain information about the directors and
executive officers of the Company. Directors are elected annually and hold
office until the earlier of the election and qualification of their successors
or their resignation or removal. Executive officers of the Company are elected
annually by the Board of Directors and generally serve at the discretion of the
Board. There are no arrangements or understandings between the Company and any
person pursuant to which such person was elected as a director or executive
officer of the Company. Other than William C. Erbey and John R. Erbey, who are
brothers, no director or executive officer is related to any other director or
executive officer of the Company or any of its subsidiaries by blood, marriage
or adoption.
DIRECTORS OF THE COMPANY
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE(1) POSITION SINCE
- ------------------------------------ ----------- ----------------------------------------------- -----------
<S> <C> <C> <C>
William C. Erbey 47 Chairman, President and Chief Executive 1988
Officer(2)
Barry N. Wish 54 Chairman, Emeritus(2) 1988
W. C. Martin 47 Director 1996
Howard H. Simon 55 Director 1996
</TABLE>
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
<TABLE>
<CAPTION>
NAME AGE(1) POSITION
- ------------------------------------ ----------- -----------------------------------------------
<S> <C> <C> <C>
John R. Barnes 53 Senior Vice President
Rory A. Brown 33 Managing Director
John R. Erbey 55 Managing Director and Secretary
Robert E. Koe 51 Managing Director
Christine A. Reich 35 Managing Director and Chief Financial Officer
Stephen C. Wilhoit 35 Senior Vice President
</TABLE>
- ------------------------
(1) As of June 30, 1996.
(2) Upon consummation of the Common Stock Offering, Mr. Erbey, who currently
serves as President and Chief Executive Officer, will become Chairman of the
Board, and Mr. Wish, who currently serves as Chairman of the Board, will
become Chairman, Emeritus and continue as a director of the Company.
The principal occupation for the last five years of each director of the
Company, as well as certain other information, is set forth below.
WILLIAM C. ERBEY. Mr. Erbey has served as President and Chief Executive
Officer of the Company since January 1988 and as Chief Investment Officer of the
Company since January 1992, and will become Chairman of the Board upon closing
of the Common Stock Offering. Mr. Erbey has served as Chairman of the Board of
the Bank since February 1988 and as President and Chief Executive Officer of the
Bank since June 1990. From 1983 to 1995, Mr. Erbey served as a Managing General
Partner of The Oxford Financial Group ("Oxford"), a private investment company,
in charge of merchant banking. From 1975 to 1983, he served at General Electric
Capital Corporation ("GECC") in various capacities, most recently as President
and Chief Operating Officer of General Electric Mortgage Insurance Corporation,
a subsidiary of the General Electric Company engaged in the mortgage insurance
business. Mr. Erbey also served as Program
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General Manager of GECC's Commercial Financial Services Department and its
subsidiary Acquisition Funding Corporation. He received a B.A. in Economics from
Allegheny College and an M.B.A. from the Harvard Graduate School of Business
Administration.
BARRY N. WISH. Mr. Wish has served as Chairman of the Board of the Company
since January 1988, and will become Chairman, Emeritus and continue as a
director of the Company upon closing of the Common Stock Offering. From 1983 to
1995, he served as a Managing General Partner of Oxford, which he founded. From
1979 to 1983, he was a Managing General Partner of Walsh, Greenwood, Wish & Co.,
a member firm of the New York Stock Exchange. Prior to founding that firm, Mr.
Wish was a Vice President and Shareholder of Kidder, Peabody & Co., Inc. He is a
graduate of Bowdoin College.
W. C. MARTIN. Since 1982, Mr. Martin has been associated with Holding
Capital Group ("HCG"), which is engaged in the acquisition and turnaround of
businesses in a broad variety of industries. Since March 1993, Mr. Martin also
has served as President and Chief Executive Officer of Solitron Vector Microwave
Products, Inc., a company he formed along with other HCG investors to acquire
the assets of the former Microwave Division of Solitron Devices, Inc. Prior to
1982, Mr. Martin was a Manager in Touche Ross & Company's Management Consulting
Division, and prior to that he held positions in financial management with
Chrysler Corporation. Mr. Martin is a graduate of LaSalle University and
received an M.B.A. from Notre Dame.
HOWARD H. SIMON. From 1978 to the present, Mr. Simon has been President of
Simon, Master & Sidlow, P.A., a certified public accounting firm which Mr. Simon
founded and which is based in Wilmington, Delaware. He is a member of the Board
of Directors and the Executive Committee of CPA Associates International, Inc.
Mr. Simon is a Certified Public Accountant in the State of Delaware. He is
graduate of the University of Delaware.
The background for the last five years of each executive officer of the
Company who is not a director, as well as certain other information, is set
forth below.
JOHN R. BARNES. Mr. Barnes has served as Senior Vice President of the
Company and the Bank since May 1994 and served as Vice President of the same
from October 1989 to May 1994. Mr. Barnes was a Tax Partner in the firm of
Deloitte Haskins & Sells from 1986 to 1989 and in the firm of Arthur Young & Co.
from 1979 to 1986. Mr. Barnes was the Partner in Charge of the Cleveland Office
Tax Department of Arthur Young & Co. from 1979 to 1984. Mr. Barnes is a graduate
of Ohio State University.
RORY A. BROWN. Mr. Brown has served as a Managing Director of the Company
since January 1993, as Vice President--Corporate Development of the Company from
December 1991 until January 1993 and as Vice President and Treasurer of the
Company from June 1988 to December 1991. Mr. Brown has served as a director of
the Bank and as a Managing Director of the Bank since May 1993. Mr. Brown served
as a Vice President of the Bank from July 1989 to May 1993 and as Treasurer from
July 1989 to December 1991. Mr. Brown was a Senior Consultant with the Asset
Securitization Group of Arthur Andersen & Co. from 1985 to 1988. He is a
graduate of Humboldt State University.
JOHN R. ERBEY. Mr. Erbey has served as a Managing Director of the Company
since January 1993 and as Secretary of the Company since June 1989, and served
as Senior Vice President of the Company from June 1989 until January 1993. Mr.
Erbey has served as a director of the Bank since 1990, as a Managing Director of
the Bank since May 1993 and as Secretary of the Bank since July 1989.
Previously, he served as Senior Vice President of the Bank from June 1989 until
May 1993. From 1971 to 1989 he was a member of the Law Department of
Westinghouse Electric Corporation and held various management positions,
including Associate General Counsel and Assistant Secretary from 1984 to 1989.
Previously, he held the positions of Assistant General Counsel of the Industries
and International Group and Assistant General Counsel of the Power Systems Group
of Westinghouse. Mr. Erbey is a graduate of Allegheny College and Vanderbilt
University School of Law.
ROBERT E. KOE. Mr. Koe was elected as a Managing Director of the Company
and the Bank on July 1, 1996. Mr. Koe has served as a director of the Bank since
1994. Mr. Koe formerly was Chairman, President and Chief Executive Officer of
United States Leather, Inc. ("USL"), which includes Pfister & Vogel Leather,
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<PAGE>
Lackawanna Leather, A.L. Gebhardt and Caldwell/Moser Leather. Prior to joining
USL in 1990, he was Vice Chairman of Heller Financial Inc., and served as a
member of the board of its parent company, Heller International Corp.
("Heller"), as well as Heller Overseas Corp. Mr. Koe came to Heller in 1984 from
General Electric Capital Corp. ("GECC"), where he held positions which included
Vice President and General Manager of Commercial Financial Services, Vice
President and General Manager of Commercial Equipment Financing, and President
of Acquisition Funding Corp. Before joining GECC, Mr. Koe held various
responsibilities with its parent, the General Electric Company, from 1967 to
1975. Mr. Koe is a graduate of Kenyon College.
CHRISTINE A. REICH. Ms. Reich has served as a Managing Director of the
Company since June 1994 and as Chief Financial Officer of the Company since
January 1990. Ms. Reich served as Senior Vice President of the Company from
January 1993 until June 1994 and as Vice President from January 1990 until
January 1993. Ms. Reich has served as a director of the Bank since 1993, as a
Managing Director of the Bank since June 1994 and as Chief Financial Officer of
the Bank since May 1990. Ms. Reich served as Senior Vice President of the Bank
from May 1993 to June 1994 and Vice President of the Bank from January 1990 to
May 1993. From 1987 to 1990, Ms. Reich served as an officer of another
subsidiary of the Company. Prior to 1987, Ms. Reich was employed by KPMG Peat
Marwick LLP, most recently in the position of Manager. She is a graduate of the
University of Southern California.
STEPHEN C. WILHOIT. Mr. Wilhoit has served as Senior Vice President of the
Company and the Bank since May 1994. He served as Vice President of the Company
from March 1990 to May 1994 and served as Vice President of the Bank from May
1992 to May 1994. From 1986 to 1990 he was an attorney with the Atlanta law firm
of Trotter Smith & Jacobs. Mr. Wilhoit is a graduate of the University of
Virginia and Wake Forest University School of Law.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Company recently established an Executive
Committee, an Audit Committee and a Nominating and Compensation Committee. A
brief description of these committees is set forth below.
The Executive Committee is generally responsible to act on behalf of the
Board of Directors on all matters when the full Board of Directors is not in
session. Currently, the members of this committee are Directors Erbey and Wish.
The Audit Committee of the Board of Directors reviews and advises the Board
of Directors with respect to reports by the Company's independent auditors and
monitors the Company's compliance with laws and regulations applicable to the
Company's operations. Currently, the members of the Audit Committee are
Directors Simon and Martin.
The Nominating and Compensation Committee evaluates and makes
recommendations to the Board of Directors for the election of directors, as well
as handles personnel and compensation matters relating to the executive officers
of the Company. Currently, the members of the Nominating and Compensation
committee are Directors Simon and Martin.
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<PAGE>
REMUNERATION OF EXECUTIVE OFFICERS--SUMMARY COMPENSATION TABLE
The following table discloses compensation received by the Company's chief
executive officer and the four other most highly paid directors and executive
officers of the Company for the years ended December 31, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
AWARDS
---------------------------
NUMBER OF
ANNUAL COMPENSATION SECURITIES
----------------------------------- RESTRICTED UNDERLYING ALL OTHER
NAME AND POSITION YEAR SALARY BONUS($)(1) STOCK AWARDS OPTIONS(#)(2) COMPENSATION($)(3)
- -------------------------------- --------- ---------- ------------ ------------ ------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
William C. Erbey, 1995 $ 150,000 $ -- -- -- $ 3,000
President and Chief Executive 1994 150,000 1,171,675 -- 269,400 3,000
Officer 1993 150,000 100,000 -- 166,350 4,497
Barry N. Wish 1995 150,000 -- -- -- 3,000
Chairman 1994 150,000 800,000 -- 175,970 3,000
1993 150,000 100,000 -- 110,400 4,497
John R. Erbey, 1995 150,000 50,000 -- 44,500 3,000
Managing Director and Secretary 1994 150,000 800,000 -- 175,970 3,000
1993 150,000 100,000 -- 166,350 4,497
Rory A. Brown, 1995 150,000 50,000 -- 44,500 3,000
Managing Director 1994 150,000 650,000 -- 138,260 3,000
1993 150,000 100,000 -- 166,350 4,497
Christine A. Reich, 1995 150,000 50,000 -- 44,500 3,000
Managing Director and and Chief 1994 147,917 487,500 -- 97,410 3,000
Financial Officer 1993 122,917 100,000 -- 86,350 4,497
</TABLE>
- ------------------------
(1) The indicated bonuses were paid in the first quarter of the following year
for services rendered in the year indicated.
(2) Consists of options granted pursuant to the Company's Stock Option Plan.
(3) Consists of contributions by the Company pursuant to the Company's 401(k)
Savings Plan.
ANNUAL INCENTIVE PLAN
Since 1990, the Company has maintained an annual incentive plan for the
management and other salaried employees of the Company and its subsidiaries. The
plan provides the participants with bonuses each year paid from a pool based
upon the Company's consolidated operating income for that year. Accordingly, the
plan provides the Company's management and other personnel with a significant
incentive to contribute to the Company's financial success by allowing them to
share in a portion of the consolidated operating income of the Company and its
subsidiaries.
The aggregate bonus pool payable under the plan may not exceed 20% of income
before taxes and incentive awards of the Company plus pre-tax equivalent income
generated by tax advantaged investments. The plan is administered by the
President of the Company and may be amended or terminated at any time by the
Board of Directors.
Incentive awards are paid to participants following the end of each fiscal
year after the determination of the Company's income. Incentive awards may be
paid in cash or in any other form approved by the Board of Directors. Since
1990, certain executive officers and other eligible participants have received a
portion of their annual incentive award in the form of options to acquire Common
Stock pursuant to the Stock Option Plan.
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<PAGE>
Under present federal income tax law, participants will realize ordinary
income immediately upon receipt of a cash distribution under the incentive plan.
The Company will be entitled to an income tax deduction, in the amount of such
ordinary income, for the fiscal year for which such bonus payment is made,
provided the bonus payment is made within two and one-half months after the
close of that fiscal year; otherwise the payment will be deductible in the
fiscal year in which such payment is made to the participant. It is expected
that through the year 1999 all payments under the plan will be fully deductible
by the Company for federal income tax purposes and will not be subject to
Section 162(m) of the Code, which provides for a cap on the deductibility of
compensation paid to certain corporate executives of $1 million per covered
executive.
DIRECTORS STOCK PLAN
In July 1996, the Board of Directors and stockholders of the Company
approved the Directors Stock Plan, pursuant to which the sole compensation of
the directors of the Company shall be paid in Common Stock, subject to
consummation of the Common Stock Offering. (Directors also are reimbursed for
their travel and other reasonable expenses incurred in performing their duties
as directors of the Company.) The Directors Stock Plan is intended to encourage
directors to own shares of Common Stock and the highest level of director
performance, as well as to provide a financial incentive that will help attract
and retain the most qualified directors.
Beginning in 1996, the Company will compensate directors by delivering a
total annual value of $10,000 (which may be prorated for a director serving less
than a full one-year term, as in the case of a director joining the Board after
an annual meeting of stockholders), subject to review and adjustment by the
Board of Directors from time to time. Except for 1996, such payment will be made
after the annual organizational meeting of the Board of Directors which follows
the annual meeting of stockholders of the Company. An additional annual fee
payable in shares of Common Stock, which is $2,000 beginning in 1996, subject to
review and adjustment by the Board of Directors from time to time, will be paid
to committee chairs after the annual organizational meeting of the Board of
Directors. For 1996, the four directors of the Company and three committee
chairs will receive shares of Common Stock issuable under the Directors Stock
Plan upon consummation of the Common Stock Offering.
Shares issued pursuant to the Directors Stock Plan will be based on their
"fair market value" on the date of grant. The term "fair market value" is
defined in the Directors Stock Plan to mean the mean of the high and low prices
of the Common Stock as reported by the Nasdaq Stock Market's National Market on
the relevant date, or if no sale of Common Stock shall have been reported for
that day, the average of such prices on the next preceding day and the next
following day for which there are reported sales.
Shares issued pursuant to the Directors Stock Plan, other than the committee
fee shares, would be subject to forfeiture during the 12 full calendar months
following election or appointment to the Board of Directors or a committee
thereof if the director does not attend an aggregate of at least 75% of all
meetings of the Board of Directors and committees thereof of which he is a
member during such period.
An aggregate of 250,000 shares of Common Stock has been reserved for
issuance pursuant to the Directors Stock Plan, subject to adjustment in the
event of specified changes in the Common Stock resulting from recapitalizations,
stock splits, stock dividends and other circumstances set forth in the Directors
Stock Plan.
STOCK OPTION PLAN
The Company's Stock Option Plan is designed to advance the interests of the
Company, its subsidiaries (including the Bank) and the Company's shareholders by
affording certain officers and other key employees of the Company, the Bank and
other subsidiaries an opportunity to acquire or increase their proprietary
interests in the Company by granting such persons options to acquire Common
Stock. A total of 9,316,750 shares of Common Stock currently are authorized for
issuance under the Stock Option Plan. As of June 30, 1996, options to acquire
3,210,540 shares of Common Stock were outstanding under the Stock Option Plan.
Options granted pursuant to the Stock Option Plan have had exercise prices which
are at a substantial
85
<PAGE>
discount to the book value of the Common Stock. At June 30, 1996, the average
exercise price of the outstanding options granted under the Stock Option Plan
was $1.27 and the book value per share of Common Stock was $6.50.
The Stock Option Plan currently is administered and interpreted by either
the Board of Directors of the Company or, to the extent authority is delegated,
the stock option committee thereof. After the offerings, the Stock Option Plan
will be administered by a committee consisting of not less than two
"disinterested" directors within the meaning of Rule 16b-3 under the Exchange
Act. In the event that the outstanding shares of Common Stock are affected by
reason of a merger, consolidation, reorganization, recapitalization, combination
of shares, stock split or dividend, the number and kind of shares to which any
option relates and the exercise price of any option shall be appropriately
adjusted as determined solely by the Board of Directors of the Company or the
Nominating and Compensation Committee. In the event of a liquidation or
dissolution of the Company, an optionee generally shall have the right,
immediately prior to such dissolution or liquidation, to exercise any
outstanding options in whole or in part.
OPTION GRANTS FOR 1995
The following table provides information relating to option grants made
pursuant to the Stock Option Plan to the individuals named in the Summary
Compensation Table for services rendered in 1995.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------------------------------------------------
NUMBER OF PERCENT OF SECURITIES BOOK VALUE PER
SECURITIES UNDERLYING TOTAL EXERCISE SHARE OF OCWEN
UNDERLYING OPTIONS OPTIONS GRANTED TO PRICE COMMON STOCK AT EXPIRATION
NAME GRANTED(#)(1)(2) EMPLOYEES(2) ($/SH) DECEMBER 31, 1995 DATE
- --------------------------- ------------------- ----------------------- ----------- --------------------- -------------
<S> <C> <C> <C> <C> <C>
William C. Erbey........... -- -- % $ -- $ -- --
Barry N. Wish.............. -- -- -- -- --
John R. Erbey.............. 44,500 14.6 5.76 5.86 2006
Rory A. Brown.............. 44,500 14.6 5.76 5.86 2006
Christine A. Reich......... 44,500 14.6 5.76 5.86 2006
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED RATES OF STOCK PRICE
APPRECIATION FOR OPTION TERM(3)
-------------------------------
NAME 0%($) 5%($) 10%($)
- --------------------------- --------- --------- ---------
<S> <C> <C> <C>
William C. Erbey........... $ -- $ -- $
Barry N. Wish.............. -- -- --
John R. Erbey.............. 4,450 168,655 420,080
Rory A. Brown.............. 4,450 168,655 420,080
Christine A. Reich......... 4,450 168,655 420,080
</TABLE>
- ----------------------------------
(1) All options vest and become exercisable in January 1997.
(2) Indicated grants were made in January 1996 for services rendered in 1995.
The percentage of securities underlying these options to the total number of
securities underlying all options granted to employees of the Company is
based on options to purchase a total of 304,490 shares of Common Stock
granted to participants under the Stock Option Plan in January 1996.
(3) Assumes future prices of shares of Common Stock of $5.86, $9.55 and $15.20
at compounded rates of return of 0%, 5% and 10%, respectively.
AGGREGATED OPTION EXERCISES IN 1995 AND YEAR-END OPTION VALUES
The following table provides information relating to option exercises in
1995 by the individuals named in the Summary Compensation Table and the value of
each such individual's unexercised options at December 31, 1995.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
NUMBER OF SHARES DECEMBER 31, 1995 DECEMBER 31, 1995(1)(2)
ACQUIRED ON VALUE -------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------- ---------------- ------------ ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
William C. Erbey............... -- $ -- 924,640 -- $ 4,742,422 $ --
Barry N. Wish.................. 432,620 1,754,237 175,970 -- 892,696 --
John R. Erbey.................. -- -- 747,880 44,500 3,810,136 4,450
Rory A. Brown.................. -- -- 504,610 44,500 2,474,254 4,450
Christine A. Reich............. -- -- 222,650 44,500 1,060,577 4,450
</TABLE>
- ------------------------
(1) Based on the $5.86 book value of a share of Common Stock at December 31,
1995.
(2) For information regarding recent exercises of stock options, see
--"Transactions with Affiliates" below.
86
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Determinations regarding compensation of the Company's employees are made by
the Company's Board of Directors. Although Director William C. Erbey is an
employee of the Company, he does not participate in deliberations of the Board
of Directors concerning his compensation.
TRANSACTIONS WITH AFFILIATES
As of June 30, 1996, the Company (through the Bank) held a residential
mortgage loan with an interest rate of 8.5% which was made by the Company in
1987 to Howard H. Simon, a director of the Company. The principal balance of
this loan amounted to $124,624 at June 30, 1996, and the highest principal
balance of this loan during 1996 was $132,427.
From time to time the Company raises funds by privately issuing short-term
notes to its stockholders. At June 30, 1996, the Company had $7.4 million of
such short-term notes outstanding, including $1.0 million and $250,000 which
were held by William C. Erbey and John R. Erbey (or their affiliates),
respectively. All of such short-term notes bear interest at 10.5% per annum and
mature on May 1, 1997.
In September 1996, the Company loaned $6.7 million to certain of its and the
Bank's officers to fund their exercise of vested stock options to purchase an
aggregate of 2,713,660 shares of Common Stock, including 924,640 shares, 175,970
shares, 747,880 shares, 471,280 shares and 222,650 shares acquired by William C.
Erbey, Barry N. Wish, John R. Erbey, Rory A. Brown and Christine A. Reich,
respectively, who issued notes to the Company in the amount of $2.2 million,
$423,000, $1.8 million, $1.2 million and $583,000, respectively. Such notes bear
interest at 10.5% per annum, are payable in two equal installments on March 1,
1998 and March 1, 1999 and are secured by the related shares of Common Stock. At
the time of the issuance of the foregoing notes, the Company also agreed to loan
the issuers thereof up to an additional $1.7 million to fund the payment of
additional taxes owed in connection with the exercise of the above-referenced
stock options, including $594,000, $112,000, $478,000, $288,000 and $134,000 in
the case of William C. Erbey, Barry N. Wish, John R. Erbey, Rory A. Brown and
Christine A. Reich, respectively. Such loans will have the same terms as the
above-referenced notes.
87
<PAGE>
BENEFICIAL OWNERSHIP OF COMMON STOCK
As of the date hereof, the Company had 26,741,100 shares of Common Stock
outstanding which were held by 86 stockholders of record. The Common Stock is
privately held and, as a result, there are no market prices available for such
stock.
The following table sets forth, as of the date hereof, certain information
as to the Common Stock beneficially owned by (i) persons or entities, including
any "group" as that term is used in Section 13(d)(3) of the Exchange Act, who or
which were known to the Company to be the beneficial owners of 5% or more of the
issued and outstanding Common Stock, (ii) the executive officers of the Company
identified in the summary compensation table and (iii) all directors and
executive officers of the Company as a group. Other than Mr. Harold D. Price,
whose address is 2450 Presidential Way, #1806, West Palm Beach, Florida 33401,
the address for each of the individuals named below is the same as that of the
Company. See "The Company."
<TABLE>
<CAPTION>
SHARES
SHARES BENEFICIALLY OWNED AFTER
BENEFICIALLY OWNED
AS OF SEPTEMBER 25, 1996 THE COMMON STOCK OFFERING
----------------------------- ---------------------------
NAME OF BENEFICIAL OWNER AMOUNT(1) PERCENT(1) AMOUNT(1) PERCENT(1)
- ------------------------------------------------------------ -------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Harold D. Price............................................. 2,048,480(2) 7.7% 1,764,192 6.6%
Directors and executive officers:
William C. Erbey.......................................... 9,852,420(3) 36.8 9,852,420 36.8
Barry N. Wish............................................. 6,011,020(4) 22.5 5,178,350 19.4
John R. Erbey............................................. 976,030 3.6 976,030 3.6
Rory A. Brown............................................. 504,610 1.9 504,610 1.9
Christine A. Reich........................................ 222,650 0.8 222,650 0.8
All directors and executive officers as a group (nine
persons)................................................... 17,732,380 66.3 16,899,971 63.2
</TABLE>
- ------------------------
(1) For purposes of this table, pursuant to rules promulgated under the Exchange
Act, an individual is considered to beneficially own any shares of Common
Stock if he directly or indirectly has or shares: (i) voting power, which
includes the power to vote or to direct the voting of the shares, or (ii)
investment power, which includes the power to dispose or direct the
disposition of the shares. Unless otherwise indicated, an individual has
sole voting power and sole investment power with respect to the indicated
shares. Amounts shown assume no exercise of the Common Stock underwriters'
over-allotment option.
(2) Includes 1,436,990 shares held by HAP Investment Partnership, the partners
of which are Harold D. Price and his spouse. Mr. and Mrs. Price share voting
and dispositive power with respect to the shares owned by HAP Investment
Partnership. Also includes 611,490 shares held by Mr. Price as nominee for
various trusts for the benefit of members of his family.
(3) Includes 5,923,700 shares held by FF Plaza Partners, a Delaware partnership
of which the partners are William C. Erbey, his spouse, E. Elaine Erbey, and
Delaware Permanent Corporation, a corporation wholly owned by William C.
Erbey. Mr. and Mrs. William C. Erbey share voting and dispositive power with
respect to the shares owned by FF Plaza Partners. Also includes 3,004,080
shares held by Erbey Holding Corporation, a corporation wholly owned by
William C. Erbey.
(4) Includes 5,835,050 shares held by Wishco, Inc., a corporation controlled by
Barry N. Wish pursuant to his ownership of 93.0% of the common stock
thereof.
For additional information, see "Management--Transactions with Affiliates."
88
<PAGE>
DESCRIPTION OF NOTES OFFERING
The following summary of the principal terms of the Notes does not purport
to be complete and is qualified in its entirety by reference to all of the
provisions of the Indenture governing the Notes, a copy of which has been filed
as an exhibit to the Registration Statement of which this Prospectus is a part.
Capitalized terms not otherwise defined herein have the meanings specified in
the Indenture.
The Notes will be limited in aggregate principal amount to $125 million
(plus up to an additional $18.75 million aggregate principal amount of Notes
that may be issued upon exercise of the Note underwriter's over-allotment
option) and will mature on October 1, 2003. The Notes will be unsecured
obligations of the Company and will rank PARI PASSU in right of payment with all
existing and future general unsecured indebtedness of the Company. Interest on
the Notes will accrue at a rate of 11 7/8% per annum and will be payable in cash
semi-annually on April 1 and October 1 of each year, commencing April 1, 1997.
The Notes will be redeemable at the option of the Company, in whole or in
part, at any time on or after October 1, 2001 at specified redemption prices
together with accrued and unpaid interest, if any, to the date of redemption.
Until October 1, 1999, the Company may redeem up to 35% of the original
aggregate principal amount of the Notes with the proceeds from one or more
public or private sales of the Company's Qualified Capital Stock (as defined) at
a redemption price of 111.875%, provided that at least 65% of the original
aggregate principal amount of the Notes remain outstanding immediately after
such redemption. In addition, upon the occurrence of a Change of Control (as
defined), each holder of Notes will be able to require the Company to repurchase
all or a portion of such holder's Notes at 101% of the principal amount thereof,
plus accrued and unpaid interest, if any, to the date of repurchase.
The Indenture governing the Notes will contain certain covenants, including
a liquidity maintenance requirement, limitations on the incurrence of
indebtedness, transfers and issuances of stock of the Bank, the making of
restricted payments (including restrictions on the payment of dividends on the
Common Stock), the imposition of certain payment restrictions on subsidiaries,
transactions with affiliates, the existence of liens, the making of guaranties
by subsidiaries, mergers and sales of assets and on the conduct of business.
The Common Stock Offering is not conditioned upon the consummation of the
Notes Offering.
DESCRIPTION OF CAPITAL STOCK
GENERAL
Pursuant to the Articles of Incorporation of the Company, the Company is
authorized to issue 200,000,000 shares of Common Stock and 20,000,000 shares of
preferred stock, par value $0.01 per share (the "Preferred Stock"). As of the
date hereof, there were 26,741,100 shares of Common Stock outstanding and no
shares of Preferred Stock were outstanding.
COMMON STOCK
GENERAL. Each share of Common Stock has the same relative rights as, and is
identical in all respects with, each other share of Common Stock. All shares of
Common Stock currently outstanding are fully paid and nonassessable. The Common
Stock represents nonwithdrawable capital and is not subject to call for
redemption. The Common Stock is not an account of an insurable type and is not
insured by the FDIC or any other governmental authority.
DIVIDENDS. The Company can pay dividends if, as and when declared by its
Board of Directors, subject to compliance with limitations which are imposed by
law. See "Dividend Policy." The holders of Common Stock will be entitled to
receive and share equally in such dividends as may be declared by the Board of
Directors of the Company out of funds legally available therefor. If the Company
issues Preferred Stock, the holders thereof may have a priority over the holders
of the Common Stock with respect to dividends.
VOTING RIGHTS. The holders of Common Stock possess exclusive voting rights
in the Company. They elect the Company's Board of Directors and act on such
other matters as are required to be presented to them under applicable law or
the Company's Articles of Incorporation or as are otherwise presented to them
89
<PAGE>
by the Board of Directors. Each holder of Common Stock is entitled to one vote
per share and does not have any right to cumulate votes in the election of
directors. If the Company issues Preferred Stock, holders of the Preferred Stock
also may possess voting rights.
LIQUIDATION. In the event of any liquidation, dissolution or winding up of
the Company, the holders of the then-outstanding Common Stock would be entitled
to receive, after payment or provision for payment of all its debts and
liabilities, all of the assets of the Company available for distribution. If
Preferred Stock is issued, the holders thereof may have a priority over the
holders of the Common Stock in the event of liquidation or dissolution.
PREEMPTIVE RIGHTS. Holders of the Common Stock are not entitled to
preemptive rights with respect to any shares which may be issued in the future.
Thus, the Company may sell shares of Common Stock without first offering them to
the then holders of the Common Stock.
TRANSFER AGENT AND REGISTRAR. The transfer agent and registrar for the
Common Stock is The Bank of New York.
STOCKHOLDERS AGREEMENT. The Company and all of its stockholders, including
the Selling Stockholders, are parties to a Stockholders Agreement, dated as of
May 1, 1988, as amended (the "Stockholders Agreement"), which contains certain
restrictions on the transfer of the Common Stock held by them, certain "piggy
back" registration rights and, for stockholders holding an aggregate of 30% of
the outstanding Common Stock, certain one-time demand registration rights.
Recently, the Stockholders Agreement was amended to provide that it shall be
terminated upon closing of the Common Stock Offering, except for the restriction
that no stockholder will sell any shares of Common Stock (other than the shares
offered hereby) for a period of 120 days after the date of this Prospectus
without the prior written consent of Friedman, Billings, Ramsey & Co., Inc. on
behalf of the Common Stock underwriters.
PREFERRED STOCK
The Company's authorized Preferred Stock may be issued with such preferences
and designations as the Board of Directors may from time to time determine. The
Board of Directors can, without stockholder approval, issue Preferred Stock with
voting, dividend, liquidation and conversion rights which could dilute the
voting strength of the holders of the Common Stock and may assist management in
impeding an unfriendly takeover or attempted change in control.
SHARES AVAILABLE FOR FUTURE SALE
As of the date hereof, there were 26,741,100 shares of Common Stock
outstanding, which will not be affected by the offering of Common Stock as all
shares offered hereby are outstanding shares held by the Selling Stockholders.
The 2,000,000 shares of Common Stock offered on behalf of the Selling
Stockholders (plus up to 300,000 shares which may be sold pursuant to the Common
Stock underwriters' overallotment option) will be freely transferable without
further restriction or further registration under the Securities Act, except
that any shares purchased by an "affiliate" of the Company, as that term is
defined by the Securities Act ("affiliate"), will be subject to certain of the
resale limitations of Rule 144 under the Securities Act. All other outstanding
shares of Common Stock will be "restricted securities" as that term is defined
in Rule 144 and may only be sold pursuant to a registration statement under the
Securities Act or an applicable exemption from registration thereunder,
including pursuant to Rule 144. Management of the Company believes that
approximately 6,821,920 of those shares of Common Stock may be eligible for
resale pursuant to Rule 144 without restriction.
In general, under Rule 144, as currently in effect, beginning 90 days after
the offering of Common Stock, any person (or persons whose shares are
aggregated) who has beneficially owned restricted securities for at least two
years (which is proposed to be reduced to one year) will be entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of (i) 1% of the then-outstanding shares of Common Stock (267,411 shares
immediately after the offering of Common Stock) or (ii) the average weekly
trading volume of the Common Stock in the over-the-counter market during the
four calendar weeks preceding the date on which notice of the sale is filed with
the Commission. Sales under Rule 144 also are
90
<PAGE>
subject to certain manner of sale provisions, notice requirements and the
availability of current public information about the Company. Any person (or
persons whose shares are aggregated) who is not deemed to have been an affiliate
of the Company at any time during the three months preceding a sale, and who has
beneficially owned shares, within the context of Rule 144, for at least three
years (which is proposed to be reduced to two years), is entitled to sell such
shares under Rule 144(k) without regard to the volume limitations, manner of
sale provisions, public information or notice requirements.
The Company, the Selling Stockholders, certain other stockholders of the
Company and the directors and executive officers of the Company have agreed not
to offer, sell or otherwise dispose of any shares of Common Stock for a period
of 120 days (or 365 days in the case of Messrs. Erbey and Wish) after the date
of this Prospectus without the prior written consent of Friedman, Billings,
Ramsey & Co., Inc. on behalf of the Common Stock underwriters (excluding, in the
case of the Company, shares of Common Stock issued upon the exercise of stock
options granted pursuant to the Stock Option Plan and grants pursuant to the
Directors Stock Plan). After such restricted periods, there will be no
restrictions on the sale of these shares other than those imposed by Rule 144.
Under the Company's Stock Option Plan, 6,388,550 shares currently may be
issued upon exercise of outstanding options or future grants of stock options,
and a total of 250,000 shares of Common Stock may be issued pursuant to the
Directors' Stock Plan. See "Management--Stock Option Plan" and "--Directors'
Stock Plan." After the closing of the Common Stock Offering, the Company may
file a Registration Statement on Form S-8 under the Securities Act to register
the issuance of shares of Common Stock issuable under the Stock Option Plan and
the Directors' Stock Plan. Shares of Common Stock issued under the Stock Option
Plan and the Directors' Stock Plan after the effective date of such Registration
Statement, other than shares held by affiliates of the Company, will be eligible
for resale in the public market without restriction.
SELLING STOCKHOLDERS
The following table sets forth information regarding security ownership of
the Selling Stockholders:
<TABLE>
<CAPTION>
SHARES OF
COMMON STOCK SHARES OF
BENEFICIALLY OWNED COMMON STOCK TO BE
AS OF SEPTEMBER 25, NUMBER OF BENEFICIALLY OWNED
1996 SHARES OF AFTER OFFERING
----------------------- COMMON -----------------------
NAME OF SELLING STOCKHOLDER NUMBER PERCENT STOCK OFFERED NUMBER PERCENT
- -------------------------------------------------- ---------- ----------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Affiliates of the Company:
Wishco, Inc.(1)................................. 6,011,020 22.5% 832,670 5,178,350 19.4%
Timothy M. Grant(1)............................. 70,270 * 30,357 39,913 *
Non-Affiliates of the Company:
HAP Investment Partnership(2)................... 2,048,480 7.7 284,288 1,764,192 6.6
Paul D. Kaneb Limited Partnership............... 1,103,920 4.1 153,202 950,718 3.6
John J. Lohrman Revocable Trust U/A/D
4/25/86(3)..................................... 205,130 * 88,905 116,225 *
Bowdoin College................................. 517,840 1.9 67,373 450,467 *
Internal Medicine Association Pension Fund...... 133,540 * 58,833 74,707 *
Henry H. Goldberg............................... 402,730 1.5 55,893 346,837 1.3
C.A.L.M. Venture Partners, Limited
Partnership.................................... 400,000 1.5 55,511 344,489 1.3
Simon & Eve Colin Foundation, Inc. ............. 114,300 * 48,104 66,196 *
P.A.W. Investment, L.P. ........................ 274,970 1.0 38,164 236,806 *
Harbor Partners II.............................. 271,230 1.0 37,643 233,587 *
Leigh Carter(4)................................. 200,740 * 28,397 172,343 *
Thomas A. Rosse................................. 181,930 * 25,249 156,681 *
John Mulheren(5)................................ 173,600 * 24,096 149,504 *
Elbert H. Baker, III Revocable Trust............ 140,000 * 19,429 120,571 *
Louis Berkman................................... 120,900 * 18,128 102,772 *
Elliott S. Grayson.............................. 80,000 * 17,347 62,653 *
C.E.H. Limited Partnership...................... 116,120 * 16,115 100,005 *
</TABLE>
(CONTINUED ON NEXT PAGE)
91
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
The L.C. & M.C. Partnership,
L.P.(4).............................. 100,000 * 13,878 86,122 *
Terence J. Clark, Trustee fbo Brian C.
Clark, Steven B. Clark, Megan A.
Clark
U/A/D 5/25/83........................ 87,010 * 12,076 74,934 *
Norman W. Barron...................... 124,390 * 10,790 113,600 *
Wood Investment Partners.............. 71,020 * 9,853 61,167 *
Stanley S. Benjamin, Settlor U/A/D
10/17/69 as Modified................. 70,000 * 9,715 60,285 *
Jeff Jaffe............................ 65,240 * 8,674 56,566 *
Peter Chernis......................... 53,690 * 7,450 46,240 *
Norman C. Harbert..................... 8,520 * 7,390 1,130 *
Nancy Mulheren(5)..................... 49,060 * 6,809 42,251 *
Annie Lewis J. Garda.................. 31,950 * 4,432 27,518 *
RSS Family Partners, Ltd. ............ 40,000 * 4,337 35,663 *
John D. Brady......................... 4,250 * 3,036 1,214 *
Terence C. Sullivan(3)................ 13,370 * 1,856 11,514 *
-----------
2,000,000
-----------
-----------
</TABLE>
- ------------------------
* Less than 1%.
(1) Except for Wishco, Inc., which is controlled by Barry N. Wish, currently
Chairman of the Company and a former executive officer of the Company, and
Timothy M. Grant, a former Senior Vice President of the Bank, no Selling
Stockholder has had any relationship with the Company or any of its
affiliates during the last three years. For information as to the shares of
Common Stock and stock options beneficially owned by Mr. Wish, see
"Beneficial Ownership of Common Stock" and "Management-- Aggregated Option
Exercises in 1995 and Year-End Option Values."
(2) An affiliate of Harold D. Price. See "Beneficial Ownership of Common Stock."
(3) Mr. Sullivan is one of the trustees of the John J. Lohrman Revocable Trust.
(4) Mr. Carter is a general partner of the L.C. & M.C. Partnership, L.P.
(5) Husband and wife.
The foregoing information assumes no exercise of the Common Stock
underwriters' over-allotment option. To the extent that the Common Stock
underwriters exercise their over-allotment option, the Selling Stockholders will
sell shares pro rata in accordance with the number of shares of Common Stock
offered, as set forth in the table set forth above, and their respective
ownership interests in the Company will be reduced accordingly.
92
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
with respect to the Common Stock Offering (the "Common Stock Underwriting
Agreement") among the Company, the Selling Stockholders and each of the
underwriters named below (the "Common Stock Underwriters"), for whom Friedman,
Billings, Ramsey & Co., Inc. is acting as representative (the "Representative"),
the Selling Stockholders have agreed to sell to each of the Common Stock
Underwriters, and each of the Common Stock Underwriters severally has agreed to
purchase from the Selling Stockholders, the aggregate number of shares of Common
Stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
COMMON STOCK UNDERWRITERS SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc............................................ 1,550,000
Advest, Inc...................................................................... 30,000
The Chicago Corporation.......................................................... 30,000
Dominick & Dominick, Inc......................................................... 30,000
Equitable Securities Corporation................................................. 30,000
EVEREN Securities, Inc........................................................... 30,000
Howe Barnes Investments, Inc..................................................... 30,000
Interstate/Johnson Lane Corporation.............................................. 30,000
Legg Mason Wood Walker, Incorporated............................................. 30,000
McDonald & Company Securities, Inc............................................... 30,000
Pennsylvania Merchant Group Ltd.................................................. 30,000
Piper Jaffray Inc................................................................ 30,000
Raymond James & Associates, Inc.................................................. 30,000
The Robinson-Humphrey Company.................................................... 30,000
Scott & Stringfellow, Inc........................................................ 30,000
Stifel, Nicolaus & Company Incorporated.......................................... 30,000
----------
Total........................................................................ 2,000,000
----------
----------
</TABLE>
The Common Stock Underwriting Agreement provides that, subject to the terms
and conditions set forth therein, the Common Stock Underwriters are obligated to
purchase all of such shares if any are purchased.
The Representative has advised the Company and the Selling Stockholders that
the Common Stock Underwriters propose initially to offer the shares of Common
Stock to the public at the initial public offering price set forth on the cover
page of this Prospectus, and to certain dealers at such price less a concession
not in excess of $0.63 per share. The Common Stock Underwriters may allow, and
such dealers may re-allow, a discount not in excess of $0.10 per share on sales
to certain other dealers. The offering of the Common Stock is made for delivery
when, as and if accepted by the Common Stock Underwriters and subject to prior
sale and to withdrawal, cancellation or modification of the offer without
notice. The Common Stock Underwriters reserve the right to reject any offer for
the purchase of shares of Common Stock. After the Common Stock Offering, the
public offering price and other selling terms may be changed by the Common Stock
Underwriters.
At the request of the Company, the Common Stock Underwriters have initially
reserved up to 200,000 (230,000 if the Common Stock Underwriters' exercise their
over-allotment option) shares of Common Stock for sale at the initial public
offering price set forth on the cover page of this Prospectus to directors,
officers and employees of the Company and its subsidiaries and to certain other
persons. The number of shares of Common Stock available for sale to the general
public will be reduced to the extent such persons purchase such reserved shares.
Any reserved shares which are not so purchased will be offered by the Common
Stock Underwriters to the general public on the same basis as other shares
offered hereby.
93
<PAGE>
The Selling Stockholders have granted an option to the Common Stock
Underwriters, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to an aggregate of 300,000 additional shares of
Common Stock, at the initial public offering price set forth on the cover page
of this Prospectus, less the underwriting discount. The Common Stock
Underwriters may exercise this option only to cover over-allotments, if any,
made on the sale of the shares of Common Stock in the Common Stock Offering. To
the extent that the Common Stock Underwriters exercise this option, each Common
Stock Underwriter will be obligated, subject to certain conditions, to purchase
the number of additional shares of Common Stock proportionate to such Common
Stock Underwriter's initial amount reflected in the foregoing table.
The Company and the Selling Stockholders have agreed to indemnify the
several Common Stock Underwriters against certain liabilities, including
liabilities under the federal securities laws, or to contribute to payments that
the Common Stock Underwriters may be required to make in respect thereof.
Prior to the Common Stock Offering, there has been no public market for the
Common Stock. Consequently, the initial public offering price of the Common
Stock was determined by negotiations among the Company, the Selling Stockholders
and the Underwriters. Among the factors considered in such negotiations were the
history of, and prospects for, the Company and the industry in which it
competes, an assessment of management, the Company's past and present
operations, its past and present earnings and the trend of such earnings, the
prospects for future earnings of the Company, the general condition of the
securities markets at the time of the Common Stock Offering and the market
prices of publicly-traded common stocks of comparable companies in recent
periods.
The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
LEGAL MATTERS
The legality of the shares of Common Stock offered in the Common Stock
Offering will be passed upon for the Company by Elias, Matz, Tiernan & Herrick
L.L.P., Washington, D.C. Certain legal matters in connection with the Common
Stock Offering will be passed upon for the Common Stock Underwriters by Simpson
Thacher & Bartlett (a partnership which includes professional corporations), New
York, New York.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1995
and 1994 and for each of the three years in the period ended December 31, 1995
included in this Prospectus have been so included in reliance on the report of
Price Waterhouse LLP, independent certified public accountants, given upon the
authority of said firm as experts in auditing and accounting.
94
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants...................... F-2
Consolidated Statements of Financial Condition at December 31, 1995 and
1994................................................................... F-3
Consolidated Statements of Operations for each of the three years in the
period ended December 31, 1995......................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for each of
the three years
in the period ended December 31, 1995.................................. F-5
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 1995......................................... F-6
Notes to Consolidated Financial Statements.............................. F-8
INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED):
Consoidated Statements of Financial Condition at June 30, 1996 and
December 31, 1995...................................................... F-45
Consolidated Statements of Operations for the three and six months ended
June 30, 1996 and 1995................................................. F-46
Consolidated Statements of Changes in Stockholders' Equity for the six
months ended
June 30, 1996.......................................................... F-47
Consolidated Statements of Cash Flows for the six months ended June 30,
1996 and 1995.......................................................... F-48
Notes to Interim Consolidated Financial Statements...................... F-50
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Ocwen Financial Corporation
In our opinion, the accompanying consolidated statements of financial
condition and the related consolidated statements of operations, of changes in
stockholders' equity and of cash flows present fairly, in all material respects,
the financial position of Ocwen Financial Corporation and its subsidiaries (the
"Company") at December 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosure in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Fort Lauderdale, Florida
February 16, 1996, except as to Note 21 which
is as of July 31, 1996
F-2
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Cash and amounts due from depository institutions..................................... $ 4,200 $ 32,954
Interest bearing deposits............................................................. 50,432 3,796
Securities available for sale, at market value........................................ 337,480 187,717
Loans available for sale, at lower of cost or market.................................. 251,790 102,293
Investment securities, net............................................................ 18,665 17,011
Mortgage-related securities held for investment, net.................................. -- 91,917
Loan portfolio, net................................................................... 295,605 57,045
Discounted loan portfolio, net........................................................ 669,771 529,460
Principal, interest and dividends receivable.......................................... 12,636 6,152
Investments in low income housing tax credit interests................................ 81,362 49,442
Real estate owned, net................................................................ 166,556 96,667
Premises and equipment, net........................................................... 25,359 38,309
Income taxes receivable............................................................... 1,005 --
Deferred tax asset.................................................................... 22,263 20,695
Other assets.......................................................................... 36,466 32,945
------------ ------------
$ 1,973,590 $ 1,266,403
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits............................................................................ $ 1,501,646 $ 1,023,268
Advances from the Federal Home Loan Bank............................................ 70,399 5,399
Securities sold under agreements to repurchase...................................... 84,761 --
Subordinated debentures and other interest bearing obligations...................... 117,054 20,111
Income taxes payable................................................................ -- 10,025
Accrued expenses, payables and other liabilities.................................... 60,183 54,217
------------ ------------
Total liabilities................................................................. 1,834,043 1,113,020
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 20,000,000 shares authorized; 0 shares issued and
outstanding........................................................................ -- --
Common stock, $.01 par value; 200,000,000 shares authorized; 23,812,270 and
32,194,710 shares issued and outstanding at December 31, 1995 and 1994,
respectively....................................................................... 238 322
Additional paid-in capital.......................................................... 10,449 13,652
Retained earnings................................................................... 130,275 142,230
Unrealized loss on securities available for sale, net of taxes...................... (1,415) (2,821)
------------ ------------
Total stockholders' equity........................................................ 139,547 153,383
------------ ------------
$ 1,973,590 $ 1,266,403
------------ ------------
------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-3
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Interest income:
Federal funds sold and repurchase agreements................................ $ 3,502 $ 8,861 $ 873
Securities available for sale............................................... 18,391 27,988 19,714
Loans available for sale.................................................... 15,608 19,353 5,376
Mortgage-related securities held for investment............................. 4,313 6,930 9,379
Loans....................................................................... 15,430 5,924 6,232
Discounted loans............................................................ 75,998 52,560 31,036
Investment securities and other............................................. 4,033 9,842 6,313
--------- --------- ---------
137,275 131,458 78,923
--------- --------- ---------
Interest expense:
Deposits.................................................................... 71,853 44,961 19,039
Securities sold under agreements to repurchase.............................. 951 10,416 9,340
Securities sold but not yet purchased....................................... 1,142 2,780 -
Advances from the Federal Home Loan Bank.................................... 1,126 1,232 2,834
Subordinated debentures and other interest bearing obligations.............. 8,988 3,209 4,093
--------- --------- ---------
84,060 62,598 35,306
--------- --------- ---------
Net interest income before provision for loan losses...................... 53,215 68,860 43,617
Provision for loan losses..................................................... 1,121 -- --
--------- --------- ---------
Net interest income after provision for loan losses....................... 52,094 68,860 43,617
--------- --------- ---------
Non-interest income:
Servicing fees and other charges............................................ 2,870 4,786 3,800
Gains on sales of interest earning assets, net.............................. 6,955 5,727 8,386
Fees on financing transactions.............................................. -- -- 15,340
Gain from sale of branch offices............................................ 5,430 62,600 --
Gain on sale of subsidiary's stock.......................................... -- -- 3,835
Income (loss) on real estate owned, net..................................... 9,540 5,995 (1,158)
Gain on sale of hotel....................................................... 4,658 -- --
Other income................................................................ 1,727 2,467 5,669
--------- --------- ---------
31,180 81,575 35,872
--------- --------- ---------
Non-interest expense:
Compensation and employee benefits.......................................... 23,787 42,395 23,507
Occupancy and equipment..................................................... 8,360 11,537 9,106
Amortization of excess cost over net assets acquired........................ -- 1,346 1,301
Hotel operations expense (income), net...................................... 337 (723) (710)
Other operating expenses.................................................... 13,089 14,303 8,655
--------- --------- ---------
45,573 68,858 41,859
--------- --------- ---------
Income from continuing operations before income taxes..................... 37,701 81,577 37,630
Income tax expense............................................................ 4,562 29,724 10,325
--------- --------- ---------
Income from continuing operations......................................... 33,139 51,853 27,305
Discontinued operations:
Loss from operations of discontinued divisions to September 30, 1995 net of
tax benefits of $2,321, $2,227 and $1,259 for 1995, 1994 and 1993,
respectively............................................................... (4,468) (4,514) (2,270)
Loss on disposal of divisions, net of tax benefit of $1,776................. (3,204) -- --
--------- --------- ---------
Income before extraordinary gain and cumulative effect of a change in
accounting principle..................................................... 25,467 47,339 25,035
Extraordinary gain on extinguishment of debt, net of tax expense of $828...... -- -- 1,538
Cumulative effect on prior year of a change in accounting principle........... -- -- (1,341)
--------- --------- ---------
Net income.................................................................. $ 25,467 $ 47,339 $ 25,232
--------- --------- ---------
--------- --------- ---------
Earnings per share:
Income from continuing operations........................................... $ 1.19 $ 1.52 $ 0.80
Discontinued operations, net of tax benefit................................. (0.28) (0.13) (0.07)
Extraordinary gain on extinguishment of debt, net of taxes.................. -- -- 0.04
Cumulative effect of a change in accounting principle....................... -- -- (0.04)
--------- --------- ---------
Net income................................................................ $ 0.91 $ 1.39 $ 0.73
--------- --------- ---------
--------- --------- ---------
Weighted average common shares outstanding.................................... 27,769,080 34,084,160 34,285,850
--------- --------- ---------
--------- --------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
ON
SECURITIES
COMMON STOCK ADDITIONAL AVAILABLE
------------------------- PAID-IN RETAINED FOR SALE,
SHARES AMOUNT CAPITAL EARNINGS NET OF TAXES TOTAL
------------ ----------- ----------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1992................. 34,810,920 $ 348 $ 21,142 $ 72,906 $ -- $ 94,396
Net income.................................. -- -- -- 25,232 -- 25,232
Exercise of common stock options............ 250,000 3 447 -- -- 450
Repurchase of common stock.................. (2,865,880) (29) (7,944) -- -- (7,973)
Predecessor basis of subsidiary
accounting................................. -- -- -- (3,247) -- (3,247)
Subsidiary's retirement of common stock..... -- -- 81 -- -- 81
Change in unrealized gain on securities
available for sale, net of taxes........... -- -- -- -- 2,892 2,892
------------ ----- ----------- ---------- ------------ ----------
Balances at December 31, 1993................. 32,195,040 322 13,726 94,891 2,892 111,831
Net income.................................. -- -- -- 47,339 -- 47,339
Repurchase of common stock options.......... -- -- (73) -- -- (73)
Repurchase of common stock.................. (330) -- (1) -- -- (1)
Change in unrealized loss on securities
available for sale, net of tax benefit..... -- -- -- -- (5,713) (5,713)
------------ ----- ----------- ---------- ------------ ----------
Balances at December 31, 1994................. 32,194,710 322 13,652 142,230 (2,821) 153,383
Net income.................................. -- -- -- 25,467 -- 25,467
Repurchase of common stock options.......... -- -- (132) -- -- (132)
Exercise of common stock options............ 432,620 4 1,416 -- -- 1,420
Repurchase of common stock.................. (8,815,060) (88) (4,487) (37,422) -- (41,997)
Change in unrealized loss on securities
available for sale, net of taxes........... -- -- -- -- 1,406 1,406
------------ ----- ----------- ---------- ------------ ----------
Balances at December 31, 1995................. 23,812,270 $ 238 $ 10,449 $ 130,275 $ (1,415) $ 139,547
------------ ----- ----------- ---------- ------------ ----------
------------ ----- ----------- ---------- ------------ ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
---------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................................... $ 25,467 $ 47,339 $ 25,232
Adjustments to reconcile net income to net cash (used) provided in
operating activities:
Net cash provided from trading activities.............................. 2,949 4,118 1,183
Proceeds from sales of loans available for sale........................ 100,104 383,673 95,936
Purchases of loans available for sale.................................. (271,210) (510,362) (70,483)
Origination of loans available for sale................................ (2,829) (39,546) (4,162)
Principal payments received on loans available for sale................ 10,103 36,966 1,051
Amortization of excess of costs over net assets acquired............... -- 1,346 1,372
(Discount accretion) premium amortization, net......................... (2,401) (8,268) 5,617
Depreciation and amortization.......................................... 3,755 4,877 2,509
Provision for loan losses.............................................. 1,262 -- --
Loss on sales of premises and equipment................................ 3,002 -- --
Gains on sales of interest earning assets, net......................... (6,955) (5,727) (8,386)
(Gain) loss on sale of real estate owned, net.......................... (8,496) (12,234) 439
Gain from sale of branch offices....................................... (5,430) (62,600) --
Gain on sale of hotel.................................................. (4,658) -- --
Gain on sale of stock in subsidiary.................................... -- -- (3,835)
Extraordinary gain on extinguishment of debt, net of taxes............. -- -- (1,538)
Cumulative effect of a change in accounting principle.................. -- -- 1,341
Decrease in minority interest.......................................... -- -- (10,726)
(Increase) decrease in principal, interest and dividends receivable.... (6,484) 5,710 (3,719)
(Increase) decrease in income taxes receivable......................... (10,769) 16,473 12,187
(Increase) decrease in other assets.................................... (15,159) 8,841 (4,394)
(Decrease) increase in accrued expenses, payables and other
liabilities........................................................... (1,677) 20,587 (24,852)
---------- ----------- -----------
Net cash (used) provided in operating activities........................... (189,426) (108,807) 14,772
---------- ----------- -----------
Cash flows from investing activities:
Proceeds from sales of securities available for sale..................... 836,247 877,911 744,636
Purchases of securities available for sale............................... (934,179) (511,694) (1,048,685)
Maturities of and principal payments received on securities available for
sale.................................................................... 21,639 115,357 245,554
Purchase of securities held for investment............................... -- (4,804) (218,222)
Maturities of and principal payments received on securities held for
investments............................................................. 17,545 44,133 194,262
Proceeds from sale of hotel.............................................. 25,193 -- --
Purchases of low income housing tax credit interests..................... (29,280) (31,821) (11,988)
Proceeds from sales of discounted loans and loans held for investment.... 38,942 35,161 456,434
Origination of loans held for investment................................. (235,527) (29,013) (75,280)
Purchases of loans held for investment................................... (35,073) -- (123,293)
Purchases of discounted loans............................................ (547,987) (543,982) (195,750)
Principal payments received on discounted loans and loans held for
investment.............................................................. 251,485 188,850 141,674
Proceeds from sales of real estate owned................................. 148,225 129,671 30,976
Purchases of real estate owned in connection with discounted loan
purchases............................................................... (24,617) (38,071) (7,782)
Cash balances acquired in connection with the purchase of a Federal
savings bank............................................................ -- -- 39,558
Cash balances released in connection with the sale of a subsidiary....... -- -- (18,933)
Net acquisition of hotel businesses...................................... -- -- (23,204)
Additions to premises and equipment...................................... (12,207) (7,438) (9,775)
Other, net............................................................... 5,067 10,262 10,599
---------- ----------- -----------
Net cash (used) provided by investing activities........................... (474,527) 234,522 130,781
---------- ----------- -----------
</TABLE>
(continued on next page)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-6
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
---------- ----------- -----------
Cash flows from financing activities:
<S> <C> <C> <C>
Increase (decrease) in deposits.......................................... $ 585,335 $ 1,065,300 $ (121,237)
Proceeds from issuance of subordinated debentures...................... 100,000 -- --
Payment of debt issuance costs......................................... (3,301) -- --
Sales of deposits...................................................... (111,686) (909,315) --
Premium received on sales of deposits.................................. 5,492 66,595 --
Advances from the Federal Home Loan Bank............................... 170,000 17,000 2,000
Payments on advances from the Federal Home Loan Bank................... (105,000) (69,000) (34,500)
Increase (decrease) in securities sold under agreements to repurchase.. 84,761 (276,095) (14,746)
Issuance of notes and mortgages payable................................ 7,615 -- 40,694
Payments and repurchase of notes and mortgages payable................. (10,672) (22,270) (5,386)
Exercise of common stock options....................................... 1,420 -- 450
Repurchase of common stock options and common stock.................... (42,129) (74) (7,892)
---------- ----------- -----------
Net cash provided (used) by financing activities........................... 681,835 (127,859) (140,617)
---------- ----------- -----------
Net increase (decrease) in cash and cash equivalents....................... 17,882 (2,144) 4,936
Cash and cash equivalents at beginning of year............................. 36,750 38,894 33,958
---------- ----------- -----------
Cash and cash equivalents at end of year................................... $ 54,632 $ 36,750 $ 38,894
---------- ----------- -----------
---------- ----------- -----------
Reconciliation of cash and cash equivalents at end of year:
Cash and amounts due from depository institutions........................ $ 4,200 $ 32,954 $ 38,894
Interest bearing deposits................................................ 50,432 3,796 --
---------- ----------- -----------
$ 54,632 $ 36,750 $ 38,894
---------- ----------- -----------
---------- ----------- -----------
Supplemental disclosure of cash flow information:
Cash paid (received) during the year for:
Interest............................................................... $ 72,626 $ 58,174 $ 32,333
---------- ----------- -----------
---------- ----------- -----------
Income taxes........................................................... $ 12,858 $ 11,170 $ (6,607)
---------- ----------- -----------
---------- ----------- -----------
Supplemental schedule of non-cash investing and financing activities:
The Company purchased certain assets and assumed certain liabilities of a
Federal savings institution as follows:
Fair value of assets acquired.......................................... $ -- $ -- $ 667,792
---------- ----------- -----------
---------- ----------- -----------
Liabilities assumed.................................................... $ -- $ -- $ 667,792
---------- ----------- -----------
---------- ----------- -----------
Exchange of loans available for sale for FNMA securities................. $ 83,875 $ 346,588 $ 67,121
---------- ----------- -----------
---------- ----------- -----------
Real estate owned acquired through foreclosure........................... $ 185,001 $ 136,764 $ 26,887
---------- ----------- -----------
---------- ----------- -----------
Retirement of subsidiary's common stock.................................. $ -- $ -- $ 81
---------- ----------- -----------
---------- ----------- -----------
Purchase of common stock of a subsidiary in exchange for a subordinated
note.................................................................... $ -- $ -- $ 4,351
---------- ----------- -----------
---------- ----------- -----------
Transfer of mortgage--related securities from held for investment to
available for sale...................................................... $ 73,706 $ -- $ --
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-7
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
Ocwen Financial Corporation (the "Company") is a financial services holding
company engaged in asset acquisition and resolution, residential finance,
commercial finance, investment management and hotel operations through its
subsidiaries. The Company owns directly and indirectly all of the outstanding
common and preferred stock of its primary subsidiaries, Berkeley Federal Bank &
Trust FSB (the "Bank") and Investors Mortgage Insurance Holding Company ("IMI"),
which are included in the Company's consolidated financial statements. The Bank
changed its name from First Federal Savings Bank (of Delaware) to Berkeley
Federal Bank & Trust FSB on June 3, 1993 following the acquisition of Berkeley
Federal Savings Bank ("Old Berkeley"). All significant intercompany transactions
and balances have been eliminated in consolidation.
The Bank is a federally chartered savings bank regulated by the Office of
Thrift Supervision ("OTS"). IMI's primary subsidiaries are engaged in hotel
operations and other real estate related ventures.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, interest bearing and non-interest bearing deposits and all highly
liquid debt instruments purchased with an original maturity of three months or
less. Cash flows associated with items intended as hedges of identifiable
transactions or events are classified in the same category as the cash flows
from the items being hedged.
SECURITIES AVAILABLE FOR SALE
Certain U.S. Treasury securities, mortgage-backed securities and
mortgage-related securities are designated as assets available for sale because
the Company does not intend to hold them to maturity. Securities available for
sale are carried at market value with the net unrealized gains or losses
reported as a separate component of stockholders' equity. Unrealized losses on
securities that reflect a decline in value which is other than temporary, if
any, are charged to earnings. At disposition the realized net gain or loss is
included in earnings on a specific identification basis. The amortization of
premiums and accretion of discounts are computed using the interest method after
considering actual and estimated prepayment rates, if applicable. During
December 1995, in conjunction with a transition provision provided by the
Financial Accounting Standards Board pertaining to the classification of
securities in accordance with Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", the Company transferred all of its mortgage-related securities held
for investment, with a book value of $75,194 and a market value of $73,706 to
securities available for sale.
INVESTMENTS AND MORTGAGE-RELATED SECURITIES HELD FOR INVESTMENT
Investments and mortgage-related securities held for investment are stated
at cost, adjusted for amortization of premiums and accretion of discounts,
because the Company has the ability and the intent to hold them to maturity.
Unrealized losses on securities that reflect a decline in value which is other
than temporary, if any, are charged to earnings. The amortization of premiums
and accretion of discounts are computed using the interest method after
considering actual and estimated prepayment rates, if applicable. Actual
prepayment experience is periodically reviewed and effective yields are
recalculated when differences arise between prepayments originally anticipated
and amounts actually received plus anticipated future prepayments.
F-8
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
TRADING ACTIVITIES
From time to time the Company purchases investment and mortgage-backed and
related securities into its trading account. In addition, securities acquired
and sold shortly thereafter resulting from the securitization of loans available
for sale are accounted for as the sale of loans and the purchase and sale of
trading securities. Securities held for trading purposes are carried at market
value with the unrealized gains or losses included in gains on sales of interest
earning assets, net. Although no such positions were held as of December 31,
1995 or 1994, the Company traded assets totaling $93,942, $621,991 and $145,716
in aggregate sales proceeds during the years ended December 31, 1995, 1994 and
1993, respectively, resulting in net gains of $2,949, $4,118 and $1,183 for the
years ended December 31, 1995, 1994 and 1993, respectively.
LOANS AVAILABLE FOR SALE AND HELD FOR INVESTMENT
Loans originated or purchased by the Company which the Company presently
does not intend to hold to maturity are designated as loans available for sale
upon origination or purchase and are stated at the lower of cost, after
considering deferred loan fees and costs, or aggregate market value. Upon the
sale of a loan, any unamortized deferred loan fees, net of costs, are included
in the gain or loss on sale of interest earning assets. Gains and losses on
disposal of such assets are computed on a specific identification basis.
Loans held for investment are stated at amortized cost, less an allowance
for loan losses, because the Company has the ability and the intent to hold them
to maturity.
Interest income is accrued as it is earned. Loans are placed on non-accrual
status after being delinquent greater than 90 days, or earlier if the borrower
is deemed by management to be unable to continue performance. When a loan is
placed on non-accrual status, interest accrued but not received is reversed.
While a loan is on non-accrual status, interest is recognized only as cash is
received. Loans are returned to accrual status only when the loan is reinstated
and ultimate collectibility of future interest is no longer in doubt.
Loan origination fees and certain direct loan origination costs are deferred
and recognized over the lives of the related loans as a yield adjustment and
included in interest income using the interest method applied on a loan-by-loan
basis.
ALLOWANCE FOR ESTIMATED LOAN LOSSES ON LOAN PORTFOLIO
The allowance for estimated loan losses is maintained at a level that
management, based upon an evaluation of known and inherent risks in the
portfolio, considers adequate to provide for potential losses. Specific
valuation allowances are established for impaired loans in the amount by which
the carrying value, before allowance for estimated losses, exceeds the fair
value of collateral less costs to dispose on an individual loan basis except for
single family residential mortgage loans and consumer loans which are generally
evaluated for impairment as homogeneous pools of loans. The Company considers a
loan to be impaired when, based upon current information and events, it believes
that it is probable that the Company will be unable to collect all amounts due
according to the contractual terms of the loan agreement on a timely basis. The
Company measures these impaired loans at the fair value of the loans' collateral
properties less selling costs. Impaired loans may be left on accrual status
during the period the Company is pursuing repayment of the loan. These loans are
placed on non-accrual status at such time that the loans either: (1) become 90
days delinquent; or (2) the Company determines the borrower is incapable of, or
has ceased efforts toward, curing a loan. Impairment losses are recognized
through an increase in the allowance for loan losses and a corresponding charge
to the provision for loan losses. When an impaired loan is either sold,
transferred to REO or charged off, any related valuation allowance is credited
to the allowance for loan losses. Charge-offs occur when loans are considered
uncollectible and of such little value that their continuance as bankable assets
is not warranted. General valuation allowances are also established for the
inherent
F-9
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
risks in the loan portfolio which have yet to be specifically identified.
Management's periodic evaluation of the allowance for estimated losses is based
upon an analysis of the portfolio, historical loss experience, economic
conditions and trends, collateral values and other relevant factors. Future
adjustments to the allowance may be necessary if economic conditions and trends,
collateral values and other relevant factors differ substantially from the
assumptions used in making the evaluation.
DISCOUNTED LOAN PORTFOLIO
Certain mortgage loans, for which the borrower is not current as to
principal and interest payments, are acquired at a discount. The acquisition
cost for a pool of loans is allocated to each individual loan within the pool
based upon the Company's pricing methodology. The discount associated with
single family residential mortgage loans is recognized as a yield adjustment and
included in interest income using the interest method applied on a loan-by-loan
basis to the extent the timing and amount of cash flows can be reasonably
determined. For those single family residential mortgage loans which are brought
current by the borrower and certain multi-family and commercial real estate
loans which are current and the Company believes will remain current, the
remaining unamortized discount is accreted to income as a yield adjustment using
the interest method over the contractual maturity of the loan. For all other
loans, interest is reported as cash is received. Adjustments to reduce the
carrying value of discounted loans to the fair value of the properties securing
the loan discounted at the effective interest rate, as well as gains on the
repayment and discharging of loans, are reported as interest income. In
situations where the collateral is foreclosed upon, the loans are transferred to
real estate owned upon receipt of title to the property and accretion of the
related discount is discontinued.
REAL ESTATE OWNED
Properties acquired through foreclosure are valued at the lower of the
adjusted cost basis of the loan or fair value less estimated costs of disposal
of the property at the date of foreclosure. Properties held are periodically
re-evaluated to determine that they are being carried at the lower of cost or
fair value less estimated costs to dispose. Sales proceeds and related costs are
recognized with passage of title to the buyer, and in cases where the Company
finances the sale, receipt of sufficient down payment. Rental income related to
properties is reported as income as earned. Holding and maintenance costs
related to properties are reported as period costs as incurred. No depreciation
expense related to properties has been recorded. Decreases in market value of
foreclosed real estate subsequent to foreclosure are recognized as a valuation
allowance on a property specific basis. Subsequent increases in market value of
the foreclosed real estate are reflected as reductions in the valuation
allowance, but not below zero. Such changes in the valuation allowance are
charged or credited to income.
VALUATION ALLOWANCES ON ASSETS HELD FOR DISPOSITION AND RESOLUTION
The Company is currently reviewing its methodology for valuing assets held
for disposition and resolution, which include discounted loans, loans available
for sale and real estate owned, with the OTS. Although the Company believes that
its methods for determining net carrying values of such assets are in accordance
with generally accepted accounting principles, as a result of this review,
however, the Company may provide a general allowance for losses on discounted
loans, loans available for sale and real estate owned. Such a general allowance
would supplement, or otherwise amend, the Company's current practice of
adjusting discounted loans, loans available for sale and real estate owned to
the lower of the recorded investment or fair value through direct charges to
interest income or non-interest income, as appropriate. Although the Company
cannot at this time estimate the amount of general allowance which may be
required, such amount may be material. The Company at this time believes,
however, that it will continue to be classified as a well-capitalized
institution subsequent to any such provision for general allowance for losses.
F-10
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
INVESTMENTS IN LOW INCOME HOUSING TAX CREDIT INTERESTS
Low income housing tax credit partnerships own multi-family residential
properties which have been allocated tax credits under the Internal Revenue
Code. The obligations of the partnership to sustain qualifying status of the
properties covers a 15-year period; however, tax credits accrue over a 10-year
period on a straight-line basis. Investments by the Company in low income
housing tax credit partnerships made on or after May 18, 1995 in which the
Company invests solely as a limited partner are accounted for using the equity
method in accordance with the consensus of the Emerging Issues Task Force
through issue number 94-1. For the Company's limited partnership investments
made prior to this date, the Company records its receipt of tax credits and
other tax benefits on a level yield basis over the 15-year obligation period and
reports the tax credits and tax benefits, net of the amortization of its
investment in the limited partnership as a reduction of income tax expense. Low
income housing tax credit partnerships in which the Company, through a
subsidiary, acts as the general partner are presented on a consolidated basis.
Through December 31, 1995, the operations of such partnerships in which a
Company subsidiary acted as general partner were limited to pre-operating
construction activities.
EXCESS OF COST OVER NET ASSETS ACQUIRED
On February 17, 1988, the Company acquired 100% of the common stock of First
Federal Savings Bank (of Delaware). Through 1994 the excess of cost over net
assets acquired was being amortized over the estimated periods benefited. As of
December 31, 1994, the remaining depository branches acquired in 1988, along
with certain other branches subsequently acquired, were sold, and the
unamortized excess of cost over net assets acquired of $9,135 was retired and
charged against the gain recorded on the sale of branches.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost and depreciated over their
estimated useful lives on the straight-line method. The estimated useful lives
of the related assets range from 3 to 40 years.
INTEREST RATE RISK MANAGEMENT ACTIVITIES
The Company manages its exposure to interest rate movements by seeking to
match asset and liability balances within maturity categories, both directly and
through the use of derivative financial instruments. These instruments include
interest rate swaps ("swaps") and interest rate futures contracts that are
designated and effective as hedges, as well as swaps that are designated and
effective in modifying the interest rate and/or maturity characteristics of
specified assets or liabilities.
The net interest received or paid on swaps is reflected as interest income
or expense of the related hedged position. Gains and losses resulting from the
termination of swaps are recognized over the shorter of the remaining contract
lives of the swaps or the lives of the related hedged positions or, if the
hedged positions are sold, are recognized in the current period as gains on
sales of interest earning assets, net. Gains and losses on futures contracts are
deferred and amortized over the terms of the related assets or liabilities and
reflected as interest income or expense of the related hedged positions. If the
hedged positions are sold, any unamortized deferred gains or losses on futures
contracts are recognized in the current period as gains on sales of interest
earning assets, net.
Interest rate contracts used in connection with the securities portfolio
designated as available for sale are carried at fair value with gains and
losses, net of applicable taxes, reported in a separate component of
stockholders' equity, consistent with the reporting of unrealized gains and
losses on such securities.
F-11
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
INCOME TAXES
The Company files consolidated Federal income tax returns with its
subsidiaries, excluding IMI and its subsidiaries which file separate Federal
consolidated returns. Consolidated income tax is allocated among the
subsidiaries participating in the consolidated returns as if each subsidiary of
the Company which has one or more subsidiaries filed its own consolidated
return.
In January 1993 the Company adopted SFAS No. 109, "Accounting for Income
Taxes", resulting in a $1.3 million charge in the accompanying 1993 consolidated
statements of operations for the cumulative effect of a change in accounting
principle. The adoption of SFAS No. 109 changed the Company's method of
accounting for income taxes to the asset and liability method rather than the
deferred method. The asset and liability approach requires the recognition of
deferred tax liabilities and assets for the expected future tax consequences of
temporary differences between the carrying amounts and the tax basis of assets
and liabilities. Additionally, SFAS No. 109 requires the adjustment of deferred
taxes for subsequent tax rate changes and also required upon adoption the
recognition of a deferred tax liability for the Bank's tax bad debt reserve in
excess of the 1987 balance to the extent that it exceeds the book reserve.
INVESTMENT MANAGEMENT AND TRUST ACTIVITIES
At December 31, 1995 and 1994 Ocwen Asset Management Inc. ("OAM") had under
management $48,229 and $503,730, respectively, of mortgage-backed and related
securities and mortgage loans for an unaffiliated account. Such amounts are not
included in the Company's consolidated statements of financial condition.
At December 31, 1995 and 1994 the Bank held $2,002 and $11,225,
respectively, in investments in trust accounts for customers. Such amounts are
not included in the Company's consolidated statements of financial condition.
RECENT ACCOUNTING STANDARDS
The financial statements reflect the required disclosures and certain
encouraged disclosures of SFAS No. 119, "Disclosure About Derivative Financial
Instruments and Fair Value of Financial Statements". SFAS No. 114, "Accounting
by Creditors for Impairment of a Loan", as amended by SFAS No. 118, was adopted
by the Company in the first quarter of 1995 and did not have a material impact
on the Company's financial statements.
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", is effective for financial statements
issued for fiscal years beginning after December 15, 1995. Given the Company's
current accounting policies for recording and measuring its long-lived assets,
primarily real estate owned and premises and equipment, the Company does not
anticipate a material impact on its operations or financial position from the
implementation of SFAS No. 121 in 1996.
SFAS No. 122, "Accounting for Mortgage Servicing Rights", requires that an
institution engaged in mortgage banking activities recognize as a separate asset
rights to service mortgage loans for others, regardless of the manner in which
those servicing rights are acquired. Upon sale or securitization of loans with
servicing rights retained, the Company will be required to capitalize the cost
associated with the mortgage servicing rights based on their relative fair
values. SFAS No. 122 also requires that an institution assess its capitalized
mortgage servicing rights for impairment based on the fair value of those
rights. Impairment is to be recognized through a valuation allowance. The
Company does not anticipate a material impact on its operations or financial
position from the implementation of SFAS No. 122 in 1996.
As provided in SFAS No. 123, "Accounting for Stock-Based Compensation", the
Company intends to retain the intrinsic value method of accounting for
stock-based compensation, which it currently uses.
F-12
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
EARNINGS PER SHARE
Earnings per share is calculated based upon the weighted average number of
shares of common stock outstanding during the year. The computation of the
weighted average number of shares includes the impact of the exercise of the
outstanding options to purchase common stock and assumes that the proceeds from
such issuance are used to repurchase common shares at fair value.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change in the near or
medium term relate to the determination of the allowance for losses on loans.
RECLASSIFICATION
Certain amounts included in the 1994 and 1993 consolidated financial
statements have been reclassified in order to conform to the 1995 presentation.
NOTE 2 ACQUISITION AND DISPOSITION TRANSACTIONS
ACQUISITIONS
On June 3, 1993 the Company acquired all of the stock issued by Old Berkeley
in connection with that institution's voluntary supervisory conversion. Old
Berkeley was then merged into First Federal Savings Bank (of Delaware) and the
corporate name changed to Berkeley Federal Bank & Trust FSB. IMI purchased the
assets of the Knickerbocker Hotel in Chicago, Illinois on April 19, 1993 for
$13,704 and the Great Southern Hotel in Columbus, Ohio on August 17, 1993 for
$9,500. These acquisitions were accounted for under the purchase method of
accounting. The operating results of these acquisitions are included in the
Company's consolidated statements of operations from the date of the respective
acquisitions.
DISPOSITIONS
The Bank sold two branches with deposit liabilities totaling $111,686 as of
November 17, 1995, and twenty-three branches with deposit liabilities totaling
$909,315 as of December 31, 1994. The components of the gain recorded on these
transactions is summarized below:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Premium received on deposit liabilities sold................................................. $ 5,492 $ 66,595
Difference between carrying value and face value of deposits sold............................ -- 4,596
Retirement of excess of cost over net assets acquired, net................................... -- (9,135)
Net gain on sale of land, buildings, furniture, fixtures and equipment....................... 158 2,908
Broker's fee and other costs associated with the sale of the deposits........................ (220) (2,364)
--------- ---------
Gains on sales of branches............................................................... $ 5,430 $ 62,600
--------- ---------
--------- ---------
</TABLE>
Additionally, on October 4, 1995 the Company sold the Knickerbocker Hotel
for a gain of $4,658.
Effective December 30, 1993 the Company sold all of the stock of Investors
Mortgage Insurance Company ("Investors") and Investors Equity Insurance Company,
Inc. ("Equity"), both wholly-owned subsidiaries of IMI, for approximately $24.8
million. All assets and liabilities of these two subsidiaries were transferred
including the 50 state insurance business licenses held by Investors and the 17
state insurance business licenses held by Equity. A gain of $3,835 was
recognized on the sale. IMI continues to service the
F-13
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
insurance policies through December 31, 1996 for a fee of 25 basis points of the
insured mortgage loan amount at the beginning of each calendar year. In
addition, the Company has guaranteed through December 31, 1996 that the loss
reserves transferred will be sufficient to cover the claims on all policies
underwritten prior to the sale date.
NOTE 3 DISCONTINUED OPERATIONS
In September 1995, the Company announced its decisions to dispose of its
automated banking division and related activities. As a result of these
decisions, a loss of $3,204, net of a tax benefit of $1,776 was recorded
consisting of a net loss of $1,954 on the sale of assets and a loss of $1,250,
incurred from related operations until the sales and dispositions, both of which
were substantially complete at December 31, 1995. The Company's consolidated
statements of operations have been restated for all periods presented to reflect
the discontinuance of these operations. Losses from operations of the
discontinued division, net of tax, amounted to $4,468, $4,514 and $2,270 for the
nine months ended September 30, 1995, the year ended December 31, 1994 and the
year ended December 31, 1993, respectively. Gross revenues from the automated
banking division and related activities for the years ended December 31, 1995,
1994 and 1993 amounted to $1,822, $1,768 and $1,451, respectively.
NOTE 4 FAIR VALUE OF FINANCIAL INSTRUMENTS
Substantially all of the Company's assets, liabilities and off-balance sheet
instruments and commitments are considered financial instruments. For the
majority of the Company's financial instruments, principally loans and deposits,
fair values are not readily available since there are no available trading
markets as characterized by current exchanges between willing parties.
Accordingly, fair values can only be derived or estimated using various
valuation techniques, such as computing the present value of estimated future
cash flows using discount rates commensurate with the risks involved. However,
the determination of estimated future cash flows is inherently subjective and
imprecise. In addition, for those financial instruments with option-related
features, prepayment assumptions are incorporated into the valuation techniques.
It should be noted that minor changes in assumptions or estimation methodologies
can have a material effect on these derived or estimated fair values.
The fair values reflected below are indicative of the interest rate
environments as of December 31, 1995 and 1994 and do not take into consideration
the effects of interest rate fluctuations. In different interest rate
environments, fair value results can differ significantly, especially for
certain fixed-rate financial instruments and non-accrual assets. In addition,
the fair values presented do not attempt to estimate the value of the Company's
fee generating businesses and anticipated future business activities. In other
words, they do not represent the Company's value as a going concern.
Furthermore, the differences between the carrying amounts and the fair values
presented may not be realized because, except as indicated, the Company
generally intends to hold these financial instruments to maturity and realize
their recorded values.
Reasonable comparability of fair values among financial institutions is
difficult due to the wide range of permitted valuation techniques and numerous
estimates that must be made in the absence of secondary market prices. This lack
of objective pricing standards introduces a degree of subjectivity to these
derived or estimated fair values. Therefore, while disclosure of estimated fair
values of financial instruments is required, readers are cautioned in using this
data for purposes of evaluating the financial condition of the Company.
The methodologies used and key assumptions made to estimate fair value, the
estimated fair values determined and recorded carrying values follow:
F-14
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents have been valued at their carrying amounts as
these are reasonable estimates of fair value given the relatively short period
of time between origination of the instruments and their expected realization.
INVESTMENTS AND MORTGAGE-BACKED AND RELATED SECURITIES
For investments and mortgage-backed and related securities, fair value
equals quoted price, if available. For securities for which a quoted market
price is not available, fair value is estimated using quoted market prices for
similar instruments.
LOANS AND DISCOUNTED LOANS
The fair value of whole loans is estimated based upon quoted market prices
for similar whole loan pools. The fair value of the discounted loan portfolio is
estimated based upon current market yields at which recent pools of similar
mortgages have traded taking into consideration the timing and amount of
expected cash flows.
LOW INCOME HOUSING TAX CREDIT INTERESTS
The fair value of the investments in low income housing tax credit interests
is estimated by discounting the future tax benefits expected to be realized from
these investments using discount rates at which similar investments were being
made on or about the respective financial statement dates.
DEPOSITS
The fair value of demand deposits, savings accounts and money market
deposits is the amount payable on demand at the reporting date. The fair value
of fixed-maturity certificates of deposit is estimated by discounting the
required cash payments at the market rates offered for deposits with similar
maturities on or about the respective financial statement dates.
BORROWINGS
The fair value of the Company's subordinated debentures is based upon quoted
market prices. The fair value of the Company's other borrowings is estimated
based upon the discounted value of the future cash flows expected to be paid on
such borrowings using estimated market discount rates that reflect the
borrowings of others with similar terms and maturities.
RISK MANAGEMENT INSTRUMENTS
The fair value of interest rate swap agreements is the estimated amount that
the Company would receive or pay to terminate the swap agreements at the
reporting date taking into account interest rates and the credit worthiness of
the swap counterparties on or about the respective financial statement dates.
Market quotes are used to estimate the fair value of interest rate futures
contracts.
LOAN COMMITMENTS
The fair value of loan commitments is estimated considering the difference
between interest rates on or about the respective financial statement dates and
the committed rates.
REAL ESTATE OWNED
Real estate owned, although not a financial instrument, is an integral part
of the Company's discounted loan business. The fair value of real estate owned
is estimated based upon appraisals, broker price opinions and other standard
industry valuation methods, less anticipated selling costs.
F-15
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
The carrying amounts and the estimated fair values of the Company's
financial instruments and real estate owned are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
-------------------------- ------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents................................ $ 54,632 $ 54,632 $ 36,750 $ 36,750
Securities available for sale............................ 337,480 337,480 187,717 187,717
Loans available for sale................................. 251,790 253,854 102,293 102,934
Investment securities.................................... 18,665 18,657 17,011 16,728
Mortgage-related securities held for investment.......... -- -- 91,917 85,547
Loan portfolio, net...................................... 295,605 300,075 57,045 55,731
Discounted loan portfolio, net........................... 669,771 682,241 529,460 529,460
Investments in low income housing tax credit interest.... 81,362 94,238 49,442 60,144
Real estate owned, net................................... 166,556 187,877 96,667 109,169
Financial Liabilities:
Deposits................................................. 1,501,646 1,488,668 1,023,268 992,340
Advances from the Federal Home Loan Bank................. 70,399 70,530 5,399 5,528
Securities sold under agreements to repurchase........... 84,761 84,761 -- --
Subordinated debentures and other interest bearing
obligations............................................. 117,054 120,398 20,111 19,993
Other:
Loan commitments......................................... 54,405 54,405 41,027 41,027
</TABLE>
F-16
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
NOTE 5 SECURITIES AND LOANS AVAILABLE FOR SALE
The amortized cost, fair value and gross unrealized gains and losses on the
Company's securities and loans available for sale are as follows at the periods
ended:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
DECEMBER 31, 1995: COST GAINS LOSSES FAIR VALUE
- ----------------------------------------------------------------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Mortgage-related securities:
Single family residential:
AAA-rated collateralized mortgage obligations................ $ 140,304 $ 9 $ (1,482) $ 138,831
FHLMC interest only.......................................... 2,217 -- (35) 2,182
FNMA interest only........................................... 10,080 -- (488) 9,592
FNMA principal only.......................................... 8,104 114 -- 8,218
Subordinates................................................. 27,410 -- (100) 27,310
Futures contracts............................................ -- 168 (1,766) (1,598)
Planned amortization class (PAC) residuals................... 759 -- (185) 574
REMIC residuals.............................................. 616 -- (144) 472
---------- ----------- ----------- ----------
189,490 291 (4,200) 185,581
---------- ----------- ----------- ----------
Multi-family and commercial:
AAA-rated interest only...................................... 101,110 2,840 (18) 103,932
FNMA interest only........................................... 5,520 16 (275) 5,261
Subordinates................................................. 43,605 845 (1,496) 42,954
Futures contracts............................................ -- -- (248) (248)
---------- ----------- ----------- ----------
150,235 3,701 (2,037) 151,899
---------- ----------- ----------- ----------
$ 339,725 $ 3,992 $ (6,237) $ 337,480
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
Loans:
Single family residential...................................... 221,927 1,736 -- 223,663
Multi-family................................................... 28,694 314 -- 29,008
Consumer....................................................... 1,169 14 -- 1,183
---------- ----------- ----------- ----------
$ 251,790 $ 2,064 $ -- $ 253,854
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
F-17
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
DECEMBER 31, 1994: COST GAINS LOSSES FAIR VALUE
- ----------------------------------------------------------------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury bills.............................................. $ 3,531 $ 2 $ (1) $ 3,532
---------- ----------- ----------- ----------
Mortgage-backed securities:
Single family residential:
AAA-rated.................................................... 19,174 -- (75) 19,099
---------- ----------- ----------- ----------
Mortgage-related securities:
Single family residential:
FNMA interest only........................................... 1,996 -- -- 1,996
FNMA principal only.......................................... 11,663 -- (173) 11,490
Collateralized mortgage obligations.......................... 79,539 -- (4,507) 75,032
Futures contracts............................................ -- 1,143 -- 1,143
---------- ----------- ----------- ----------
93,198 1,143 (4,680) 89,661
---------- ----------- ----------- ----------
Multi-family:
Collateralized mortgage obligations.......................... 54,950 1,535 (2,546) 53,939
Subordinates................................................. 21,334 761 -- 22,095
Futures contracts............................................ -- -- (609) (609)
---------- ----------- ----------- ----------
76,284 2,296 (3,155) 75,425
---------- ----------- ----------- ----------
$ 192,187 $ 3,441 $ (7,911) $ 187,717
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
Loans:
Single family residential mortgages............................ 16,825 -- (562) 16,263
Multi-family................................................... 83,845 1,503 -- 85,348
Futures contracts.............................................. -- -- (121) (121)
Consumer....................................................... 1,623 -- (179) 1,444
---------- ----------- ----------- ----------
$ 102,293 $ 1,503 $ (862) $ 102,934
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
A profile of the maturities of securities available for sale at December 31,
1995 follows. Mortgage-backed securities are included based on their
weighted-average maturities, reflecting anticipated future prepayments based on
a consensus of dealers in the market.
<TABLE>
<CAPTION>
AMORTIZED COST FAIR VALUE
-------------- ----------
<S> <C> <C>
Due within one year............................................... $ 13,977 $ 13,970
Due after 1 through 5 years....................................... 193,207 189,465
Due after 5 through 10 years...................................... 130,988 131,634
Due after 10 years................................................ 22,797 23,655
-------------- ----------
$ 360,969 $ 358,724
-------------- ----------
-------------- ----------
</TABLE>
F-18
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
Gross realized gains and losses, proceeds on sales, premiums amortized
against and discounts accreted to income were as follows during the periods
ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Securities:
Gross realized gains....................................................... $ 1,266 $ 10,654 $ 3,980
Gross realized losses...................................................... (2,079) (7,999) (1,010)
---------- ---------- ----------
Net realized (losses) gains.............................................. $ (813) $ 2,655 $ 2,970
---------- ---------- ----------
---------- ---------- ----------
Proceeds on Sales.......................................................... $ 836,247 $ 877,911 $ 744,636
---------- ---------- ----------
---------- ---------- ----------
Premiums amortized against interest income................................. $ 5,188 $ 2,782 $ 7,578
Discounts accreted to interest income...................................... (3,135) (553) (49)
---------- ---------- ----------
Net premium amortization................................................. $ 2,053 $ 2,229 $ 7,529
---------- ---------- ----------
---------- ---------- ----------
Loans:
Gross realized gains....................................................... $ 1,817 $ 3,399 $ 773
Gross realized losses...................................................... -- (806) --
---------- ---------- ----------
Net realized gains....................................................... $ 1,817 $ 2,593 $ 773
---------- ---------- ----------
---------- ---------- ----------
Proceeds on Sales.......................................................... $ 100,104 $ 383,673 $ 95,936
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
One security in the available for sale portfolio, with a market value of
$10,954, is pledged as collateral to the State of New Jersey in connection with
the Bank's sales of certificates of deposit over $100 to New Jersey
municipalities. Additionally, certain mortgage-related securities are pledged as
collateral for securities sold under agreements to repurchase (see note 15).
NOTE 6 INVESTMENT SECURITIES
The book and fair values and gross unrealized gains and losses on the
Company's investment securities are as follows at the periods ended:
<TABLE>
<CAPTION>
GROSS GROSS
BOOK UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
--------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1995:
U.S. Treasury securities......................................... $ 10,036 $ -- $ (8) $ 10,028
Federal Home Loan Bank stock..................................... 8,520 -- -- 8,520
Limited partnership interests.................................... 109 -- -- 109
--------- ----------- ----- ---------
$ 18,665 $ -- $ (8) $ 18,657
--------- ----------- ----- ---------
--------- ----------- ----- ---------
DECEMBER 31, 1994:
U.S. Treasury securities......................................... $ 10,325 $ -- $ (283) $ 10,042
Federal Home Loan Bank stock..................................... 6,555 -- -- 6,555
Limited partnership interests.................................... 131 -- -- 131
--------- ----------- ----- ---------
$ 17,011 $ -- $ (283) $ 16,728
--------- ----------- ----- ---------
--------- ----------- ----- ---------
</TABLE>
All U.S. Treasury securities held for investment at December 31, 1995 are
due within one year. The FHLB stock is pledged as additional collateral for FHLB
advances, and a portion of the U.S. Treasury securities are pledged as
collateral for the $399 FHLB advance due in 1997 (see note 14).
F-19
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
Premiums amortized against and discounts accreted to income on U.S. Treasury
securities held for investment were as follows for the periods ended December
31:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Premiums amortized against interest income................................................ $ 289 $ 324 $ 286
Discounts accreted to interest income..................................................... -- (12) (7)
--------- --------- ---------
Net premium amortization................................................................ $ 289 $ 312 $ 279
--------- --------- ---------
--------- --------- ---------
</TABLE>
Included in interest income on investment securities and other for the
periods ended December 31, 1995, 1994 and 1993 are $1,388, $5,654 and $2,572,
respectively, of deferred fees accreted on tax residuals (see note 19).
NOTE 7 MORTGAGE-RELATED SECURITIES
In December 1995 the Company transferred all of its mortgage-related
securities held for investment to its available for sale portfolio (see note 1).
The book and market values and gross unrealized gains and losses for the
Company's mortgage-related securities held for investment at December 31, 1994
were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
BOOK UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
--------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Collateralized mortgage obligations................................ $ 90,153 $ -- $ (6,024) $ 84,129
Planned amortization class securities.............................. 994 -- (19) 975
REMIC residuals.................................................... 770 -- (327) 443
--------- ----------- ----------- ---------
$ 91,917 $ -- $ (6,370) $ 85,547
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
</TABLE>
Premiums amortized against and discounts accreted to interest income on
mortgage-related securities were as follows for the periods ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Premiums amortized against interest income............................................ $ 652 $ 1,043 $ 5,094
Discounts accreted to interest income................................................. (36) (277) (1,694)
--------- --------- ---------
Net premium amortization............................................................ $ 616 $ 766 $ 3,400
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-20
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
NOTE 8 LOAN PORTFOLIO
The Company's loan portfolio consists of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Carrying Value:
Single family residential............................................ $ 75,928 $ 31,926
---------- ---------
Multi-family residential
Permanent.......................................................... 41,306 1,800
Construction....................................................... 7,741 --
---------- ---------
Total multi-family residential................................... 49,047 1,800
---------- ---------
Commercial real estate:
Hotel.............................................................. 125,791 19,659
Office............................................................. 61,262 --
Land............................................................... 24,904 1,315
Other.............................................................. 2,494 4,936
---------- ---------
Total commercial real estate..................................... 214,451 25,910
---------- ---------
Consumer............................................................. 3,223 1,558
---------- ---------
Total loans...................................................... 342,649 61,194
Undisbursed loan funds............................................... (39,721) --
Unaccreted discount.................................................. (5,376) (3,078)
Allowance for loan losses............................................ (1,947) (1,071)
---------- ---------
Loans, net....................................................... $ 295,605 $ 57,045
---------- ---------
---------- ---------
</TABLE>
At December 31, 1995 the Company had $7,005 of single family residential
loans, $3,648 of land loans and $1,275 of multi-family residential loans
outstanding, at market interest rates and terms, which were issued to facilitate
the sale of the Company's real estate owned and real estate held for
development.
F-21
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
The following table presents a summary of the Company's non-performing
loans, allowance for loan losses and significant ratios as of and for the years
ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Non-Performing Loans:
Single family residential...................................... $ 2,923 $ 2,478 $ 2,347
Multi-family................................................... 731 152 664
Consumer....................................................... 202 29 556
--------- --------- ---------
$ 3,856 $ 2,659 $ 3,567
--------- --------- ---------
--------- --------- ---------
Allowance for Loan Losses:
Balance, beginning of year..................................... $ 1,071 $ 884 $ 752
Provision for loan losses...................................... 1,121 --
Charge-offs.................................................... (263) (472) (336)
Recoveries..................................................... 18 659 468
--------- --------- ---------
Balance, end of year........................................... $ 1,947 $ 1,071 $ 884
--------- --------- ---------
--------- --------- ---------
Significant Ratios:
Non-performing loans as a percentage of:
Loans........................................................ 1.27% 4.35% 3.71%
Total assets................................................. 0.20% 0.21% 0.26%
Allowance for loan losses as a percentage of:
Loans........................................................ 0.65% 1.84% 0.99%
Non-performing loans......................................... 50.49% 40.28% 24.78%
Net charge-offs (recoveries) as a percentage of average
loans......................................................... 0.19% (0.28)% (0.10)%
</TABLE>
If non-accrual loans had been current in accordance with their original
terms, interest income for the years ended December 31, 1995, 1994 and 1993
would have been approximately $322, $207 and $243 higher, respectively. No
interest has been accrued on loans greater than 90 days past due. At December
31, 1995, the Company had no investment in impaired loans as defined in
accordance with SFAS No. 114, and as amended by SFAS No. 118.
The Company services for other investors mortgage loans which it does not
own. The total amount of such loans serviced for others was $361,608 and
$132,843 at December 31, 1995 and 1994, respectively. Servicing fee income on
such loans amounted to $493, $231 and $548 for the years ended December 31,
1995, 1994 and 1993, respectively. The unamortized balance of purchased mortgage
servicing rights was $3,433 and $41 at December 31, 1995 and 1994, respectively,
and is included in other assets.
F-22
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
The loan portfolio is geographically located throughout the United States.
The following table sets forth the five states in which the largest amount of
properties securing the Company's loans were located at December 31, 1995.
<TABLE>
<CAPTION>
SINGLE
FAMILY MULTI-FAMILY COMMERCIAL
RESIDENTIAL RESIDENTIAL REAL ESTATE CONSUMER TOTAL
------------ ------------ ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
California................. $ 8,392 $ 22,761 $ 42,419 $ -- $ 73,572
New Jersey................. 39,090 -- 15,829 128 55,047
New York................... 9,681 1,876 29,800 2,309 43,666
Florida.................... 182 -- 29,225 -- 29,407
Massachusetts.............. 213 -- 20,047 -- 20,260
Other...................... 18,370 24,410 77,131 786 120,697
------------ ------------ ----------- ----------- ----------
Total.................. $ 75,928 $ 49,047 $ 214,451 $ 3,223 $ 342,649
------------ ------------ ----------- ----------- ----------
------------ ------------ ----------- ----------- ----------
</TABLE>
Certain mortgage loans are pledged as collateral for FHLB advances (see note
14).
NOTE 9 DISCOUNTED LOAN PORTFOLIO
The Company has acquired through private sales and auctions mortgage loans
at a discount on which the borrowers are either not current as to principal and
interest payments or there is doubt as to the borrowers' ability to pay in full
the contractual principal and interest. The Company estimates the amounts it
will realize through foreclosure, collection efforts or other resolution of each
loan and the length of time required to complete the collection process in
determining the amounts it will bid to acquire such loans.
The resolution alternatives applied to the discounted loan portfolio are (i)
the borrower brings the loan current in accordance with original or modified
terms; (ii) the borrower repays the loan or a negotiated amount; (iii) the
borrower agrees to a deed-in-lieu of foreclosure, in which case it is classified
as real estate owned and held for sale by the Company and (iv) the Company
forecloses on the loan and the property is either acquired at the foreclosure
sale by a third party or by the Company, in which case it is classified as real
estate owned and held for sale. The Company periodically reviews the discounted
loan portfolio performance to ensure that the loans are carried at the lower of
amortized cost or net realizable value and the remaining unaccreted discount is
adjusted accordingly. Upon receipt of title to the property, the loans are
transferred to real estate owned.
F-23
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
The Company's discounted loan portfolio consists of the following at
December 31:
<TABLE>
<CAPTION>
CARRYING VALUE
------------------------
1995 1994
----------- -----------
<S> <C> <C>
Loan Type:
Single family residential......................................... $ 376,501 $ 382,165
Multi-family residential.......................................... 176,259 300,220
Commercial real estate............................................ 388,566 102,138
Other............................................................. 2,203 911
----------- -----------
Total discounted loans........................................ 943,529 785,434
Unaccreted discount............................................... (273,758) (255,974)
----------- -----------
Discounted loans, net......................................... $ 669,771 $ 529,460
----------- -----------
----------- -----------
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
----------- -----------
<S> <C> <C>
Loan Status:
Current........................................................... $ 351,630 $ 113,794
Less than 90 days past due........................................ 86,838 57,023
Greater than 90 days past due..................................... 385,112 413,506
Acquired and servicing not yet transferred........................ 119,949 201,111
----------- -----------
$ 943,529 $ 785,434
----------- -----------
----------- -----------
</TABLE>
At December 31, 1995 and 1994 the total accreted and unrealized discount on
discounted loans was $7,505 and $5,306, respectively. A summary of income on
discounted loans is as follows for the years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Interest Income:
Realized................................................... $ 70,807 $ 48,734 $ 25,871
Accreted and unrealized.................................... 5,191 3,826 5,165
--------- --------- ---------
$ 75,998 $ 52,560 $ 31,036
--------- --------- ---------
--------- --------- ---------
Gains on Sales:
Realized gains on sales.................................... $ 6,008 $ 890 $ 3,862
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following table sets forth the activity in the Company's gross
discounted loan portfolio during the years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Principal balance, beginning of year................... $ 785,434 $ 433,516 $ 310,464
Acquisitions........................................... 791,195 826,391 294,359
Resolutions and repayments............................. (300,161) (265,292) (116,890)
Loans transferred to real estate owned................. (281,344) (171,300) (26,887)
Sales.................................................. (51,595) (37,881) (27,530)
----------- ----------- -----------
Principal balance, end of year......................... $ 943,529 $ 785,434 $ 433,516
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-24
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
The discounted loan portfolio is geographically located throughout the
United States. The following table sets forth the five states in which the
largest amount of properties securing the Company's discounted loans were
located at December 31, 1995:
<TABLE>
<CAPTION>
SINGLE COMMERCIAL
FAMILY MULTI-FAMILY REAL ESTATE
RESIDENTIAL RESIDENTIAL AND OTHER TOTAL
------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
California............................. $ 77,988 $ 111,754 $ 210,872 $ 400,614
New Jersey............................. 58,643 774 53,976 113,393
New York............................... 68,483 13,571 12,528 94,582
Florida................................ 17,248 26,464 19,299 63,011
Connecticut............................ 49,705 2,753 10,263 62,721
Other.................................. 104,434 20,943 83,831 209,208
------------ ------------ ----------- ----------
Total.............................. $ 376,501 $ 176,259 $ 390,769 $ 943,529
------------ ------------ ----------- ----------
------------ ------------ ----------- ----------
</TABLE>
NOTE 10 REAL ESTATE OWNED
Real estate owned, net of allowance for losses, is held for sale and
consists of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Discounted loan portfolio:
Single family residential............................................ $ 75,144 $ 86,426
Multi-family residential............................................. 59,932 --
Commercial real estate............................................... 31,218 8,801
---------- ---------
Total discounted loan portfolio.................................... 166,294 95,227
Loan portfolio......................................................... 262 1,440
---------- ---------
$ 166,556 $ 96,667
---------- ---------
---------- ---------
</TABLE>
The following schedule presents the activity, in aggregate, in the valuation
allowances on real estate owned for the years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Balance, beginning of year..................................... $ 3,937 $ 2,455 $ 102
Provision for losses........................................... 10,510 9,074 2,980
Charge-offs and sales.......................................... (9,841) (7,592) (627)
--------- --------- ---------
Balance, end of year........................................... $ 4,606 $ 3,937 $ 2,455
--------- --------- ---------
--------- --------- ---------
</TABLE>
Valuation allowances on real estate owned are established on a specific
property basis.
The following table sets forth the pre-tax results of the Company's
investment in real estate owned, which were primarily related to the discounted
loan portfolio, during the years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
---------- --------- ---------
<S> <C> <C> <C>
Gains on sales.............................................. $ 19,006 $ 21,308 $ 2,541
Provision for losses........................................ (10,510) (9,074) (2,980)
Carrying costs, net of rental income........................ 1,044 (6,239) (719)
---------- --------- ---------
Income (loss)............................................... $ 9,540 $ 5,995 $ (1,158)
---------- --------- ---------
---------- --------- ---------
</TABLE>
F-25
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
NOTE 11 INVESTMENTS IN LOW INCOME HOUSING TAX CREDIT INTERESTS
The carrying value of the Company's investments in low income housing tax
credit interests are as follows at December 31:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Investments solely as a limited partner made prior to May 18, 1995.......................... $ 58,911 $ 47,978
Investments solely as a limited partner made on or after May 18, 1995....................... 4,223 --
Investments as both a limited and, through subsidiaries, general partner.................... 18,228 1,464
--------- ---------
$ 81,362 $ 49,442
--------- ---------
--------- ---------
</TABLE>
The qualified affordable housing projects underlying the Company's
investments in low income housing tax credit interests are geographically
located throughout the United States. At December 31, 1995, the Company's
largest single investment was $16,295 which is in a project located in Fort
Lauderdale, Florida.
Income on the Company's limited partnership investments made prior to May
18, 1995 is recorded under the level yield method as a reduction of income tax
expense, and amounted to $7,715, $5,410 and $2,013 for the years ended December
31, 1995, 1994 and 1993, respectively. Had these investments been accounted for
under the equity method, net income would have been reduced by $2,798, $2,742
and $1,606 for the years ended December 31, 1995, 1994 and 1993, respectively.
For the three years ended December 31, 1995 the Company recorded no income or
expense on its limited partnership investments made after May 18, 1996 or its
investments as a limited and, through subsidiaries, general partner.
Other liabilities include $9,794 and $8,577 at December 31, 1995 and 1994,
respectively, representing contractual obligations to fund certain limited
partnerships which invest in low income housing tax credit interests.
NOTE 12 PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
--------- ----------
<S> <C> <C>
Hotel subsidiaries:
Land................................................................. $ 613 $ 5,178
Building and leasehold improvements.................................. 11,402 16,823
Office and computer equipment........................................ 720 2,485
Less accumulated depreciation and amortization....................... (778) (1,316)
--------- ----------
11,957 23,170
--------- ----------
Subsidiaries other than hotels:
Land................................................................. 485 751
Building and leasehold improvements.................................. 5,672 2,330
Automated banking equipment.......................................... 322 5,317
Office and computer equipment........................................ 12,726 16,425
Manufacturing equipment.............................................. 25 550
Less accumulated depreciation and amortization....................... (5,828) (10,234)
--------- ----------
13,402 15,139
--------- ----------
$ 25,359 $ 38,309
--------- ----------
--------- ----------
</TABLE>
F-26
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
As part of the branch sales, premises and equipment with a net book value of
$1,112 and $4,192 were sold for a gain of $158 and $2,908 in 1995 and 1994,
respectively. Also, all automated banking equipment was sold or otherwise
disposed of during the fourth quarter of 1995, with the exception of $322 of
such equipment which was sold in January 1996 (see note 3).
NOTE 13 DEPOSITS
The Company's deposits consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
------------------------- -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RATE BOOK VALUE RATE BOOK VALUE
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Non-interest bearing deposits......................... -- % $ 48,482 -- % $ 35,943
NOW and money market checking accounts................ 3.37 17,147 2.17 18,934
Savings accounts...................................... 2.30 3,471 2.30 24,007
------------ ------------
69,100 78,884
------------ ------------
Certificates of deposit............................... 1,440,240 950,817
Unamortized deferred fees............................. (7,694) (6,433)
------------ ------------
5.68 1,432,546 5.50 944,384
------------ ------------
5.46 $ 1,501,646 5.17 $ 1,023,268
------------ ------------
------------ ------------
</TABLE>
At December 31, 1995 and 1994 certificates of deposit include $1,123,196 and
$857,770, respectively, of deposits originated through investment banking firms
which solicit deposits from their customers, of which $996,543 and $745,591,
respectively, are non-cancelable. Additionally, at December 31, 1995 and 1994,
$80,045 and $21,124 of certificates of deposit were issued on an uninsured
basis. Non-interest bearing deposits include $37,686 and $7,397 of advance
payments by borrowers for taxes and insurance and principal and interest
collected but not yet remitted in accordance with loan servicing agreements at
December 31, 1995 and 1994, respectively.
The contractual maturity of the Company's certificates of deposit at
December 31, 1995 follows:
<TABLE>
<S> <C>
Contractual Remaining Maturity:
Within one year............................... $ 928,542
Within two years.............................. 192,833
Within three years............................ 132,287
Within four years............................. 109,742
Within five years............................. 68,721
Thereafter.................................... 421
---------
$1,432,546
---------
---------
</TABLE>
The amortization of the deferred fees of $4,729, $1,606 and $462 for the
years ended December 31, 1995, 1994 and 1993, respectively, and the accretion of
the purchase accounting discount of $0, $(2,991) and
F-27
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
$(2,999) for the years ended December 31, 1995, 1994 and 1993, respectively, are
computed using the interest method and are included in interest expense on
certificates of deposit. The interest expense by type of deposit account is as
follows for the years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
NOW accounts and money market checking....................... $ 1,031 $ 1,395 $ 1,315
Savings...................................................... 451 2,602 1,982
Certificates of deposit...................................... 70,371 40,964 15,742
--------- --------- ---------
$ 71,853 $ 44,961 $ 19,039
--------- --------- ---------
--------- --------- ---------
</TABLE>
Accrued interest payable on deposits in the amount of $18,994 and $12,061 as
of December 31, 1995 and 1994, respectively, is included in accrued expenses,
payables and other liabilities.
NOTE 14 ADVANCES FROM THE FEDERAL HOME LOAN BANK ("FHLB")
Advances from the FHLB mature as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
---------------------- ----------------------
INTEREST BOOK INTEREST BOOK
DUE DATE RATE VALUE RATE VALUE
- ------------------------------------------------------ ----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
1995.................................................. -- % $ -- 9.80% $ 5,000
1996.................................................. 5.83 70,000 -- --
1997.................................................. 7.02 399 7.02 399
--------- ---------
$ 70,399 $ 5,399
--------- ---------
--------- ---------
</TABLE>
Accrued interest payable on FHLB advances amounted to $297 and $44 as of
December 31, 1995 and 1994, respectively, and is included in accrued expenses,
payables and other liabilities. All interest rates are fixed by contract. Under
the terms of its collateral agreement, the Company is required to maintain
otherwise unencumbered qualifying assets with a fair market value ranging from
105% to 125% of FHLB advances depending on the type of collateral. The Company's
FHLB stock is pledged as additional collateral for these advances.
NOTE 15 SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Company enters into sales of securities under agreements to repurchase
the same securities (reverse repurchase agreements). Fixed coupon reverse
repurchase agreements are treated as financings, and the obligations to
repurchase securities sold are reflected as a liability in the accompanying
consolidated statements of financial condition. All securities underlying
reverse repurchase agreements are reflected as assets in the accompanying
consolidated statements of financial condition and are held in safekeeping by
broker/dealers. For the years ended December 31, 1995, 1994 and 1993, interest
rate swap agreements and
F-28
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
Eurodollar futures contracts used for risk management purposes had the effect of
increasing interest expense on securities sold under agreements to repurchase
and certificates of deposit by $261, $296 and $2,246, respectively.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1995 1994 1993
----------- ------------ ------------
<S> <C> <C> <C>
Other information concerning securities sold under agreements to
repurchase:
Balance, end of year.................................................. $ 84,761 $ -- $ 275,468
Accrued interest payable, end of year................................. 153 -- 610
Weighted average interest rate, end of year........................... 5.70% -- % 3.57%
Average balance during the year....................................... $ 16,754 $ 254,052 $ 195,111
Weighted average interest rate during the year........................ 5.68% 3.98% 3.56%
Maximum month-end balance............................................. $ 84,761 $ 537,629 $ 275,468
</TABLE>
Mortgage-related securities with a book value of $91,085 and a market value
of $90,368 were posted as collateral for securities sold under agreements to
repurchase at December 31, 1995.
NOTE 16 SUBORDINATED DEBENTURES AND OTHER INTEREST BEARING OBLIGATIONS
Subordinated debentures and other interest bearing obligations mature as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
---------- ---------
<S> <C> <C>
1996:
12% subordinated notes due January 2................................. $ 1,012 $ 1,012
10.5% notes due May 1................................................ 7,615 --
---------- ---------
8,627 1,012
2003:
12% mortgage loan due September 1.................................... 7,817 7,939
2005:
12% subordinated debentures due June 15.............................. 100,000 --
2014:
0 - 8.5% subordinated mortgage loan due December 1................... 610 638
2018:
9.65% mortgage loan due April 18..................................... -- 10,522
---------- ---------
$ 117,054 $ 20,111
---------- ---------
---------- ---------
</TABLE>
The notes due in 1996 are payable to current or former shareholders and
executive officers.
On June 12, 1995 the Bank issued $100,000 of 12% Subordinated Debentures due
2005 (the "Debentures") with interest payable semiannually on June 15 and
December 15. The Debentures are unsecured general obligations of the Bank and
are subordinated in right of payment to all existing and future senior debt.
The Debentures may not be redeemed prior to June 15, 2000, except as
described below. On or after such date, the Debentures may be redeemed at any
time at the option of the Bank, in whole or in part,
F-29
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
together with accrued and unpaid interest, if any, on not less than 30 nor more
than 60 days' notice at the following redemption prices (expressed as a
percentage of the principal amount), if redeemed during the twelve month period
beginning June 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ---------------------------------------------- ----------------
<S> <C>
2000.......................................... 105.333%
2001.......................................... 104.000%
2002.......................................... 102.667%
2003.......................................... 101.333%
2004 and thereafter........................... 100.000%
</TABLE>
In addition, the Bank may redeem, at its option, up to $35,000 principal
amount of the Debentures at any time prior to June 15, 1998 with the net cash
proceeds received by the Bank from one or more public equity offerings at a
purchase price of 112.000% of the principal amount thereof, plus accrued and
unpaid interest.
In connection with the issuance of the Debentures, the Bank incurred certain
costs which have been capitalized and are being amortized on a straight-line
basis over the expected life of the Debentures. The unamortized balance of these
issuance costs amounted to $3,170 at December 31, 1995 and is included in other
assets. Accrued interest payable on the Debentures amounted to $500 at December
31, 1995 and is included in accrued expenses, payables and other liabilities.
In 1993, subsequent to the acquisition of Old Berkeley, the Company acquired
loans with an aggregate principal balance of $8,958 that had been made by third
parties to the Company's subsidiary, Berkeley Realty Group, Inc., at a discount
of $2,366. An extraordinary gain of $1,538, after deduction of $828 for related
income taxes, is recognized in the accompanying consolidated statements of
operations for that year. Berkeley Realty Group, Inc. is a subsidiary of Old
Berkeley which was engaged in real estate development and residential
construction activities. The loans acquired by the Company were collateralized
by real estate held for development, which was recorded at fair value at the
effective date of the acquisition.
NOTE 17 INTEREST RATE RISK MANAGEMENT INSTRUMENTS
In managing its interest rate risk, the Company on occasion enters into
interest rate exchange agreements (swaps). Under swaps, the Company agrees with
other parties to exchange, at specified intervals, the difference between
fixed-rate and floating-rate interest amounts calculated by reference to an
agreed notional amount. The terms of the swaps provide for the Company to
receive a floating rate of interest based on the London Interbank Offered Rate
("LIBOR") and to pay fixed interest rates. The Company had no outstanding swaps
at December 31, 1995. The terms of outstanding swaps at December 31, 1994
follows:
<TABLE>
<CAPTION>
FLOATING RATE
LIBOR AT END OF
MATURITY NOTIONAL AMOUNT INDEX FIXED RATE YEAR FAIR VALUE
- ------------------------ ---------------- ---------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
1995.................... $ 40,000 6-Month 5.260% 6.625% $ 491
</TABLE>
The 6-month LIBOR was 7.0% on December 31, 1994. The interest expense or
benefit of the swaps had the effect of increasing (decreasing) net interest
income by $358, $(754) and $(2,246) for the years ended December 31, 1995, 1994
and 1993, respectively. In June 1994 the Company sold certain adjustable rate
mortgage-backed securities and, as a result, also terminated a related $150,000
notional amount swap resulting in a realized gain on termination of the swap of
$1,110.
The Company also enters into short sales of Eurodollar and U.S. Treasury
interest rate futures contracts as part of its overall interest rate risk
management activity. Interest rate futures contracts are commitments to either
purchase or sell designated financial instruments at a future date for a
specified price and may be
F-30
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
settled in cash or through delivery. The Eurodollar futures contracts have been
sold by the Company to hedge the repricing or maturity risk of certain
adjustable rate mortgage-backed securities and short duration mortgage-related
securities. U.S. Treasury futures have been sold by the Company to hedge the
risk of a reduction in the market value of fixed rate multi-family residential
loans and certain fixed rate mortgage-backed and related securities available
for sale in a rising interest rate environment.
Terms and other information on interest rate futures contracts sold short
are as follows:
<TABLE>
<CAPTION>
NOTIONAL
MATURITY PRINCIPAL FAIR VALUE
----------- ----------------- -----------
<S> <C> <C> <C>
December 31, 1995:
Eurodollar futures................................. 1996 $ 386,000 $ (1,598)
1997 26,000 (168)
U.S. Treasury futures.............................. 1996 11,100 (80)
December 31, 1994:
Eurodollar futures................................. 1995 350,000 1,090
1996 117,000 248
1997 26,000 34
U.S. Treasury futures.............................. 1995 222,500 (960)
</TABLE>
The following table summarizes the Company's use of interest rate risk
management instruments.
<TABLE>
<CAPTION>
NOTIONAL AMOUNT
----------------------------------------
SHORT SHORT U.S.
EURODOLLAR TREASURY
SWAPS FUTURES FUTURES
----------- ------------- ------------
<S> <C> <C> <C>
Balance, December 31, 1993......................... $ 254,000 $ 200,000 $ 110,900
Purchases........................................ -- 2,577,000 1,016,800
Maturities....................................... (64,000) -- --
Terminations..................................... (150,000) (2,284,000) (905,200)
----------- ------------- ------------
Balance, December 31, 1994......................... 40,000 493,000 222,500
Purchases........................................ -- 336,000 708,600
Maturities....................................... (40,000)
----
Terminations..................................... -- (417,000) (920,000)
----------- ------------- ------------
Balance, December 31, 1995......................... $ -- $ 412,000 $ 11,100
----------- ------------- ------------
----------- ------------- ------------
</TABLE>
Because interest rate futures contracts are exchange traded, holders of
these instruments look to the exchange for performance under these contracts and
not the entity holding the offsetting futures contract, thereby minimizing the
risk of nonperformance under these contracts. The Company is exposed to credit
loss in the event of nonperformance by the counterparty to the swap and controls
this risk through credit monitoring procedures. The notional principal amount
does not represent the Company's exposure to credit loss.
U.S. Government securities with a carrying value of $1,134 and $7,630 and a
fair value of $1,134 and $7,519 were pledged by the Company as security for the
obligations under these swaps and interest rate futures contracts at December
31, 1995 and 1994, respectively.
F-31
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
NOTE 18 ASSET AND LIABILITY MANAGEMENT
Asset and liability management is concerned with the timing and magnitude of
the repricing of assets and liabilities. The Company's objective is to attempt
to control risks associated with interest rate movements. In general, the
Company's strategy is to match asset and liability balances within maturity
categories to limit its exposure to earnings variations and variations in the
value of assets as interest rates change over time. Additionally, the Company's
strategy has been to acquire and hold assets and liabilities with short
durations which are less subject to interest rate volatility. The Company also
utilizes off-balance sheet financial techniques to assist in the management of
interest rate risk (see note 17).
The Company's methods for evaluating interest rate risk include an analysis
of its interest rate sensitivity "gap", which is defined as the difference
between interest-earning assets and interest-bearing liabilities maturing or
repricing within a given time period. A gap is considered positive when the
amount of interest rate sensitive assets exceeds the amount of interest rate
sensitive liabilities. A gap is considered negative when the amount of interest
rate sensitive liabilities exceeds interest rate sensitive assets. During a
period of rising interest rates, a negative gap would tend to adversely affect
net interest income, while a positive gap would tend to result in an increase in
net interest income. During a period of falling interest rates, a negative gap
would tend to result in an increase in net interest income, while a positive gap
would tend to affect net interest income adversely. Because different types of
assets and liabilities with the same or similar maturities may react differently
to changes in overall market rates or conditions, changes in interest rates may
affect net interest income positively or negatively even if an institution were
perfectly matched in each maturity category.
The following tables, which are unaudited, set forth the estimated maturity
or repricing of the Company's interest-earning assets and interest-bearing
liabilities at December 31, 1995 and 1994. The amounts of assets and liabilities
shown which mature or reprice within a particular period were determined in
accordance with the contractual terms of the assets and liabilities, except (i)
adjustable-rate loans and securities are included in the period in which they
are first scheduled to adjust and not in the period in which they mature, (ii)
fixed-rate, non-residual mortgage-related securities reflect estimated
prepayments, which were based on the average prepayment rate projected by the
ten largest investment banking firms making markets in these specific
securities, (iii) non-performing discounted loans reflect the estimated timing
of resolutions which result in repayment to the Company, (iv) fixed-rate loans
reflect scheduled contractual amortization,
F-32
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
with no estimated prepayments, and (v) NOW and money market checking and savings
deposits, which do not have contractual maturities, reflect estimated levels of
attrition, which are based on detailed studies of each such category of deposit
by the Company.
<TABLE>
<CAPTION>
MORE THAN
ONE
FOUR TO YEAR TO
WITHIN THREE TWELVE THREE THREE YEARS
MONTHS MONTHS YEARS AND OVER TOTAL
------------ ----------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
AT DECEMBER 31, 1995:
Rate-sensitive assets....................... $ 231,652 $ 350,277 $ 263,058 $ 778,756 $ 1,623,743
Rate-sensitive liabilities.................. 355,368 737,908 197,683 434,419 1,725,378
------------ ----------- ------------ ----------- ------------
Interest rate sensitivity gap before off-
balance sheet financial instruments........ (123,716) (387,631) 65,375 344,337 (101,635)
Off-balance sheet financial instruments..... 104,612 (38,518) (34,496) (31,598) --
------------ ----------- ------------ ----------- ------------
Interest rate sensitivity gap............... $ (19,104) $ (426,149) $ 30,879 $ 312,739 $ (101,635)
------------ ----------- ------------ ----------- ------------
------------ ----------- ------------ ----------- ------------
Cumulative interest rate sensitivity gap.... $ (19,104) $ (445,253) $ (414,374) $(101,635)
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Cumulative interest rate sensitivity gap as
a percentage of total rate sensitive
assets..................................... (1.18)% (27.42)% (25.52)% (6.26)%
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
AT DECEMBER 31, 1994:
Rate-sensitive assets....................... $ 164,755 $ 410,339 $ 291,844 $ 122,301 $ 989,239
Rate-sensitive liabilities.................. 182,045 311,463 373,213 146,114 1,012,835
------------ ----------- ------------ ----------- ------------
Interest rate-sensitivity gap before off-
balance sheet financial instruments........ (17,290) 98,876 (81,369) (23,813) (23,596)
Off-balance sheet financial instruments..... 185,535 (127,060) (13,069) (45,406) --
------------ ----------- ------------ ----------- ------------
Interest rate sensitivity gap............... $ 168,245 $ (28,184) $ (94,438) $ (69,219) $ (23,596)
------------ ----------- ------------ ----------- ------------
------------ ----------- ------------ ----------- ------------
Cumulative interest rate sensitivity gap.... $ 168,245 $ 140,061 $ 45,623 $ (23,596)
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Cumulative interest rate sensitivity gap as
a percentage of total rate-sensitive
assets..................................... 17.01% 14.16% 4.61% (2.39)%
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
</TABLE>
Although interest rate sensitivity gap is a useful measurement and
contributes toward effective asset and liability management, it is difficult to
predict the effect of changing interest rates based solely on that measure. As a
result, and as required by OTS regulations, the Company also regularly reviews
interest rate risk by forecasting the impact of alternative interest rate
environments on net interest income and market value of portfolio equity
("MVPE"), which is defined as the net present value of an institution's existing
assets, liabilities and off-balance sheet instruments, and evaluating such
impacts against the maximum potential changes in net interest income and MVPE
that are authorized by the Board of Directors of the Company.
F-33
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
The following table, which is unaudited, sets forth as of December 31, 1995
and 1994 the estimated percentage change in the Company's net interest income
over a four-quarter period and MVPE based upon the indicated changes in interest
rates, assuming an instantaneous uniform change in interest rates at all
maturities.
<TABLE>
<CAPTION>
ESTIMATED CHANGE IN
------------------------------------------
NET INTEREST INCOME
MVPE
CHANGE (IN BASIS POINTS) -------------------- --------------------
IN INTEREST RATES 1995 1994 1995 1994
- --------------------------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
+400....................... (15.54) 24.10 (19.31) 6.19
+300....................... (11.66) 18.07 (14.06) 5.07
+200....................... (7.77) 12.05 (8.02) 4.12
+100....................... (3.89) 6.02 (3.77) 2.15
0....................... -- -- -- --
- -100....................... 3.89 (6.02) 1.58 (1.38)
- -200....................... 7.77 (12.05) 4.93 (2.41)
- -300....................... 11.66 (18.07) 10.96 (2.94)
- -400....................... 15.54 (24.10) 18.06 (5.59)
</TABLE>
The Company believes that the assumptions used by it to evaluate the
vulnerability of the Company's operations to changes in interest rates
approximate actual experience and considers them reasonable; however, the
interest rate sensitivity of the Company's assets and liabilities and the
estimated effects of changes in interest rates on the Company's net interest
income and MVPE indicated in the above tables could vary substantially if
different assumptions were used or actual experience differs from the historical
experience on which they are based.
NOTE 19 INCOME TAXES
Total income tax expense (benefit) was allocated as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Income from continuing operations............................ $ 4,562 $ 29,724 $ 10,325
Discontinued operations...................................... (4,097) (2,227) (1,259)
Extraordinary gains.......................................... -- -- 828
Cumulative effect of a change in accounting principle........ -- -- 1,341
Benefit of tax deduction in excess of amounts recognized for
financial reporting purposes related to employee stock
options reflected in stockholders' equity................... (375) (39) (199)
--------- --------- ---------
$ 90 $ 27,458 $ 11,036
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-34
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
The components of income tax expense (benefit) attributable to income from
continuing operations were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C> <C>
CURRENT: Federal......................................... $ 1,673 $ 26,267 $ 4,269
State........................................... 5,011 2,261 260
--------- --------- ---------
6,684 28,528 4,529
--------- --------- ---------
DEFERRED: Federal......................................... 1,762 1,022 5,742
State........................................... (3,884) 174 54
--------- --------- ---------
(2,122) 1,196 5,796
--------- --------- ---------
Total........................................................ $ 4,562 $ 29,724 $ 10,325
--------- --------- ---------
--------- --------- ---------
</TABLE>
Income tax expense differs from the amounts computed by applying the U.S.
Federal corporate income tax rate of 35% as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Expected income tax expense at statutory rate................ $ 13,196 $ 28,552 $ 13,171
Differences between expected and actual tax:
Effect of tax rate increase on net deferred tax asset...... -- -- (784)
Excess of cost over net assets acquired adjustments........ (76) 3,592 (392)
Tax effect of (utilization) non-utilization of net operating
loss........................................................ (1,380) 23 2,147
Sale of IMI insurance licenses............................... -- -- (1,682)
Utilization of subsidiary's losses........................... -- -- 299
State tax (after Federal tax benefit)........................ 733 2,054 204
Low income housing tax credits............................... (7,715) (5,410) (2,013)
Tax effect of minority interests............................. -- -- (105)
Other........................................................ (196) 913 (520)
--------- --------- ---------
Actual income tax expense................................ $ 4,562 $ 29,724 $ 10,325
--------- --------- ---------
--------- --------- ---------
</TABLE>
The adjustments to the 1993 consolidated statements of financial condition
to adopt SFAS No. 109 netted to a charge of $1,341 and is reflected as a
cumulative effect of a change in accounting principle. It primarily represents
the impact of conversion of the tax bad debt reserve in excess of that at
December 31, 1987 to a temporary rather than a permanent difference. At December
31, 1995, 1994 and 1993 the Bank had statutory bad debt reserves of
approximately $5.7 million for which no provision for Federal income taxes had
been made. If, in the future, this reserve is used for any purpose other than to
absorb bad debt losses, Federal income taxes may be imposed at the then
applicable rate.
F-35
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
The net deferred tax asset was comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Deferred Tax Assets:
Tax residuals and deferred income on tax residuals.................... $ 26,303 $ 22,833
Deferred income on futures gain....................................... -- 1,827
Application of purchase accounting.................................... 566 6,106
Accrued profit sharing................................................ 1,615 3,809
Accrued other liabilities............................................. 406 964
Deferred interest expense on discounted loan portfolio................ 1,170 700
Mark to market and reserves on REO properties......................... 582 --
Other................................................................. -- 154
--------- ---------
30,642 36,393
--------- ---------
Deferred Tax Liabilities:
Bad debt reserves..................................................... 6,790 6,892
Deferred interest income on discounted loan portfolio................. 2,350 5,209
Mark to market and reserves on REO properties......................... -- 3,032
Premises and equipment................................................ -- 736
Cancellation of indebtedness.......................................... 459 899
Other................................................................. 13 --
--------- ---------
9,612 16,768
--------- ---------
21,030 19,625
Mark to market on certain mortgage-backed and related securities
available for sale..................................................... 1,233 1,070
--------- ---------
22,263 20,695
--------- ---------
Deferred tax asset valuation allowance.................................. -- --
--------- ---------
Net deferred tax asset.................................................. $ 22,263 $ 20,695
--------- ---------
--------- ---------
</TABLE>
Deferred tax assets, net of deferred fees, include tax residuals which
result from the ownership of Real Estate Mortgage Investment Conduits ("REMIC").
While a tax residual is anticipated to have little or no future cash flows from
the REMIC from which it has been issued, the tax residual does bear the income
tax liability and benefit resulting from the annual differences between the
interest paid on the debt instruments issued by the REMIC and the interest
received on the mortgage loans held by the REMIC. Typically this difference
generates taxable income to the Company in the first several years of the REMIC
and equal amounts of tax losses thereafter, thus resulting in the deferred tax
asset. As a result of the manner in which REMIC residual interests are treated
for tax purposes, at December 31, 1995, 1994 and 1993, the Company had
approximately $55,000, $12,400 and $1,200, respectively, of net operating loss
carryforwards for tax purposes. The net operating loss carryforwards of $1,200,
$11,200 and $42,600 will expire, if unused, in the years 2008, 2009 and 2010,
respectively.
Prior to 1994, a portion of the fees received by the Company related to the
acquisition of tax residuals were recorded in the statements of operations as
fees on financing transactions at the time of acquisition and the remainder were
deferred and recognized as interest income on a level yield basis over the
expected life of the related deferred tax asset. From time to time, the Company
revises its estimate of its future obligations under the tax residuals and in
1994, due primarily to certain changes in the marketplace, began to defer all
F-36
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
fees received and recognize such fees as interest income on a level yield basis
over the expected life of the related deferred tax asset. The Company also
adjusts, as interest income, the recognition of fees deferred based upon changes
in the actual prepayment rates of the underlying mortgages held by the REMIC and
periodic reassessment of the expected life of the related deferred tax asset.
As a result of the Company's earnings history, current tax position and
taxable income projections, the Company believes that it will generate
sufficient taxable income in future years to realize the net deferred tax asset
position as of December 31, 1995. In evaluating the expectation of sufficient
future taxable income, the Company considered future reversals of temporary
differences and available tax planning strategies that could be implemented, if
required.
A valuation allowance was not required as of December 31, 1995 and 1994 as
it was the Company's assessment that, based on available information, it is more
likely than not that all of the deferred tax asset will be realized. A valuation
allowance will be established in the future to the extent of a change in the
Company's assessment of the amount of the net deferred tax asset that is
expected to be realized.
NOTE 20 RETIREMENT PLAN
The Company maintains a defined contribution 401(k) plan. The Company
matches 50% of each employee's contributions, limited to 2% of the employee's
compensation.
In connection with its acquisition of Old Berkeley, the Bank assumed the
obligations under a noncontributory defined benefit pension plan (the "Plan")
covering substantially all employees upon their eligibility under the terms of
the Plan. The Plan has been frozen for the plan year ended December 31, 1993 and
has been fully funded. Old Berkeley also maintained a defined contribution
401(k) plan in which Old Berkeley's eligible employees continued to participate
until December 31, 1994, when Old Berkeley's 401(k) plan was merged into the
Company's 401(k) Plan.
The Company's combined contributions to its 401(k) plan and the Old Berkeley
401(k) plan in the years ended December 31, 1995, 1994, and 1993 were $248, $163
and $127, respectively.
NOTE 21 STOCKHOLDERS' EQUITY
On July 31, 1996, the Board of Directors approved an increase in the
authorized number of common shares from 20,000,000 shares of $1.00 par value to
200,000,000 shares of $0.01 par value and declared a 10 for 1 stock split for
each share of common stock then outstanding and for all then outstanding options
to purchase shares of the Company's common stock. All references in the
consolidated financial statements to the number of shares and per share amounts
have been adjusted retroactively for the recapitalization and stock split.
During 1995, the Company repurchased from stockholders and retired 8,815,060
shares of common stock for the aggregate price of $41,997.
F-37
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
In December 1991, as part of its annual incentive compensation plan, the
Company adopted a Non-Qualified Stock Option Plan (the 'Stock Plan'). The Stock
Plan provides for the issuance of stock options to key employees to purchase
shares of common stock at prices less than the fair market value of the stock at
the date of grant.
<TABLE>
<CAPTION>
OPTIONS
OPTIONS EXERCISE OPTIONS FORFEITED OR OPTIONS
YEAR GRANTED PRICE EXERCISED REPURCHASED VESTED
- --------- ---------- ----------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
1991 1,133,320 $ .30 450,000 99,990 583,330
1992 826,670 .45 122,220 68,890 635,560
1993 1,003,600 1.74 110,400 135,150 758,050
1994 1,149,320 .79 -- 69,140 1,080,180
1995 297,380 5.76 -- -- --
1995 7,110 .94 -- -- --
</TABLE>
The difference between the fair market value of the stock at the date of
grant and the exercise price is treated as compensation expense; included in
compensation expense is $65, $4,571, and $1,744 for the years ended December 31,
1995, 1994 and 1993, respectively.
NOTE 22 REGULATORY REQUIREMENTS
As a Federal savings bank, the Bank is subject to Federal laws and
regulations including regulations that require institutions to comply with
minimum regulatory capital requirements. A comparison of the Bank's regulatory
capital to its regulatory capital requirements at December 31, 1995 and related
additional discussion is as follows:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK- BASED
CAPITAL CAPITAL CAPITAL
---------- ---------- ----------
<S> <C> <C> <C>
GAAP capital............................................. $ 124,725 $ 124,725 $ 124,725
Implementation of Financial Accounting Standard No.
115..................................................... 1,415 1,415 1,415
Excess qualifying purchased mortgage servicing rights.... (343) (343) (343)
Additional capital items:
Subordinated debentures................................ -- -- 100,000
General valuation allowances........................... -- -- 1,757
Regulatory capital-computed.............................. 125,797 125,797 227,554
Minimum capital requirement.............................. 28,952 57,904 154,324
---------- ---------- ----------
Regulatory capital excess................................ $ 96,845 $ 67,893 $ 73,230
---------- ---------- ----------
---------- ---------- ----------
Capital Ratios:
Required............................................... 1.50% 3.00% 8.00%
Actual................................................. 6.52% 6.52% 11.80%
</TABLE>
The OTS has promulgated a regulation governing capital distributions. The
Bank is considered to be a Tier 1 association under this regulation because it
met or exceeded its fully phased-in capital requirements at December 31, 1995. A
Tier 1 association that before and after a proposed capital distribution meets
or exceeds its fully phased-in capital requirements may make capital
distributions during any calendar year equal to the greater of (i) 100% of net
income for the calendar year to date plus 50% of its "surplus capital ratio" at
the beginning of the year or (ii) 75% of its net income over the most recent
four-quarter period. In order to make these capital distributions, the Bank must
submit written notice to the OTS 30 days in advance
F-38
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
of making the distribution. In addition, the indenture governing the Bank's
Debentures limits the declaration or payment of dividends and the purchase or
redemption of the Bank's common or preferred stock in the aggregate to the sum
of 50% of the Bank's consolidated net income and 100% of all capital
contributions and proceeds from the issuance or sale of common stock, since the
date the Debentures were issued.
NOTE 23 OTHER OPERATING EXPENSES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Other Operating Expenses:
Professional fees................................. $ 2,786 $ 2,928 $ 1,896
Loan related expenses............................. 2,433 1,332 1,207
FDIC insurance.................................... 2,212 2,220 1,255
Marketing......................................... 968 1,305 360
Travel and lodging................................ 925 1,566 994
Corporate insurance............................... 637 501 425
Investment and treasury services.................. 387 681 516
Deposit related expenses.......................... 303 513 459
OTS assessment.................................... 257 393 62
Other............................................. 2,181 2,864 1,481
--------- --------- ---------
$ 13,089 $ 14,303 $ 8,655
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-39
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
NOTE 24 BUSINESS LINE REPORTING
The Company considers itself to be involved in the single business segment
of providing financial services and conducts a variety of business activities
within this segment. Such activities are as follows:
<TABLE>
<CAPTION>
INCOME FROM
CONTINUING
INTEREST OPERATIONS
INCOME BEFORE TAXES ASSETS
---------- ------------ ------------
<S> <C> <C> <C>
DECEMBER 31, 1995:
Asset acquisition and resolution..................... $ 77,143 $ 28,184 $ 910,680
Residential finance.................................. 13,323 1,338 321,350
Commercial finance................................... 23,708 (1,686) 356,690
Investment management................................ 21,855 3,641 328,263
Retail banking....................................... 44 4,053 3,449
Hotel operations..................................... -- 2,593 19,451
Other................................................ 1,202 (422) 33,707
---------- ------------ ------------
$ 137,275 $ 37,701 $ 1,973,590
---------- ------------ ------------
---------- ------------ ------------
DECEMBER 31, 1994:
Asset acquisition and resolution..................... $ 53,357 $ 18,008 $ 656,125
Residential finance.................................. 4,573 (303) 59,513
Commercial finance................................... 21,566 4,550 175,958
Investment management................................ 47,906 7,504 308,530
Retail banking....................................... 121 53,214 27,282
Hotel operations..................................... -- (1,808) 26,149
Other................................................ 3,935 412 12,846
---------- ------------ ------------
$ 131,458 $ 81,577 $ 1,266,403
---------- ------------ ------------
---------- ------------ ------------
DECEMBER 31, 1993:
Asset acquisition and resolution..................... $ 31,036 $ 19,426 $ 341,098
Residential finance.................................. 6,056 447 71,292
Commercial finance................................... 2,135 (882) 101,134
Investment management................................ 36,044 25,145 761,040
Retail banking....................................... -- (7,495) 30,851
Hotel operations..................................... -- (1,278) 26,470
Mortgage insurance operations........................ -- 877 --
Other................................................ 3,652 1,390 64,792
---------- ------------ ------------
$ 78,923 $ 37,630 $ 1,396,677
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
The asset acquisition and resolution business includes the Company's
discounted loan activities, including residential and commercial loans and the
related real estate owned. Residential finance includes the Company's
acquisition of single family residential loans to non-conforming borrowers,
which began in late 1994 and which are recorded as available for sale, and the
Company's historical loan portfolio of single family residential loans held for
investment. The commercial finance activities include the Company's origination
of commercial real estate loans held for investment, the origination and
purchase of multi-family residential loans available for sale, investments in
subordinate securities, and investments in low income housing tax credit
partnerships. Low income housing tax credits of $7,715, $5,410 and $2,013 were
earned as part of the commercial finance activity for the years ended December
31, 1995, 1994 and 1993, respectively, and are not reflected in the above table.
Investment management includes the results of the securities
F-40
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
portfolio, whether available for sale or investment, other than subordinate
interests, and the retail banking operations include the results of the
Company's retail branch network which consists of one branch at December 31,
1995. Included in income from continuing operations for retail banking are gains
on sales of branches, net of profit sharing expense, of $4,344 and $50,080 for
the years ended December 31, 1995 and 1994, respectively.
Interest income and expense has been allocated to each business segment for
the investment of funds raised or funding of investments made at an interest
rate based upon the LIBOR swap yield curve taking into consideration the actual
duration of such liabilities or assets. Allocations of non-interest expense
generated by corporate support services were made to each business segment based
upon management's estimate of time and effort spent in the respective activity.
As such, the resulting income from continuing operations is an estimate of the
contribution margin of each business activity to the Company.
NOTE 25 COMMITMENTS AND CONTINGENCIES
Certain premises are leased under various noncancellable operating leases
with terms expiring at various times through 2005, exclusive of renewal option
periods. The annual aggregate minimum rental commitments under these leases are
summarized as follows:
<TABLE>
<S> <C>
1996........................................ $ 762
1997........................................ 808
1998........................................ 805
1999........................................ 838
2000........................................ 872
2001-2005................................... 4,394
---------
Minimum lease payments...................... $ 8,479
---------
---------
</TABLE>
Rent expense for the years ended December 31, 1995, 1994 and 1993 was
$1,601, $2,402 and $1,757, respectively, which are net of sublease rentals of
$68, $339 and $282, respectively.
At December 31, 1995 the Company was committed to lend up to $9,884 under
outstanding unused lines of credit. The Company also had commitments to (i)
originate multi-family construction loans with aggregate principal balances of
$8,907, (ii) purchase $4,800 of residential discounted loans, (iii) originate
$5,390 of loans secured by office buildings, and (iv) originate $25,424 of
mortgage loans secured by hotel properties. In connection with its acquisition
of Old Berkeley in 1993, the Company has a recourse obligation of $4,163 on
single family residential loans sold to the Federal Home Loan Mortgage
Corporation ("FHLMC"). The Company, through its investment in subordinated
securities which had a book value of $69,156 at December 31, 1995, supports
senior classes of securities having an outstanding principal balance of
$868,835.
At December 31, 1994 the Company was committed to lend up to $8,353 under
outstanding unused lines of credit. The Company also had commitments to (i)
originate multifamily loans with an aggregate principal balance of $25,634; (ii)
purchase and sell mortgage-backed and related securities of $46,578 and $19,483,
respectively; and (iii) purchase an adjustable rate loan with an aggregate
principal balance of $1,493. In connection with its acquisition of Old Berkeley,
the Company had a recourse obligation of $4,163 on single family residential
loans sold to FHLMC. The Company, through its investment in a subordinated
security which had a book value of $22,897 at December 31, 1994, supported
senior classes of the security having an outstanding principal balance of
$362,271.
In order to increase the Savings Association Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation ("FDIC") to its minimum required reserve
ratio of 1.25%, a proposal has been made to impose
F-41
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
a special one-time assessment of 85 to 90 basis points on all SAIF-insured
deposits held as of March 31, 1995. This one-time assessment is intended to
recapitalize the SAIF to the required level of 1.25% of insured deposits and
would be paid during 1996 if the law is enacted as proposed. The Bank's annual
FDIC insurance premium would thereafter be reduced. If the assessment is made at
the currently proposed rate, the effect on the Company would be a pre-tax charge
of approximately $9.4 million (0.85% on deposits of $1.1 billion at March 31,
1995) or $6.0 million after taxes (35.85% assumed tax rate). Should this law be
enacted as proposed, the Company believes that its current capital is sufficient
to enable the Bank to remain a well-capitalized institution.
The Company has guaranteed through December 31, 1996 that the loss reserves
of Investors and Equity, transferred in conjunction with the Company's sale of
their stock, will be sufficient to cover the claims on all policies transferred.
Management does not believe this guarantee will have a material effect on the
consolidated financial statements.
The Company is subject to various pending legal proceedings. Management is
of the opinion that the resolution of these claims will not have a material
effect on the consolidated financial statements.
NOTE 26 PARENT COMPANY ONLY FINANCIAL INFORMATION
CONDENSED STATEMENTS OF FINANCIAL CONDITION:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents............................................. $ 1,028 $ 1,910
Investment in bank subsidiary......................................... 117,300 130,337
Investments in non-bank subsidiaries.................................. 35,660 25,527
Loan portfolio, net................................................... 520 --
Prepaid expenses and other assets..................................... 4,240 1,985
---------- ----------
$ 158,748 $ 159,759
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable......................................................... $ 8,627 $ 1,012
Other liabilities..................................................... 10,574 5,364
---------- ----------
Total liabilities................................................. 19,201 6,376
Total stockholders' equity............................................ 139,547 153,383
---------- ----------
$ 158,748 $ 159,759
---------- ----------
---------- ----------
</TABLE>
F-42
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
CONDENSED STATEMENTS OF OPERATIONS:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Interest income............................................................... $ 401 $ 42 $ 74
Non-interest income........................................................... 8 67 700
---------- ---------- ----------
409 109 774
Interest expense.............................................................. (654) (678) (2,034)
Non-interest expense.......................................................... (277) (401) (459)
---------- ---------- ----------
Loss before income taxes.................................................. (522) (970) (1,719)
Income tax (expense) benefit.................................................. 1,533 1,197 (50)
---------- ---------- ----------
Income (loss) before equity in net income of subsidiaries..................... 1,011 227 (1,769)
Equity in net income of bank subsidiary....................................... 24,773 51,650 22,824
Equity in net income (loss) of non-bank subsidiaries.......................... (317) (4,538) 4,177
---------- ---------- ----------
Net income................................................................ $ 25,467 $ 47,339 $ 25,232
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................................. $ 25,467 $ 47,339 $ 25,232
Adjustments to reconcile net income to net cash provided (used) in operating
activities:
Equity in income of bank subsidiary....................................... (24,773) (51,650) (22,824)
Equity in (income) losses of non-bank subsidiaries........................ 317 4,538 (4,177)
(Increase) decrease in other assets....................................... (2,254) (1,947) 997
Increase (decrease) in accrued expenses, payables and other liabilities... 5,209 2,023 (1,291)
---------- ---------- ----------
Net cash provided (used) by operating activities.............................. 3,966 303 (2,063)
---------- ---------- ----------
Cash flows from investing activities:
Net distributions from (investment in) bank subsidiary...................... 39,216 802 (2,553)
Net (investment in) distributions from non-bank subsidiaries................ (10,450) 11,491 5,537
Purchase of loans held for investment....................................... (520) -- --
---------- ---------- ----------
Net cash provided by investing activities..................................... 28,246 12,293 2,984
---------- ---------- ----------
Cash flows from financing activities:
Issuance of notes payable................................................... 7,615 -- 13,566
Repayment of notes payable.................................................. -- (13,566) (4,605)
Exercise of common stock options............................................ 1,420 -- 450
Repurchase of common stock options and common stock......................... (42,129) (74) (7,892)
---------- ---------- ----------
Net cash (used) provided by financing activities.............................. (33,094) (13,640) 1,519
---------- ---------- ----------
Net (decrease) increase in cash and cash equivalents.......................... (882) (1,044) 2,440
Cash and cash equivalents at beginning of year................................ 1,910 2,954 514
---------- ---------- ----------
Cash and cash equivalents at end of year...................................... $ 1,028 $ 1,910 $ 2,954
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-43
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
NOTE 27 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1995 1995 1995 1995
------------ ------------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income................................... $ 44,916 $ 32,489 $ 33,840 $ 26,030
Interest expense.................................. (26,692) (22,688) (18,110) (16,570)
Provision for loan losses......................... (1,121) -- -- --
------------ ------------- ---------- ----------
Net interest income after provision for loan
losses........................................... 17,103 9,801 15,730 9,460
Gain on sale of branches.......................... 5,430 -- -- --
Gain on sale of hotel............................. 4,658 -- -- --
Non-interest income............................... 8,081 4,084 6,380 2,547
Non-interest expense.............................. (13,407) (10,274) (13,130) (8,762)
------------ ------------- ---------- ----------
Income before income taxes and discontinued
operations....................................... 21,865 3,611 8,980 3,245
Income tax (expense) benefit...................... (4,660) 858 (1,172) 412
Discontinued operations, net...................... -- (4,536) (1,586) (1,550)
------------ ------------- ---------- ----------
Net income (loss)................................. $ 17,205 $ (67) $ 6,222 $ 2,107
------------ ------------- ---------- ----------
------------ ------------- ---------- ----------
Earnings per share:
Earnings before discontinued operations......... $ 0.67 $ 0.17 $ 0.30 $ 0.11
Earnings (loss) after discontinued operations... $ 0.67 $ -- $ 0.24 $ 0.06
</TABLE>
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1994 1994 1994 1994
------------ ------------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income................................... $ 41,931 $ 32,243 $ 31,481 $ 25,803
Interest expense.................................. (21,506) (15,714) (13,744) (11,634)
Provision for loan losses......................... -- -- -- --
------------ ------------- ---------- ----------
Net interest income after provision for loan
losses........................................... 20,425 16,529 17,737 14,169
Gain on sale of branches.......................... 62,600 -- -- --
Non-interest income............................... 4,443 4,908 4,464 5,160
Non-interest expense.............................. (27,701) (13,544) (14,157) (13,456)
------------ ------------- ---------- ----------
Income before income taxes and discontinued
operations....................................... 59,767 7,893 8,044 5,873
Income tax expense................................ (25,202) (1,480) (1,192) (1,850)
Discontinued operations, net...................... (2,164) (928) (437) (985)
------------ ------------- ---------- ----------
Net income........................................ $ 32,401 $ 5,485 $ 6,415 $ 3,038
------------ ------------- ---------- ----------
------------ ------------- ---------- ----------
Earnings per share:
Earnings before discontinued operations......... $ 1.02 $ 0.19 $ 0.20 $ 0.12
Earnings after discontinued operations.......... $ 0.95 $ 0.16 $ 0.19 $ 0.09
</TABLE>
F-44
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1995
JUNE 30, ------------
1996
------------
(UNAUDITED)
<S> <C> <C>
Cash and amounts due from depository institutions.............................. $ 6,196 $ 4,200
Interest bearing deposits...................................................... 57,638 50,432
Federal funds sold and repurchase agreements................................... 187,232 --
Securities available for sale, at market value................................. 263,199 337,480
Loans available for sale, at lower of cost or market........................... 84,078 251,790
Investment securities, net..................................................... 8,902 18,665
Loan portfolio, net............................................................ 312,576 295,605
Discounted loan portfolio, net................................................. 594,634 669,771
Principal, interest and dividends receivable................................... 12,019 12,636
Investments in low income housing tax credit interests......................... 92,273 81,362
Real estate owned, net......................................................... 133,604 166,556
Investment in joint venture.................................................... 63,404 --
Premises and equipment, net.................................................... 28,750 25,359
Income taxes receivable........................................................ 8,606 1,005
Deferred tax asset............................................................. 17,981 22,263
Other assets................................................................... 28,216 36,466
------------ ------------
$ 1,899,308 $1,973,590
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits..................................................................... $ 1,502,175 $1,501,646
Advances from the Federal Home Loan Bank..................................... 70,399 70,399
Securities sold under agreements to repurchase............................... -- 84,761
Subordinated debentures and other interest bearing obligations............... 115,703 117,054
Accrued expenses, payables and other liabilities............................. 56,293 60,183
------------ ------------
Total liabilities.......................................................... 1,744,570 1,834,043
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 20,000,000 shares authorized; 0 shares
issued and outstanding...................................................... -- --
Common stock, $.01 par value; 200,000,000 shares authorized; 23,812,900 and
23,812,270 shares issued and outstanding at June 30, 1996 and December 31,
1995, respectively.......................................................... 238 238
Additional paid-in capital................................................... 10,275 10,449
Retained earnings............................................................ 145,301 130,275
Unrealized loss on securities available for sale, net of taxes............... (1,076) (1,415)
------------ ------------
Total stockholders' equity................................................. 154,738 139,547
------------ ------------
$ 1,899,308 $1,973,590
------------ ------------
------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-45
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
--------------------------
1996 1995
------------ ------------
(UNAUDITED)
<S> <C> <C>
Interest income:
Federal funds sold and repurchase agreements............................... $ 2,098 $ 1,748
Securities available for sale.............................................. 14,064 6,943
Loans available for sale................................................... 11,484 7,154
Mortgage-related securities held for investment............................ -- 2,343
Loans...................................................................... 17,773 3,944
Discounted loans........................................................... 52,058 36,474
Investment securities and other............................................ 1,980 1,264
------------ ------------
99,457 59,870
------------ ------------
Interest expense:
Deposits................................................................... 45,355 31,790
Securities sold under agreements to repurchase............................. 685 199
Advances from the Federal Home Loan Bank................................... 2,032 257
Subordinated debentures and other interest bearing obligations............. 6,964 1,796
Securities sold but not yet purchased...................................... -- 638
------------ ------------
55,036 34,680
------------ ------------
Net interest income before provision for loan losses..................... 44,421 25,190
Provision for loan losses.................................................... 14,370 --
------------ ------------
Net interest income after provision for loan losses...................... 30,051 25,190
------------ ------------
Non-interest income:
Servicing fees and other charges........................................... 787 1,805
Gains on sales of interest earning assets, net............................. 9,601 3,356
(Loss) income on real estate owned, net.................................... (1,028) 2,558
Other income............................................................... 1,996 1,208
------------ ------------
11,356 8,927
------------ ------------
Non-interest expense:
Compensation and employee benefits......................................... 14,562 10,464
Occupancy and equipment.................................................... 4,227 4,795
Hotel operations expense, net.............................................. 57 264
Other operating expenses................................................... 6,703 6,369
------------ ------------
25,549 21,892
------------ ------------
Equity in earnings of investment in joint venture............................ 1,078 --
Income from continuing operations before income taxes...................... 16,936 12,225
Income tax expense........................................................... 1,910 760
------------ ------------
Income from continuing operations.......................................... 15,026 11,465
Discontinued operations:
Loss from operations of discontinued divisions, net of tax benefit of
$1,435 for the period ended June 30, 1995 -- (3,136)
------------ ------------
Net income............................................................... $ 15,026 $ 8,329
------------ ------------
------------ ------------
Earnings per share:
Income from operations..................................................... $ 0.57 $ 0.39
Discontinued operations, net of tax benefit................................ -- (0.11)
------------ ------------
Net income............................................................... $ 0.57 $ 0.28
------------ ------------
------------ ------------
Weighted average common shares outstanding................................... 26,397,920 29,781,510
------------ ------------
------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-46
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND THE YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
UNREALIZED LOSS
ON SECURITIES
COMMON STOCK ADDITIONAL AVAILABLE FOR
------------------------- PAID-IN RETAINED SALE, NET OF
SHARES AMOUNT CAPITAL EARNINGS TAXES TOTAL
------------ ----------- ----------- ---------- ----------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1994............... 32,194,710 $ 322 $ 13,652 $ 142,230 $ (2,821) $ 153,383
Net income................................ -- -- -- 25,467 -- 25,467
Repurchase of common stock options........ -- -- (132) -- -- (132)
Exercise of common stock options.......... 432,620 4 1,416 -- -- 1,420
Repurchase of common stock................ (8,815,060) (88) (4,487) (37,422) -- (41,997)
Change in unrealized loss on securities
available for sale, net of taxes......... -- -- -- -- 1,406 1,406
------------ ----- ----------- ---------- ------- ----------
Balances at December 31, 1995............... 23,812,270 238 10,449 130,275 (1,415) 139,547
Net income (unaudited).................... -- -- -- 15,026 -- 15,026
Repurchase of common stock options
(unaudited).............................. -- -- (176) -- -- (176)
Exercise of common stock options
(unaudited).............................. 630 -- 2 -- -- 2
Change in unrealized loss on securities
available for sale, net of taxes
(unaudited).............................. -- -- -- -- 339 339
------------ ----- ----------- ---------- ------- ----------
Balances at June 30, 1996 (unaudited)....... 23,812,900 $ 238 $ 10,275 $ 145,301 $ (1,076) $ 154,738
------------ ----- ----------- ---------- ------- ----------
------------ ----- ----------- ---------- ------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-47
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
--------------------
1996 1995
--------- ---------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................................... $ 15,026 $ 8,329
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Net cash provided from trading activities.......................................... 4,744 2,865
Proceeds from sales of loans available for sale.................................... 287,233 77,460
Purchases of loans available for sale.............................................. (142,150) (113,676)
Origination of loans available for sale............................................ (720) (2,829)
Maturities of and principal payments received on loans available for sale.......... 21,334 2,774
Premium amortization (discount accretion), net..................................... 3,229 (2,131)
Depreciation and amortization...................................................... 1,997 2,798
Provision for loan losses.......................................................... 14,370 --
Provision for real estate losses................................................... 9,788 5,035
Loss on sales of premises and equipment............................................ 97 --
Gains on sales of interest earning assets, net..................................... (9,601) (3,356)
Gain on sale of real estate owned, net............................................. (7,778) (9,137)
Gain on sale of interest in tax credit partnership interests....................... (990) --
Decrease in principal, interest and dividends receivable........................... 1,366 285
Increase in income taxes receivable................................................ (7,076) (13,583)
Decrease (increase) in other assets................................................ 8,627 (9,449)
Decrease in accrued expenses, payables and other liabilities....................... (6,386) (2,605)
--------- ---------
Net cash provided (used) by operating activities....................................... 193,110 (57,220)
--------- ---------
Cash flows from investing activities:
Proceeds from sales of securities available for sale................................. 137,454 686,628
Purchases of securities available for sale........................................... (85,557) (648,100)
Maturities of and principal payments received on securities available for sale....... 23,021 14,288
Maturities of and principal payments received on securities held for investment...... -- 7,969
Purchases of low income housing tax credit interests................................. (14,427) (9,940)
Proceeds from low income housing tax credit interest................................. 3,704 --
Proceeds from sales of discounted loans and loans held for investment................ 22,152 22,425
Origination of loans held for investment............................................. (80,071) (73,668)
Purchase of loans held for investment................................................ -- (2,608)
Purchase of discounted loans......................................................... (120,590) (124,697)
Investment in joint venture.......................................................... (63,404) --
Principal payments received on discounted loans and loans held for investment........ 198,024 98,864
Proceeds from sales of real estate owned............................................. 75,674 76,533
Purchases of real estate owned in connection with discounted loan purchases.......... (1,434) (13,419)
Proceeds from sale of premises and equipment......................................... 233 --
Additions to premises and equipment.................................................. (5,698) (15,152)
--------- ---------
Net cash provided by investing activities.............................................. 89,081 19,123
--------- ---------
</TABLE>
(continued on next page)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-48
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
--------------------
1996 1995
--------- ---------
(UNAUDITED)
Cash flows from financing activities:
<S> <C> <C>
Increase in deposits................................................................. $ 529 $ 118,650
Proceeds from issuance of subordinated debentures.................................... -- 100,000
Proceeds from issuance of notes payable.............................................. -- 7,615
Decrease in securities sold under agreements to repurchase........................... (84,761) --
Payments and repurchase of notes and mortgages payable............................... (1,351) (147)
Exercise of common stock options..................................................... 2 1,045
Repurchase of common stock options and common stock.................................. (176) (42,127)
--------- ---------
Net cash (used) provided by financing activities....................................... (85,757) 185,036
--------- ---------
--------- ---------
Net increase in cash and cash equivalents.............................................. 196,434 146,939
Cash and cash equivalents at beginning of period....................................... 54,632 36,750
--------- ---------
Cash and cash equivalents at end of period............................................. $ 251,066 $ 183,689
--------- ---------
--------- ---------
Reconciliation of cash and cash equivalents at end of period:
Cash and amounts due from depository institutions.................................... $ 6,196 $ 18,403
Interest bearing deposits............................................................ 57,638 28,928
Federal funds sold and repurchase agreements......................................... 187,232 136,358
--------- ---------
$ 251,066 $ 183,689
--------- ---------
--------- ---------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest........................................................................... $ 54,424 $ 26,818
--------- ---------
--------- ---------
Income taxes....................................................................... $ 1,922 $ 9,608
--------- ---------
--------- ---------
Supplemental schedule of non-cash investing and financing activities:
Exchange of loans available for sale for securities.................................. $ 134,785 $ 83,875
--------- ---------
--------- ---------
Real estate owned acquired through foreclosure....................................... $ 43,299 $ 114,835
--------- ---------
--------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-49
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(DOLLARS IN THOUSANDS)
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Ocwen Financial Corporation (the "Company") and its subsidiaries and
have been prepared in conformity with the instructions to Form 10-Q and Article
10, Rule 10-01 of Regulation S-X for interim financial statements. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles ("GAAP") for complete financial statements.
In the opinion of management, the accompanying financial statements contain
all adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the Company's results for the interim periods. The result of
operations and other data for the six month period ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 1996. The unaudited consolidated financial statements
presented herein should be read in conjunction with the audited consolidated
financial statements and related notes thereto included elsewhere in this
Offering Circular.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities at the dates of the balance sheets and revenues and expenses for the
periods covered. Actual results could differ significantly from those estimates
and assumptions.
NOTE 2 VALUATION ALLOWANCES ON ASSETS HELD FOR DISPOSITION AND RESOLUTION
As a result of the historical and expected future growth in the discounted
loan portfolio and associated real estate owned, particularly in the commercial
segment, and as requested by the Office of Thrift Supervision ("OTS"), the
Company has modified its methodology for valuing its assets held for disposition
and resolution beginning in the first quarter of 1996. This methodology results
in a valuation allowance which supplements the Company's practice of adjusting
these assets to the net present value of expected cash flows discounted at the
effective interest rate in the case of discounted loans and fair value less
estimated disposition costs in the case of real estate owned. Beginning in 1996
the Company has recorded charge-offs on discounted loans against the allowance
for loan losses. Previously these amounts were deducted from interest income.
NOTE 3 DISCONTINUED OPERATIONS
In September 1995, the Company announced its decision to dispose of its
automated banking division and related activities. The sale and disposition of
this division was substantially complete at December 31, 1995. The Company's
Consolidated Statement of Operations have been restated for the six months ended
June 30, 1995 to reflect the discontinuance of these operations.
NOTE 4 ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" on January 1,
1996. The adoption of SFAS No. 121 did not have a material effect on the
Company's financial condition or results of operations.
On January 1, 1996 the Company adopted SFAS No. 122, "Accounting for
Mortgage Servicing Rights", which requires that an institution engaged in
mortgage banking activities recognize as a separate asset rights to service
mortgage loans for others, regardless of the manner in which those servicing
rights are acquired. Upon sale or securitization of loans with servicing rights
retained, the Company is required to capitalize the cost associated with the
mortgage servicing rights based on their relative fair values. SFAS No. 122 also
F-50
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(DOLLARS IN THOUSANDS)
requires that an institution assess its capitalized mortgage servicing rights
for impairment based on the fair value of those rights. Impairment is recognized
through a valuation allowance. See note 7 for disclosures regarding capitalized
mortgage servicing rights as required by SFAS No. 122.
As provided in SFAS No. 123, "Accounting for Stock-Based Compensation", the
Company has elected to retain the intrinsic value method of accounting for
stock-based compensation, which it currently uses.
NOTE 5 INTEREST RATE RISK MANAGEMENT INSTRUMENTS
The Company enters into short sales of Eurodollar and U.S. Treasury interest
rate futures contracts as part of its overall interest rate risk management
activity. Interest rate futures contracts are commitments to either purchase or
sell designated financial instruments at a future date for a specified price and
may be settled in cash or through delivery. Terms and other information on the
interest rate futures sold short are as follows:
<TABLE>
<CAPTION>
NOTIONAL
JUNE 30, 1996: MATURITY PRINCIPAL FAIR VALUE
----------- ----------------- -----------
<S> <C> <C> <C>
Eurodollar futures................................... 1996 $ 188,000 $ (206)
1997 365,000 (37)
1998 40,000 (35)
U.S. Treasury futures................................ 1996 306,600 (1,135)
<CAPTION>
DECEMBER 31, 1995:
<S> <C> <C> <C>
Eurodollar futures................................... 1996 $ 386,000 $ (1,598)
1997 26,000 (168)
U.S. Treasury futures................................ 1996 11,100 (80)
</TABLE>
Because futures contracts are exchange traded, holders of these instruments
look to the exchange for performance under these contracts and not the entity
holding the offsetting futures contract, thereby minimizing the risk of
nonperformance under these contracts.
NOTE 6 INVESTMENT IN JOINT VENTURE
On March 22, 1996, the Company was notified by the U.S. Department of
Housing and Urban Development ("HUD") that BCBF, L.L.C., a newly-formed limited
liability company ("LLC") in which the Company and a co-investor each have a 50%
interest, was the successful bidder to purchase 16,196 single-family residential
loans offered by HUD at an auction and on April 10, 1996 the LLC consummated the
acquisition of the HUD loans.
The Company's investment in the LLC is accounted for under the equity method
of accounting. Under the equity method of accounting, an investment in the
shares or other interests of an investee is initially recorded at the cost of
the shares or interests acquired and thereafter is periodically increased
(decreased) by the investor's proportionate share of the earnings (losses) of
the investee and decreased by all dividends received by the investor from the
investee. The Company services all loans on behalf of the LLC for a fee, and all
intercompany transactions between the Company and the LLC are eliminated for
financial reporting purposes, to the extent of the Company's ownership in the
LLC. At June 30, 1996, the Company's investment in the LLC amounted to $63,404.
Because the LLC is a pass-through entity for federal income tax purposes,
provisions for income taxes will be established by each of the Company and its
co-investor and not the LLC.
F-51
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(DOLLARS IN THOUSANDS)
Set forth below is an unaudited statement of financial condition of the LLC
at June 30, 1996 and a statement of operations for the period from the date of
acquisition of the HUD Loans through June 30, 1996.
BCBF, L.L.C.
STATEMENT OF FINANCIAL CONDITION
JUNE 30, 1996
<TABLE>
<CAPTION>
Assets:
<S> <C>
Cash............................................................ $ 3,426
Discounted loans, net........................................... 559,374
Real estate owned, net.......................................... 88
Other assets.................................................... 29,159
---------
Total assets.................................................. $ 592,047
---------
---------
Liabilities:
Note payable.................................................... $ 462,937
Other liabilities............................................... 2,302
---------
Total liabilities............................................. 465,239
---------
---------
Equity:
The Company..................................................... 63,404
Co-investor..................................................... 63,404
---------
Total equity.................................................. 126,808
---------
Total liabilities and equity.................................. $ 592,047
---------
---------
</TABLE>
BCBF, L.L.C.
STATEMENT OF OPERATIONS
FOR THE PERIOD APRIL 10, 1996 THROUGH JUNE 30, 1996
<TABLE>
<CAPTION>
Interest income.................................................... $ 12,222
<S> <C>
Interest expense................................................... 8,279
---------
Net interest income before provision for loan losses........... 3,943
Provision for loan losses.......................................... 2,913
---------
Net interest income after provision for loan losses............ 1,030
Non-interest income:
Gain on sale of discounted loans................................. 1,324
Loan fees........................................................ 7
---------
1,331
---------
Operating expenses:
Loan servicing fees.............................................. 2,003
Other loan expenses.............................................. 204
---------
2,207
---------
Net income..................................................... $ 154
---------
---------
</TABLE>
F-52
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(DOLLARS IN THOUSANDS)
The Company's equity in earnings of the LLC of $1,078 includes 50% of the
net income of the LLC before deduction of the loan servicing fees which are paid
100% to the Company. The Company has recognized the 50% of the loan servicing
fee not eliminated in consolidation in servicing fees and other charges.
NOTE 7 MORTGAGE SERVICING RIGHTS
The unamortized balance of mortgage servicing rights which are included in
other assets is as follows:
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
<S> <C> <C>
Unamortized balance......................................... $ 3,585 $ 3,433
Valuation allowance......................................... (928) --
------ ------
$ 2,657 $ 3,433
------ ------
------ ------
</TABLE>
Periodically, the Company evaluates the recoverability of mortgage servicing
rights based on the projected value of future net servicing income. Future
prepayment rates are estimated based on current interest rates and various
portfolio characteristics, including loan type, interest rate, and market
prepayment estimates. If the estimated recovery is lower than the current amount
of mortgage servicing rights, a reduction to mortgage servicing rights is
recorded through an increase in the valuation allowance. A valuation allowance
was established during the first quarter of 1996 in the amount of $928 primarily
as a result of higher than projected prepayment rates.
NOTE 8 REGULATORY REQUIREMENTS
The Company's primary subsidiary, Berkeley Federal Bank & Trust FSB
("Berkeley") is a federally chartered savings bank regulated by the OTS and is
subject to Federal laws and regulations including regulations that require
institutions to comply with minimum regulatory capital requirements.
A comparison of Berkeley's regulatory capital to its regulatory capital
requirements as of June 30, 1996 and related additional discussion follows:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
---------- ---------- -----------
<S> <C> <C> <C>
GAAP capital............................................. $ 140,159 $ 140,159 $ 140,159
Nonallowable assets:
Implementation of Financial Accounting Standard No.
115................................................... 1,076 1,076 1,076
Excess qualifying purchased mortgage servicing
rights................................................ (266) (266) (266)
Additional capital items:
Subordinated debentures................................ -- -- 100,000
General valuation allowances........................... -- -- 11,741
---------- ---------- -----------
Regulatory capital-computed.............................. 140,969 140,969 252,710
Minimum capital requirement.............................. 31,367 62,735 148,525
---------- ---------- -----------
Regulatory capital excess................................ $ 109,602 $ 78,234 $ 104,185
---------- ---------- -----------
---------- ---------- -----------
Capital ratios:
Required............................................... 1.50% 3.00% 8.00%
Actual................................................. 6.74% 6.74% 13.61%
</TABLE>
F-53
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(DOLLARS IN THOUSANDS)
The OTS has promulgated a regulation governing capital distributions.
Berkeley is considered to be a Tier 1 association under this regulation because
it met or exceeded its fully phased-in capital requirements at June 30, 1996. A
Tier 1 association that before and after a proposed capital distribution meets
or exceeds its fully phased-in capital requirements may make capital
distributions during any calendar year equal to the greater of (i) 100% of net
income for the calendar year to date plus 50% of its "surplus capital ratio" at
the beginning of the year or (ii) 75% of its net income over the most recent
four-quarter period. In order to make these capital distributions, Berkeley must
submit written notice to the OTS thirty days in advance of making the
distribution. In addition, the indenture governing Berkeley's Debentures limits
the declaration or payment of dividends and the purchase or redemption of
Berkeley's common or preferred stock in the aggregate to the sum of 50% of
Berkeley's consolidated net income and 100% of all capital contributions and
proceeds from the issuance or sale of common stock, since the date the
Debentures were issued. At June 30, 1996, taking into account the foregoing
restrictions, Berkeley could have distributed $18.7 million to the Company.
NOTE 9 COMMITMENTS AND CONTINGENCIES
At June 30, 1996 the Company had (i) commitments to fund an additional
$25,087 on multi-family residential loans, (ii) commitments to fund an
additional $6,768 on loans secured by office buildings, (iii) commitments to
fund $32,028 of loans secured by hotel properties and (iv) a commitment to fund
an additional $4,886 on a loan secured by land. In connection with its
acquisition of Berkeley Federal Savings Bank in 1993, the Company has a recourse
obligation of $4,519 on single-family residential loans sold to the Federal Home
Loan Mortgage Corporation. The Company, through its investment in subordinated
securities which had a book value of $51,906 at June 30, 1996, supports senior
classes of securities having an outstanding principal balance of $664,696.
The Company is subject to various pending legal proceedings. Management,
after reviewing these claims with legal counsel, is of the opinion that the
resolution of these claims will not have a material effect on the Company's
financial position, results of operations, cash flows or liquidity.
NOTE 10 SUBSEQUENT EVENT
On July 31, 1996 the Board of Directors of the Company approved an increase
in the authorized number of common shares from 20,000,000 shares of $1.00 par
value to 200,000,000 shares of $0.01 par value and declared a 10 for 1 stock
split for each share of common stock then outstanding and for all then
outstanding options to purchase shares of the Company's common stock. All
references in the interim consolidated financial statements to the number of
shares and per share amounts have been adjusted retroactively for the
recapitalization and stock split.
F-54
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND ANY INFORMATION OR
REPRESENTATION NOT CONTAINED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT
RELATES OR AN OFFER TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER WOULD
BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
--------------------
TABLE OF CONTENTS
--------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 2
Summary................................................................... 3
Selected Consolidated Financial and Other Data............................ 6
Risk Factors.............................................................. 9
The Company............................................................... 17
Use of Proceeds........................................................... 18
Dividend Policy........................................................... 18
Capitalization............................................................ 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 20
Business.................................................................. 42
Regulation................................................................ 72
Taxation.................................................................. 78
Management................................................................ 81
Beneficial Ownership of Common Stock...................................... 88
Description of Notes Offering............................................. 89
Description of Capital Stock.............................................. 89
Shares Available for Future Sale.......................................... 90
Selling Stockholders...................................................... 91
Underwriting.............................................................. 93
Legal Matters............................................................. 94
Experts................................................................... 94
Index to Consolidated Financial Statements................................ F-1
</TABLE>
UNTIL OCTOBER 20, 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE SHARES OF
COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
2,000,000 SHARES
[LOGO]
OCWEN FINANCIAL
CORPORATION
COMMON STOCK
-----------------
PROSPECTUS
-----------------
FRIEDMAN, BILLINGS,
RAMSEY & CO., INC.
SEPTEMBER 25, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
