<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 5, 1996
REGISTRATION NO. 333-05153
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
PRE-EFFECTIVE
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------
OCWEN FINANCIAL CORPORATION
(Exact name of registrant as specified in its articles of incorporation)
<TABLE>
<S> <C> <C>
FLORIDA 6712, 6035 65-0039856
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of
incorporation or organization) Classification Code Number) Identification
No.)
</TABLE>
----------------------
THE FORUM, SUITE 1000
1675 PALM BEACH LAKES BLVD.
WEST PALM BEACH, FLORIDA 33401
(561) 681-8000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
WILLIAM C. ERBEY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
OCWEN FINANCIAL CORPORATION
THE FORUM, SUITE 1000
1675 PALM BEACH LAKES BLVD.
WEST PALM BEACH, FLORIDA 33401
(561) 681-8000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------------
COPY TO:
<TABLE>
<S> <C>
Raymond A. Tiernan, Esq. Lee Meyerson, Esq.
Gerard L. Hawkins, Esq. Simpson Thacher & Bartlett
Elias, Matz, Tiernan & Herrick L.L.P. 425 Lexington Avenue
734 15th Street, N.W., 12th Floor New York, New York 10017-3909
Washington, D.C. 20005 (212) 455-2000
(202) 347-0300
</TABLE>
----------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
----------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
----------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This Registration Statement is being filed with respect to (i) 2,000,000
shares of common stock, par value $0.01 per share (the "Common Stock"), of Ocwen
Financial Corporation (the "Company") (and an additional 300,000 shares of
Common Stock issuable upon exercise of the Underwriters' over-allotment option),
all of which are being offered by certain stockholders of the Company, and (ii)
$100 million principal amount of Notes due 2003 (the "Notes"), which are being
offered by the Company.
This Registration Statement contains two forms of Prospectus. The first
Prospectus relates to the offering of Notes and the second Prospectus relates to
the offering of Common Stock.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER 5, 1996
PROSPECTUS
$100,000,000
[LOGO]
OCWEN FINANCIAL CORPORATION
% NOTES DUE 2003
Ocwen Financial Corporation (the "Company") is offering hereby (the "Notes
Offering") $100 million principal amount of its % Notes due 2003 (the
"Notes"). Interest on the Notes will be payable semiannually on and
of each year, commencing , 1997. On and after ,
1999, 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 , 1999, except that until ,
1999, the Company may redeem, at its option, up to $35 million of Notes at a
redemption price equal to % 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 million 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......................................... % % %
Total(3)......................................... $ $ $
</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 $ .
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 , 1996.
--------------------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
The date of this Prospectus is , 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
<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
3,210,540 SHARES OF COMMON STOCK AS OF JUNE 30, 1996. 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 $1.1 billion.
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 NOTES OFFERING
<TABLE>
<S> <C>
Amount offered.................... $100 million aggregate principal amount.
Maturity date..................... , 2003.
Interest payment dates............ and of each year, commencing ,
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
, 1999 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 , 1999, other than as described
directly below.
Capital stock redemption.......... Until , 1999, the Company may redeem, at its
option, up to $35 million aggregate principal amount of
the Notes at % 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 million 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
<PAGE>
<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 $45.6 million after deducting the
underwriting discount and estimated offering expenses)
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' overallotment
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>
7
<PAGE>
<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 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.
USE OF PROCEEDS
Net proceeds from the Notes Offering currently are estimated to be
approximately $95.6 million, after deducting the underwriting discount and
estimated offering expenses payable by the Company. 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
17
<PAGE>
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 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:
% Notes due 2003.......................................................... $ -- $ 100,000
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 $ 286,102
-------------- --------------
-------------- --------------
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)................................................................ 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 $ 154,738
-------------- --------------
-------------- --------------
Regulatory capital ratios of the Bank(2):
Tangible capital............................................................... 6.74% 8.92%
Core (leverage) capital........................................................ 6.74 8.92
Risk-based capital............................................................. 13.61 15.95
</TABLE>
- --------------------
(1) Does not include 9,316,750 additional shares of Common Stock reserved for
issuance upon the exercise of options granted pursuant to the Company's
Stock Option Plan. See "Management--Stock Option Plan."
(2) 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
BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE BALANCE INTEREST
--------- --------- ------------- --------- --------- ------------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <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
Securities available for
sale(1)...................... 211,559 18,391 8.69 449,654 27,988 6.22 435,541 19,714
Loans available for sale(2)... 167,011 15,608 9.35 179,962 19,353 10.75 45,757 5,376
Mortgage-related securities
held for investment.......... 77,257 4,313 5.58 140,321 6,930 4.94 192,052 9,379
Loan portfolio(2)............. 130,901 15,430 11.79 81,070 5,924 7.31 73,854 6,232
Discounted loan portfolio..... 483,204 75,998 15.73 352,633 52,560 14.91 193,652 31,036
Investment securities and
other(3)..................... 46,440 4,033 8.68 79,895 9,842 12.32 48,255 6,313
--------- --------- --------- --------- --------- -----------
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
--------- --------- -----------
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
Savings deposits.............. 20,370 451 2.21 138,434 2,602 1.88 142,053 1,982
Certificates of deposit....... 1,119,836 70,371 6.28 928,209 40,963 4.41 416,658 16,001
--------- --------- --------- --------- --------- -----------
Total interest-bearing
deposits................. 1,171,579 71,853 6.13 1,144,076 44,961 3.93 657,912 19,039
Reverse repurchase
agreements................... 16,754 951 5.68 254,457 10,416 4.09 195,745 9,340
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
Subordinated debentures and
other interest-bearing
obligations.................. 78,718 8,988 11.42 25,041 3,209 12.81 26,572 4,093
--------- --------- --------- --------- --------- -----------
Total interest-bearing
liabilities, interest
expense.................. 1,299,066 84,060 6.47 1,489,576 62,598 4.20 944,359 35,306
--------- --------- -----------
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%
----- -----
----- -----
Net interest margin........... 4.54% 4.75%
----- -----
----- -----
Ratio of interest-earning
assets to interest-bearing
liabilities.................. 90% 97% 107%
--------- --------- ---------
--------- --------- ---------
<CAPTION>
AVERAGE
YIELD/RATE
-------------
<S> <C>
AVERAGE ASSETS:
Federal funds sold and
repurchase agreements........ 3.59%
Securities available for
sale(1)...................... 4.53
Loans available for sale(2)... 11.75
Mortgage-related securities
held for investment.......... 4.88
Loan portfolio(2)............. 8.44
Discounted loan portfolio..... 16.03
Investment securities and
other(3)..................... 13.08
Total interest-earning
assets, interest
income................... 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..................... 1.06
Savings deposits.............. 1.40
Certificates of deposit....... 3.84
Total interest-bearing
deposits................. 2.89
Reverse repurchase
agreements................... 4.77
Securities sold but not yet
purchased.................... --
FHLB advances................. 4.42
Subordinated debentures and
other interest-bearing
obligations.................. 15.40
Total interest-bearing
liabilities, interest
expense.................. 3.74
Non-interest bearing
deposits.....................
Escrow deposits...............
Other liabilities(1)..........
Total liabilities.........
Stockholders' equity(1).......
Total liabilities and
stockholders' equity.....
Net interest income...........
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>
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
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<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).
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 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
33
<PAGE>
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 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.
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<PAGE>
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 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
35
<PAGE>
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 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
---------------------------------------------------------------------------
SINGLE-FAMILY MULTI-FAMILY RESIDENTIAL
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.
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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
71
<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.
72
<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%)
76
<PAGE>
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
$6.50.
84
<PAGE>
The Stock Option Plan currently is administered and interpreted by either
the Board of Directors of the Company or, to the extent authority is delegated,
the stock option committee thereof. After the offerings, the Stock Option Plan
will be administered by a committee consisting of not less than two
"disinterested" directors within the meaning of Rule 16b-3 under the Exchange
Act. In the event that the outstanding shares of Common Stock are affected by
reason of a merger, consolidation, reorganization, recapitalization, combination
of shares, stock split or dividend, the number and kind of shares to which any
option relates and the exercise price of any option shall be appropriately
adjusted as determined solely by the Board of Directors of the Company or the
Nominating and Compensation Committee. In the event of a liquidation or
dissolution of the Company, an optionee generally shall have the right,
immediately prior to such dissolution or liquidation, to exercise any
outstanding options in whole or in part.
OPTION GRANTS FOR 1995
The following table provides information relating to option grants made
pursuant to the Stock Option Plan to the individuals named in the Summary
Compensation Table for services rendered in 1995.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF RATES OF STOCK PRICE
SECURITIES PERCENT OF APPRECIATION FOR
UNDERLYING SECURITIES BOOK VALUE PER OPTION TERM(3)
OPTIONS UNDERLYING TOTAL EXERCISE SHARE OF OCWEN --------------------
GRANTED OPTIONS GRANTED TO PRICE COMMON STOCK AT EXPIRATION 0% 5%
NAME (#)(1)(2) EMPLOYEES(2) ($/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)
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.
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.
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<PAGE>
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.
The Company expects to lend up to $9 million to certain of its officers in
connection with the exercise of their vested stock options. Such notes will bear
interest at 10.5% per annum, have a maturity of two years and be secured by the
related shares of Common Stock.
BENEFICIAL OWNERSHIP OF COMMON STOCK
At June 30, 1996, the Company had 23,812,900 shares of Common Stock
outstanding which were held by 73 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 June 30, 1996, 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 JUNE 30, 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) 8.6% 1,720,720 7.2%
Directors and executive officers:
William C. Erbey...................................... 9,852,420(3) 39.8 9,852,420 39.8
Barry N. Wish......................................... 6,011,020(4) 25.1 5,051,020 21.1
John R. Erbey......................................... 976,030(5) 4.0 976,030 4.0
Rory A. Brown......................................... 504,610(6) 2.1 504,610 2.1
Christine A. Reich.................................... 222,650(6) 0.9 222,650 0.9
All directors and executive officers as a group
(eight persons).................................... 17,732,380(7) 66.8 16,772,380 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.
(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.
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<PAGE>
(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, and options to acquire 924,640 shares of Common Stock
which were exercisable at or within 60 days of June 30, 1996.
(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. Also includes options to acquire 175,970 shares of Common Stock
which were exercisable at or within 60 days of June 30, 1996.
(5) Includes options to acquire 747,880 shares of Common Stock which were
exercisable at or within 60 days of June 30, 1996.
(6) Consists of options to acquire shares of Common Stock which were exercisable
at or within 60 days of June 30, 1996.
(7) Includes options to acquire 2,741,400 shares of Common Stock which were
exercisable at or within 60 days of June 30, 1996.
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 $100
million. The Notes will mature on , 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 and of each year (each an
"Interest Payment Date"), commencing , 1997, to the holders of record
at the close of business on the or (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."
87
<PAGE>
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 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
88
<PAGE>
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.
OPTIONAL REDEMPTION
The Notes may not be redeemed prior to , 1999 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 , of the years
indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ----------------------------------------------------------------------- -----------
<S> <C>
1999................................................................... %
2000...................................................................
2001...................................................................
2002...................................................................
</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 prior to , 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 % 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
89
<PAGE>
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 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 minimum capital
requirements under the regulations of the OTS 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
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<PAGE>
(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;
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 or holding 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
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<PAGE>
(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
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
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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 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.
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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 Consolidation" provisions of the Indenture, consent to the assignment or
transfer by the Company of any of its rights and obligations under the
Indenture; (v) amend or modify any of the provisions of the Indenture relating
to the subordination of the Notes in any manner adverse to any of the Holders of
the Notes; or (vi) 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;
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(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 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
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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 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
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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.
"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;
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(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.
"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.
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"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.
"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
99
<PAGE>
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
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.
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<PAGE>
"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 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
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<PAGE>
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.
"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
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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
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.
103
<PAGE>
"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.
104
<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. (the "Note Underwriter"), the
Company has agreed to sell to the Note Underwriter, and the Note Underwriter had
agreed to purchase, the $100,000,000 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 % of
the principal amount. The Note Underwriter may allow, and such dealers may re-
allow, a concession not in excess of % 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 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 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 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................................ 17
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........... 86
Description of Notes........................... 87
Underwriting................................... 105
Legal Matters.................................. 105
Experts........................................ 105
Index to Consolidated Financial Statements..... F-1
</TABLE>
UNTIL , 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.
$100,000,000
[LOGO]
OCWEN FINANCIAL
CORPORATION
% NOTES DUE 2003
---------------------
PROSPECTUS
---------------------
FRIEDMAN, BILLINGS,
RAMSEY & CO., INC.
, 1996
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Set forth below is an estimate of the expenses to be incurred in connection
with the offering of securities described herein.
<TABLE>
<CAPTION>
SEC registration fee.............................................. $ 42,759
<S> <C>
NASD and NASDAQ fees.............................................. 62,900
Legal fees and expenses........................................... 175,000
Accounting fees and expenses...................................... 165,000
Printing, postage and delivery expenses........................... 100,000
Blue Sky fees and expenses........................................ 25,000
Trustee fees...................................................... 6,240
Rating agency fees................................................ 90,000
Miscellaneous expenses............................................ 10,101
---------
Total......................................................... $ 677,000
---------
---------
</TABLE>
In addition to the foregoing, the Underwriting Agreement provides for
underwriting discounts, certain dealer concessions and the reimbursement of
certain expenses. See "Underwriting" in the Prospectus.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article V of the Company's Articles of Incorporation provides as follows:
INDEMNIFICATION
This corporation shall, to the fullest extent permitted by the provisions of
Fla. Stat. Section607.0850, as the same may be amended and supplemented,
indemnify any and all persons whom it shall have power to indemnify under said
section from and against any and all of the expenses, liabilities, or other
matters referred to in or covered by said section, and the indemnification
provided for herein shall not be deemed exclusive of any other rights to which
those indemnified may be entitled under any Bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director,
officer, employee, or agent and shall inure to the benefit of the heirs,
executors, and administrators of such a person.
Section 607.0850 of the Florida Business Corporation Act provides as
follows:
607.0850 INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES, AND AGENTS.--
(1) A corporation shall have the power to indemnify any person who was or is a
party to any proceeding (other than an action by, or in the right of, the
corporation), by reason of the fact that he is or was a director, officer,
employee, or agent of the corporation or is or was serving at the request of the
corporation as a director, officer, employee, or agent of another corporation,
partnership, joint venture, trust, or other enterprise against liability
incurred in connection with such proceeding, including any appeal thereof, if he
acted in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. The termination of any proceeding by judgment, order, settlement,
or conviction or upon a plea of nolo contendere or its equivalent shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in, or not opposed to, the best
interests of the corporation or, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
(2) A corporation shall have power to indemnify any person, who was or is a
party to any proceeding by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he is or was a
II-1
<PAGE>
director, officer, employee, or agent of the corporation or is or was serving at
the request of the corporation as a director, officer, employee, or agent of
another corporation, partnership, joint venture, trust, or other enterprise,
against expenses and amounts paid in settlement not exceeding, in the judgment
of the board of directors, the estimated expense of litigating the proceeding to
conclusion, actually and reasonably incurred in connection with the defense or
settlement of such proceeding, including any appeal thereof. Such
indemnification shall be authorized if such person acted in good faith and in a
manner he reasonably believed to be in, or not opposed to, the best interests of
the corporation, except that no indemnification shall be made under this
subsection in respect of any claim, issue, or matter as to which such person
shall have been adjudged to be liable unless, and only to the extent that, the
court in which such proceeding was brought, or any other court of competent
jurisdiction, shall determine upon application that, despite the adjudication of
liability but in view of all circumstances of the case, such person is fairly
and reasonably entitled to indemnity for such expenses which such court shall
deem proper.
(3) To the extent that a director, officer, employee, or agent of a
corporation has been successful on the merits or otherwise in defense of any
proceeding referred to in subsection (1) or subsection (2), or in defense of any
claim, issue, or matter therein, he shall be indemnified against expenses
actually and reasonably incurred by him in connection therewith.
(4) Any indemnification under subsection (1) or subsection (2), unless
pursuant to a determination by a court, shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification of the
director, officer, employee, or agent is proper in the circumstances because he
has met the applicable standard of conduct set forth in subsection (1) or
subsection (2). Such determination shall be made:
(a) By the board of directors by a majority vote of a quorum consisting
of directors who were not parties to such proceeding;
(b) If such a quorum is not obtainable or, even if obtainable, by
majority vote of a committee duly designated by the board of directors (in
which directors who are parties may participate) consisting solely of two or
more directors not at the time parties to the proceeding;
(c) By independent legal counsel:
(1) Selected by the board of directors prescribed in paragraph (a) or
the committee prescribed in paragraph (b); or
(2) If a quorum of the directors cannot be obtained for paragraph (a)
and the committee cannot be designated under paragraph (b), selected by
majority vote of the full board of directors (in which directors who are
parties may participate); or
(d) By the shareholders by a majority vote of a quorum consisting of
shareholders who were not parties to such proceeding or, if no such quorum
is obtainable, by a majority vote of shareholders who were not parties to
such proceeding.
(5) Evaluation of the reasonableness of expenses and authorization of
indemnification shall be made in the same manner as the determination that
indemnification is permissible. However, if the determination of permissibility
is made by independent legal counsel, persons specified by paragraph (4)(c)
shall evaluate the reasonableness of expenses and may authorize indemnification.
(6) Expenses incurred by an officer or director in defending a civil or
criminal proceeding may be paid by the corporation in advance of the final
disposition of such proceeding upon receipt of an undertaking by or on behalf of
such director or officer to repay such amount if he is ultimately found not to
be entitled to indemnification by the corporation pursuant to this section.
Expenses incurred by other employees and agents may be paid in advance upon such
terms or conditions that the board of directors deems appropriate.
(7) The indemnification and advancement of expenses provided pursuant to
this section are not exclusive, and a corporation may make any other or further
indemnification or advancement of expenses of any of its directors, officers,
employees, or agents, under any bylaw, agreement, vote of shareholders or
II-2
<PAGE>
disinterested directors, or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office.
However, indemnification or advancement of expenses shall not be made to or on
behalf of any director, officer, employee, or agent if a judgment or other final
adjudication establishes that his actions, or omissions to act, were material to
the cause of action so adjudicated and constitute:
(a) A violation of the criminal law, unless the director, officer,
employee, or agent had reasonable cause to believe his conduct was lawful or
had no reasonable cause to believe his conduct was unlawful;
(b) A transaction from which the director, officer, employee, or agent
derived an improper personal benefit;
(c) In the case of a director, a circumstance under which the liability
provisions of s.607.0834 are applicable; or
(d) Willful misconduct or a conscious disregard for the best interests
of the corporation in a proceeding by or in the right of the corporation to
procure a judgment in its favor or in a proceeding by or in the right of a
shareholder.
(8) Indemnification and advancement of expenses as provided in this section
shall continue as, unless otherwise provided when authorized or ratified, to a
person who has ceased to be a director, officer, employee, or agent and shall
inure to the benefit of the heirs, executors, and administrators of such a
person, unless otherwise provided when authorized or ratified.
(9) Unless the corporation's articles of incorporation provide otherwise,
notwithstanding the failure of a corporation to provide indemnification, and
despite any contrary determination of the board or of the shareholders in the
specific case, a director, officer, employee, or agent of the corporation who is
or was a party to a proceeding may apply for indemnification or advancement of
expenses, or both, to the court conducting the proceeding, to the circuit court,
or to another court of competent jurisdiction. On receipt of an application, the
court, after giving notice that it considers necessary, may order
indemnification and advancement of expenses, including expenses incurred in
seeking court-ordered indemnification or advancement of expenses, if it
determines that:
(a) The director, officer, employee, or agent is entitled to mandatory
indemnification under subsection (3), in which case the court shall also
order the corporation to pay the director reasonable expenses incurred in
obtaining court-ordered indemnification or advancement of expenses;
(b) The director, officer, employee or agent is entitled to
indemnification or advancement of expenses, or both, by virtue of the
exercise by the corporation of its power pursuant to subsection (7); or
(c) The director, officer, employee, or agent is fairly and reasonably
entitled to indemnification or advancement of expenses, or both, in view of
all the relevant circumstances, regardless of whether such person met the
standard of conduct set forth in subsection (1), subsection (2), or
subsection (7).
(10) For purposes of this section, the term "corporation" includes, in
addition to the resulting corporation, any constituent corporation (including
any constituent of a constituent) absorbed in a consolidation or merger, so that
any person who is or was a director, officer, employee, or agent of a
constituent corporation, or is or was serving at the request of a constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, or other enterprise, is in the same position
under this section with respect to the resulting or surviving corporation as he
would have with respect to such constituent corporation if its separate
existence had continued.
(11) For purposes of this section:
(a) The term "other enterprises" includes employee benefit plans;
(b) The term "expenses" includes counsel fees, including those for
appeal;
II-3
<PAGE>
(c) The term "liability" includes obligations to pay for a judgment,
settlement, penalty, find (including an excise tax assessed with respect to
any employee benefit plan), and expenses actually and reasonably incurred
with respect to a proceeding;
(d) The term "proceeding" includes any threatened, pending, or completed
action, suit, or other type of proceeding, whether civil, criminal,
administrative, or investigative and whether formal or informal;
(e) The term "agent" includes a volunteer;
(f) The term "serving at the request of the corporation" includes any
service as a director, officer, employee, or agent of the corporation that
imposes duties on such persons, including duties relating to an employee
benefit plan and its participants or beneficiaries; and
(g) The term "not opposed to the best interest of the corporation"
describes the actions of a person who acts in good faith and in a manner he
reasonably believes to be in the best interests of the participants and
beneficiaries of an employee benefit plan.
(12) A corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee, or agent of
the corporation or is or was serving at the request of the corporation as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise against any liability asserted against him
and incurred by him in any such capacity or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under the provisions of this section.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
During 1993 and 1995, the Company issued 250,000 shares and 432,620 shares
of Common Stock, respectively, upon the exercise of stock options granted to
employees of the Company or its subsidiaries pursuant to the Company's 1991
Non-Qualified Stock Option Plan, as amended. These shares were issued for cash
and in reliance on the private offering exemption from registration set forth in
Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act").
During 1993, the Company issued $9.2 million of 15% notes due April 1, 1994
to 18 stockholders/ employees of the Company, during 1995 the Company issued
$7.6 million of 10.5% notes due May 1, 1996 to 14 stockholders of the Company
and on May 1, 1996 the Company reissued $7.4 million of 10.5% notes due May 1,
1997 to 11 stockholders of the Company. These notes were issued for cash and in
reliance on the private offering exemption from registration set forth in
Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
PAGE NO.
-------------
<C> <S> <C>
1.0 Form of Underwriting Agreement relating to Common Stock *
1.1 Form of Underwriting Agreement relating to Notes *
3.1 Amended and Restated Articles of Incorporation *
3.2 Bylaws *
4.0 Form of certificate of Common Stock *
4.1 Form of indenture between the Company and the Trustee *
4.2 Form of Notes due 2003 (included in Exhibit 4.1) *
5.0 Opinion of Elias, Matz, Tiernan & Herrick L.L.P. **
10.1 Ocwen Financial Corporation 1991 Non-Qualified Stock Option Plan, as amended *
10.2 Annual Incentive Plan *
10.3 Ocwen Financial Corporation 1996 Stock Plan for Directors *
12.0 Statement regarding the computation of the ratio of earnings to fixed charges *
21.0 Subsidiaries (see "Business--General" in the Prospectus)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
PAGE NO.
-------------
23.1 Consent of Elias, Matz, Tiernan & Herrick L.L.P. (to be contained in the opinion included
as Exhibit 5) **
<C> <S> <C>
23.2 Consent of Price Waterhouse LLP
25.0 Form T-1
</TABLE>
- ------------------------
* Previously filed.
** To be filed by amendment.
(b) Financial Statements and Schedules:
The Consolidated Financial Statements listed in the Index to
Consolidated Financial Statements contained in the Prospectus are hereby
incorporated herein by reference.
Schedules to the Consolidated Financial Statements are not required under
the related instructions or are inapplicable, and therefore have been omitted.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering range
may be reflected in the form of Prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial BONA
FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offerings.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-5
<PAGE>
SIGNATURES
The Registrant has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of West
Palm Beach, State of Florida, on September 4, 1996.
OCWEN FINANCIAL CORPORATION
By: /s/ WILLIAM C. ERBEY
-----------------------------------
William C. Erbey
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
(duly authorized representative)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<C> <S> <C>
/s/ WILLIAM C. ERBEY Date: September 4, 1996
- -------------------------------------------
William C. Erbey
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(principal executive officer)
/s/ W. C. MARTIN Date: September 4, 1996
- -------------------------------------------
W. C. Martin
DIRECTOR
/s/ HOWARD H. SIMON Date: September 4, 1996
- -------------------------------------------
Howard H. Simon
DIRECTOR
/s/ BARRY N. WISH Date: September 4, 1996
- -------------------------------------------
Barry N. Wish,
CHAIRMAN
/s/ CHRISTINE A. REICH Date: September 4, 1996
- -------------------------------------------
Christine A. Reich
MANAGING DIRECTOR AND CHIEF FINANCIAL
OFFICER
(principal financial and accounting
officer)
</TABLE>
II-6
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER 5, 1996
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. It is currently estimated that the initial public offering
price for the shares of Common Stock offered hereby will be between $11.50 and
$13.50 per share. See "Underwriting" for information relating to the factors to
be considered in determining such 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.
In addition, the Company is concurrently offering $100 million principal
amount of % Notes due 2003 (the "Notes") of the Company (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............................. $ $ $
Total(3).............................. $ $ $
</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) Before deducting expenses payable by the Company estimated at $ .
(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 $ , $ and $ , 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 , 1996.
--------------------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
The date of this Prospectus is , 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
3,210,540 SHARES OF COMMON STOCK AS OF JUNE 30, 1996. 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 $1.1 billion.
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' overallotment
option)
Common Stock outstanding........... 23,812,900
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>
THE NOTES OFFERING
Concurrently with the Common Stock Offering, the Company is separately
offering $100 million principal amount of Notes, which will mature on
, 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 % per annum and will be payable in cash semi-annually on
and of each year, commencing on , 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.
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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.
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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
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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."
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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
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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
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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 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
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("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 and including
currently-exercisable options to acquire Common Stock, 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 39.8% owned or
controlled by William C. Erbey, Chairman, President and Chief Executive Officer
of the Company, and 21.1% 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 be able
15
<PAGE>
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 June 30, 1996, there were 23,812,900 shares of Common Stock
outstanding held by 73 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
9,316,750 shares of Common Stock 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 June 30, 1996, 3,210,540 shares of Common Stock were subject to
outstanding options under the Stock Option Plan at an average exercise price of
$1.27 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 $95.6 million, after deducting the underwriting discount and
estimated offering expenses payable by the Company. 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 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:
% Notes due 2003............................................................ $ -- $ 100,000
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 $ 286,102
------------ ------------
------------ ------------
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)..................................................................... 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 $ 154,738
------------ ------------
------------ ------------
Regulatory capital ratios of the Bank(2):
Tangible capital.................................................................... 6.74% 8.92%
Core (leverage) capital............................................................. 6.74 8.92
Risk-based capital.................................................................. 13.61 15.95
</TABLE>
- ------------------------
(1) Does not include 9,316,750 additional shares of Common Stock reserved for
issuance upon the exercise of options granted pursuant to the Company's
Stock Option Plan. See "Management--Stock Option Plan."
(2) 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).
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 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
33
<PAGE>
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 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.
34
<PAGE>
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 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
35
<PAGE>
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 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.
67
<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.
68
<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.
69
<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
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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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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
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<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.
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<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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<PAGE>
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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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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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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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
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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)
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.
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.
The Company expects to lend up to $9 million to certain of its officers in
connection with the exercise of their vested stock options. Such notes will bear
interest at 10.5% per annum, have a maturity of two years and be secured by the
related shares of Common Stock.
87
<PAGE>
BENEFICIAL OWNERSHIP OF COMMON STOCK
At June 30, 1996, the Company had 23,812,900 shares of Common Stock
outstanding which were held by 73 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 June 30, 1996, 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 JUNE 30, 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) 8.6% 1,720,720 7.2%
Directors and executive officers:
William C. Erbey.......................................... 9,852,420(3) 39.8 9,852,420 39.8
Barry N. Wish............................................. 6,011,020(4) 25.1 5,051,020 21.1
John R. Erbey............................................. 976,030(5) 4.0 976,030 4.0
Rory A. Brown............................................. 504,610(6) 2.1 504,610 2.1
Christine A. Reich........................................ 222,650(6) 0.9 222,650 0.9
All directors and executive officers as a group (eight
persons)................................................... 17,732,380(7) 66.8 16,772,380 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.
(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, and options to acquire 924,640 shares of Common Stock
which were exercisable at or within 60 days of June 30, 1996.
(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. Also includes options to acquire 175,970 shares of Common Stock
which were exercisable at or within 60 days of June 30, 1996.
(5) Includes options to acquire 747,880 shares of Common Stock which were
exercisable at or within 60 days of June 30, 1996.
(6) Consists of options to acquire shares of Common Stock which were exercisable
at or within 60 days of June 30, 1996.
(7) Includes options to acquire 2,741,400 shares of Common Stock which were
exercisable at or within 60 days of June 30, 1996.
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 and the Notes, copies of which
have been filed as exhibits 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 $100 million and
will mature on , 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 % per annum and will be payable in cash semi-annually on
and of each year, commencing , 1997.
The Notes will be redeemable at the option of the Company, in whole or in
part, at any time on or after , 1999 at specified redemption prices
together with accrued and unpaid interest, if any, to the date of redemption.
Until , 1999, the Company may redeem up to $35 million 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 %, provided that at least $65 million 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"). At June 30,
1996, there were 23,812,900 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. It is
anticipated that the Stockholders Agreement will be amended prior to the closing
of the Common Stock Offering 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.
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 June 30, 1996, there were 23,812,900 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 (238,129 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, 9,316,750 shares 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 SHARES OF
COMMON STOCK COMMON STOCK TO BE
BENEFICIALLY OWNED NUMBER OF BENEFICIALLY OWNED
AS OF JUNE 30, 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 25.1% 960,000 5,051,020 21.1%
Non-Affiliates of the Company:
HAP Investment Partnership(2)................... 2,048,480 8.6 327,760 1,720,720 7.2
[to be completed]
</TABLE>
- ------------------------
(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, 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."
91
<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............................................
----------
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 $ per share. The Common Stock Underwriters may allow,
and such dealers may re-allow, a discount not in excess of $ 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.
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 will be determined by negotiations among the Company, the Selling
Stockholders and the Underwriters. Among the factors to be considered in such
negotiations are the history of, and prospects for, the Company and the industry
in which it competes,
92
<PAGE>
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.
93
<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>
Note: The financial statements in the Common Stock Prospectus
are identical to those contained in the Notes Prospectus.
F-3
<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.............................................................. 92
Legal Matters............................................................. 93
Experts................................................................... 93
Index to Consolidated Financial Statements................................ F-1
</TABLE>
UNTIL , 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
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PROSPECTUS
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FRIEDMAN, BILLINGS,
RAMSEY & CO., INC.
, 1996
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EXHIBIT 23.2
Consent of Independent Certified Public Accountants
We hereby consent to the use in the Prospectuses constituting part of this
Registration Statement on Form S-1 of our report dated February 16, 1996, except
as to Note 21 which is as of July 31, 1996, relating to the consolidated
financial statements of Ocwen Financial Corporation, which appears in the
Registration Statement. We also consent to the references to us under the
headings "Experts" and "Selected Consolidated Financial and Other Data" in such
Prospectus. However, it should be noted that Price Waterhouse LLP has not
prepared or certified such "Selected Consolidated Financial and Other Data" in
such Prospectuses.
Price Waterhouse LLP
Fort Lauderdale, Florida
September 4, 1996
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EXHIBIT 25.0
Registration No. 333-05153
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM T-1
STATEMENT OF ELIGIBILITY AND QUALIFICATION UNDER THE
TRUST INDENTURE ACT OF 1939
OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE
BANK ONE, COLUMBUS, N.A.
Not Applicable 31-4148768
(State of Incorporation (I.R.S. Employer
if not a national bank) Identification No.)
100 East Broad Street, Columbus, Ohio 43271-0181
(Address of trustee's principal (Zip Code) executive offices)
Ted Kravits
c/o Bank One Trust Company, NA
100 East Broad Street
Columbus, Ohio 43271-0181
(614) 248-2566
(Name, address and telephone number of agent for service)
OCWEN FINANCIAL CORPORATION
(Exact name of obligor as specified in its charter)
Florida 65-0039856
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
The Forum, Suite 1000
1675 Palm Beach Lakes Blvd. 33401
West Palm Beach Florida (Zip Code)
(Address of principal executive
offices)
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OCWEN FINANCIAL CORPORATION % NOTES DUE 2003
(Title of the Indenture securities)
GENERAL
1. GENERAL INFORMATION.
FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE:
(a) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY
TO WHICH IT IS SUBJECT.
Comptroller of the Currency, Washington, D.C.
Federal Reserve Bank of Cleveland, Cleveland, Ohio
Federal Deposit Insurance Corporation, Washington, D.C.
The Board of Governors of the Federal Reserve System, Washington,
D.C.
(b) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
The trustee is authorized to exercise corporate trust powers.
2. AFFILIATIONS WITH OBLIGOR AND UNDERWRITERS.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
The obligor is not an affiliate of the trustee.
16. LIST OF EXHIBITS
LIST BELOW ALL EXHIBITS FILED AS A PART OF THIS STATEMENT OF
ELIGIBILITY AND QUALIFICATION. (EXHIBITS IDENTIFIED in PARENTHESES, ON
FILE WITH THE COMMISSION, ARE INCORPORATED HEREIN BY REFERENCE AS
EXHIBITS HERETO.)
Exhibit 1 - A copy of the Articles of Association of the trustee as now in
effect.
Exhibit 2 - A copy of the Certificate of Authority of the trustee to commence
business, see Exhibit 2 to Form T-1, filed in connection with Form S-3 relating
to Wheeling-Pittsburgh Corporation 9 3/8% Senior Notes due 2003, Securities and
Exchange Commission File No. 33-50709.
Exhibit 3 - A copy of the Authorization of the trustee to exercise corporate
trust powers, see Exhibit 3 to Form T-1, filed in connection with Form S-3
relating to Wheeling-Pittsburgh Corporation 9 3/8% Senior Notes due 2003,
Securities and Exchange
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Commission File No. 33-50709.
Exhibit 4 - A copy of the Bylaws of the trustee as now in effect.
Exhibit 5 - Not applicable.
Exhibit 6 - The consent of the trustee required by Section 321 (b) of the Trust
Indenture Act of 1939, as amended.
Exhibit 7 - Report of Condition of the trustee as of the close of business on
March 31, 1 996, published pursuant to the requirements of the Comptroller of
the Company.
Exhibit 8 - Not applicable.
Exhibit 9 - Not applicable.
Items 3 through 15 are not answered pursuant to General Instruction B which
requires responses to Item 1, 2 and 1 6 only, if the obligor is not in default.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the Trustee, Bank One, Columbus, NA, a national banking association
organized under the National Banking Act, has duly caused this statement of
eligibility and qualification to be signed on its behalf by the undersigned,
thereunto duly authorized, all in Columbus, Ohio, on August 28, 1996.
Bank One, Columbus, NA
By: /s/ Ted Kravits
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Ted Kravits
Authorized Signer
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Exhibit 1
BANK ONE, COLUMBUS, NATIONAL ASSOCIATION
ARTICLES OF ASSOCIATION
For the purpose of organizing an association to carry on the business of
banking under the laws of the United States, the following Articles of
Association are entered into:
FIRST. The title of this Association shall be BANK ONE, COLUMBUS, NATIONAL
ASSOCIATION.
SECOND. The main office of the Association shall be in Columbus, County of
Franklin, State of Ohio. The general business of the Association shall be
conducted at its main office and its branches.
THIRD. The Board of Directors of this Association shall consist of not
less than five nor more than twenty-five Directors, the exact number of
Directors within such minimum and maximum limits to be fixed and determined from
time-to-time by resolution of the shareholders at any annual or special meeting
thereof, provided, however, that the Board of Directors, by resolution of a
majority thereof, shall be authorized to increase the number of its members by
not more than two between regular meetings of the shareholders. Each Director,
during the full term of his directorship, shall own, as qualifying shares, the
minimum number of shares of either this Association or of its parent bank
holding company in accordance with the provisions of applicable law. Unless
otherwise provided by the laws of the United States, any vacancy in the Board of
Directors for any reason, including an increase in the number thereof, may be
filled by action of the Board of Directors.
FOURTH. The annual meeting of the shareholders for the election of
Directors and the transaction of whatever other business may be brought before
said meeting shall be held
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at the main office of this Association or such other place as the Board of
Directors may designate, on the day of each year specified therefor in the By-
Laws, but if no election is held on that day, it may be held on any subsequent
business day according to the provisions of law; and all elections shall be held
according to such lawful regulations as may be prescribed by the Board of
Directors.
FIFTH. The authorized amount of capital stock of this Association shall be
2,073,750 shares of common stock of the par value of Ten Dollars ($10) each; but
said capital stock may be increased or decreased from time-to-time, in
accordance with the provisions of the laws of the United States.
No holder of shares of the capital stock of any class of the Association
shall have the preemptive or preferential right of subscription to any share of
any class of stock of this Association, whether now or hereafter authorized or
to any obligations convertible into stock of this Association, issued or sold,
nor any right of subscription to any thereof other than such, if any, as the
Board of Directors, in its discretion, may from time-to-time determine and at
such price as the Board of Directors may from time-to-time fix.
This Association, at any time and from time-to-time, may authorize and
issue debt obligations, whether or not subordinated, without the approval of the
shareholders.
SIXTH. The Board of Directors shall appoint one of its members President
of the Association, who shall be Chairman of the Board, unless the Board
appoints another director to be the Chairman. The Board of Directors shall have
the power to appoint one or more Vice Presidents and to appoint a Secretary and
such other officers and employees as may be required to transact the business of
this Association.
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The Board of Directors shall have the power to define the duties of the
officers and employees of this Association; to fix the salaries to be paid to
them; to dismiss them; to require bonds from them and to fix the penalty
thereof; to regulate the manner in which any increase of the capital of this
Association shall be made; to manage and administer the business and affairs of
this Association; to make all By-Laws that it may be lawful for them to make;
and generally to do and perform all acts that it may be legal for a Board of
Directors to do and perform.
SEVENTH. The Board of Directors shall have the power to change the
location of the main office to any other place within the limits of the City of
Columbus, Ohio, without the approval of the shareholders but subject to the
approval of the Comptroller of the Currency; and shall have the power to
establish or change the location of any branch or branches of this Association
to any other location, without the approval of the shareholders but subject to
the approval of the Comptroller of the Currency.
EIGHTH. The corporate existence of this Association shall continue until
terminated in accordance with the laws of the United States.
NINTH. The Board of Directors of this Association, or any three or more
shareholders owning, in the aggregate, not less than 1 0 percent of the stock of
this Association, may call a special meeting of shareholders at any time.
Unless otherwise provided by the laws of the United States, a notice of the
time, place and purpose of every annual and special meeting of the shareholders
shall be given by first-class mail, postage prepaid, mailed at least ten days
prior to the date of such meeting to each shareholder of record at his address
as shown upon the books of this Association.
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TENTH. Every person who is or was a Director, officer or employee of the
Association or of any other corporation which he served as a Director, officer
or employee at the request of the Association as part of his regularly assigned
duties may be indemnified by the Association in accordance with the provisions
of this paragraph against all liability (including, without limitation,
judgments, fines, penalties and settlements) and all reasonable expenses
(including, without limitation, attorneys' fees and investigative expenses) that
may be incurred or paid by him in connection with any claim, action, suit or
proceeding, whether civil, criminal or administrative (all referred to hereafter
in this paragraphs as "Claims") or in connection with any appeal relating
thereto in which he may become involved as a party or otherwise or with which he
may be threatened by reason of his being or having been a Director, officer or
employee of the Association or such other corporation, or by reason of any
action taken or omitted by him in his capacity as such Director, officer or
employee, whether or not he continues to be such at the time such liability or
expenses are incurred, provided that nothing contained in this paragraph shall
be construed to permit indemnification of any such person who is adjudged guilty
of, or liable for, willful misconduct, gross neglect of duty or criminal acts,
unless, at the time such indemnification is sought, such indemnification in such
instance is permissible under applicable law and regulations, including
published rulings of the Comptroller of the Currency or other appropriate
supervisory or regulatory authority, and provided further that there shall be no
indemnification of directors, officers, or employees against expenses,
penalties, or other payments incurred in an administrative proceeding or action
instituted by an appropriate regulatory agency which proceeding or action
results in a final order assessing civil money penalties or requiring
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affirmative action by an individual or individuals in the form of payments to
the Association. Every person who may be indemnified under the provisions of
this paragraph and who has been wholly successful on the merits with respect to
any Claim shall be entitled to indemnification as of right. Except as provided
in the preceding sentence, any indemnification under this paragraph shall be at
the sole discretion of the Board of Directors and shall be made only if the
Board of Directors or the Executive Committee acting by a quorum consisting of
Directors who are not parties to such Claim shall find or if independent legal
counsel (who may be the regular counsel of the Association) selected by the
Board of Directors or Executive Committee whether or not a disinterested quorum
exists shall render their opinion that in view of all of the circumstances then
surrounding the Claim, such indemnification is equitable and in the best
interests of the Association. Among the circumstances to be taken into
consideration in arriving at such a finding or opinion is the existence or non-
existence of a contract of insurance or indemnity under which the Association
would be wholly or partially reimbursed for such indemnification, but the
existence or non-existence of such insurance is not the sole circumstance to be
considered nor shall it be wholly determinative of whether such indemnification
shall be made. In addition to such finding or opinion, no indemnification under
this paragraph shall be made unless the Board of Directors or the Executive
Committee acting by a quorum consisting of Directors who are not parties to such
Claim shall find or if independent legal counsel (who may be the regular counsel
of the Association) selected by the Board of Directors or Executive Committee
whether or not a disinterested quorum exists shall render their opinion that the
Director, officer or employee acted in good faith in what he reasonably believed
to be the
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best interests of the Association or such other corporation and further in the
case of any criminal action or proceeding, that the Director, officer or
employee reasonably believed his conduct to be lawful. Determination of any
Claim by judgment adverse to a Director, officer or employee by settlement with
or without Court approval or conviction upon a plea of guilty or of
NOLOCONTENDERE or its equivalent shall not create a presumption that a Director,
officer or employee failed to meet the standards of conduct set forth in this
paragraph. Expenses incurred with respect to any Claim may be advanced by the
Association prior to the final disposition thereof upon receipt of an
undertaking satisfactory to the Association by or on behalf of the recipient to
repay such amount unless it is ultimately determined that he is entitled to
indemnification under this paragraph. The rights of indemnification provided in
this paragraph shall be in addition to any rights to which any Director, officer
or employee may otherwise be entitled by contract or as a matter of law. Every
person who shall act as a Director, officer or employee of this Association
shall be conclusively presumed to be doing so in reliance upon the right of
indemnification provided for in this paragraph.
ELEVENTH. These Articles of Association may be amended at any regular or
special meeting of the shareholders by the affirmative vote of the holders of a
majority of the stock of this Association, unless the vote of the holders of a
greater amount of stock is required by law, and in that case by the vote of the
holders of such greater amount.
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Exhibit 4
BY-LAWS
OF
BANK ONE, COLUMBUS, NATIONAL ASSOCIATION
ARTICLE I
MEETING OF SHAREHOLDERS
SECTION 1.01. ANNUAL MEETING. The regular annual meeting of the Shareholders
of the Bank for the election of Directors and for the transaction of such
business as may properly come before the meeting shall be held at its main
banking house, or other convenient place duly authorized by the Board of
Directors, on the third Monday of January of each year, or on the next
succeeding banking day, if the day fixed falls on a legal holiday. If from any
cause, an election of directors is not made on the day fixed for the regular
meeting of shareholders or, in the event of a legal holiday, on the next
succeeding banking day, the Board of Directors shall order the election to be
held on some subsequent day, as soon thereafter as practicable, according to the
provisions of law; and notice thereof shall be given in the manner herein
provided for the annual meeting. Notice of such annual meeting shall be given
by or under the direction of the Secretary or such other officer as may be
designated by the Chief Executive Officer by first-class mail, postage prepaid,
to all shareholders of record of the Bank at their respective addresses as shown
upon the books of the Bank mailed not less than ten days prior to the date fixed
for such meeting.
SECTION 1.02. SPECIAL MEETINGS. A special meeting of the shareholders of this
Bank may be called at any time by the Board of Directors or by any three or more
shareholders
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owning, in the aggregate, not less than ten percent of the stock of this Bank.
The notice of any special meeting of the shareholders called by the Board of
Directors, stating the time, place and purpose of the meeting, shall be given by
or under the direction of the Secretary, or such other officer as is designated
by the Chief Executive Officer, by first-class mail, postage prepaid, to all
shareholders of record of the Bank at their respective addresses as shown upon
the books of the Bank, mailed not less than ten days prior to the date fixed for
such meeting.Any special meeting of shareholders shall be conducted and its
proceedings recorded in the manner prescribed in these By-Laws for annual
meetings of shareholders.
SECTION 1.03. SECRETARY OF SHAREHOLDERS' MEETING. The Board of directors
may designate a person to be the Secretary of the meetings of shareholders. In
the absence of a presiding officer, as designated in these By-Laws, the Board
of Directors may designate a person to act as the presiding officer. In the
event the Board of Directors fails to designate a person to preside at a meeting
of shareholders and a Secretary of such meeting, the shareholders present or
represented shall elect a person to preside and a person to serve as Secretary
of the meeting.
The Secretary of the meetings of shareholders shall cause the returns made
by the judges and election and other proceedings to be recorded in the minute
book of the Bank. The presiding officer shall notify the directors-elect of
their election and to meet forthwith for the organization of the new board.
The minutes of the meeting shall be signed by the presiding officer and the
Secretary designated for the meeting.
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SECTION 1.04. JUDGES OF ELECTION. The Board of Directors may appoint as many
as three shareholders to be judges of the election, who shall hold and conduct
the same, and who shall, after the election has been held, notify, in writing
over their signatures, the secretary of the shareholders' meeting of the result
thereof and the names of the Directors elected; provided, however, that upon
failure for any reason of any judge or judges of election, so appointed by the
directors, to serve, the presiding officer of the meeting shall appoint other
shareholders or their proxies to fill the vacancies. The judges of election at
the request of the chairman of the meeting, shall act as tellers of any other
vote by ballot taken at such meeting, and shall notify, in writing over their
signatures, the secretary of the Board of Directors of the result thereof.
SECTION 1.05. PROXIES. In all elections of Directors, each shareholder of
record, who is qualified to vote under the provisions of Federal Law, shall have
the right to vote the number of shares of record in his name for as many persons
as there are Directors to be elected, or to cumulate such shares as provided by
Federal Law. In deciding all other questions at meetings of shareholders, each
shareholder shall be entitled to one vote on each share of stock of record in
his name. Shareholders may vote by proxy duly authorized in writing. All
proxies used at the annual meeting shall be secured for that meeting only, or
any adjournment thereof, and shall be dated, and if not dated by the
shareholder, shall be dated as of the date of receipt thereof. No officer or
employee of this Bank may act as proxy.
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SECTION 1.06. QUORUM. Holders of record of a majority of the shares of the
capital stock of the Bank, eligible to be voted, present either in person or by
proxy, shall constitute a quorum for the transaction of business at any meeting
of shareholders, but shareholders present at any meeting and consti- tuting less
than a quorum may, without further notice, adjourn the meeting from time to time
until a quorum is obtained. A majority of the votes cast shall decide every
question or matter submitted to the shareholders at any meeting, unless
otherwise provided by law or by the Articles of Association.
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ARTICLE II
DIRECTORS
SECTION 2.01. MANAGEMENT OF THE BANK. The business of the Bank shall be
managed by the Board of Directors. Each director of the Bank shall be the
beneficial owner of a substantial number of shares of BANC ONE CORPORATION and
shall be employed either in the position of Chief Executive Officer or active
leadership within his or her business, professional or community interest which
shall be located within the geographic area in which the Bank operates, or as an
executive officer of the Bank. A director shall not be eligible for nomination
and re-election as a director of the Bank if such person's executive or
leadership position within his or her business, professional or community
interests which qualifies such person as a director of Bank terminates. The age
of 70 is the mandatory retirement age as a director of the Bank. When a
person's eligibility as director of the Bank terminates, whether because of
change in share ownership, position, residency or age, within 30 days after such
termination, such person shall submit his resignation as a director to be
effective at the pleasure of the Board provided, however, that in no event shall
such person be nominated or elected as a director. Provided, however, following
a person's retirement or resignation as a director because of the age
limitations herein set forth with respect to election or re-election as a
director, such person may, in special or unusual circumstances, and at the
discretion of the Board, be elected by the directors as a Director Emeritus of
the Bank for a limited period of time. A Director Emeritus shall have the right
to participate in board meetings but shall be without the power to vote and
shall be subject to re-election by the Board at its organizational meeting
following the Bank's annual meeting of
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shareholders.
SECTION 2.02. QUALIFICATIONS. Each director shall have the qualification
prescribed by law. No person elected a director may exercise any of the powers
of his office until he has taken the oath of such office.
SECTION 2.03. TERM OF OFFICE/VACANCIES A director shall hold office until the
annual meeting for the year in which his term expires and until his successor
shall be elected and shall qualify, subject, however, to his prior death,
resignation, or removal from office. Whenever any vacancy shall occur among the
directors, the remaining directors shall constitute the directors of the Bank
until such vacancy is filled by the remaining directors, and any director so
appointed shall hold office for the unexpired term of his or her successor.
Notwithstanding the foregoing, each director shall hold office and serve at the
pleasure of the Board.
SECTION 2.04. ORGANIZATION MEETING. The directors elected by the shareholders
shall meet for organization of the new board at the time fixed by the presiding
officer of the annual meeting. If at the time fixed for such meeting there is
no quorum present, the Directors in attendance may adjourn from time to time
until a quorum is obtained. A majority of the number of Directors elected by
the shareholders shall constitute a quorum for the transaction of business.
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SECTION 2.05. REGULAR MEETINGS. The regular meetings of the Board of Directors
shall be held on the third Monday of each calendar month excluding March and
July, which meeting will be held at 4:00 p.m. When any regular meeting of the
Board falls on a holiday, the meeting shall be held on such other day as the
Board may previously designate or should the Board fail to so designate, on such
day as the Chairman of the Board of President may fix. Whenever a quorum is not
present, the directors in attendance shall adjourn the meeting to a time not
later than the date fixed by the Bylaws for the next succeeding regular meeting
of the Board.
SECTION 2.06. SPECIAL MEETINGS. Special meetings of the Board of Directors
shall be held at the call of the Chairman of the Board or President, or at the
request of two or more Directors. Any special meeting may be held at such place
in Franklin County, Ohio, and at such time as may be fixed in the call. Written
or oral notice shall be given to each Director not later than the day next
preceding the day on which special meeting is to be held, which notice may be
waived in writing. The presence of a Director at any meeting of the Board
shall be deemed a waiver of notice thereof by him. Whenever a quorum is not
present the Directors in attendance shall adjourn the special meeting from day
to day until a quorum is obtained.
SECTION 2.07. QUORUM. A majority of the Directors shall constitute a quorum at
any meeting, except when otherwise provided by law; but a lesser number may
adjourn any meeting, from time-to-time, and the meeting may be held, as
adjourned, without further
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notice. When, however, less than a quorum as herein defined, but at least one-
third and not less than two of the authorized number of Directors are present at
a meeting of the Directors, business of the Bank may be transacted and matters
before the Board approved or disapproved by the unanimous vote of the Directors
present.
SECTION 2.08. COMPENSATION. Each member of the Board of Directors shall
receive such fees for, and transportation expenses incident to, attendance at
Board and Board Committee Meetings and such fees for service as a Director
irrespective of meeting attendance as from time to time are fixed by resolution
of the Board; provided, however, that payment hereunder shall not be made to a
Director for meetings attended and/or Board service which are not for the Bank's
sole benefit and which are concurrent and duplicative with meetings attended or
board service for an affiliate of the Bank for which the Director receives
payment; and provided further, that payment hereunder shall not be made in the
case of any Director in the regular employment of the Bank or of one of its
affiliates.
SECTION 2.09. EXECUTIVE COMMITTEE. There shall be a standing committee of the
Board of Directors known as the Executive Committee which shall possess and
exercise, when the Board is not in session, all powers of the Board that may
lawfully be delegated. The Executive Committee shall also exercise the powers
of the Board of Directors in accordance with the Provisions of the "Employees
Retirement Plan" and the "Agreement and Declaration of Trust" as the same now
exist or may be amended hereafter. The Executive Committee shall consist of not
fewer than four board members, including the Chairman of the Board and
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President of the Bank, one of whom, as hereinafter required by these By-laws,
shall be the Chief Executive Officer. The other members of the Committee shall
be appointed by the Chairman of the Board or by the President, with the approval
of the Board and shall continue as members of the Executive Committee until
their successors are appointed, provided, however, that any member of the
Executive Committee may be removed by the Board upon a majority vote thereof at
any regular or special meeting of the Board. The Chairman or President shall
fill any vacancy in the Committee by the appointment of another Director,
subject to the approval of the Board of Directors. The regular meetings of the
Executive Committee shall be held on a regular basis as scheduled by the Board
of Directors. Special meetings of the Executive Committee shall be held at the
call of the Chairman or President or any two members thereof at such time or
times as may be designated. In the event of the absence of any member or
members of the Committee, the presiding member may appoint a member or members
of the Board to fill the place or places of such absent member or members to
serve during such absence. Not fewer than three members of the Committee must
be present at any meeting of the Executive Committee to constitute a quorum,
provided, however that with regard to any matters on which the Executive
Committee shall vote, a majority of the Committee members present at the meeting
at which a vote is to be taken shall not be officers of the Bank and, provided
further, that if, at any meeting at which the Chairman of the Board and
President are both present, Committee members who are not officers are not in
the majority, then the Chairman of the Board or President, which ever of such
officers is not also the Chief Executive Officer, shall not be eligible to vote
at such meeting and shall not be recognized for purposes of determining if a
quorum is present at
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such meeting. When neither the Chairman of the Board nor President are present,
the Committee shall appoint a presiding officer. The Executive Committee shall
keep a record of its proceedings and report its proceedings and the action taken
by it to the Board of Directors.
SECTION 2.10. COMMUNITY REINVESTMENT ACT AND COMPLIANCE POLICY COMMITTEE.
There shall be a standing committee of the Board of Directors known as the
Community Reinvestment Act and Compliance Policy Committee the duties of which
shall be, at least once in each calendar year, to review, develop and recommend
policies and programs related to the Bank's Community Reinvestment Act
Compliance and regulatory compliance with all existing statutes, rules and
regulations affecting the Bank under state and federal law. Such Committee
shall provide and promptly make a full report of such review of current Bank
policies with regard to Community Reinvestment Act and regulatory compliance in
writing to the Board, with recommendations, if any, which may be necessary to
correct any unsatisfactory conditions. Such Committee may, in its discretion,
in fulfilling its duties, utilize the Community Reinvestment Act officers of the
Bank, Banc One Ohio Corporation and Banc One Corporation and may engage outside
Community Reinvestment Act experts, as approved by the Board, to review, develop
and recommend policies and programs as herein required. The Community
Reinvestment Act and regulatory compliance policies and procedures established
and the recommendations made shall be consistent with, and shall supplement, the
Community Reinvestment Act and regulatory compliance programs, policies and
procedures of Banc One Corporation and Banc One Ohio Corporation. The
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Community Reinvestment Act and Compliance Policy Committee shall consist of not
fewer than four board members, one of whom shall be the Chief Executive Officer
and a majority of whom are not officers of the Bank. Not fewer than three
members of the Committee, a majority of whom are not officers of the Bank, must
be present to constitute a quorum. The Chairman of the Board or President of
the Bank, whichever is not the Chief Executive Officer, shall be an ex officio
member of the Community Reinvestment Act and Compliance Policy Committee. The
Community Reinvestment Act and Compliance Policy Committee, whose chairman shall
be appointed by the Board, shall keep a record of its proceedings and report its
proceedings and the action taken by it to the Board of Directors.
SECTION 2.11. TRUST COMMITTEES. There shall be two standing Committees known
as the Trust Management Committee and the Trust Examination Committee appointed
as hereinafter provided.
SECTION 2.12. OTHER COMMITTEES. The Board of Directors may appoint such
special committees from time to time as are in its judgment necessary in the
interest of the Bank.
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ARTICLE III
OFFICERS, MANAGEMENT STAFF AND EMPLOYEES
SECTION 3.01 OFFICERS AND MANAGEMENT STAFF.
(a) The officers of the Bank shall include a President, Secretary and Security
Officer and may include a Chairman of the Board, one or more Vice Chairmen, one
or more Vice Presidents (which may include one or more Executive Vice Presidents
and/or Senior Vice Presidents) and one or more Assistant Secretaries, all of
whom shall be elected by the Board. All other officers may be elected by the
Board or appointed in writing by the Chief Executive Officer. The salaries of
all officers elected by the Board shall be fixed by the Board. The Board from
time-to-time shall designate the President or Chairman of the Board to serve as
the Bank's Chief Executive Officer.
(b) The Chairman of the Board, if any, and the President shall be elected by
the Board from their own number. The President and Chairman of the Board shall
be re-elected by the Board annually at the organizational meeting of the Board
of Directors following the Annual Meeting of Shareholders. Such officers as the
Board shall elect from their own number shall hold office from the date of their
election as officers until the organization meeting of the Board of Directors
following the next Annual Meeting of Shareholders, provided, however, that such
officers may be relieved of their duties at any time by action of the Board in
which event all the powers incident to their office shall immediately terminate.
(c) Except as provided in the case of the elected officers who are members of
the Board, all officers, whether elected or appointed, shall hold office at the
pleasure of the Board.
21
<PAGE>
Except as otherwise limited by law or these By-laws, the Board assigns to Chief
Executive Officer and/or his designees the authority to appoint and dismiss any
elected or appointed officer or other member of the Bank's management staff and
other employees of the Bank, as the person in charge of and responsible for any
branch office, department, section, operation, function, assignment or duty in
the Bank.
(d) The management staff of the Bank shall include officers elected by the
Board, officers appointed by the Chief Executive Officer, and such other persons
in the employment of the Bank who, pursuant to written appointment and
authorization by a duly authorized officer of the Bank, perform management
functions and have management responsibilities. Any two or more offices may be
held by the same person except that no person shall hold the office of Chairman
of the Board and/or President and at the same time also hold the office of
Secretary.
(e) The Chief Executive Officer of the Bank and any other officer of the Bank,
to the extent that such officer is authorized in writing by the Chief Executive
Officer, may appoint persons other than officers who are in the employment of
the Bank to serve in management positions and in connection therewith, the
appointing officer may assign such title, salary, responsibilities and functions
as are deemed appropriate by him, provided, however, that nothing contained
herein shall be construed as placing any limitation on the authority of the
Chief Executive Officer as provided in this and other sections of these By-Laws.
22
<PAGE>
SECTION 3.02. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer of the Bank
shall have general and active management of the business of the Bank and shall
see that all orders and resolutions of the Board of Directors are carried into
effect. Except as otherwise prescribed or limited by these By-Laws, the Chief
Executive Officer shall have full right, authority and power to control all
personnel, including elected and appointed officers, of the Bank, to employ or
direct the employment of such personnel and officers as he may deem necessary,
including the fixing of salaries and the dismissal of them at pleasure, and to
define and prescribe the duties and responsibility of all Officers of the Bank,
subject to such further limitations and directions as he may from time-to-time
deem proper. The Chief Executive Officer shall perform all duties incident to
his office and such other and further duties, as may, from time-to-time, be
required of him by the Board of Directors or the shareholders. The
specification of authority in these By-Laws wherever and to whomever granted
shall not be construed to limit in any manner the general powers of delegation
granted to the Chief Executive Officer in conducting the business of the Bank.
The Chief Executive Officer or, in his absence, the Chairman of the Board or
President of the Bank, as designated by the Chief Executive Officer, shall
preside at all meetings of shareholders and meetings of the Board. In the
absence of the Chief Executive Officer, such officer as is designated by the
Chief Executive Officer shall be vested with all the powers and perform all the
duties of the Chief Executive Officer as defined by these By-Laws. When
designating an officer to serve in his absence, the Chief Executive Officer
shall select an officer who is a member of the Board of Directors whenever such
officer is available.
23
<PAGE>
SECTION 3.03. POWERS OF OFFICERS AND MANAGEMENT STAFF. The Chief Executive
Officer, the Chairman of the Board, the President, and those officers so
designated and authorized by the Chief Executive Officer are authorized for an
on behalf of the Bank, and to the extent permitted by law, to make loans and
discounts; to purchase or acquire drafts, notes, stock, bonds, and other
securities for investment of funds held by the Bank; to execute and purchase
acceptances; to appoint, empower and direct all necessary agents and attor-
neys; to sign and give any notice required to be given; to demand payment and/or
to declare due for any default any debt or obligation due or payable to the Bank
upon demand or authorized to be declared due; to foreclose any mortgages, to
exercise any option, privilege or election to forfeit, terminate, extend or
renew any lease; to authorize and direct any proceedings for the collection of
any money or for the enforcement of any right or obligation; to adjust, settle
and compromise all claims of every kind and description in favor of or against
the Bank, and to give receipts, releases and discharges therefor; to borrow
money and in connection therewith to make, execute and deliver notes, bonds or
other evidences of indebtedness; to pledge or hypothecate any securities or any
stocks, bonds, notes or any property real or personal held or owned by the Bank,
or to rediscount any notes or other obli- gations held or owned by the Bank, to
employ or direct the employment of all personnel, including elected and
appointed officers, and the dismissal of them at pleasure, and in furtherance of
and in addition to the powers hereinabove set forth to do all such acts and to
take all such proceedings as in his judgment are necessary and incidental to the
operation of the Bank.
Other persons in the employment of the Bank, including but not limited
to officers and
24
<PAGE>
other members of the management staff, may be authorized by the Chief Executive
Officer, or by an officer so designated and authorized by the chief Executive
Officer, to perform the powers set forth above, subject, however, to such
limitations and conditions as are set forth in the authorization given to such
persons.
SECTION 3.04. SECRETARY. The Secretary or such other officers as may be
designated BY the Chief Executive Officer shall have supervision and control of
the records of the Bank and, subject to the direction of the Chief Executive
Officer, shall undertake other duties and functions usually performed by a
corporate secretary. Other officers may be designated by the Chief Executive
Officer or the Board of Directors as Assistant Secretary to perform the duties
of the Secretary.
SECTION 3.05. EXECUTION OF DOCUMENTS. The Chief Executive Officer, Chairman of
the Board, President, any officer being a member of the Bank's management staff
who is also a person in charge of and responsible for any department within the
Bank and any other officer to the extent such officer is so designated and
authorized BY the Chief Executive Officer, the Chairman of the Board, the
President, or any other officer who is a member of the Bank's management staff
who is in charge of and responsible for any department within the Bank, are
hereby authorized on behalf of the Bank to sell, assign, lease, mortgage,
transfer, deliver and convey any real or personal property now or hereafter
owned by or standing in the name of the Bank or its nominee, or held by this
Bank as collateral security, and to execute and deliver such deeds, contracts,
leases,
25
<PAGE>
assignments, bills of sale, transfers or other papers or documents as may be
appropriate in the circumstances; to execute any loan agreement, security
agreement, commitment letters and financing statements and other documents on
behalf of the Bank as a lender; to execute purchase orders, documents and
agreements entered into by the Bank in the ordinary course of business, relating
to purchase, sale, exchange or lease of services, tangible personal property,
materials and equipment for the use of the Bank; to execute powers of attorney
to perform specific or general functions in the name of or on behalf of the
Bank; to execute promissory notes or other instruments evidencing debt of the
Bank; to execute instruments pledging or releasing securities for public funds,
documents submitting public fund bids on behalf of the Bank and public fund
contracts; to purchase and acquire any real or personal property including loan
portfolios and to execute and deliver such agreements, contracts or other papers
or documents as may be appropriate in the circumstances; to execute any
indemnity and fidelity bonds, proxies or other papers or documents of like or
different character necessary, desirable or incidental to the conduct of its
banking business; to execute and deliver settlement agreements or other papers
or documents as may be appropriate in connection with a dismissal authorized by
Section 3.01(c) of these By-laws; to execute agreements, instruments, documents,
contracts or other papers of like or difference character necessary, desirable
or incidental to the conduct of its banking business; and to execute and deliver
partial releases from and discharges or assignments of mortgages, financing
statements and assignments or surrender of insurance policies, now or hereafter
held by this Bank.
The Chief Executive Officer, Chairman of the Board, President, any
officer being a
26
<PAGE>
member of the Bank's management staff who is also a person in charge of and
responsible for any department within the Bank, and any other officer of the
Bank so designated and authorized by the Chief Executive Officer, Chairman of
the Board, President or any officer who is a member of the Bank's management
staff who is in charge of and responsible for any department within the Bank are
authorized for and on behalf of the Bank to sign and issue checks, drafts, and
certificates of deposit; to sign and endorse bills of exchange, to sign and
countersign foreign and domestic letters of credit, to receive and receipt for
payments of principal, interest, dividends, rents, fees and payments of every
kind and description paid to the Bank, to sign receipts for property acquired by
or entrusted to the Bank, to guarantee the genuineness of signatures on
assignments of stocks, bonds or other securities, to sign certifications of
checks, to endorse and deliver checks, drafts, warrants, bills, notes,
certificates of deposit and acceptances in all business transactions of the
Bank.
Other persons in the employment of the Bank and of its subsidiaries,
including but not limited to officers and other members of the management staff,
may be authorized by the Chief Executive Officer, Chairman of the Board,
President or by an officer so designated by the Chief Executive Officer,
Chairman of the Board, or President to perform the acts and to execute the
documents set forth above, subject, however, to such limitations and conditions
as are contained in the authorization given to such person.
SECTION 3.06. PERFORMANCE BOND. All officers and employees of the Bank shall
be bonded for the honest and faithful performance of their duties for such
amount as may
27
<PAGE>
be prescribed by the Board of Directors.
ARTICLE IV
TRUST DEPARTMENT
SECTION 4.01. TRUST DEPARTMENT. Pursuant to the fiduciary powers granted to
this Bank under the provisions of Federal Law and Regulations of the Comp-
troller of the Currency, there shall be maintained a separate Trust Department
of the Bank, which shall be operated in the manner specified herein.
SECTION 4.02. TRUST MANAGEMENT COMMITTEE. There shall be a standing Committee
known as the Trust Management Committee, consisting of at least five members, a
majority of whom shall not be officers of the Bank. The Committee shall consist
of the Chairman of the Board who shall be Chairman of the Committee, the
President, and at least three other Directors appointed by the Board of
Directors and who shall continue as members of the Committee until their
successors are appointed. Any vacancy in the Trust Management Committee may be
filled by the Board at any regular or special meeting. In the event of the
absence of any member or members, such Committee may, in its discretion, appoint
members of the Board to fill the place of such absent members to serve during
such absence. Three members of the Committee shall constitute a quorum. Any
member of the Committee may be removed by the Board by a majority vote at any
regular or special meeting of the Board. The Committee shall meet at such times
as it may determine or at the
28
<PAGE>
call of the Chairman, or President or any two members thereof.
The Trust Management Committee, under the general direction of the Board of
Directors, shall supervise the policy of the Trust Department which shall be
formulated and executed in accordance with Law, Regulations of the Comp- troller
of the Currency, and sound fiduciary principles.
SECTION 4.03. TRUST EXAMINATION COMMITTEE. There shall be a standing Commit-
tee known as the Trust Examination Committee, consisting of three directors
appointed by the Board of Directors and who shall continue as members of the
committee until their successors are appointed. Such members shall not be
active officers of the Bank. Two members of the Committee shall constitute a
quorum. Any member of the Committee may be removed by the Board by a majority
vote at any regular or special meeting of the Board. The Committee shall meet
at such times as it may determine or at the call of two members thereof.
This Committee shall, at least once during each calendar year and within
fifteen months of the last such audit, or at such other time(s) as may be
required by Regulations of the Comptroller of the Currency, make suitable audits
of the Trust Department or cause suitable audits to be made by auditors
responsible only to the Board of Directors, and at such time shall ascertain
whether the Department has been administered in accordance with Law, Regula-
tions of the Comptroller of the Currency and sound fiduciary principles.
The Committee shall promptly make a full report of such audits in writing
to the Board of Directors of the Bank, together with a recommendation as to what
action, if any, may be
29
<PAGE>
necessary to correct any unsatisfactory condition. A report of the audits
together with the action taken thereon shall be noted in the Minutes of the
Board of Directors and such report shall be a part of the records of this Bank.
SECTION 4.04. MANAGEMENT. The Trust Department shall be under the management
and supervision of an officer of the Bank or of the trust affiliate of the Bank
designated by and subject to the advice and direction of the Chief Executive
Officer. Such officer having supervisory responsibility over the Trust
Department shall do or cause to be done all things necessary or proper in
carrying on the business of the Trust Department in accordance with provi- sions
of law and applicable regulations.
SECTION 4.05. HOLDING OF PROPERTY. Property held by the Trust Department may
be carried in the name of the Bank in its fiduciary capacity, in the name of
Bank, or in the name of a nominee or nominees.
SECTION 4.06. TRUST INVESTMENTS. Funds held by the Bank in a fiduciary
capacity awaiting investment or distribution shall not be held uninvested or
undistributed any longer than is reasonable for the proper management of the
account and shall be invested in accordance with the instrument establishing a
fiduciary relationship and local law. Where such instrument does not specify
the character or class of investments to be made and does not vest in the Bank
any discretion in the matter, funds held pursuant to such instrument shall be
invested in any investment which corporate fiduciaries may invest under local
law.
30
<PAGE>
The investments of each account in the Trust Department shall be kept
separate from the assets of the Bank, and shall be placed in the joint custody
or control of not less than two of the officers or employees of the Bank or of
the trust affiliate of the Bank designated for the purpose by the Trust
Management Committee.
SECTION 4.07. EXECUTION OF DOCUMENTS. The Chief Executive Officer, Chairman of
the Board, President, any officer of the Trust Department, and such other
officers of the trust affiliate of the Bank as are specifically designated and
authorized by the Chief Executive Officer, the President, or the officer in
charge of the Trust Department, are hereby authorized, on behalf of this Bank,
to sell, assign, lease, mortgage, transfer, deliver and convey any real property
or personal property and to purchase and acquire any real or personal property
and to execute and deliver such agreements, contracts, or other papers and
documents as may be appropriate in the circumstances for property now or
hereafter owned by or standing in the name of this Bank, or its nominee, in any
fiduciary capacity, or in the name of any principal for whom this Bank may now
or hereafter be acting under a power of attorney, or as agent and to execute and
deliver partial releases from any discharges or assignments or mortgages and
assignments or surrender of insurance policies, to execute and deliver deeds,
contracts, leases, assignments, bills of sale, transfers or such other papers or
documents as may be appropriate in the circumstances for property now or
hereafter held by this Bank in any fiduciary capacity or owned by any principal
for whom this Bank may now or hereafter be acting under a power of attorney or
as agent; to execute and deliver settlement agreements or other papers or
documents as may be appropriate in connection
31
<PAGE>
with a dismissal authorized by Section 3.01(c) of these By-laws; provided that
the signature of any such person shall be attested in each case by any officer
of the Trust Department or by any other person who is specifically authorized by
the Chief Executive Officer, the President or the officer in charge of the Trust
Department.
The Chief Executive Officer, Chairman of the Board, President, any officer
of the Trust Department and such other officers of the trust affiliate of the
Bank as are specifically designated and authorized by the Chief Executive
Officer, the President, or the officer in charge of the Trust Department, or any
other person or corporation as is specifically authorized by the Chief Executive
Officer, the President or the officer in charge of the Trust Department, are
hereby authorized on behalf of this Bank, to sign any and all pleadings and
papers in probate and other court proceedings, to execute any indemnity and
fidelity bonds, trust agreements, proxies or other papers or documents of like
or different character necessary, desirable or incidental to the appointment of
the Bank in any fiduciary capacity and the conduct of its business in any
fiduciary capacity; also to foreclose any mortgage, to execute and deliver
receipts for payments of principal, interest, dividends, rents, fees and
payments of every kind and description paid to the Bank; to sign receipts for
property acquired or entrusted to the Bank; also to sign stock or bond
certificates on behalf of this Bank in any fiduciary capacity and on behalf of
this Bank as transfer agent or registrar; to guarantee the genuineness of
signatures on assignments of stocks, bonds or other securities, and to
authenticate bonds, debentures, land or lease trust certificates or other forms
of security issued pursuant to any indenture under which this Bank now or
hereafter is acting as Trustee. Any such person, as well as such other persons
as are specifically authorized by
32
<PAGE>
the Chief Executive Officer or the officer in charge of the Trust Department,
may sign checks, drafts and orders for the payment of money executed by the
Trust Department in the course of its business.
SECTION 4.08. VOTING OF STOCK. The Chairman of the Board, President, any
officer of the Trust Department, any officer of the trust affiliate of the Bank
and such other persons as may be specifically authorized by Resolution of the
Trust Management Committee or the Board of Directors, may vote shares of stock
of a corporation of record on the books of the issuing company in the name of
the Bank or in the name of the Bank as fiduciary, or may grant proxies for the
voting of such stock of the granting if same is permitted by the instrument
under which the Bank is acting in a fiduciary capacity, or by the law applicable
to such fiduciary account. In the case of shares of stock which are held by a
nominee of the Bank, such shares may be voted by such person(s) authorized by
such nominee.
33
<PAGE>
ARTICLE V
STOCKS AND STOCK CERTIFICATE
SECTION 5.01. STOCK CERTIFICATES. The shares of stock of the Bank shall be
evidenced by certificates which shall bear the signature of the Chairman of the
Board, the President, or a Vice President (which signature may be engraved,
printed or impressed), and shall be signed manually by the Secretary, or any
other officer appointed by the Chief Executive Officer for that purpose.
In case any such officer who has signed or whose facsimile signature has
been placed upon such certificate shall have ceased to be such before such
certificate is issued, it may be issued by the Bank with the same effect as if
such officer had not ceased to be such at the time of its issue. Each such
certificate shall bear the corporate seal of the Bank, shall recite on its fact
that the stock represented thereby is transferable only upon the books of the
Bank properly endorsed and shall recite such other information as is required by
law and deemed appropriate by the Board. The corporate seal may be facsimile
engraved or printed.
SECTION 5.02. STOCK ISSUE AND TRANSFER. The shares of stock of the Bank shall
be transferable only upon the stock transfer books of the Bank and except as
hereinafter provided, no transfer shall be made or new certificates issued
except upon the surrender for cancellation of the certificate or certificates
previously issued therefor. In the case of the loss, theft, or destruction of
any certificate, a new certificate may be issued in place of such
34
<PAGE>
certificate upon the furnishing of any affidavit setting forth the circumstances
of such loss, theft, or destruction and indemnity satisfactory to the Chairman
of the Board, the President, or a Vice President. The Board of Directors, or
the Chief Executive Officer, may authorize the issuance of a new certificate
therefor without the furnishing of indemnity. Stock Transfer Books, in which
all transfers of stock shall be recorded, shall be provided.
The stock transfer books may be closed for a reasonable period and under
such conditions as the Board of Directors may at any time determine for any
meeting of shareholders, the payment of dividends or any other lawful purpose.
In lieu of closing the transfer books, the Board may, in its discretion, fix a
record date and hour constituting a reasonable period prior to the day
designated for the holding of any meeting of the shareholders or the day
appointed for the payment of any dividend or for any other purpose at the time
as of which shareholders entitled to notice of and to vote at any such meeting
or to receive such dividend or to be treated as shareholders for such other
purpose shall be determined, and only shareholders of record at such time shall
be entitled to notice of or to vote at such meeting or to receive such dividends
or to be treated as shareholders for such other purpose.
35
<PAGE>
ARTICLE VI
MISCELLANEOUS PROVISIONS
SECTION 6.01. SEAL. The impression made below is an impression of the seal
adopted by the Board of Directors of BANK ONE, COLUMBUS, NATIONAL ASSOCIATION.
The Seal may be affixed by any officer of the Bank to any document executed by
an authorized officer on behalf of the Bank, and any officer may certify any
act, proceedings, record, instrument or authority of the Bank.
SECTION 6.02. BANKING HOURS. Subject to ratification by the Executive
Committee, the Bank and each of its Branches shall be open for business on such
days and during such hours as the Chief Executive Officer of the Bank shall,
from time to time, prescribe.
SECTION 6.03. MINUTE BOOK. The organization papers of this Bank, the Articles
of Association, the returns of the judges of elections, the By-Laws and any
amendments thereto, the proceedings of all regular and special meetings of the
shareholders and of the Board of Directors, and reports of the committees of the
Board of Directors shall be recorded in the minute book of the Bank. The
minutes of each such meeting shall be signed by the presiding Officer and
attested by the secretary of the meetings.
SECTION 6.04. AMENDMENT OF BY-LAWS. These By-Laws may be amended by vote of a
majority of the Directors.
36
<PAGE>
EXHIBIT 6
Securities and Exchange Commission
Washington, D.C. 20549
CONSENT
The undersigned, designated to act as Trustee under the Indenture for Ocwen
Financial Corporation described in the attached Statement of Eligibility and
Qualification, does hereby consent that reports of examinations by Federal,
State, Territorial, or District Authorities may be furnished by such authorities
to the Commission upon the request of the Commission.
This Consent is given pursuant to the provision of Section 321(b) of the Trust
Indenture Act of 1939, as amended.
Bank One, Columbus, NA
Dated: August 28, 1996
By: /s/ Ted Kravits
-------------------------------------
Ted Kravits
Authorized Signer
<PAGE>
Board of Governors of
the Federal Reserve
System
OMB Number: 7100-0036
Federal Deposit
Insurance Corporation
OMB Number: 3064-0052
Office of the Comptroller
of the Currency
OMB Number: 1557-0081
Federal Financial Institutions Examination Council Expires March 31, 1999
- --------------------------------------------------------------------------------
/1/
[LOGO] Please refer to page i.
Table of Contents, for
the required disclosure
of estimated burden.
- --------------------------------------------------------------------------------
CONSOLIDATED REPORTS OF CONDITION AND INCOME FOR A BANK WITH DOMESTIC AND
FOREIGN OFFICES -- FFIEC 031
(960630)
-----------
REPORT AT THE CLOSE OF BUSINESS JUNE 30, 1996 (RCRI 9999)
This report is required by law: 12 U.S.C. Section 324 (State member banks);
12 U.S.C. Section 1817 (State nonmember banks); and 12 U.S.C. Section 161
(National banks).
This report form is to be filed by banks with branches and consolidated
subsidiaries in U.S. territories and possessions, Edge or Agreement
subsidiaries, foreign branches, consolidated foreign subsidiaries, or
International Banking Facilities.
- --------------------------------------------------------------------------------
NOTE: The Reports of Condition and Income must be signed by an authorized
officer and the Report of Condition must be attested to by not less than two
directors (trustees) for State nonmember banks and three directors for State
member and National banks.
I, Richard D. Nadler, Controller
----------------------------------------------------------
Name and Title of Officer Authorized to Sign Report
of the named bank do hereby declare that these Reports of Condition and Income
(including the supporting schedules) have been prepared in conformance with the
instructions issued by the appropriate Federal regulatory authority and are true
to the best of my knowledge and belief.
/s/ R. D. Nadler
- ----------------------------------------
Signature of Officer Authorized to Sign Report
7/26/96
- ----------------------------------------
Date of Signature
The Reports of Condition and Income are to be prepared in accordance with
Federal regulatory authority instructions. NOTE: These instructions may in
some cases differ from generally accepted accounting principles.
We, the undersigned directors (trustees), attest to the correctness of this
Report of Condition (including the supporting schedules) and declare that it has
been examined by us and to the best of our knowledge and belief has been
prepared in conformance with the instructions issued by the appropriate Federal
regulatory authority and is true and correct.
/s/ Illegible
- ----------------------------------------
Director (Trustee)
/s/ Illegible
- ----------------------------------------
Director (Trustee)
/s/ Illegible
- ----------------------------------------
Director (Trustee)
- --------------------------------------------------------------------------------
FOR BANKS SUBMITTING HARD COPY REPORT FORMS:
STATE MEMBER BANKS: Return the original and one copy to the appropriate
Federal Reserve District Bank.
STATE NONMEMBER BANKS: Return the original only in the SPECIAL RETURN
ADDRESS ENVELOPE PROVIDED. If express mail is used in lieu of the special
return address envelope, return the original only to the FDIC, c/o Quality
Data Systems, 2127 Espey Court, Suite 204, Crofton, MD 21114.
NATIONAL BANKS: Return the original only in the SPECIAL RETURN ADDRESS ENVELOPE
PROVIDED. If express mail is used in lieu of the special return address
envelope, return the original only to the FDIC, c/o Quality Data Systems, 2127
Espey Court, Suite 204, Crofton, MD 21114.
- --------------------------------------------------------------------------------
FDIC Certificate Number
-----------
(RCRI 9050)
CALL NO. 196 31 06-30-96
STBK: 39-1580 00088 STCERT: 39-06559
BANK ONE, COLUMBUS, NATIONAL ASSOCIA
100 EAST BROAD STREET
COLUMBUS, OH 43271
Board of Governors of the Federal Reserve System, Federal Deposit Insurance
Corporation, Office of the Comptroller of the Currency
<PAGE>
Page i
/2/
CONSOLIDATED REPORTS OF CONDITION AND INCOME FOR A BANK WITH DOMESTIC AND
FOREIGN OFFICES
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Signature Page Cover
Report of Income
Schedule RI--Income Statement . . . . . . . . . . . . . . . . . . . . RI-1, 2, 3
Schedule RI-A--Changes in Equity Capital. . . . . . . . . . . . . . . . . . RI-4
Schedule RI-B--Charge-offs and Recoveries and
Changes in Allowance for Loan and Lease
Losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RI-4, 5
Schedule RI-C--Applicable Income Taxes by
Taxing Authority. . . . . . . . . . . . . . . . . . . . . . . . . . . RI-5
Schedule RI-D--Income from
International Operations. . . . . . . . . . . . . . . . . . . . . . . RI-6
Schedule RI-E--Explanations . . . . . . . . . . . . . . . . . . . . . . RI-7, 8
Report of Condition
Schedule RC--Balance Sheet. . . . . . . . . . . . . . . . . . . . . . . RC-1, 2
Schedule RC-A--Cash and Balances Due
From Depository Institutions. . . . . . . . . . . . . . . . . . . . . RC-3
Schedule RC-B--Securities . . . . . . . . . . . . . . . . . . . . . . RC-3, 4, 5
Schedule RC-C--Loans and Lease Financing
Receivables:
Part I. Loans and Leases. . . . . . . . . . . . . . . . . . . . . . RC-6, 7
Part II. Loans to Small Businesses and
Small Farms (included in the forms for
June 30 only). . . . . . . . . . . . . . . . . . . . . . . . RC-7a, 7b
Schedule RC-D--Trading Assets and Liabilities
(to be completed only by selected banks). . . . . . . . . . . . . . . .RC-8
Schedule RC-E--Deposit Liabilities. . . . . . . . . . . . . . . . . RC-9, 10, 11
Schedule RC-F--Other Assets . . . . . . . . . . . . . . . . . . . . . . . RC-11
Schedule RC-G--Other Liabilities. . . . . . . . . . . . . . . . . . . . . RC-11
Schedule RC-H--Selected Balance Sheet Items
for Domestic Offices. . . . . . . . . . . . . . . . . . . . . . . . . RC-12
Schedule RC-I--Selected Assets and Liabilities
of IBFs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RC-13
Schedule RC-K--Quarterly Averages . . . . . . . . . . . . . . . . . . . . RC-13
Schedule RC-L--Off-Balance Sheet
Items . . . . . . . . . . . . . . . . . . . . . . . . . . . . RC-14, 15, 16
Schedule RC-M--Memoranda. . . . . . . . . . . . . . . . . . . . . . . RC-17, 18
Schedule RC-N--Past Due and Nonaccrual
Loans, Leases, and Other Assets . . . . . . . . . . . . . . . . . RC-19, 20
Schedule RC-O--Other Data for Deposit
Insurance Assessments . . . . . . . . . . . . . . . . . . . . . . RC-21, 22
Schedule RC-R--Regulatory Capital . . . . . . . . . . . . . . . . . . RC-23, 24
Optional Narrative Statement Concerning
the Amounts Reported in the Reports
of Condition and Income . . . . . . . . . . . . . . . . . . . . . . . RC-25
Special Report (to be completed by all banks)
Schedule RC-J--Repricing Opportunities (sent only to and to be completed only
by savings banks)
Disclosure of Estimated Burden
The estimated average burden associated with this information collection is 32.2
hours per respondent and is estimated to vary from 15 to 230 hours per response,
depending on individual circumstances. Burden estimates include the time for
reviewing instructions, gathering and maintaining data in the required form, and
completing the information collection, but exclude the time for compiling and
maintaining business records in the normal course of a respondent's activities.
Comments concerning the accuracy of this burden estimate and suggestions for
reducing this burden should be directed to the Office of Information and
Regulatory Affairs, Office of Management and Budget, Washington, D.C. 20503,
and to one of the following:
Secretary
Board of Governors of the Federal Reserve System
Washington, D.C. 20551
Legislative and Regulatory Analysis Division
Office of the Comptroller of the Currency
Washington, D.C. 20219
Assistant Executive Secretary
Federal Deposit Insurance Corporation
Washington, D.C. 20429
For information or assistance, National and State nonmember banks should contact
the FDIC's Call Reports Analysis Unit, 550 17th Street, NW, Washington, D.C.
20429, toll free on (800) 688-FDIC(3342), Monday through Friday between 8:00
a.m. and 5:00 p.m., Eastern time. State member banks should contact their
Federal Reserve District Bank.
<PAGE>
Legal Title of Bank: BANK ONE, COLUMBUS, NA
Address: 100 East Broad Street
City, State Zip: Columbus, OH 43271-1066
FDIC Certificate No.: 06559 Page RI-1
CONSOLIDATED REPORT OF INCOME
FOR THE PERIOD JANUARY 1, 1996 - JUNE 30, 1996
All Report of Income schedules are to be reported on a calendar year-to-date
basis in thousands of dollars.
SCHEDULE RI--INCOME STATEMENT
<TABLE>
<CAPTION>
--------
I480
--------------------
Dollar Amounts in Thousands RIAD Bil Mil Thou
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
1. Interest income:
a. Interest and fee income on loans:
(1) In domestic offices:
(a) Loans secured by real estate . . . . . . . . . . . . . . . . . . 4011 57,877 1.a.(1)(a)
(b) Loans to depository institutions . . . . . . . . . . . . . . . . 4019 16 1.a.(1)(b)
(c) Loans to finance agricultural production and other loans
to farmers . . . . . . . . . . . . . . . . . . . . . . . . . . . 4024 381 1.a.(1)(c)
(d) Commercial and industrial loans. . . . . . . . . . . . . . . . . 4012 33,533 1.a.(1)(d)
(e) Acceptances of other banks . . . . . . . . . . . . . . . . . . . 4026 0 1.a.(1)(e)
(f) Loans to individuals for household, family, and other personal
expenditures:
(1) Credit cards and related plans . . . . . . . . . . . . . . . 4054 189,430 1.a.(1)(f)(1)
(2) Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4055 54,848 1.a.(1)(f)(2)
(g) Loans to foreign governments and official institutions . . . . . 4056 0 1.a.(1)(g)
(h) Obligations (other than securities and leases) of states and
political subdivisions in the U.S.:
(1) Taxable obligations. . . . . . . . . . . . . . . . . . . . . 4503 78 1.a.(1)(h)(1)
(2) Tax-exempt obligations . . . . . . . . . . . . . . . . . . . 4504 581 1.a.(1)(h)(2)
(i) All other loans in domestic offices. . . . . . . . . . . . . . . 4058 4,986 1.a.(1)(i)
(2) In foreign offices, Edge and Agreement subsidiaries, and IBFs. . . . 4059 0 1.a.(2)
b. Income from lease financing receivables:
(1) Taxable leases . . . . . . . . . . . . . . . . . . . . . . . . . . . 4505 31,773 1.b.(1)
(2) Tax-exempt leases. . . . . . . . . . . . . . . . . . . . . . . . . . 4307 60 1.b.(2)
c. Interest income on balances due from depository institutions: (1)
(1) In domestic offices. . . . . . . . . . . . . . . . . . . . . . . . . 4105 0 1.c.(1)
(2) In foreign offices, Edge and Agreement subsidiaries, and IBFs. . . . 4106 0 1.c.(2)
d. Interest and dividend income on securities:
(1) U.S. Treasury securities and U.S. Government agency and corporation
obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4027 11,220 1.d.(1)
(2) Securities issued by states and political subdivisions in the U.S.:
(a) Taxable securities . . . . . . . . . . . . . . . . . . . . . . . 4506 0 1.d.(2)(a)
(b) Tax-exempt securities. . . . . . . . . . . . . . . . . . . . . . 4507 1,463 1.d.(2)(b)
(3) Other domestic debt securities . . . . . . . . . . . . . . . . . . . 3657 417 1.d.(3)
(4) Foreign debt securities. . . . . . . . . . . . . . . . . . . . . . . 3658 108 1.d.(4)
(5) Equity securities (including investments in mutual funds). . . . . . 3659 115 1.d.(5)
e. Interest income from trading assets. . . . . . . . . . . . . . . . . . . 4069 0 1.e.
</TABLE>
- ------------------
(1) Includes interest income on time certificates of deposit not held for
trading.
3
<PAGE>
Legal Title of Bank: BANK ONE, COLUMBUS, NA Page RI-2
Address: 100 East Broad Street
City, State Zip: Columbus, OH 43271-1066
FDIC Certificate No.: 0 6 5 5 9
SCHEDULE RI--CONTINUED
<TABLE>
<CAPTION>
---------------
Dollar Amounts in Thousands Year-to-date
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RIAD Bil Mil Thou
1. Interest income (continued)
f. Interest income on federal funds sold and securities purchased under
agreements to resell in domestic offices of the bank and of its Edge
and Agreement subsidiaries, and in IBFs . . . . . . . . . . . . . . . . . . 4020 6,503 1.f.
g. Total interest income (sum of items 1.a through 1.f). . . . . . . . . . . . 4107 393,389 1.g.
2. Interest expense:
a. Interest on deposits:
(1) Interest on deposits in domestic offices:
(a) Transaction accounts (NOW accounts, ATS accounts, and
telephone and preauthorized transfer accounts). . . . . . . . . . . 4508 360 2.a.(1)(a)
(b) Nontransaction accounts:
(1) Money market deposit accounts (MMDAs) . . . . . . . . . . . . . 4509 26,817 2.a.(1)(b)(1)
(2) Other savings deposits. . . . . . . . . . . . . . . . . . . . . 4511 9,638 2.a.(1)(b)(2)
(3) Time certificates of deposit of $100,000 or more. . . . . . . . 4174 2,160 2.a.(1)(b)(3)
(4) All other time deposits . . . . . . . . . . . . . . . . . . . . 4512 30,968 2.a.(1)(b)(4)
(2) Interest on deposits in foreign offices, Edge and Agreement
subsidiaries, and IBFs. . . . . . . . . . . . . . . . . . . . . . . . . 4172 12,112 2.a.(2)
b. Expense of federal funds purchased and securities sold under
agreements to repurchase in domestic offices of the bank and of its
Edge and Agreement subsidiaries, and in IBFs. . . . . . . . . . . . . . . . 4180 35,084 2.b.
c. Interest on demand notes issued to the U.S. Treasury, trading
liabilities, and other borrowed money . . . . . . . . . . . . . . . . . . . 4185 22,394 2.c.
d. Interest on mortgage indebtedness and obligations under capitalized
leases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4072 187 2.d.
e. Interest on subordinated notes and debentures . . . . . . . . . . . . . . . 4200 5,914 2.e.
f. Total interest expense (sum of items 2.a through 2.e) . . . . . . . . . . . 4073 145,634 2.f.
------------------
3. Net interest income (item 1.g minus 2.f). . . . . . . . . . . . . . . . . . . . RIAD 4074 247,755 3.
------------------
4. Provisions:
------------------
a. Provision for loan and lease losses . . . . . . . . . . . . . . . . . . . . RIAD 4230 73,642 4.a.
b. Provision for allocated transfer risk . . . . . . . . . . . . . . . . . . . RIAD 4243 0 4.b.
------------------
5. Noninterest income:
a. Income from fiduciary activities. . . . . . . . . . . . . . . . . . . . . . 4070 15,993 5.a.
b. Service charges on deposit accounts in domestic offices . . . . . . . . . . 4080 19,861 5.b.
c. Trading revenue (must equal Schedule RI, sum of Memorandum
items 8.a through 8.d). . . . . . . . . . . . . . . . . . . . . . . . . . . A220 0 5.c.
d. Other foreign transaction gains (losses). . . . . . . . . . . . . . . . . . 4076 177 5.d.
e. Not applicable
f. Other noninterest income:
(1) Other fee income. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5407 103,509 5.f.(1)
(2) All other noninterest income* . . . . . . . . . . . . . . . . . . . . . 5408 45,014 5.f.(2)
------------------
g. Total noninterest income (sum of items 5.a through 5.f) . . . . . . . . . . RIAD 4079 184,554 5.g.
6. a. Realized gains (losses) on held-to-maturity securities. . . . . . . . . . . RIAD 3521 (38) 6.a.
b. Realized gains (losses) on available-for-sale securities. . . . . . . . . . RIAD 3196 0 6.b.
------------------
7. Noninterest expense:
a. Salaries and employee benefits. . . . . . . . . . . . . . . . . . . . . . . 4135 74,769 7.a.
b. Expenses of premises and fixed assets (net of rental income)
(excluding salaries and employee benefits and mortgage interest). . . . . . 4217 14,205 7.b.
c. Other noninterest expense*. . . . . . . . . . . . . . . . . . . . . . . . . 4092 261,658 7.c.
------------------
d. Total noninterest expense (sum of items 7.a through 7.c). . . . . . . . . . RIAD 4093 350,632 7.d.
------------------
8. Income (loss) before income taxes and extraordinary items and other ------------------
adjustments (item 3 plus or minus items 4.a, 4.b, 5.g, 6.a, 6.b, and 7.d) . . . RIAD 4301 7,997 8.
9. Applicable income taxes (on item 8) . . . . . . . . . . . . . . . . . . . . . . RIAD 4302 971 9.
------------------
------------------
10. Income (loss) before extraordinary items and other adjustments
(item 8 minus 9). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RIAD 4300 7,026 10.
------------------
</TABLE>
- -------------------
*Describe on Schedule RI-E--Explanations.
4
<PAGE>
Legal Title of Bank: BANK ONE, COLUMBUS, NA Page RI-3
Address: 100 East Broad Street
City, State Zip: Columbus, OH 43271-1066
FDIC Certificate No.: 06559
SCHEDULE RI--CONTINUED
<TABLE>
<CAPTION>
--------------
Dollar Amounts in Thousands Year-to-date
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RIAD Bil Mil Thou
11. Extraordinary items and other adjustments:
a. Extraordinary items and other adjustments, gross of income taxes* . . . . . . 4310 0 11.a.
b. Applicable income taxes (on item 11.a)* . . . . . . . . . . . . . . . . . . . 4315 0 11.b.
c. Extraordinary items and other adjustments, net of income taxes ------------------
(item 11.a minus 11.b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . RIAD 4320 0 11.c.
12. Net income (loss) (sum of items 10 and 11.c) . . . . . . . . . . . . . . . . . . RIAD 4340 7,026 12.
-----------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-----------
I481
----------------
Memoranda Year-to-date
---------------------
Dollar Amounts in Thousands RIAD Bil Mil Thou
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1. Interest expense incurred to carry tax-exempt securities, loans, and leases acquired after
August 7, 1986, that is not deductible for federal income tax purposes. . . . . . . . . . . . . 4513 305 M.1.
2. Income from the sale and servicing of mutual funds and annuities in domestic offices
(included in Schedule RI, item 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8431 917 M.2.
3.-4. Not applicable.
5. Number of full-time equivalent employees on payroll at end of current period (round to Number
nearest whole number) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4150 3,508 M.5.
6. Not applicable
7. If the reporting bank has restated its balance sheet as a result of applying push down MM DD YY
accounting this calendar year, report the date of the bank's acquisition. . . . . . . . . . . . 9106 00/00/00 M.7.
8. Trading revenue (from cash instruments and off-balance sheet derivative instruments)
(sum of Memorandum items 8.a through 8.d must equal Schedule RI, item 5.c): Bil Mil Thou
a. Interest rate exposures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8757 0 M.8.a.
b. Foreign exchange exposures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8758 0 M.8.b.
c. Equity security and index exposures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8759 0 M.8.c.
d. Commodity and other exposures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8760 0 M.8.d.
9. Impact on income of off-balance sheet derivatives held for purposes other than trading:
a. Net increase (decrease) to interest income. . . . . . . . . . . . . . . . . . . . . . . . . 8761 (1,237) M.9.a.
b. Net (increase) decrease to interest expense . . . . . . . . . . . . . . . . . . . . . . . . 8762 (4,342) M.9.b.
c. Other (noninterest) allocations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8763 (3,008) M.9.c.
10. Credit losses on off-balance sheet derivatives (see instructions) . . . . . . . . . . . . . . . A251 0 M.10.
</TABLE>
- -----------------
*Describe on Schedule RI-E--Explanations.
5
<PAGE>
Legal Title of Bank: BANK ONE, COLUMBUS, NA
Address: 100 East Broad Street
City, State Zip: Columbus, OH 43271-1066
FDIC Certificate No.: 06559 Page RI-4
Schedule RI-A--Changes in Equity Capital
Indicate decreases and losses in parentheses.
<TABLE>
<CAPTION>
----
I483
-------------------
Dollar Amounts in Thousands RIAD Bil Mil Thou
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1. Total equity capital originally reported in the December 31, 1995, Reports of
Condition and Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3215 501,192 1.
2. Equity capital adjustments from amended Reports of Income, net*. . . . . . . . . . . . . . 3216 (10,104) 2.
3. Amended balance end of previous calendar year (sum of items 1 and 2) . . . . . . . . . . . 3217 491,088 3.
4. Net income (loss) (must equal Schedule RI, item 12). . . . . . . . . . . . . . . . . . . . 4340 7,026 4.
5. Sale, conversion, acquisition, or retirement of capital stock, net . . . . . . . . . . . . 4346 0 5.
6. Changes incident to business combinations, net . . . . . . . . . . . . . . . . . . . . . . 4356 0 6.
7. LESS: Cash dividends declared on preferred stock. . . . . . . . . . . . . . . . . . . . . 4470 0 7.
8. LESS: Cash dividends declared on common stock . . . . . . . . . . . . . . . . . . . . . . 4460 16,000 8.
9. Cumulative effect of changes in accounting principles from prior years* (see
instructions for this schedule). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4411 0 9.
10. Corrections of material accounting errors from prior years* (see instructions
for this schedule) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4412 0 10.
11. Change in net unrealized holding gains (losses) on available-for-sale securities . . . . . 8433 (3,902) 11.
12. Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . 4414 0 12.
13. Other transactions with parent holding company* (not included in
items 5, 7, or 8 above). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4415 0 13.
14. Total equity capital end of current period (sum of items 3 through 13) (must equal
Schedule RC, item 28). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3210 478,212 14.
-------------------
</TABLE>
- --------------------------------------------------------------------------------
* Describe on Schedule RI-E--Explanations.
Schedule RI-B--Charge-offs and Recoveries and Changes
in Allowance for Loan and Lease Losses
Part I. Charge-offs and Recoveries on Loans and Leases
Part I excludes charge-offs and recoveries through the
allocated transfer risk reserve.
<TABLE>
<CAPTION>
----
I486
------------------------------------------
(Column A) (Column B)
Charge-offs Recoveries
------------------------------------------
Calendar year-to-date
------------------------------------------
Dollar Amounts in Thousands RIAD Bil Mil Thou RIAD Bil Mil Thou
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. Loans secured by real estate:
a. To U.S. addressees (domicile) . . . . . . . . . . . . . . . . . . 4651 1,942 4661 1,199 1.a.
b. To non-U.S. addressees (domicile) . . . . . . . . . . . . . . . . 4652 0 4662 0 1.b.
2. Loans to depository institutions and acceptances of other banks:
a. To U.S. banks and other U.S. depository institutions. . . . . . . 4653 0 4663 0 2.a.
b. To foreign banks. . . . . . . . . . . . . . . . . . . . . . . . . 4654 0 4664 0 2.b.
3. Loans to finance agricultural production and other loans to
farmers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4655 0 4665 0 3.
4. Commercial and industrial loans:
a. To U.S. addressees (domicile) . . . . . . . . . . . . . . . . . . 4645 2,006 4617 611 4.a.
b. To non-U.S. addressees (domicile) . . . . . . . . . . . . . . . . 4646 0 4618 0 4.b.
5. Loans to individuals for household, family, and other personal
expenditures:
a. Credit cards and related plans. . . . . . . . . . . . . . . . . . 4656 78,460 4666 9,090 5.a.
b. Other (includes single payment, installment, and all
student loans) . . . . . . . . . . . . . . . . . . . . . . . . . 4657 12,428 4667 10,298 5.b.
6. Loans to foreign governments and official institutions . . . . . . . . 4643 0 4627 0 6.
7. All other loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4644 306 4628 312 7.
8. Lease financing receivables:
a. Of U.S. addressees (domicile) . . . . . . . . . . . . . . . . . . 4658 286 4668 369 8.a.
b. Of non-U.S. addressees (domicile) . . . . . . . . . . . . . . . . 4659 0 4669 0 8.b.
9. Total (sum of items 1 through 8) . . . . . . . . . . . . . . . . . . . 4635 95,428 4605 21,879 9.
--------------------------------------------
</TABLE>
6
<PAGE>
Legal Title of Bank: BANK ONE, COLUMBUS, NA
Address: 100 East Broad Street
City, State Zip: Columbus, OH 43271-1066
FDIC Certificate No.: 06559 Page RI-5
Schedule RI-B--Continued
Part I. Continued
<TABLE>
<CAPTION>
---------------------------------------------
(Column A) (Column B)
Charge-offs Recoveries
---------------------------------------------
Memoranda Calendar Year-to-Date
---------------------------------------------
Dollar Amounts in Thousands RIAD Bil Mil Thou RIAD Bil Mil Thou
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1-3. Not applicable
4. Loans to finance commercial real estate,
construction, and land development activities
(not secured by real estate) included in
Schedule RI-B, part I, items 4 and 7, above) . . . . . . 5409 0 5410 42 M.4.
5. Loans secured by real estate in domestic offices
(included in Schedule RI-B, part I, item 1, above):
a. Construction and land development . . . . . . . . . 3582 514 3583 50 M.5.a.
b. Secured by farmland . . . . . . . . . . . . . . . . 3584 0 3585 .2 M.5.b.
c. Secured by 1-4 family residential properties:
(1) Revolving, open-end loans secured by
1-4 family residential properties and
extended under lines of credit . . . . . . . . 5411 977 5412 3 M.5.e.(1)
(2) All other loans secured by 1-4 family
residential properties . . . . . . . . . . . . 5413 421 5414 463 M.5.e.(2)
d. Secured by multifamily (5 or more)
residential properties. . . . . . . . . . . . . . . 3588 0 3589 237 M.5.d.
e. Secured by nonfarm nonresidential properties. . . . 3590 30 3591 445 M.5.e.
----------------------------------------------
</TABLE>
Part II. Changes in Allowance for Loan and Lease Losses
<TABLE>
<CAPTION>
----------------------
Dollar Amounts in Thousands RIAD Bil Mil Thou
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1. Balance originally reported in the December 31, 1995, Reports of Condition and Income. . . . . 3124 152,121 1.
2. Recoveries (must equal part I, item 9, column B above) . . . . . . . . . . . . . . . . . . . . 4605 21,879 2.
3. LESS: Charge-offs (must equal part I, item 9, column A above). . . . . . . . . . . . . . . . . 4635 95,428 3.
4. Provision for loan and lease losses (must equal Schedule RI, item 4.a) . . . . . . . . . . . . 4230 73,642 4.
5. Adjustments* (see instructions for this schedule). . . . . . . . . . . . . . . . . . . . . . . 4815 0 5.
6. Balance end of current period (sum of items 1 through 5) (must equal Schedule RC,
item 4.b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3123 152,214 6.
----------------------
</TABLE>
- --------------------
* Describe on Schedule RI-E--Explanations.
Schedule RI-C-- Applicable Income Taxes by Taxing Authority
Schedule RI-C is to be reported with the December Report of Income.
<TABLE>
<CAPTION>
------
I489
----------------------
Dollar Amounts in Thousands RIAD Bil Mil Thou
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1. Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4780 N/A 1.
2. State and local. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4790 N/A 2.
3. Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4795 N/A 3.
4. Total (sum of items 1 through 3) must equal sum of Schedule RI, items 9 and 11.b). . . . . . . 4770 N/A 4.
-------------------------------
5. Deferred portion of item 4 . . . . . . . . . . . . . . . . . . RIAD 4772 N/A 5.
--------------------------------------------------------
</TABLE>
7
<PAGE>
Legal Title of Bank: BANK ONE, COLUMBUS, NA
Address: 100 East Broad Street
City, State Zip: Columbus, OH 43271-1066
FDIC Certificate No.: 06559 Page RI-6
Schedule RI-D--Income from International Operations
For all banks with foreign offices, Edge or Agreement subsidiaries, or IBFs
where international operations account for more than 10 percent of total
revenues, total assets, or net income.
Part I. Estimated Income from International Operations
<TABLE>
<CAPTION>
------
I492
-------------
Year-to-date
---------------------
Dollar Amounts in Thousands RIAD Bil Mil Thou
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1. Interest income and expense booked at foreign offices, Edge and Agreement subsidiaries,
and IBFs:
a. Interest income booked. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4837 108 1.a.
b. Interest expense booked . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4838 12,112 1.b.
c. Net interest income booked at foreign offices, Edge and Agreement subsidiaries, and
IBFs (item 1.a minus 1.b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4839 (12,004) 1.c.
2. Adjustments for booking location of international operations:
a. Net interest income attributable to international operations booked at domestic offices . 4840 0 2.a.
b. Net interest income attributable to domestic business booked at foreign offices . . . . . 4841 0 2.b.
c. Net booking location adjustment (item 2.a minus 2.b). . . . . . . . . . . . . . . . . . . 4842 0 2.c.
3. Noninterest income and expense attributable to international operations:
a. Noninterest income attributable to international operations . . . . . . . . . . . . . . . 4097 0 3.a.
b. Provision for loan and lease losses attributable to international operations. . . . . . . 4235 0 3.b.
c. Other noninterest expense attributable to international operations. . . . . . . . . . . . 4239 0 3.c.
d. Net noninterest income (expense) attributable to international operations (item 3.a
minus 3.b and 3.c). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4843 0 3.d.
4. Estimated pretax income attributable to international operations before capital allocation
adjustment (sum of items 1.c, 2.c, and 3.d). . . . . . . . . . . . . . . . . . . . . . . . . . 4844 (12,004) 4.
5. Adjustment to pretax income for internal allocations to international operations to reflect
the effects of equity capital on overall bank funding costs. . . . . . . . . . . . . . . . . . 4845 0 5.
6. Estimated pretax income attributable to international operations after capital allocation
adjustment (sum of items 4 and 5). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4846 (12,004) 6.
7. Income taxes attributable to income from international operations as estimated in item 6.. . . 4797 (4,201) 7.
8. Estimated net income attributable to international operations (item 6 minus 7) . . . . . . . . 4341 (7,803) 8.
--------------------
</TABLE>
<TABLE>
<CAPTION>
Memoranda
---------------------
Dollar Amounts in Thousands RIAD Bil Mil Thou
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1. Intracompany interest income included in item 1.a above. . . . . . . . . . . . . . . . . . . . 4847 0 M.1.
2. Intracompany interest expense included in item 1.b above . . . . . . . . . . . . . . . . . . . 4848 0 M.2.
--------------------
</TABLE>
Part II. Supplementary Details on Income from International Operations Required
by the Departments of Commerce and Treasury for Purposes of the U.S.
International Accounts and the U.S. National Income and Product Accounts
<TABLE>
<CAPTION>
-------------
Year-to-date
---------------------
Dollar Amounts in Thousands RIAD Bil Mil Thou
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1. Interest income booked at IBFs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4849 0 1.
2. Interest expense booked at IBFs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4850 0 2.
3. Noninterest income attributable to international operations at domestic offices
(excluding IBFs):
a. Gains (losses) and extraordinary items. . . . . . . . . . . . . . . . . . . . . . . . . . 5491 0 3.a.
b. Fees and other noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5492 0 3.b.
4. Provision for loan and lease losses attributable to international operations booked
at domestic offices (excluding IBFs) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4852 0 4.
5. Other non interest expense attributable to international operations booked at
domestic offices (excluding IBFs). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4853 0 5.
--------------------
</TABLE>
8
<PAGE>
Legal Title of Bank: BANK ONE, COLUMBUS, NA
Address: 100 East Broad Street
City, State Zip: Columbus, OH 43271-1066
FDIC Certificate No.: 06559 Page RI-7
Schedule RI-E--Explanations
Schedule RI-E is to be completed each quarter on a calendar year-to-date basis.
Detail all adjustments in Schedule RI-A and RI-B, all extraordinary items and
other adjustments in Schedule RI, and all significant items of other noninterest
income and other noninterest expense in Schedule RI. (See instructions for
details.)
<TABLE>
<CAPTION>
----
I495
-------------
Year-to-date
---------------------
Dollar Amounts in Thousands RIAD Bil Mil Thou
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1. All other noninterest income (from Schedule RI, item 5.f.(2))
Report amounts that exceed 10% of Schedule RI, item 5.f.(2):
a. Net gains on other real estate owned. . . . . . . . . . . . . . . . . . . . . . . . . . . 5415 0 1.a.
b. Net gains on sales of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5416 0 1.b.
c. Net gains on sales of premises and fixed assets . . . . . . . . . . . . . . . . . . . . . 5417 0 1.c.
Itemize and describe the three largest other amounts that exceed 10% of Schedule RI,
item 5.f.(2):
-------------
d. TEXT 4461 Card Processing Income 4461 28,563 1.d.
------------------------------------------------------------------------------------------
e. TEXT 4462 Installment Loan Servicing Income 4462 4,943 1.e.
------------------------------------------------------------------------------------------
f. TEXT 4463 4463 1.f.
------------------------------------------------------------------------------------------
2. Other noninterest expense (from Schedule RI, item 7.c):
a. Amortization expense of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . 4531 3,729 2.a.
Report amounts that exceed 10% of Schedule RI, item 7.c:
b. Net losses on other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . 5418 0 2.b.
c. Net losses on sales of loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5419 0 2.c.
d. Net losses on sales of premises and fixed assets. . . . . . . . . . . . . . . . . . . . . 5420 0 2.d.
Itemize and describe the three largest other amounts that exceed 10% of Schedule RI,
item 7.c:
------------
e. TEXT 4464 Card Processing Expense 4464 50,943 2.e.
------------------------------------------------------------------------------------------
f. TEXT 4467 4467 2.f.
------------------------------------------------------------------------------------------
g. TEXT 4468 4468 2.g.
------------------------------------------------------------------------------------------
3. Extraordinary items and other adjustments (from Schedule RI, item 11.a) and applicable
income tax effect (from Schedule RI, item 11.b) (itemize and describe all extraordinary
items and other adjustments):
---------
a. (1) TEXT 4469 4469 3.a.(1)
------------------------------------------------------------------------------------
(2) Applicable income tax effect RIAD 4486 3.a.(2)
--------- -----------------------
b. (1) TEXT 4487 4487 3.b.(1)
------------------------------------------------------------------------------------
(2) Applicable income tax effect RIAD 4488 3.b.(2)
--------- -----------------------
c. (1) TEXT 4489 4489 3.c.(1)
------------------------------------------------------------------------------------
(2) Applicable income tax effect RIAD 4491 3.c.(2)
-----------------------
4. Equity capital adujstments from amended Reports of Income (from Schedule RI-A, item 2)
(itemize and describe all adjustments):
------------
a. TEXT 4492 Amended Call Report (Securitization Adjustment) 4492 (10,104) 4.a.
-----------------------------------------------------------------------------------------
b. TEXT 4493 4493 4.b.
-----------------------------------------------------------------------------------------
5. Cumulative effect of changes in accounting principles from prior years
(from Schedule RI-A, item 9) (itemize and describe all changes in accounting principles):
-----------
a. TEXT 4494 4494 5.a.
-----------------------------------------------------------------------------------------
b. TEXT 4495 4495 5.b.
-----------------------------------------------------------------------------------------
6. Corrections of material accounting errors from prior years (from Schedule RI-A, item 10)
(itemize and describe all corrections):
-----------
a. TEXT 4496 4496 6.a.
-----------------------------------------------------------------------------------------
b. TEXT 4497 4497 6.b.
-----------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
Legal Title of Bank: BANK ONE, COLUMBUS, NA
Address: 100 East Broad Street
City, State Zip: Columbus, OH 43271-1066
FDIC Certificate No.: 06559 Page RI-8
Schedule RI-E--Continued
<TABLE>
<CAPTION>
-------------
Year-to-date
---------------------
Dollar Amounts in Thousands RIAD Bil Mil Thou
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
7. Other transactions with parent holding company (from Schedule RI-A, item 13)
(itemize and describe all such transactions):
----------
a. TEXT 4498 4498 7.a.
-----------------------------------------------------------------------------------------
b. TEXT 4499 4499 7.b.
-----------------------------------------------------------------------------------------
8. Adjustments to allowance for loan and lease losses (from Schedule RI-B, part II, item 5)
(itemize and describe all such adjustments):
----------
a. TEXT 4521 4521 8.a.
-----------------------------------------------------------------------------------------
b. TEXT 4522 4522 8.b.
----------------------------------------------------------------------------------------------------------------
9. Other explanations (the space below is provided for the bank to briefly describe, at its I498 I499
option, any other significant items affecting the Report of Income): ---------------------
----
No comment | | (RIAD 4769)
----
Other explanations (please type or print clearly):
(TEXT 4769)
</TABLE>
10
<PAGE>
Legal Title of Bank: BANK ONE, COLUMBUS, NA
Address: 100 East Broad Street
City, State Zip: Columbus, OH 43271-1066
FDIC Certificate No.: 06559 Page RC-1
Consolidated Report of Condition for Insured Commercial
and State-Chartered Savings Banks for June 30, 1996
All schedules are to be reported in thousands of dollars. Unless otherwise
indicated, report the amount outstanding as of the last business day of the
quarter.
Schedule RC--Balance Sheet
<TABLE>
<CAPTION>
----
C400
---------------------
Dollar Amounts in Thousands RCFD Bil Mil Thou
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
1. Cash and balances due from depository institutions (from Schedule RC-A):
a. Noninterest-bearing balances and currency and coin(1) . . . . . . . . . . . . . . . . . . 0081 654,761 1.a.
b. Interest-bearing balances(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0071 0 1.b.
2. Securities:
a. Held-to-maturity securities (from Schedule RC-B, column A). . . . . . . . . . . . . . . . 1754 40,472 2.a.
b. Available-for-sale securities (from Schedule RC-B, column D). . . . . . . . . . . . . . . 1773 265,972 2.b.
3. Federal funds sold and securities purchased under agreements to resell in domestic offices
of the bank and of its Edge and Agreement subsidiaries, and in IBFs:
a. Federal funds sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0276 354,335 3.a.
b. Securities purchased under agreement to resell. . . . . . . . . . . . . . . . . . . . . . 0277 48,800 3.b.
4. Loans and lease financing receivables:
-----------------------
a. Loans and leases, net of unearned income (from Schecule RC-C) RCFD 2122 6,372,947 4.a.
b. LESS: Allowance for loan and lease losses . . . . . . . . . . .RCFD 3123 152,214 4.b.
c. LESS: Allocated transfer risk reserve . . . . . . . . . . . . .RCFD 3128 0 4.c.
-----------------------
d. Loans and leases, net of unearned income,
allowance, and reserve (item 4.a minus 4.b and 4.c) . . . . . . . . . . . . . . . . . . . 2125 6,220,733 4.d.
5. Trading assets (from Schedule RC-D). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3545 0 5.
6. Premises and fixed assets (including capitalized leases) . . . . . . . . . . . . . . . . . . . 2145 62,342 6.
7. Other real estate owned (from Schedule RC-M) . . . . . . . . . . . . . . . . . . . . . . . . . 2150 5,296 7.
8. Investments in unconsolidated subsidiaries and associated companies (from Schedule RC-M) . . . 2130 728 8.
9. Customers' liability to this bank on acceptances outstanding . . . . . . . . . . . . . . . . . 2155 6,291 9.
10. Intangible assets (from Schedule RC-M) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2143 37,044 10.
11. Other assets (from Schedule RC-F). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2160 358,023 11.
12. Total assets (sum of items 1 through 11) . . . . . . . . . . . . . . . . . . . . . . . . . . . 2170 8,054,797 12.
--------------------
- ----------------
(1) Includes cash items in process of collection and unposted debits.
(2) Includes time certificates of deposit not held for trading.
</TABLE>
11
<PAGE>
Legal Title of Bank: BANK ONE, COLUMBUS, NA
Address: 100 East Broad Street
City, State Zip: Columbus, OH 43271-1066
FDIC Certificate No.: 06559 Page RC-2
Schedule RC--Continued
<TABLE>
<CAPTION>
----------------------
Dollar Amounts in Thousands Bil Mil Thou
- --------------------------------------------------------------------------------------------- ----------------------
<S> <C> <C> <C>
LIABILITIES
13. Deposits:
a. In domestic offices (sum of totals of columns A and C
from Schedule RC-E, part I). . . . . . . . . . . . . . . . RCON 2200 4,424,918 13.a
---------------------
(1) Noninterest-bearing(1) . . . . . . . . . . . . . . . . RCON 6631 1,586,160 13.a.(1)
(2) Interest-bearing . . . . . . . . . . . . . . . . . . . RCON 6636 2,838,758 13.a.(2)
---------------------
b. In foreign offices, Edge and Agreement subsidiaries, and
IBFs (from Schedule RC-E, part II) . . . . . . . . . . . . RCFN 2200 995,547 13.b.
---------------------
(1) Noninterest-bearing. . . . . . . . . . . . . . . . . . RCFN 6631 0 13.b.(1)
(2) Interest-bearing . . . . . . . . . . . . . . . . . . . RCFN 6636 995,547 13.b.(2)
---------------------
14. Federal funds purchased and securities sold under agreements
to repurchase in domestic offices of the bank and of its Edge
and Agreement subsidiaries, and in IBFs:
a. Federal funds purchased. . . . . . . . . . . . . . . . . . RCFD 0278 1,022,036 14.a.
b. Securities sold under agreements to repurchase . . . . . . RCFD 0279 31,160 14.b.
15. a. Demand notes issued to the U.S. Treasury . . . . . . . . . RCON 2480 54,869 15.a.
b. Trading liabilities (from Schedule RC-D) . . . . . . . . . RCFD 3548 0 15.b.
16. Other borrowed money:
a. With a remaining maturity of one year or less. . . . . . . RCFD 2332 540,960 16.a.
b. With a remaining maturity of more than one year. . . . . . RCFD 2333 151,980 16.b.
17. Mortgage indebtedness and obligations under capitalized
leases . . . . . . . . . . . . . . . . . . . . . . . . . . . RCFD 2910 4,000 17.
18. Bank's liability on acceptances executed and outstanding. . . RCFD 2920 6,291 18.
19. Subordinated notes and debentures . . . . . . . . . . . . . . RCFD 3200 189,284 19.
20. Other liabilities (from Schedule RC-G). . . . . . . . . . . . RCFD 2930 155,540 20.
21. Total liabilities (sum of items 13 through 20). . . . . . . . RCFD 2948 7,576,585 21.
22. Limited-life preferred stock and related surplus. . . . . . . RCFD 3282 0 22.
EQUITY CAPITAL
23. Perpetual preferred stock and related surplus . . . . . . . . RCFD 3838 0 23.
24. Common stock. . . . . . . . . . . . . . . . . . . . . . . . . RCFD 3230 20,738 24.
25. Surplus (exclude all surplus related to preferred stock). . . RCFD 3839 107,356 25.
26. a. Undivided profits and capital reserves . . . . . . . . . . RCFD 3632 352,289 26.a.
b. Net unrealized holding gains (losses) on available-for-
sale securities. . . . . . . . . . . . . . . . . . . . . . RCFD 8434 (2,171) 26.b.
27. Cumulative foreign currency translation adjustments . . . . . RCFD 3284 0 27.
28. Total equity capital (sum of items 23 through 27) . . . . . . RCFD 3210 478,212 28.
29. Total liabilities, limited-life preferred stock, and equity
capital (sum of items 21, 22, and 28) . . . . . . . . . . . . RCFD 3300 8,054,797 29.
----------------------
</TABLE>
Memorandum
To be reported only with the March Report of Condition.
<TABLE>
<CAPTION>
Number
-------------
<S> <C> <C>
1. Indicate in the box at the right the number of the statement below that best describes the
most comprehensive level of auditing work performed for the bank by independent external
auditors as of any date during 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RCFD 6724 N/A M.1.
-------------
</TABLE>
1 = Independent audit of the bank conducted in accordance with generally
accepted auditing standards by a certified public accounting firm which
submits a report on the bank
2 = Independent audit of the bank's parent holding company conducted in
accordance with generally accepted auditing standards by a certified public
accounting firm which submits a report on the consolidated holding company
(but not on the bank separately)
3 = Directors' examination of the bank conducted in accordance with generally
accepted auditing standards by a certified public accounting firm (may be
required by state chartering authority)
4 = Directors' examination of the bank performed by other external auditors (may
be required by state chartering authority)
5 = Review of the bank's financial statements by external auditors
6 = Compilation of the bank's financial statements by external auditors
7 = Other audit procedures (excluding tax preparation work)
8 = No external audit work
- ------------------
(1) Includes total demand deposits and noninterest-bearing time and savings
deposits.
12
<PAGE>
Legal Title of Bank: BANK ONE, COLUMBUS, NA
Address: 100 East Broad Street
City, State Zip: Columbus, OH 43271-1066
FDIC Certificate No.: 06559 Page RC-3
Schedule RC-A--Cash and Balances Due From Depository Institutions
Exclude assets held for trading.
<TABLE>
<CAPTION>
--------
C405
----------------- ------------------
(Column A) (Column B)
Consolidated Domestic
Bank Offices
----------------- ------------------
Dollar Amounts in Thousands RCFD Bil Mil Thou RCON Bil Mil Thou
- ------------------------------------------------------------------------------ ----------------- ------------------
<S> <C> <C> <C>
1. Cash items in process of collection, unposted debits, and currency and
coin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0022 560,380 1.
a. Cash items in process of collection and unposted debits. . . . . . . . 0020 515,822 1.a.
b. Currency and coin. . . . . . . . . . . . . . . . . . . . . . . . . . . 0080 44,558 1.b.
2. Balances due from depository institutions in the U.S. . . . . . . . . . . 0082 37,079 2.
a. U.S. branches and agencies of foreign banks (including their IBFs) . . 0083 0 2.a.
b. Other commercial banks in the U.S. and other depository institutions
in the U.S. (including their IBFs) . . . . . . . . . . . . . . . . . . 0085 37,079 2.b.
3. Balances due from banks in foreign countries and foreign central banks. . 0070 4,652 3.
a. Foreign branches of other U.S. banks . . . . . . . . . . . . . . . . . 0073 0 3.a.
b. Other banks in foreign countries and foreign central banks . . . . . . 0074 4,652 3.b.
4. Balances due from Federal Reserve Banks . . . . . . . . . . . . . . . . . 0090 52,650 0090 52,650 4.
5. Total (sum of items 1 through 4) (total of column A must equal
Schedule RC, sum of items 1.a and 1.b). . . . . . . . . . . . . . . . . . 0010 654,761 0010 654,761 5.
----------------- ------------------
</TABLE>
<TABLE>
<CAPTION>
------------------
Memorandum Dollar Amounts in Thousands RCON Bil Mil Thou
- ------------------------------------------------------------------------------------------------ ------------------
<S> <C> <C>
1. Noninterest-bearing balances due from commercial banks in the U.S. (included in item 2,
column B above) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0050 37,079 M.1.
------------------
</TABLE>
<TABLE>
<CAPTION>
--------
C410
---------------------------------------------------------------------------
Held-to-maturity Available-for-sale
------------------------------------- -------------------------------------
(Column A) (Column B) (Column C) (Column D)
Amortized Cost Fair Value Amortized Cost Fair Value(1)
------------------ ------------------ ------------------ ------------------
Dollar Amounts in Thousands RCFD Bil Mil Thou RCFD Bil Mil Thou RCFD Bil Mil Thou RCFD Bil Mil Thou
- ------------------------------------ ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C>
1. U.S. Treasury securities. . . . 0211 0 0213 0 1286 125,803 1287 122,378 1.
2. U.S. Government agency
and corporation obligations
(exclude mortgage-backed
securities):
a. Issued by U.S. Govern-
ment agencies(2) . . . . . . 1289 0 1290 0 1291 0 1293 0 2.a.
b. Issued by U.S.
Government-sponsored
agencies(3). . . . . . . . . 1294 0 1295 0 1297 97,883 1298 97,490 2.b.
--------------------------------------------------------------------------
</TABLE>
- ----------------
(1) Includes equity securities without readily determinable fair values at
historical cost in item 6.c, column D.
(2) Includes Small Business Administration "Guaranteed Loan Pool Certificates,"
U.S. Maritime Administration obligations, and Export-Import Bank
participation certificates.
(3) Includes obligations (other than mortgage-backed securities) issued by the
Farm Credit System, the Federal Home Loan Bank System, the Federal Home
Loan Mortgage Corporation, the Federal National Mortgage Association, the
Financing Corporation, Resolution Funding Corporation, the Student Loan
Marketing Association, and the Tennessee Valley Authority.
13
<PAGE>
Legal Title of Bank: BANK ONE, COLUMBUS, NA
Address: 100 East Broad Street
City, State Zip: Columbus, OH 43271-1066
FDIC Certificate No.: 06559 Page RC-4
Schedule RC-B--Continued
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
Held-to-maturity Available-for-sale
---------------------------------------- ----------------------------------------
(Column A) (Column B) (Column C) (Column D)
Amortized Cost Fair Value Amortized Cost Fair Value(1)
------------------- ------------------- ------------------- -------------------
Dollar Amounts in Thousands RCFD Bil Mil Thou RCFD Bil Mil Thou RCFD Bil Mil Thou RCFD Bil Mil Thou
- ---------------------------------- ------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
3. Securities issued by states
and political subdivisions
in the U.S.:
a. General obligations. . . . 1676 11,683 1677 15,361 1678 0 1679 0 3.a.
b. Revenue obligations. . . . 1681 14,171 1686 11,920 1690 645 1691 662 3.b.
c. Industrial development
and similar obligations. . 1694 9,454 1695 9,495 1696 0 1697 0 3.c.
4. Mortgage-backed
securities (MBS):
a. Pass-through securities:
(1) Guaranteed by
GNMA . . . . . . . . . 1698 0 1699 0 1701 0 1702 0 4.a.(1)
(2) Issued by FNMA
and FHLMC. . . . . . . 1703 0 1705 0 1706 14,599 1707 14,769 4.a.(2)
(3) Other pass-through
securities . . . . . . 1709 2,414 1710 2,336 1711 5,864 1713 6,073 4.a.(3)
b. Other mortgage-backed
securities (include CMOs,
REMICs, and stripped
MBS):
(1) Issued or guaranteed
by FNMA, FHLMC,
or GNMA. . . . . . . . 1714 0 1715 0 1716 19,933 1717 19,931 4.b.(1)
(2) Collateralized
by MBS issued or
guaranteed by FNMA,
FHLMC, or GNMA . . . . 1718 0 1719 0 1731 0 1732 0 4.b.(2)
(3) All other mortgage-
backed securities. . . 1733 0 1734 0 1735 231 1736 277 4.b.(3)
5. Other debt securities:
a. Other domestic debt
securities . . . . . . . . 1737 500 1738 500 1739 537 1741 548 5.a.
b. Foreign debt
securities . . . . . . . . 1742 2,250 1743 2,250 1744 0 1746 0 5.b.
6. Equity securities:
a. Investments in mutual
funds. . . . . . . . . . . 1747 0 1748 0 6.a.
b. Other equity securities
with readily determin-
able fair values . . . . . 1749 0 1751 0 6.b.
c. All other equity
securities(1). . . . . . . 1752 3,844 1753 3,844 6.c.
7. Total (sum of items 1
through 6) (total of
column A must equal
Schedule RC, item 2.a)
(total of column D must
equal Schedule RC,
item 2.b) . . . . . . . . . . 1754 40,472 1771 41,862 1772 269,339 1773 265,972 7.
---------------------------------------------------------------------------------
</TABLE>
- ----------------
(1) Includes equity securities without readily determinable fair values at
historical cost in item 6.c, column D.
14
<PAGE>
Legal Title of Bank: BANK ONE, COLUMBUS, NA
Address: 100 East Broad Street
City, State Zip: Columbus, OH 43271-1066
FDIC Certificate No.: 06559 Page RC-5
Schedule RC-B--Continued
Memoranda
<TABLE>
<CAPTION>
--------
C412
-------------------
Dollar Amounts in Thousands RCFD Bil Mil Thou
- ------------------------------------------------------------------------------------------------ -------------------
<S> <C> <C>
1. Pledged securities(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0416 297,612 M.1.
2. Maturity and repricing data for debt securities(2), (3), (4) (excluding those in
nonaccrual status):
a. Fixed rate debt securities with a remaining maturity of:
(1) Three months or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0343 0 M.2.a.(1)
(2) Over three months through 12 months. . . . . . . . . . . . . . . . . . . . . . . . . 0344 2,829 M.2.a.(2)
(3) Over one year through five years . . . . . . . . . . . . . . . . . . . . . . . . . . 0345 175,627 M.2.a.(3)
(4) Over five years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0346 30,167 M.2.a.(4)
(5) Total fixed rate debt securities (sum of Memorandum items 2.a.(1) through 2.a.(4). . 0347 208,623 M.2.a.(5)
b. Floating rate debt securities with a repricing frequency of:
(1) Quarterly or more frequently . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4544 91,003 M.2.b.(1)
(2) Annually or more frequently, but less frequently than quarterly. . . . . . . . . . . 4545 2,250 M.2.b.(2)
(3) Every five years or more frequently, but less frequently than annually . . . . . . . 4551 0 M.2.b.(3)
(4) Less frequently than every five years. . . . . . . . . . . . . . . . . . . . . . . . 4552 724 M.2.b.(4)
(5) Total floating rate debt securities (sum of Memorandum items 2.b.(1) through
2.b.(4)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4553 93,977 M.2.b.(5)
c. Total debt securities (sum of Memorandum items 2.a.(5) and 2.b.(5)) (must equal total
debt securities from Schedule RC-B, sum of items 1 through 5, columns A and D, minus
nonaccrual debt securities included in Schedule RC-N, item 9, column C). . . . . . . . . 0393 302,600 M.2.c.
3. Not applicable
4. Held-to-maturity debt securities restructured and in compliance with modified terms
(included in Schedule RC-B, items 3 through 5, column A, above) . . . . . . . . . . . . . . 5365 0 M.4.
5. Not applicable
6. Floating rate debt securities with a remaining maturity of one year or less(2), (4)
(included in Memorandum items 2.b.(1) through 2.b.(4) above). . . . . . . . . . . . . . . . 5519 39,966 M.6.
7. Amortized cost of held-to-maturity securities sold or transferred to available-for-sale or
trading securities during the calendar year-to-date (report the amortized cost at date of
sale or transfer) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1778 0 M.7.
8. High-risk mortgage securities (included in the held-to-maturity and available-for-sale
accounts in Schedule RC-B, item 4.b):
a. Amortized cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8780 0 M.8.a.
b. Fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8781 0 M.8.b.
9. Structured notes (included in the held-to-maturity and available-for-sale accounts in
Schedule RC-B, items 2, 3, and 5):
a. Amortized cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8782 0 M.9.a.
b. Fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8783 0 M.9.b.
-------------------
</TABLE>
- -------------------
(2) Includes held-to-maturity securities at amortized cost and available-for-
sale securities at fair value.
(3) Exclude equity securities, e.g., investments in mutual funds, Federal
Reserve stock, common stock, and preferred stock.
(4) Memorandum items 2 and 6 are not applicable to savings banks that must
complete supplemental Schedule RC-J.
15
<PAGE>
Legal Title of Bank: BANK ONE, COLUMBUS, NA
Address: 100 East Broad Street
City, State Zip: Columbus, OH 43271-1066
FDIC Certificate No.: 06559 Page RC-6
Schedule RC-C--Loans and Lease Financing Receivables
Part I. Loans and Leases
Do not deduct the allowance for loan and lease losses from amounts reported in
this schedule. Report total loans and leases, net of unearned income. Exclude
assets held for trading.
<TABLE>
<CAPTION>
--------
C415
----------------------------------------
(Column A) (Column B)
Consolidated Domestic
Bank Offices
------------------- -------------------
Dollar Amounts in Thousands RCFD Bil Mil Thou RCON Bil Mil Thou
- ---------------------------------------------------------------------------- ------------------- -------------------
<S> <C> <C> <C>
1. Loans secured by real estate. . . . . . . . . . . . . . . . . . . . . . 1410 1,102,590 1.
a. Construction and land development. . . . . . . . . . . . . . . . . . 1415 146,576 1.a.
b. Secured by farmland (including farm residential and other
improvements). . . . . . . . . . . . . . . . . . . . . . . . . . . . 1420 8,443 1.b.
c. Secured by 1-4 family residential properties:
(1) Revolving, open-end loans secured by 1-4 family residential
properties and extended under lines of credit. . . . . . . . . . 1797 325,228 1.c.(1)
(2) All other loans secured by 1-4 family residential properties:
(a) Secured by first liens. . . . . . . . . . . . . . . . . . . 5367 214,497 1.c.(2)(a)
(b) Secured by junior liens . . . . . . . . . . . . . . . . . . 5368 50,863 1.c.(2)(b)
d. Secured by multifamily (5 or more) residential properties. . . . . . 1460 26,914 1.d.
e. Secured by nonfarm nonresidential properties . . . . . . . . . . . . 1480 330,069 1.e.
2. Loans to depository institutions:
a. To commercial banks in the U.S.. . . . . . . . . . . . . . . . . . . 1505 306 2.a.
(1) To U.S. branches and agencies of foreign banks. . . . . . . . . 1506 0 2.a.(1)
(2) To other commercial banks in the U.S. . . . . . . . . . . . . . 1507 306 2.a.(2)
b. To other depository institutions in the U.S. . . . . . . . . . . . . 1517 373 1517 373 2.b.
c. To banks in foreign countries. . . . . . . . . . . . . . . . . . . . 1510 563 2.c.
(1) To foreign branches of other U.S. banks . . . . . . . . . . . . 1513 0 2.c.(1)
(2) To other banks in foreign countries . . . . . . . . . . . . . . 1516 563 2.c.(2)
3. Loans to finance agricultural production and other loans to farmers . . 1590 10,277 1590 10,277 3.
4. Commercial and industrial loans:
a. To U.S. addressees (domicile). . . . . . . . . . . . . . . . . . . . 1763 859,122 1763 859,122 4.a.
b. To non-U.S. addressees (domicile). . . . . . . . . . . . . . . . . . 1764 0 1764 0 4.b.
5. Acceptances of other banks:
a. Of U.S. banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1756 0 1756 0 5.a.
b. Of foreign banks . . . . . . . . . . . . . . . . . . . . . . . . . . 1757 0 1757 0 5.b.
6. Loans to individuals for household, family, and other personal
expenditures (i.e., consumer loans) (includes purchased paper). . . . . 1975 3,270,631 6.
a. Credit cards and related plans (includes check credit and other
revolving credit plans). . . . . . . . . . . . . . . . . . . . . . . 2008 2,328,634 6.a.
b. Other (includes single payment, installment, and all student loans). 2011 941,997 6.b.
7. Loans to foreign governments and official institutions (including
foreign central banks). . . . . . . . . . . . . . . . . . . . . . . . . 2081 0 2081 0 7.
8. Obligations (other than securities and leases) of states and political
subdivisions in the U.S. (includes nonrated industrial development
obligations). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2107 13,911 2107 13,911 8.
9. Other loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1563 161,003 9.
a. Loans for purchasing or carrying securities (secured and unsecured). 1545 7,562 9.a.
b. All other loans (exclude consumer loans) . . . . . . . . . . . . . . 1564 153,441 9.b.
10. Lease financing receivables (net of unearned income). . . . . . . . . . 2165 955,646 10.
a. Of U.S. addressees (domicile). . . . . . . . . . . . . . . . . . . . 2182 955,646 10.a.
b. Of non-U.S. addressees (domicile). . . . . . . . . . . . . . . . . . 2183 0 10.b.
11. LESS: Any unearned income on loans reflected in items 1-9 above . . . . 2123 1,475 2123 1,475 11.
12. Total loans and leases, net of unearned income (sum of items 1
through 10 minus item 11) (total of column A must equal
Schedule RC, item 4.a). . . . . . . . . . . . . . . . . . . . . . . . . 2122 6,372,947 2122 6,372,947 12.
----------------------------------------
</TABLE>
16
<PAGE>
Legal Title of Bank: BANK ONE, COLUMBUS, NA
Address: 100 East Broad Street
City, State Zip: Columbus, OH 43271-1066
FDIC Certificate No.: 06559 Page RC-7
Schedule RC-C--Continued
Part I. Continued
<TABLE>
<CAPTION>
------------------ ------------------
(Column A) (Column B)
Consolidated Domestic
Memoranda Bank Offices
------------------ ------------------
Dollar Amounts in Thousands RCFD Bil Mil Thou RCON Bil Mil Thou
- ------------------------------------------------------------------------------------------------- ------------------
<S> <C> <C> <C>
1. Commercial paper included in Schedule RC-C, part I, above. . . . . . . 1496 0 1496 0 M.1.
2. Loans and leases restructured and in compliance with modified terms
(included in Schedule RC-C, part I, above and not reported as past
due or nonaccrual in Schedule RC-N, Memorandum item 1):
a. Loans secured by real estate:
(1) To U.S. addressees (domicile). . . . . . . . . . . . . . . . 1687 0 M.2.a.(1)
(2) To non-U.S. addresses (domicile) . . . . . . . . . . . . . . 1689 0 M.2.a.(2)
b. All other loans and all lease financing receivables (exclude
loans to individuals for household, family, and other
personal expenditures). . . . . . . . . . . . . . . . . . . . . . 8691 0 M.2.b.
c. Commercial and industrial loans to and lease financing
receivables of non-U.S. addressees (domicile) included in
Memorandum item 2.b above . . . . . . . . . . . . . . . . . . . . 8692 0 M.2.c
3. Maturity and repricing data for loans and leases(1) (excluding
those in nonaccrual status):
a. Fixed rate loans and leases with a remaining maturity of:
(1) Three months or less . . . . . . . . . . . . . . . . . . . . 0348 180,625 M.3.a.(1)
(2) Over three months through 12 months. . . . . . . . . . . . . 0349 329,734 M.3.a.(2)
(3) Over one year through five years . . . . . . . . . . . . . . 0356 1,575,605 M.3.a.(3)
(4) Over five years. . . . . . . . . . . . . . . . . . . . . . . 0357 199,690 M.3.a.(4)
(5) Total fixed rate loans and leases (sum of Memorandum
items 3.a.(1) through 3.a.(4). . . . . . . . . . . . . . . . 0358 2,285,654 M.3.a.(5)
b. Floating rate loans with a repricing frequency of:
(1) Quarterly or more frequently . . . . . . . . . . . . . . . . 4554 3,401,961 M.3.b.(1)
(2) Annually or more frequently, but less frequently than
quarterly. . . . . . . . . . . . . . . . . . . . . . . . . . 4555 665,784 M.3.b.(2)
(3) Every five years or more frequently, but less frequently
than annually. . . . . . . . . . . . . . . . . . . . . . . . 4561 6,571 M.3.b.(3)
(4) Less frequently than every five years. . . . . . . . . . . . 4564 0 M.3.b.(4)
(5) Total floating rate loans (sum of Memorandum items
3.b.(1) through 3.b.(4)) . . . . . . . . . . . . . . . . . . 4567 4,074,316 M.3.b.(5)
c. Total loans and leases (sum of Memorandum items 3.a.(5) and
3.b.(5)) (must equal the sum of total loans and leases, net, from
Schedule RC-C, part I, item 12, plus unearned income from
Schedule RC-C, part I, item 11, minus total nonaccrual loans and
leases from Schedule RC-N, sum of items 1 through 8, column C). . 1479 6,359,970 M.3.c
d. Floating rate loans with a remaining maturity of one year or less
(included in Memorandum items 3.b.(1) through 3.b.(4) above). . . A246 1,080,059 M.3.d.
4. Loans to finance commercial real estate, construction, and land
development activities (not secured by real estate) included in
Schedule RC-C, part I, items 4 and 9, column A, page RC-6(2) . . . . . 2746 27,316 M.4.
5. Loans and leases held for sale (included in Schedule RC-C,
part I, above) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5369 0 M.5.
6. Adjustable rate closed-end loans secured by first liens on ------------------
1-4 family residential properties (included in Schedule RC-C, RCON Bil Mil Thou
part I, item 1.c.(2)(a), column B, page RC-6). . . . . . . . . . . . . 5370 93,704 M.6.
----------------- ------------------
</TABLE>
- -----------------------
(1) Memorandum item 3 is not applicable to savings banks that must complete
supplemental Schedule RC-J.
(2) Exclude loans secured by real estate that are included in Schedule RC-C,
part I, item 1, column A.
17
<PAGE>
Legal Title of Bank: BANK ONE, COLUMBUS, NA
Address: 100 East Broad Street
City, State Zip: Columbus, OH 43271-1066
FDIC Certificate No.: 06559 Page RC-7
Schedule RC-C--Continued
Part II. Loans to Small Businesses and Small Farms
Schedule RC-C, Part II is to be reported only with the June Report of Condition.
Report the number and amount currently outstanding as of June 30 of business
loans with "original amounts" of $1,000,000 or less and farm loans with
"original amounts" of $500,000 or less. The following guidelines should be used
to determine the "original amount" of a loan: (1) For loans drawn down under
lines of credit or loan commitments, the "original amount" of the loan is the
size of the line of credit or loan commitment when the line of credit or loan
commitment was most recently approved, extended, or renewed prior to the report
date. However, if the amount currently outstanding as of the report date
exceeds this size, the "original amount" is the amount currently outstanding on
the report date. (2) For loan participations and syndications, the "original
amount" of the loan participation or syndication is the entire amount of the
credit originated by the lead lender. (3) For all other loans, the "original
amount" is the total amount of the loan at origination or the amount currently
outstanding of the report date, whichever is larger.
Loans to Small Businesses
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1. Indicate in the appropriate box at the right whether all or substantially all of the dollar
volume of your bank's "Loans secured by nonfarm nonresidential properties" in domestic offices -------
reported in Schedule RC-C, part I, item 1.e, column B, and all or substantially all of the C418
dollar volume of your bank's "Commercial and industrial loans to U.S. addressees" in domestic -------------------
offices reported in Schedule RC-C, part I, item 4.a, column B, have original amounts of RCON YES NO
$100,000 or less (If your bank has no loans outstanding in both of these two loan -------------------
categories, place an "X" in the box marked "NO" and go to item 5; otherwise, see 6999 X 1.
instructions for further information.). . . . . . . . . . . . . . . . . . . . . . . . . . . . . -------------------
If YES, complete items 2.a and 2.b below, skip items 3 and 4, and go to item 5.
If NO and your bank has loans outstanding in either loan category, skip items 2.a and 2.b,
complete items 3 and 4 below, and go to item 5.
-------------------
2. Report the total number of loans currently outstanding for each of the Number of Loans
following Schedule RC-C, part I, loan categories: -------------------
a. "Loans secured by nonfarm nonresidential properties" in RCON
domestic offices reported in Schedule RC-C, part I, item 1.e,
column B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5562 N/A 2.a.
b. "Commercial and industrial loans to U.S. addressees" in domestic
offices reported in Schedule RC-C, part I, item 4.a,
column B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5563 N/A 2.b.
-------------------
----------------------------------------
(Column A) (Column B)
Amount
Currently
Number of Loans Outstanding
------------------- ------------------
Dollar Amounts in Thousands RCON RCON Bil Mil Thou
- ----------------------------------------------------------------------------------- ------------------
3. Number and amount currently outstanding of "Loans secured by
nonfarm nonresidential properties" in domestic offices
reported in Schedule RC-C, part I, item 1.e, column B (sum of
items 3.a through 3.c must be less than or equal to Schedule
RC-C, part I, item 1.e, column B):
a. With original amounts of $100,000 or less . . . . . . . . . . . . 5564 213 5565 8,583 3.a.
b. With original amounts of more than $100,000 through $250,000. . . 5566 215 5567 27,433 3.b.
c. With original amounts of more than $250,000 through $1,000,000. . 5568 205 5569 73,985 3.c.
4. Number and amount currently outstanding of "Commercial and
industrial loans to U.S. addresses" in domestic offices
reported in Schedule RC-C, part I, item 4.a, column B (sum of
items 4.a through 4.c must be less than or equal to Schedule
RC-C, part I, item 4.a, column B):
a. With original amounts of $100,000 or less . . . . . . . . . . . . 5570 3,689 5571 88,822 4.a.
b. With original amounts of more than $100,000 through $250,000. . . 5572 252 5573 28,516 4.b.
c. With original amounts of more than $250,000 through $1,000,000. . 5574 244 5575 69,513 4.c.
----------------------------------------
</TABLE>
17a
<PAGE>
Legal Title of Bank: BANK ONE, COLUMBUS, NA
Address: 100 East Broad Street
City, State Zip: Columbus, OH 42271-1066
FDIC Certificate No.: 06559 Page RC-7
Schedule RC-C--Continued
Part II. Continued
Agricultural Loans to Small Farms
<TABLE>
<S> <C> <C> <C>
5. Indicate in the appropriate box at the right whether all or substantially all of the dollar
volume of your bank's "Loans secured by farmland (including farm residential and other
improvements)" in domestic offices reported in Schedule RC-C, part I, item 1.b, column B,
and all or substantially all of the dollar volume of your bank's "Loans to finance
agricultural production and other loans to farmers" in domestic offices reported in
Schedule RC-C, part I, item 3, column B, have original amounts or $100,000 or less
(If your bank has no loans outstanding in both of these two loan categories, place an "X" in -------------------
the box marked "NO" and do not complete items 7 and 8; otherwise, see instructions for YES NO
further information.) 6860 | | |X| 5.
-------------------
If YES, complete items 6.a and 6.b below and do not complete items 7 and 8.
If NO and your bank has loans outstanding in either loan category, skip items 6.a and 6.b
and complete items 7 and 8 below.
6. Report the total number of loans currently outstanding for each of the
following Schedule RC-C, part I, loan categories: --------------------
a. "Loans secured by farmland (including Number of Loans
farm residential and other improvements)" RCON
in domestic offices reported in Schedule -----
RC-C, part I, item 1.b, column B . . . . . . . . . . . . . . . . . 5576 N/A 6.a.
b. "Loans to finance agricultural production
and other loans to farmers" in domestic
offices reported in Schedule RC-C, part I,
item 3, column B . . . . . . . . . . . . . . . . . . . . . . . . . 5577 N/A 6.b.
--------------------
-----------------------------------------
(Column A) (Column B)
Amount
Currently
Number of Loans Outstanding
-------------------- -------------------
Dollar Amounts in Thousands RCON RCON Bil Mil Thou
- ----------------------------------------------------------------------------------- -------------------
7. Number and amount currently outstanding of "Loans secured by farmland
(including farm residential and other improvements)" in domestic offices
reported in Schedule RC-C, part I, item 1.b, column B (sum of items 7.a
through 7.c must be less than or equal to Schedule RC-C, part I, item
1.b, column B:
a. With original amounts of $100,000 or less . . . . . . . . . . . . 5578 12 5579 511 7.a.
b. With original amounts of more than $100,000 through $250,000. . . 5580 6 5581 591 7.b.
c. With original amounts of more than $250,000 through $500,000. . . 5582 5 5583 1,526 7.c.
8. Number and amount currently outstanding of "Loans to finance
agricultural production and other loans to farmers" in domestic
offices reported in Schedule RC-C, part I, item 3, column B
(sum of items 8.a through 8.c must be less than or equal to
Schedule RC-C, part I, item 3, column B):
a. With original amounts of $100,000 or less . . . . . . . . . . . . 5584 82 5585 3,106 8.a.
b. With original amounts of more than $100,000 through $250,000. . . 5586 28 5587 3,491 8.b.
c. With original amounts of more than $250,000 through $500,000. . . 5588 10 5589 3,079 8.c.
-----------------------------------------
</TABLE>
17b
<PAGE>
Legal Title of Bank: BANK ONE, COLUMBUS, NA
Address: 100 East Broad Street
City, State Zip: Columbus, OH 43271-1066
FDIC Certificate No.: 06559 Page RC-8
Schedule RC-D--Trading Assets and Liabilities
Schedule RC-D is to be completed only by banks with $1 billion or more in total
assets or with $2 billion or more in par/notional amount of off-balance sheet
derivative contracts (as reported in Schedule RC-L, items 14.a through 14.e,
columns A through D).
<TABLE>
<CAPTION>
----
C420
--------------------------
Dollar Amounts in Thousands Bil Mil Thou
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
1. U.S. Treasury securities in domestic offices . . . . . . . . . . . . . RCON 3531 0 1.
2. U.S. Government agency and corporation obligations in domestic
offices (exclude mortgage-backed securities) . . . . . . . . . . . . . RCON 3532 0 2.
3. Securities issued by states and political subdivisions in the U.S.
in domestic offices. . . . . . . . . . . . . . . . . . . . . . . . . . RCON 3533 0 3.
4. Mortgage-backed securities (MBS) in domestic offices:
a. Pass-through securities issued or guaranteed by FNMA, FHLMC,
or GNMA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RCON 3534 0 4.a.
b. Other mortgage-backed securities issued or guaranteed by FNMA,
FHLMC, or GNMA (include CMOs, REMICs, and stripped MBS) . . . . . RCON 3535 0 4.b.
c. All other mortgage-backed securities. . . . . . . . . . . . . . . RCON 3536 0 4.c.
5. Other debt securities in domestic offices. . . . . . . . . . . . . . . RCON 3537 0 5.
6. Certificates of deposit in domestic offices. . . . . . . . . . . . . . RCON 3538 0 6.
7. Commercial paper in domestic offices . . . . . . . . . . . . . . . . . RCON 3539 0 7.
8. Bankers acceptances in domestic offices. . . . . . . . . . . . . . . . RCON 3540 0 8.
9. Other trading assets in domestic offices . . . . . . . . . . . . . . . RCON 3541 0 9.
10. Trading assets in foreign offices. . . . . . . . . . . . . . . . . . . RCFN 3542 0 10.
11. Revaluation gains on interest rate, foreign exchange rate, and
other commodity and equity contracts:
a. In domestic offices . . . . . . . . . . . . . . . . . . . . . . . RCON 3543 0 11.a.
b. In foreign offices. . . . . . . . . . . . . . . . . . . . . . . . RCFN 3544 0 11.b.
12. Total trading assets (sum of items 1 through 11) (must equal
Schedule RC, item 5) . . . . . . . . . . . . . . . . . . . . . . . . . RCFD 3545 0 12.
--------------------------
--------------------------
Bil Mil Thou
--------------------------
LIABILITIES
13. Liability for short positions. . . . . . . . . . . . . . . . . . . . . RCFD 3546 0 13.
14. Revaluation losses on interest rate, foreign exchange rate, and
other commodity and equity contracts . . . . . . . . . . . . . . . . . RCFD 3547 0 14.
15. Total trading liabilities (sum of items 13 and 14) (must equal
Schedule RC, item 15.b). . . . . . . . . . . . . . . . . . . . . . . . RCFD 3548 0 15.
</TABLE>
18
<PAGE>
Legal Title of Bank: BANK ONE, COLUMBUS, NA
Address: 100 East Broad Street
City, State Zip: Columbus, OH 43271-1066
FDIC Certificate No.: 06559 Page RC-9
Schedule RC-E--Deposit Liabilities
Part I. Deposits in Domestic Offices
<TABLE>
<CAPTION>
-------
C425
------------------------------------------------------------
Nontransaction
Transaction Accounts Accounts
------------------------------------------------------------
(Column A) (Column B) (Column C)
Total transaction Memo: Total Total
accounts (including demand deposits nontransaction
total demand (included in accounts
deposits) column A) (including MMDAs)
------------------------------------------------------------
Dollar Amounts in Thousands RCON Bil Mil Thou RCON Bil Mil Thou RCON Bil Mil Thou
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Deposits of:
1. Individuals, partnerships, and corporations. . . . . 2201 1,147,332 2240 1,084,872 2346 3,743,166 1.
2. U.S. Government. . . . . . . . . . . . . . . . . . . 2202 7,735 2280 7,735 2520 0 2.
3. States and political subdivisions in the U.S. . . . 2203 59,895 2290 54,880 2530 23,380 3.
4. Commercial banks in the U.S. . . . . . . . . . . . . 2206 378,243 2310 378,243 2550 4,737 4.
5. Other depository institutions in the U.S. . . . . . 2207 11,370 2312 11,370 2349 0 5.
6. Banks in foreign countries . . . . . . . . . . . . . 2213 3,153 2320 3,153 2236 0 6.
7. Foreign governments and official institutions
(including foreign central banks). . . . . . . . . . 2216 0 2300 0 2377 0 7.
8. Certified and official checks. . . . . . . . . . . . 2330 45,907 2330 45,907 8.
9. Total (sum of items 1 through 8) (sum of columns
A and C must equal Schedule RC, item 13.a) . . . . . 2215 1,653,635 2210 1,586,160 2385 2,771,283 9.
</TABLE>
Memoranda
<TABLE>
<CAPTION>
------------------
Dollar Amounts in Thousands RCON Bil Mil Thou
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1. Selected components of total deposits (i.e., sum of item 9, columns A and C):
a. Total Individual Retirement Accounts (IRAs) and Keogh Plan accounts. . . . . . . . . . . . 6835 238,272 M.1.a.
b. Total brokered deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2365 3,321 M.1.b.
c. Fully insured brokered deposits (included in Memorandum item 1.b above):
(1) Issued in denominations of less than $100,000 . . . . . . . . . . . . . . . . . . . . 2343 177 M.1.c.(1)
(2) Issued either in denominations of $100,000 or in denominations greater than
$100,000 and participated out by the broker in shares of $100,000 or less . . . . . . 2344 2,777 M.1.c.(2)
d. Maturity data for brokered deposits:
(1) Brokered deposits issued in denominations of less than $100,000 with a remaining
maturity of one year or less (included in Memorandum item 1.c.(1) above). . . . . . . A243 174 M.1.d.(1)
(2) Brokered deposits issued in denominations of $100,000 or more with a remaining
maturity of one year or less (included in Memorandum item 1.b above). . . . . . . . . A244 966 M.1.d.(2)
e. Preferred deposits (uninsured deposits of states and political subdivisions in the U.S.
reported in item 3 above which are secured or collateralized as required under state
law) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5590 81,118 M.1.e.
2. Components of total nontransaction accounts (sum of Memorandum items 2.a through 2.d
must equal item 9, column C above):
a. Savings deposits:
(1) Money market deposit accounts (MMDAs) . . . . . . . . . . . . . . . . . . . . . . . . 6810 1,295,869 M.2.a.(1)
(2) Other savings deposits (excludes MMDAs) . . . . . . . . . . . . . . . . . . . . . . . 0352 450,266 M.2.a.(2)
b. Total time deposits of less than $100,000. . . . . . . . . . . . . . . . . . . . . . . . . 6648 928,401 M.2.b.
c. Time certificates of deposit of $100,000 or more . . . . . . . . . . . . . . . . . . . . . 6645 96,747 M.2.c.
d. Open-account time deposits of $100,000 or more . . . . . . . . . . . . . . . . . . . . . . 6646 0 M.2.d.
3. All NOW accounts (included in column A above) . . . . . . . . . . . . . . . . . . . . . . . . . 2398 67,475 M.3.
----------------
4. Not applicable
</TABLE>
19
<PAGE>
Legal Title of Bank: BANK ONE, COLUMBUS, NA
Address: 100 East Broad Street
City, State, Zip: Columbus, OH 43271-1066 Page RC-10
FDIC Certificate No: 06559
Schedule RC-E--Continued
Part I. Continued
Memoranda (continued)
<TABLE>
<CAPTION>
-------------------
Dollar Amounts in Thousands RCON Bil Mil Thou
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
5. Maturity and repricing data for time deposits of less than $100,000 (sum of
Memorandum items 5.a(1) through 5.b.(3) must equal Memorandum item 2.b above):(1)
a. Fixed rate time deposits of less than $100,000 with a remaining maturity of:
(1) Three months or less. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A225 176,583 M.5.a.(1)
(2) Over three months through 12 months . . . . . . . . . . . . . . . . . . . . . . . . A226 301,884 M.5.a.(2)
(3) Over one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A227 449,934 M.5.a.(3)
b. Floating rate time deposits of less than $100,000 with a repricing frequency of:
(1) Quarterly or more frequently. . . . . . . . . . . . . . . . . . . . . . . . . . . . A228 0 M.5.b.(1)
(2) Annually or more frequently, but less frequently than quarterly . . . . . . . . . . A229 0 M.5.b.(2)
(3) Less frequently than annually . . . . . . . . . . . . . . . . . . . . . . . . . . . A230 0 M.5.b.(3)
c. Floating rate time deposits of less than $100,000 with a remaining maturity of
one year or less (included in Memorandum items 5.b.(1) through 5.b.(3) above) . . . . . A231 0 M.5.c.
6. Maturity and repricing data for time deposits of $100,000 or more (i.e., time certificates
of deposit of $100,000 or more and open-account time deposits of $100,000 or more)
(sum of Memorandum items 6.a.(1) through 6.b.(4) must equal the sum of Memorandum
items 2.c and 2.d above):(1)
a. Fixed rate time deposits of $100,000 or more with a remaining maturity of:
(1) Three months or less. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A232 46,682 M.6.a.(1)
(2) Over three months through 12 months . . . . . . . . . . . . . . . . . . . . . . . . A233 31,619 M.6.a.(2)
(3) Over one year through five years. . . . . . . . . . . . . . . . . . . . . . . . . . A234 15,883 M.6.a.(3)
(4) Over five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A235 2,563 M.6.a.(4)
b. Floating rate time deposits of $100,000 or more with a repricing frequency of:
(1) Quarterly or more frequently. . . . . . . . . . . . . . . . . . . . . . . . . . . . A236 0 M.6.b.(1)
(2) Annually or more frequently, but less frequently than quarterly . . . . . . . . . . A237 0 M.6.b.(2)
(3) Every five years or more frequently, but less frequently than annually. . . . . . . A238 0 M.6.b.(3)
(4) Less frequently than every five years . . . . . . . . . . . . . . . . . . . . . . . A239 0 M.6.b.(4)
c. Floating rate time deposits of $100,000 or more with a remaining maturity of
one year or less (included in Memorandum items 6.b.(1) through 6.b.(4) above) . . . . . A240 0 M.6.c.
</TABLE>
- -----------------------------------
(1) Memorandum items 5 and 6 are not applicable to savings banks that must
complete supplemental Schedule RC-J.
20
<PAGE>
Legal Title of Bank: BANK ONE, COLUMBUS, NA
Address: 100 East Broad Street
City, State, Zip: Columbus, OH 43271-1066 Page RC-11
FDIC Certificate No: 06559
Schedule RC-E--Continued
Part II. Deposits in Foreign Offices (including Edge and
Agreement subsidiaries and IBFs)
<TABLE>
<CAPTION>
-------------------
Dollar Amounts in Thousands RCFN Bil Mil Thou
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deposits of:
1. Individuals, partnerships, and corporations . . . . . . . . . . . . . . . . . . . . . . . . 2621 995,547 1.
2. U.S. banks (including IBFs and foreign branches of U.S. banks). . . . . . . . . . . . . . . 2623 0 2.
3. Foreign banks (including U.S. branches and agencies of foreign banks, including their IBFs) 2625 0 3.
4. Foreign governments and official institutions (including foreign central banks) . . . . . . 2650 0 4.
5. Certified and official checks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2330 0 5.
6. All other deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2668 0 6.
7. Total (sum of items 1 through 6) (must equal Schedule RC, item 13.b). . . . . . . . . . . . 2200 995,547 7.
Memorandum
--------------------
Dollar Amounts in Thousands Bil Mil Thou
- --------------------------------------------------------------------------------------------------------------------
1. Time deposits with a remaining maturity of one year or less
(included in Part II, item 7 above) A245 0 M.1.
--------------------
</TABLE>
<TABLE>
<CAPTION>
Schedule RC-F--Other Assets
------
C430
-----------------------
Dollar Amounts in Thousands Bil Mil Thou
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. Income earned, not collected on loans . . . . . . . . . . . . . . . . . . . . . . . . . . . RCFD 2164 60,339 1.
2. Net deferred tax assets(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RCFD 2148 0 2.
3. Excess residential mortgage servicing fees receivable . . . . . . . . . . . . . . . . . . . RCFD 5371 0 3.
4. Other (itemize and describe amounts that exceed 25% of this item) . . . . . . . . . . . . . RCFD 2168 297,684 4.
--------- --------------------------
a. TEXT 3549 Cash Surrender Value - COLI RCFD 3549 134,550 4.a.
--------------------------------------------------------------------------------------
b. TEXT 3550 RCFD 3550 4.b.
--------------------------------------------------------------------------------------
c. TEXT 3551 RCFD 3551 4.c
--------------------------------------------------------------------------------------
5. Total (sum of items 1 through 4) (must equal Schedule RC, item 11). . . . . . . . . . . . . RCFD 2160 358,023 5.
-----------------------
------------------------
Memorandum Dollar Amounts in Thousands Bil Mil Thou
- -------------------------------------------------------------------------------------------------------------------------
1. Deferred tax assets disallowed for regulatory capital purposes. . . . . . . . . . . . . . . RCFD 5610 0 M.1
------------------------
</TABLE>
<TABLE>
<CAPTION>
Schedule RC-G--Other Liabilities
--------
C435
-------------------------
Dollar Amounts in Thousands Bil Mil Thou
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. a. Interest accrued and unpaid on deposits in domestic offices(2). . . . . . . . . . . . . RCFD 3645 22,852 1.a.
b. Other expenses accrued and unpaid (includes accrued income taxes payable) . . . . . . . RCFD 3646 41,892 1.b.
2. Net deferred tax liabilities(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RCFD 3049 47,872 2.
3. Minority interest in consolidated subsidiaries. . . . . . . . . . . . . . . . . . . . . . . RCFD 3000 0 3.
4. Other (itemize and describe amounts that exceed 25% of this item) . . . . . . . . . . . . . RCFD 2938 42,924 4.
--------- -------------------------
a. TEXT 3552 Deferred Fees Received on Swaps RCFD 3552 34,898 4.a.
---------------------------------------------------------------------------------------
b. TEXT 3553 RCFD 3553 4.b.
---------------------------------------------------------------------------------------
c. TEXT 3554 RCFD 3554 4.c.
---------------------------------------------------------------------------------------
5. Total (sum of items 1 through 4) (must equal Schedule RC, item 20). . . . . . . . . . . . . RCFD 2930 155,540 5.
-------------------------
</TABLE>
- --------------------
(1) See discussion of deferred income taxes in Glossary entry on
"income taxes."
(2) For savings banks, include "dividends" accrued and unpaid
on deposits.
21
<PAGE>
Legal Title of Bank: BANK ONE, COLUMBUS, NA
Address: 100 East Broad Street
City, State, Zip: Columbus, OH 43271-1066 Page RC-12
FDIC Certificate No: 06559
Schedule RC-H--Selected Balance Sheet Items for Domestic Offices
<TABLE>
<CAPTION>
------
C440
----------------------
Domestic Offices
------------------------
Dollar Amounts in Thousands RCON Bil Mil Thou
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1. Customers' liability to this bank on acceptances outstanding. . . . . . . . . . . . . . . . 2155 6,291 1.
2. Bank's liability on acceptances executed and outstanding. . . . . . . . . . . . . . . . . . 2920 6,291 2.
3. Federal funds sold and securities purchased under agreements to resell. . . . . . . . . . . 1350 403,135 3.
4. Federal funds purchased and securities sold under agreements to repurchase. . . . . . . . . 2800 1,053,196 4.
5. Other borrowed money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3190 692,940 5.
EITHER
6. Net due from own foreign offices, Edge and Agreement subsidiaries and IBFs. . . . . . . . . 2163 N/A 6.
OR
7. Net due to own foreign offices, Edge and Agreement subsidiaries, and IBFs . . . . . . . . . 2941 994,702 7.
8. Total assets (excludes net due from foreign offices, Edge and Agreement subsidiaries, and
IBFs). . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2192 8,052,040 8.
9. Total liabilities (excludes net due from foreign offices, Edge and Agreement subsidiaries,
and IBFs). . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3129 6,579,125 9.
-------------------------
Items 10-17 include held-to-maturity and available-for-sale securities in
domestic offices.
----------------------
RCON Bil Mil Thou
----------------------
10. U.S. Treasury securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1779 122,378 10.
11. U.S. Government agency and corporation obligations (exclude mortgage-backed
securities). . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1785 97,490 11.
12. Securities issued by states and political subdivisions in the U.S. . . . . . . . . . . 1786 35,970 12.
13. Mortgage-backed securities (MBS):
a. Pass-through securities:
(1) Issued or guaranteed by FNMA, FHLMC, or GNMA. . . . . . . . . . . . . . . . . . 1787 14,769 13.a.(1)
(2) Other pass-through securities . . . . . . . . . . . . . . . . . . . . . . . . . 1869 8,487 13.a.(2)
b. Other mortgage-backed securities (include CMOs, REMICs, and stripped MBS):
(1) Issued or guaranteed by FNMA, FHLMC, or GNMA. . . . . . . . . . . . . . . . . . 1877 19,931 13.b.(1)
(2) All other mortgage-backed securities. . . . . . . . . . . . . . . . . . . . . . 2253 277 13.b.(2)
14. Other domestic debt securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3159 548 14.
15. Foreign debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3160 0 15.
16. Equity securities:
a. Investments in mutual funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3161 0 16.a.
b. Other equity securities with readily determinable fair values . . . . . . . . . . . 3162 0 16.b.
c. All other equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3169 3,844 16.c.
17. Total held-to-maturity and available-for-sale securities (sum of items 10 through 16) . 3170 303,694 17.
----------------------
Memorandum (to be completed only by banks with IBFs and other "foreign" offices)
---------------------
Dollar Amounts in Thousands RCON Bil Mil Thou
- --------------------------------------------------------------------------------------------------------------------------
EITHER
1. Net due from the IBF of the domestic offices of the reporting bank. . . . . . . . . . . 3051 N/A M.1.
OR
2. Net due to the IBF of the domestic offices of the reporting bank. . . . . . . . . . . . 3059 N/A M.2.
----------------------
</TABLE>
22
<PAGE>
Legal Title of Bank: BANK ONE, COLUMBUS, NA
Address: 100 East Broad Street
City, State, Zip: Columbus, OH 43271-1066 Page RC-13
FDIC Certificate No: 06559
Schedule RC-I--Selected Assets and Liabilities of IBFs
To be completed only by banks with IBFs and other "foreign" offices.
<TABLE>
<CAPTION>
-----
C445
----------------------
Dollar Amounts in Thousands RCFN Bil Mil Thou
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1. Total IBF assets of the consolidated bank (component of Schedule RC, item 12) . . . . . . . 2133 N/A 1.
2. Total IBF loans and lease financing receivables (component of Schedule RC-C, part I,
item 12, column A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2076 N/A 2.
3. IBF commercial and industrial loans (component of Schedule RC-C, part I, item 4,
column A). . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2077 N/A 3.
4. Total IBF liabilities (component of Schedule RC, item 21) . . . . . . . . . . . . . . . . 2898 N/A 4.
5. IBF deposit liabilities due to banks, including other IBFs (component of Schedule RC-E,
part II, items 2 and 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2379 N/A 5.
6. Other IBF deposit liabilities (component of Schedule RC-E, part II, items 1, 4, 5, and 6) . 2381 N/A 6.
</TABLE>
<TABLE>
<CAPTION>
Schedule RC-K--Quarterly Averages(1)
-----
C445
----------------------
Dollar Amounts in Thousands Bil Mil Thou
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
1. Interest-bearing balances due from depository institutions. . . . . . . . . . . . . . . . . RCFD 3381 0 1.
2. U.S. Treasury securities and U.S. Government agency and corporation obligations(2). . . . . RCFD 3382 325,191 2.
3. Securities issued by states and political subdivisions in the U.S.(2) . . . . . . . . . . . RCFD 3383 35,737 3.
4. a. Other debt securities(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RCFD 3647 12,819 4.a.
b. Equity securities(3) (include investments in mutual funds and Federal Reserve stock). . RCFD 3648 3,844 4.b.
5. Federal funds sold and securities purchased under agreements to resell in domestic offices
of the bank and of its Edge and Agreement subsidiaries, and in IBFs . . . . . . . . . . . . RCFD 3365 290,876 5.
6. Loans:
a. Loans in domestic offices:
(1) Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RCON 3360 5,239,586 6.a.(1)
(2) Loans secured by real estate. . . . . . . . . . . . . . . . . . . . . . . . . . . . RCON 3385 1,248,488 6.a.(2)
(3) Loans to finance agricultural production and other loans to farmers . . . . . . . . RCON 3386 8,859 6.a.(3)
(4) Commercial and industrial loans . . . . . . . . . . . . . . . . . . . . . . . . . . RCON 3387 988,381 6.a.(4)
(5) Loans to individuals for household, family, and other personal expenditures . . . . RCON 3388 2,950,661 6.a.(5)
b. Total loans in foreign offices, Edge and Agreement subsidiaries, and IBFs . . . . . . . RCFN 3360 0 6.b,
7. Trading assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RCFD 3401 0 7.
8. Lease financing receivables (net of unearned income). . . . . . . . . . . . . . . . . . . . RCFD 3484 907,765 8.
9. Total assets(4). . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RCFD 3368 7,622,976 9.
LIABILITIES
10. Interest-bearing transaction accounts in domestic offices (NOW accounts, ATS accounts,
and telephone and preauthorized transfer accounts) (exclude demand deposits). . . . . . . . RCON 3485 55,870 10.
11. Nontransaction accounts in domestic offices:
a. Money market deposit accounts (MMDAs) . . . . . . . . . . . . . . . . . . . . . . . . . RCON 3486 1,330,413 11.a.
b. Other savings deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RCON 3487 544,004 11.b.
c. Time certificates of deposit of $100,000 or more. . . . . . . . . . . . . . . . . . . . RCON 3345 99,138 11.c.
d. All other time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RCON 3469 941,203 11.d.
12. Interest-bearing deposits in foreign offices, Edge and Agreement subsidiaries, and IBFs . . RCFC 3404 493,160 12.
13. Federal funds purchased and securities sold under agreements to repurchase in domestic
offices of the bank and of its Edge and Agreement subsidiaries, and in IBFs . . . . . . . . RCFD 3353 1,340,756 13.
14. Other borrowed money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RCFD 3355 711,324 14.
</TABLE>
- ------------------
(1) For all items, banks have the option of reporting either (1) an average
of daily figures for the quarter, or
(2) an average of weekly figures (i.e., the Wednesday of each week of
the quarter).
(2) Quarterly averages for all debt securities should be based on amortized
cost.
(3) Quarterly averages for all equity securities should be based on
historical cost.
(4) The quarterly average for total assets should reflect all debt securities
(not held for trading) at amortized cost, equity securities with readily
determinable fair values at the lower of cost or fair value, and equity
securities without readily determinable fair values at historical cost.
23
<PAGE>
Legal Title of Bank: BANK ONE, COLUMBUS, NA
Address: 100 East Broad Street
City, State, Zip: Columbus, OH 43271-1066 Page RC-14
FDIC Certificate No: 06559
Schedule RC-L--Off-Balance Sheet Items
Please read carefully the instructions for the preparation of Schedule RC-L.
Some of the amounts reported in Schedule RC-L are regarded as volume indicators
and not necessarily as measures of risk.
<TABLE>
<CAPTION>
-----
C460
------------------
Dollar Amounts in Thousands RCFD Bil Mil Thou
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1. Unused commitments:
a. Revolving, open-end lines secured by 1-4 family residential properties, e.g. home
equity lines. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3814 372,894 1.a.
b. Credit card lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3815 26,023,810 1.b.
c. Commercial real estate, construction, and land development:
(1) Commitments to fund loans secured by real estate. . . . . . . . . . . . . . . . . . 3816 108,540 1.c.(1)
(2) Commitments to fund loans not secured by real estate. . . . . . . . . . . . . . . . 6550 18,614 1.c.(2)
d. Securities underwriting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3817 0 1.d.
e. Other unused commitments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3818 1,965,976 1.e.
2. Financial standby letters of credit and foreign office guarantees . . . . . . . . . . . . . 3819 439,188 2.
-----------------
a. Amount of financial standby letters of credit conveyed to others RCFD 3820 80,530 2.a.
-----------------
3. Performance standby letters of credit and foreign office guarantees . . . . . . . . . . . . 3821 92,578 3.
-----------------
a. Amount of performance standby letters of credit conveyed to others RCFD 3822 14,225 3.a.
-----------------
4. Commercial and similar letters of credit. . . . . . . . . . . . . . . . . . . . . . . . . . 3411 49,046 4.
5. Participations in acceptances (as described in the instructions) conveyed to others by the
reporting bank. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3428 0 5.
6. Participations in acceptances (as described in the instructions) acquired by the reporting
(nonaccepting) bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3429 0 6.
7. Securities borrowed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3432 0 7.
8. Securities lent (including customers' securities lent where the customer is indemnified
against loss by the reporting bank) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3433 0 8.
9. Loans transferred (i.e., sold or swapped) with recourse that have been treated as sold for
Call Report purposes:
a. FNMA and PHLMC residential mortgage loan pools:
(1) Outstanding principal balance of mortgage transferred as of the report date . . . . 3650 0 9.a.(1)
(2) Amount of recourse exposure on these mortgages as of the report date. . . . . . . . 3651 0 9.a.(2)
b. Private (nongovernment-issued or -guaranteed) residential mortgage loan pools:
(1) Outstanding principal balance of mortgage transferred as of the report date . . . . 3652 0 9.b.(1)
(2) Amount of recourse exposure on these mortgages as of the report date. . . . . . . . 3653 0 9.b.(2)
c. Farmer Mac agricultural mortgage loan pools:
(1) Outstanding principal balance of mortgage transferred as of the report date . . . . 3654 0 9.c.(1)
(2) Amount of recourse exposure on these mortgages as of the report date. . . . . . . . 3655 0 9.c.(2)
d. Small business obligations transferred with recourse under Section 208 of the
Riegle Community Development and Regulatory Improvement Act of 1994:
(1) Outstanding principal balance of small business obligations transferred
as of the report date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A249 0 9.d.(1)
(2) Amount of retained recourse on these obligations as of the report date. . . . . . . A250 0 9.d.(2)
10. When-issued securities:
a. Gross commitments to purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3434 0 10.a.
b. Gross commitments to sell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3435 0 10.b.
11. Spot foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8765 33,757 11.
12. All others off-balance sheet liabilities (exclude off-balance sheet derivatives)
(itemize and describe each component of this item over 25% of Schedule RC, item 28,
"Total equity capital") . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3430 0 12.
--------- -----------------------------------
a. TEXT 3555 RCFD 3555 12.a.
----------------------------------------------------
b. TEXT 3556 RCFD 3556 12.b.
----------------------------------------------------
c. TEXT 3557 RCFD 3557 12.c.
----------------------------------------------------
d. TEXT 3558 RCFD 3558 12.d.
----------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
Legal Title of Bank: BANK ONE, COLUMBUS, NA
Address: 100 East Broad Street
City, State Zip: Columbus, OH 43271-1066
FDIC Certificate No.: 06559 Page RC-15
Schedule RC-L--Continued
<TABLE>
<CAPTION>
------------------
Dollar Amounts in Thousands RCFD Bil Mil Thou
- ------------------------------------------------------------------------------------------------ ------------------
<S> <C> <C>
13. All other off-balance sheet assets (exclude off-balance sheet derivatives) (itemize and
describe each component of this item over 25% of Schedule RC, item 28, "Total equity
capital") . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5591 138,336 13.
--------- --------------------------
a. TEXT 5592 RCFD 5592 13.a.
-------------------------------------------------------------
b. TEXT 5593 RCFD 5593 13.b.
-------------------------------------------------------------
c. TEXT 5594 RCFD 5594 13.c.
-------------------------------------------------------------
d. TEXT 5595 RCFD 5595 13.d.
-------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
--------
C461
----------------------------------------------------------------------------
(Column A) (Column B) (Column C) (Column D)
Dollar Amounts in Thousands Interest Rate Foreign Exchange Equity Derivative Commodity and
- ---------------------------------------- Contracts Contracts Contracts Other Contracts
Off-balance Sheet Derivatives ----------------- ----------------- ----------------- -----------------
Position Indicators Tril Bil Mil Thou Tril Bil Mil Thou Tril Bil Mil Thou Tril Bil Mil Thou
- ---------------------------------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
14. Gross amounts (e.g., notional
amounts) (for each column, sum of
items 14.a through 14.e must equal
sum of items 15, 16.a, and 16.b):
a. Futures contracts . . . . . . . . 0 0 0 0 14.a
----------------- ---------------- ---------------- ----------------
RCFD 8693 RCFD 8694 RCFD 8695 RCFD 8696
----------------- ---------------- ---------------- ----------------
b. Forward contracts. . . . . . . . 600,000 72,807 0 0 14.b.
----------------- ---------------- ---------------- ----------------
RCFD 8697 RCFD 8698 RCFD 8699 RCFD 8700
----------------- ---------------- ---------------- ----------------
c. Exchange-traded option contracts:
(1) Written options. . . . . . . 0 0 0 0 14.c.(1)
----------------- ---------------- ---------------- ----------------
RCFD 8701 RCFD 8702 RCFD 8703 RCFD 8704
----------------- ---------------- ---------------- ----------------
(2) Purchased options. . . . . . 0 0 0 0 14.c.(2)
----------------- ---------------- ---------------- ----------------
RCFD 8705 RCFD 8706 RCFD 8707 RCFD 8708
----------------- ---------------- ---------------- ----------------
d. Over-the-counter option contracts:
(1) Written options. . . . . . . 2,131,388 0 0 0 14.d.(1)
----------------- ---------------- ---------------- ----------------
RCFD 8709 RCFD 8710 RCFD 8711 RCFD 8712
----------------- ---------------- ---------------- ----------------
(2) Purchased options. . . . . . 2,892,388 0 0 0 14.d.(2)
----------------- ---------------- ---------------- ----------------
RCFD 8713 RCFD 8714 RCFD 8715 RCFD 8716
----------------- ---------------- ---------------- ----------------
e. Swaps. . . . . . . . . . . . . . 15,854,789 0 0 0 14.e.
----------------- ---------------- ---------------- ----------------
RCFD 3450 RCFD 3826 RCFD 8719 RCFD 8720
----------------- ---------------- ---------------- ----------------
15. Total gross notional amount of
derivative contracts held for
trading . . . . . . . . . . . . . . 0 0 0 0 15.
----------------- ---------------- ---------------- ----------------
RCFD A126 RCFD A127 RCFD 8723 RCFD 8724
----------------- ---------------- ---------------- ----------------
16. Total gross notional amount of
derivative contracts held for
purposes other than trading:
a. Contracts marked to market . . . 305,013 72,807 0 0 16.a.
----------------- ---------------- ---------------- ----------------
RCFD 8725 RCFD 8726 RCFD 8727 RCFD 8728
----------------- ---------------- ---------------- ----------------
a. Contracts not marked to market . 21,173,552 0 0 0 16.b.
----------------- ---------------- ---------------- ----------------
RCFD 8729 RCFD 8730 RCFD 8731 RCFD 8732
----------------- ---------------- ---------------- ----------------
</TABLE>
25
<PAGE>
Legal Title of Bank: BANK ONE, COLUMBUS, NA
Address: 100 East Broad Street
City, State Zip: Columbus, OH 43271-1066
FDIC Certificate No.: 06559 Page RC-16
Schedule RC-L--Continued
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
(Column A) (Column B) (Column C) (Column D)
Dollar Amounts in Thousands Interest Rate Foreign Exchange Equity Derivative Commodity and
- ---------------------------------------- Contracts Contracts Contracts Other Contracts
Off-balance Sheet Derivatives ----------------- ----------------- ----------------- -----------------
Position Indicators RCFD Bil Mil Thou RCFD Bil Mil Thou RCFD Bil Mil Thou RCFD Bil Mil Thou
- ---------------------------------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
17. Gross fair values of
derivative contracts:
a. Contracts held for
trading:
(1) Gross positive
fair value . . . . . . . . . 8733 0 8734 0 8735 0 8736 0 17.a.(1)
(2) Gross negative
fair value . . . . . . . . . 8737 0 8738 0 8739 0 8740 0 17.a.(2)
b. Contracts held for
purposes other than
trading that are marked
to market:
(1) Gross positive
fair value . . . . . . . . . 8741 988 8742 859 8743 0 8744 0 17.b.(1)
(2) Gross negative
fair value . . . . . . . . . 8745 1,071 8746 802 8747 0 8748 0 17.b.(2)
c. Contracts held for
purposes other than
trading that are not
marked to market:
(1) Gross positive
fair value . . . . . . . . . 8749 63,673 8750 0 8751 0 8752 0 17.c.(1)
(2) Gross negative
fair value . . . . . . . . . 8753 79,961 8754 0 8755 0 8756 0 17.c.(2)
----------------------------------------------------------------------------
<CAPTION>
Memoranda Dollar Amounts in Thousands RCFD Bil Mil Thou
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1.-2. Not applicable
3. Unused commitments with an original maturity exceeding one year that are reported in
Schedule RC-L, items 1.a through 1.e, above (report only the unused portions of
commitments that are fee paid or otherwise legally binding) . . . . . . . . . . . . . . . 3833 1,034,618 M.3.
a. Participations in commitments with an original maturity ------------------
exceeding one year conveyed to others . . . . . . . . . . . . . . . RCFD 3834 192,122 M.3.a.
------------------
4. To be completed only by banks with $1 billion or more in total assets:
Standby letters of credit and foreign office guarantees (both financial and performance)
issued to non-U.S. addressees (domicile) included in Schedule RC-L, items 2 and 3,
above . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3377 932 M.4.
5. Installment loans to individuals for household, family, and other personal expenditures
that have been securitized and sold without recourse (with servicing retained), amounts
outstanding by type of loan:
a. Loans to purchase private passenger automobiles (to be completed for the September
report only) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2741 N/A M.5.a.
b. Credit cards and related plans (TO BE COMPLETED QUARTERLY) . . . . . . . . . . . . . . 2742 0 M.5.b.
c. All other consumer installment credit (including mobile home loans) (to be completed
for the September report only) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2743 N/A M.5.c.
----------------
</TABLE>
26
<PAGE>
Legal Title of Bank: BANK ONE, COLUMBUS, NA
Address: 100 East Broad Street
City, State Zip: Columbus, OH 43271-1066
FDIC Certificate No.: 06559 Page RC-17
-----
Schedule RC-M--Memoranda
<TABLE>
<CAPTION>
--------
C465
-----------------
Dollar Amounts in Thousands RCFD Bil Mil Thou
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1. Extensions of credit by the reporting bank to its executive officers, directors, principal
shareholders, and their related interests as of the report date:
a. Aggregate amount of all extension of credit to all executive officers, directors,
principal shareholders, and their related interests. . . . . . . . . . . . . . . . . . 6164 187,112 1.a.
b. Number of executive officers, directors, and principal shareholders to whom the amount
of all extensions of credit by the reporting bank (including extensions of credit to
related interests) equals or exceeds the lesser of $500,000 or Number
5 percent of total capital as defined for this purpose in agency ------------------
regulations. . . . . . . . . . . . . . . . . . . . . . . . . . . . RCFD 6165 15 1.b.
------------------
2. Federal funds sold and securities purchased under agreements to resell with U.S. branches
and agencies of foreign banks(1) (included in Schedule RC, items 3.a and 3.b) . . . . . . 3405 0 2.
3. Not applicable.
4. Outstanding principal balances of 1-4 family residential mortgage loans serviced for
others (include both retained servicing and purchased servicing):
a. Mortgages serviced under a GNMA contract . . . . . . . . . . . . . . . . . . . . . . . 5500 0 4.a.
b. Mortgages serviced under a FHLMC contract:
(1) Serviced with recourse to servicer . . . . . . . . . . . . . . . . . . . . . . . . 5501 0 4.b.(1)
(2) Serviced without recourse to servicer. . . . . . . . . . . . . . . . . . . . . . . 5502 0 4.b.(2)
c. Mortgages serviced under a FNMA contract:
(1) Serviced under a regular option contract . . . . . . . . . . . . . . . . . . . . . 5503 0 4.c.(1)
(2) Serviced under a special option contract . . . . . . . . . . . . . . . . . . . . . 5504 0 4.c.(2)
d. Mortgages serviced under other servicing contracts . . . . . . . . . . . . . . . . . . 5505 0 4.d.
5. To be completed only by banks with $1 billion or more in total assets:
Customers' liability to this bank on acceptances outstanding (sum of items 5.a and 5.b
must equal Schedule RC, item 9):
a. U.S. addressees (domicile) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2103 6,291 5.a.
b. Non-U.S. addressees (domicile) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2104 0 5.b.
6. Intangible assets:
a. Mortgage servicing rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3164 0 6.a.
b. Other identifiable intangible assets:
(1) Purchased credit card relationships. . . . . . . . . . . . . . . . . . . . . . . . 5506 22,352 6.b.(1)
(2) All other identifiable intangible assets . . . . . . . . . . . . . . . . . . . . . 5507 2,459 6.b.(2)
c. Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3163 12,233 6.c.
d. Total (sum of items 6.a through 6.c) (must equal Schedule RC, item 10) . . . . . . . . 2143 37,044 6.d.
e. Amount of intangible assets (included in item 6.b.(2) above) that have been
grandfathered or are otherwise qualifying for regulatory capital purposes. . . . . . . 6442 0 6.e.
7. Mandatory convertible debt, net of common or perpetual stock dedicated to redeem the
debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3295 0 7.
-----------------
</TABLE>
- ---------------
(1) Do not report federal funds sold and securities purchased under agreements
to resell with other commercial banks in the U.S. in this item.
27
<PAGE>
Legal Title of Bank: BANK ONE, COLUMBUS, NA
Address: 100 East Broad Street
City, State Zip: Columbus, OH 43271-1066
FDIC Certificate No.: 06559 Page RC-18
Schedule RC-M--Continued
<TABLE>
<CAPTION>
Dollar Amounts in Thousands Bil Mil Thou
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
8. a. Other real estate owned:
(1) Direct and indirect investments in real estate ventures. . . . . . . . . . . . . . RCFD 5372 0 8.a.(1)
(2) All other real estate owned:
(a) Construction and land development in domestic offices. . . . . . . . . . . . . RCON 5508 0 8.a.(2)(a)
(b) Farmland in domestic offices . . . . . . . . . . . . . . . . . . . . . . . . . RCON 5509 0 8.a.(2)(b)
(c) 1-4 family residential properties in domestic offices. . . . . . . . . . . . . RCON 5510 296 8.a.(2)(c)
(d) Multifamily (5 or more) residential properties in domestic offices . . . . . . RCON 5511 0 8.a.(2)(d)
(e) Nonfarm nonresidential properties in domestic offices. . . . . . . . . . . . . RCON 5512 5,000 8.a.(2)(e)
(f) In foreign offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RCFN 5513 0 8.a.(2)(f)
(3) Total (sum of items 8.a.(1) and 8.a.(2)) (must equal Schedule RC, item 7). . . . . RCFD 2150 5,296 8.a.(3)
b. Investments in unconsolidated subsidiaries and associated companies:
(1) Direct and indirect investments in real estate ventures. . . . . . . . . . . . . . RCFD 5374 0 8.b.(1)
(2) All other investments in unconsolidated subsidiaries and associated companies. . . RCFD 5375 738 8.b.(2)
(3) Total (sum of items a.b.(1) and a.b.(2)) (must equal Schedule RC, item 8). . . . . RCFD 2130 738 8.b.(3)
c. Total assets of unconsolidated subsidiaries and associated companies . . . . . . . . . RCFD 5376 17,602 8.c.
9. Noncumulative perpetual preferred stock and related surplus included in Schedule RC,
item 23, "Perpetual preferred stock and related surplus". . . . . . . . . . . . . . . . . RCFD 3778 0 9.
10. Mutual fund and annuity sales in domestic offices during the quarter (include
proprietary, private label, and third party products):
a. Money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RCON 6441 0 10.a.
b. Equity securities funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RCON 8427 13,192 10.b.
c. Debt securities funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RCON 8428 4,779 10.c.
d. Other mutual funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RCON 8429 0 10.d.
e. Annuities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RCON 8430 13,929 10.e.
f. Sales of proprietary mutual funds and annuities (included in items 10.a through
10.e above). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RCON 8784 12,693 10.f.
-------------------
</TABLE>
<TABLE>
<CAPTION>
Memorandum Dollar Amounts in Thousands RCFD Bil Mil Thou
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1. Interbank holdings of capital instruments (to be completed for the December report only):
a. Reciprocal holdings of banking organizations' capital instruments. . . . . . . . . . . 3836 N/A M.1.a.
b. Nonreciprocal holdings of banking organizations' capital instruments . . . . . . . . . 3837 N/A M.1.b.
-----------------
</TABLE>
28
<PAGE>
Legal Title of Bank: BANK ONE, COLUMBUS, NA
Address: 100 East Broad Street
City, State Zip: Columbus, OH 43271-1066
FDIC Certificate No.: 06559 Page RC-19
-----
Schedule RC-N--Past Due and Nonaccrual Loans, Leases, and Other Assets
The FFIEC regards the information reported in all of Memorandum item 1, in items
1 through 10, column A, and in Memorandum items 2 through 4, column A, as
confidential.
<TABLE>
<CAPTION>
---------
C470
--------------------------------------------------------
(Column A) (Column B) (Column C)
Past due Past due 90 Nonaccrual
30 through 89 days or more
days and still and still
accruing accruing
----------------- ----------------- -----------------
Dollar Amounts in Thousands RCFD Bil Mil Thou RCFD Bil Mil Thou RCFD Bil Mil Thou
- ------------------------------------------------------------ ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
1. Loans secured by real estate:
a. To U.S. addressees (domicile). . . . . . . . . . . . 1245 1246 3,043 1247 7,526 1.a.
b. To non-U.S. addressees (domicile). . . . . . . . . . 1248 1249 0 1250 0 1.b.
2. Loans to depository institutions and acceptances to
other banks:
a. To U.S. banks and other U.S. depository
institutions . . . . . . . . . . . . . . . . . . . . 5377 5378 0 5379 0 2.a.
b. To foreign banks . . . . . . . . . . . . . . . . . . 5380 5381 0 5382 0 2.b.
3. Loans to finance agricultural production and other
loans to farmers. . . . . . . . . . . . . . . . . . . . 1594 1597 0 1583 64 3.
4. Commercial and industrial loans:
a. To U.S. addressees (domicile). . . . . . . . . . . . 1251 1252 2,381 1253 3,171 4.a.
b. To non-U.S. addressees (domicile). . . . . . . . . . 1254 1255 0 1256 0 4.b.
5. Loans to individuals for household, family, and other
personal expenditures:
a. Credit cards and related plans . . . . . . . . . . . 5383 5384 37,638 5385 0 5.a.
b. Other (includes single payment, installment,
and all student loans) . . . . . . . . . . . . . . . 5386 5387 11,647 5388 2,770 5.b.
6. Loans to foreign governments and official
institutions. . . . . . . . . . . . . . . . . . . . . . 5389 5390 0 5391 0 6.
7. All other loans . . . . . . . . . . . . . . . . . . . . 5459 5460 54 5461 76 7.
8. Lease financing receivables:
a. Of U.S. addressees (domicile). . . . . . . . . . . . 1257 1258 575 1259 845 8.a.
b. Of non-U.S. addressees (domicile). . . . . . . . . . 1271 1272 0 1791 0 8.b.
9. Debt securities and other assets (exclude other real
estate owned and other repossessed assets). . . . . . . 3505 3506 0 3507 0 9.
--------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Amounts reported in items 1 through 8 above include guaranteed and unguaranteed
portions of past due and nonaccrual loans and leases. Report in item 10 below
certain guaranteed loans and leases that have already been included in the
amounts reported in items 1 through 8.
<TABLE>
<CAPTION>
RCFD Bil Mil Thou RCFD Bil Mil Thou RCFD Bil Mil Thou
- ------------------------------------------------------------ ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
10. Loans and leases reported in items 1 through 8 above
which are wholly or partially guaranteed by the U.S.
Government. . . . . . . . . . . . . . . . . . . . . . . 5612 5613 7,771 5614 2,121 10.
a. Guaranteed portion of loans and leases included in
item 10 above. . . . . . . . . . . . . . . . . . . . 5615 5616 7,771 5617 2,083 10.a.
</TABLE>
29
<PAGE>
Legal Title of Bank: BANK ONE, COLUMBUS, NA
Address: 100 East Broad Street
City, State Zip: Columbus, OH 43271-1066 Page RC-20
FDIC Certificate No.: 06559
Schedule RC-N--Continued
<TABLE>
<CAPTION>
C473
---------------------------------------------------------------
(Column A) (Column B) (Column C)
Past due Past due 90 Nonaccrual
30 through 89 days or more
days and still and still
accruing accruing
Memoranda -------------------- -------------------- --------------------
Dollar Amounts in Thousands RCFD Bil Mil Thou RCFD Bil Mil Thou RCFD Bil Mil Thou
- --------------------------------------------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
1. Restructured loans and leases included in
Schedule RC-N, items 1 through 8, above (and not
reported in Schedule RC-C, part I, Memorandum
item 2). 1658 1659 1661 M.1.a
2. Loans of finance commercial real estate,
construction, and land developemnt activities
(not secured by real estate) included in
Schedule RC-N, items 4 and 7, above . . . . . . . 6558 6559 201 6560 0 M.2
-------------------- --------------------- --------------------
3. Loans secured by real estate in domestic offices RCFD Bil Mil Thou RCFD Bil Mil Thou RCFD Bil Bil Thou
(included in Schedule RC-N, item 1, above): -------------------- --------------------- --------------------
a. Construction and land development. . . . . . . 2759 2769 751 3492 442 M.3.a
b. Secured by farmland. . . . . . . . . . . . . . 3493 3494 0 3495 0 M.3.b.
c. Secured by 1-4 family residential properties:
(1) Revolving, open-end loans secured by
1-4 family residential properties and
extended under lines of credit. . . . . . 5398 5399 577 5400 789 M.3.c.(1)
(2) All other loans secured by 1-4 family
residential properties. . . . . . . . . . 5401 5402 1,464 5403 4,489 M.3.c.(2)
d. Secured by multifamily (5 or more) residential
properties . . . . . . . . . . . . . . . . . . 3499 3500 75 3501 0 M.3.d.
e. Secured by nonfarm nonresidential properties . 3502 3503 176 3504 1,806 M.3.e
-------------------- --------------------- --------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------
(Column A) (Column B)
Past due 30 Past due 90
through 89 days days or more
-------------------- ---------------------
RCFD Bil Mil Thou RCFD Bil Mil Thou
-------------------- ---------------------
<S> <C> <C> <C>
4. Interest rate, foreign exchange rate, and other
commodity and equity contracts:
a. Book value of amounts carried as assets. . . . 3522 3528 0 M.4.a
b. Replacement cost of contracts with a
positive replacement cost. . . . . . . . . . . 3529 3530 0 M.4.b
-------------------- ---------------------
</TABLE>
30
<PAGE>
Legal Title of Bank: BANK ONE, COLUMBUS, NA
Address: 100 East Broad Street
City, State Zip: Columbus, OH 43271-1066 Page RC-21
FDIC Certificate No.: 06559
Schedule RC-O--Other Data for Deposit Insurance Assessments
<TABLE>
<CAPTION>
-------
C475
--------------------
Dollar Amounts in Thousands RCON Bil Mil Thou
- ----------------------------------------------------------------------------------------------------- --------------------
<S> <C> <C>
1. Unposted debits (see instructions):
a. Actual amount of all unposted debits. . . . . . . . . . . . . . . . . . . . . . . . . . . . 0030 N/A 1.A
OR
b. Separate amount of unposted debits:
(1) Actual amount of unposted debits to demand deposits. . . . . . . . . . . . . . . . . . 0031 0 1.b.(1)
(2) Actual amount of unposted debits to time and savings deposits(1) . . . . . . . . . . . 0032 0 1.B.(2)
2. Unposted credits (see instructions):
a. Actual amount of all unposted debits. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3510 N/A 2.A
OR
b. Separate amount of unposted debits:
(1) Actual amount of unposted credits to demand deposits . . . . . . . . . . . . . . . . . 3512 0 2.b.(1)
(2) Actual amount of unposted credits to time and savings deposits(1). . . . . . . . . . . 3514 0 2.b.(2)
3. Uninvested trust funds (cash) held in bank's own trust department (not included in total
deposits in domestic offices). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3520 0 3.
4. Deposits of consolidated subsidiaries in domestic offices and in insured branches in Puerto
Rico and U.S. territories and possessions (not included in total deposits):
a. Demand deposits of consolidated subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . 2211 0 4.a.
b. Time and savings deposits(1) of consolidated subsidiaries . . . . . . . . . . . . . . . . . 2351 0 4.b.
c. Interest accrued and unpaid on deposits of consolidated subsidiaries. . . . . . . . . . . . 5514 0 4.c.
5. Deposits in insured branches in Puerto Rico and U.S. territories and possessions:
a. Demand deposits in insured branches (included in Schedule RC-E, Part II). . . . . . . . . . 2229 0 5.a.
b. Time and savings deposits(1) in insured branches (included in Schedule RC-E, Part II) . . . 2383 0 5.b.
c. Interest accrued and unpaid on deposits in insured branches
(included in Schedule RC-G, item 1.b) . . . . . . . . . . . . . . . . . . . . . . . . . . . 5515 0 5.c
--------------------
--------------------
Item 6 is not applicable to state nonmember banks that have not been authorized by the
Federal Reserve to act as pass-through correspondents.
6. Reserve balances actually passed through to the Federal Reserve by the reporting bank on
behalf of its respondent depository institutions that are also reflected as deposit liabilities
of the reporting bank:
a. Amount reflected in demand deposits (included in Schedule RC-E, Part I, item 4 or 5,
column B) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2314 0 6.a.
b. Amount reflected in time and savings deposits(1) (included in Schedule RC-E, Part I,
item 4 or 5, column A and C, but not column B). . . . . . . . . . . . . . . . . . . . . . . 2315 0 6.b.
7. Unamortized premiums and discounts on time and savings deposits:(1)
a. Unamortized premiums. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5516 0 7.a.
b. Unamortized discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5517 0 7.b.
--------------------
- ---------------------------------------------------------------------------------------------------------------------------
8. To be completed by banks with "Oakar deposits."
Total "Adjusted Attributable Deposits" of all institutions acquired under Section 5(d)(3) of ---------------------
the Federal Deposit Insurance Act (from most recent FDIC Oakar Transaction Worksheet(s)). . . . 5518 N/A 8.
---------------------
- ---------------------------------------------------------------------------------------------------------------------------
---------------------
9. Deposits in lifeline accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5596 9.
10. Benefit-responsive "Depository Institution Investment Contracts" (included in total
deposits in domestic offices). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8432 0 10.
---------------------
</TABLE>
- -----------
(1) For FDIC insurance assessment purposes, "time and savings deposits" consists
of nontransaction accounts and all transaction accounts other than demand
deposits.
31
<PAGE>
Legal Title of Bank: BANK ONE, COLUMBUS, NA
Address: 100 East Broad Street
City, State Zip: Columbus, OH 43271-1066 Page RC-22
FDIC Certificate No.: 06559
Schedule RC-O--Contiuned
<TABLE>
<CAPTION>
----------------------
Dollar Amounts in Thousands RCON Bil Mil Thou
- ------------------------------------------------------------------------------------------------- ----------------------
<S> <C> <C>
11. Adjustments to demand deposits in domestic offices reported in Schedule RC-E for
certain reciprocal demand balances:
a. Amount by which demand deposits would be reduced if reciprocal demand balances
between the reporting bank and savings asociations were reported on a net basis
rather than a gross basis in Schedule RC-E. . . . . . . . . . . . . . . . . . . . . . . 8785 0 11.a.
b. Amount by which demand deposits would be increased if reciprocal demand balances
between the reporting bank and U.S. branches and agencies of foreign banks were
reported on a gross basis rather than a net basis in Schedule RC-E. . . . . . . . . . . A181 0 11.b.
c. Amount by which demand deposits would be reduced if cash items in process of
collection were included in the calculation of net reciprocal demand balances between
the reporting bank and the domestic offices of U.S. banks and savings associations
in Schedule RC-E. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A182 0 11.c.
Memoranda (to be completed each quarter except as noted)
----------------------
Dollar Amounts in Thousands RCON Bil Mil Thou
- ------------------------------------------------------------------------------------------------ ----------------------
<S> <C> <C>
1. Total depsoits in domestic offices of the bank (sum of Memorandum items 1.a.(1) and
1.b.(1) must equal Schedule RC, item 13.a
a. Deposit accounts of $100,00 or less:
(1) Amount of deposit accounts of $100,000 or less . . . . . . . . . . . . . . . . . . 2702 2,482,590 M.1.a.(1)
(2) Number of deposit accounts of $100,000 or less (to be Number
completed for the June report only). . . . . . . . . . . RCON 3779 566,691 M.1.a.(2)
b. Deposit accounts of more than $100,000:
(1) Amount of deposit accounts of more than $100,000 . . . . . . . . . . . . . . . . . 2710 1,942,328 M.1.b.(1)
Number
(2) Number of deposit accounts of more than $100,000 . . . . RCON 2722 3,887 M.1.b.(2)
2. Estimated amount of uninsured deposits in domestic offices of the bank:
a. An estimate of your bank's uninsured deposits can be determined by multiplying the
number of deposit accounts of more than $100,000 reported in Memorandum item 1.b.(2)
above by $100,000 and subtracting the result from the amount of deposit accounts of
more than $100,000 reported in Memorandum item 1.b.(1) above.
Indicate in the appropriate box at the right whether your bank has a method or
procedure for determining a better estimate of uninsured deposits that the YES NO
estimate described above . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6861 | | |X| M.2.a.
---------------------
RCON Bil Mil Thou
b. If the box marked YES has been checked, report the estimate of uninsured deposits ---------------------
determined by using your bank's method or procedure . . . . . . . . . . . . . . . 5597 N/A M.2.b.
---------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Person to whom questions about the Reports of Condition and Income should be directed: C477
--------
Elizabeth G. Gilliland, Assistant Vice-President (614) 248-8563
- ----------------------------------------------------------------------------------- --------------------------------------------
Name and Title (TEXT 8901) Area code/phone number/extension (TEXT 8902)
</TABLE>
32
<PAGE>
Legal Title of Bank: BANK ONE, COLUMBUS, NA
Address: 100 East Broad Street
City, State Zip: Columbus, OH 43271-1066 Page RC-23
FDIC Certificate No.: 06559
Schedule RC-R--Regulatory Capital
This schedule must be completed by all banks as follows: Banks that reported
assets of $1 billion or more in Schedule RC, item 12, for June 30, 1995, must
complete items 2 through 9 and Memoranda items 1 and 2. Banks with assets of
less then $1 billion must complete itmes 1 through 3 below or Schedule RC-R in
its entirety, depending on their response to item 1 below.
1. Test for determining the extent to which Schedule
RC-R must be completed. To be completed only by banks ----
with total assets of less than $1 billion. Indicate in C480
the appropriate box at the right whether the bank has ------------
total capital greater than or equal to eight percent of YES NO
adjusted total assets . . . . . . . . . . . . . . . RCFD 6056 | | | | 1.
For purpose of this test, adjusted total assets equal total assets less
cash, U.S. Treasuries, U.S. Government agency obligations, and 80 percent of
U.S. Government-sponsored agency obligations plus the allowance for loan and
lease and selected off-balance sheet items as reported on Schedule RC-L (see
instructions).
If the box marked YES has been checked, then the bank only has to complete
items 2 and 3 below. If the box marked NO has been checked, the bank must
complete the remainder of this schedule.
A NO response to item 1 does not necessarily mean that the bank's actual
risk-based capital ratio is less then eight percent or that the bank is not in
compliance with the risk-based capital guidelines.
- --------------------------------------------------------------------------------
NOTE: All banks are required to complete items 2 and 3 below. See optional
worksheet for items 3.a through 3.f.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
--------------------- ---------------------
(Column A) (Column B)
Subordinated Debt(1) Other
and Intermediate Limited-Life
Dollar Amounts in Thousands Term Preferred Stock Capital Instruments
- ------------------------------------------------------------------------------ --------------------- ---------------------
<S> <C> <C> <C>
2. Subordinated debt(1) and other limited-life capital instruments
(original) weighted average maturity of at least five years) with a RCFD Bil Mil Thou RCFD Bil Mil Thou
remaining maturity of: --------------------- ---------------------
a. One year or less. . . . . . . . . . . . . . . . . . . . . . . . . . . 3780 0 3786 0 2.a.
b. Over one year through two years . . . . . . . . . . . . . . . . . . . 3781 0 3787 0 2.b.
c. Over two years through three years. . . . . . . . . . . . . . . . . . 3782 0 3788 0 2.c.
d. Over three years through four years . . . . . . . . . . . . . . . . . 3783 0 3789 0 2.d.
e. Over four years through five years. . . . . . . . . . . . . . . . . . 3784 0 3790 0 2.e.
f. Over five years . . . . . . . . . . . . . . . . . . . . . . . . . . . 3785 189,284 3791 0 2.f.
---------------------
3. Amounts used in calculating regulatory capital ratios (report amounts RCFD Bil Mil Thou
determined by the bank for its own internal regulatory capital analysis): ---------------------
a. Tier 1 capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8274 465,691 3.a.
b. Tier 2 capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8275 283,359 3.b.
c. Total risk-based capital. . . . . . . . . . . . . . . . . . . . . . . 3792 749,050 3.c.
d. Excess allowance for loan and lease losses. . . . . . . . . . . . . . A222 58,139 3.d.
e. Risk-weighted assets. . . . . . . . . . . . . . . . . . . . . . . . . A223 7,467,863 3.e.
f. "Average total assets". . . . . . . . . . . . . . . . . . . . . . . . A224 7,608,284 3.f.
--------------------- ---------------------
--------------------- ---------------------
(Column A) (Column B)
Items 4-9 and Memoranda items 1 and 2 are to be completed Assets Credit Equiv-
by banks that answered NO to item 1 above and Recorded alent Amount
by banks with total assets of $1 billion or more. on the of Off-Balance
Balance Sheet Sheet Items(2)
--------------------- ---------------------
4. Assets and credit equivalents amounts of off-balance sheet items RCFD Bil Mil Thou RCFD Bil Mil Thou
assigned to the Zero percent risk category: --------------------- ---------------------
a. Assets recorded on the balance sheet:
(1) Securities issued by, other claims on, and claims unconditionally
guaranteed by, the U.S. Government and its agencies and
other OECD central governments . . . . . . . . . . . . . . . . . 3794 127,920 4.a.(1)
(2) All other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3795 101,052 4.a.(2)
b. Credit equivalent amount of off-balance sheet items.. . . . . . . . . 3796 47,555 4.b.
--------------------- ---------------------
</TABLE>
- ----------
(1) Exclude mandatory convertible debt reproted in Schedule RC-M, item 7.
(2) Do not report in column B the risk-weighted amount of assets reported in
column A.
33
<PAGE>
Legal Title of Bank: BANK ONE, COLUMBUS, NA
Address: 100 East Broad Street
City, State Zip: Columbus, OH 43271-1066 Page RC-24
FDIC Certificate No.: 06559
Schedule RC-R-Continued
<TABLE>
<CAPTION>
--------------------- ---------------------
(Column A) (Column B)
Assets Credit Equiv-
Recorded alent Amount
on the of Off-Balance
Balance Sheet Sheet Items(1)
--------------------- ---------------------
Dollar Amounts in Thousands RCFD Bil Mil Thou RCFD Bil Mil Thou
- ------------------------------------------------------------------------------ --------------------- ---------------------
<S> <C> <C> <C>
5. Assets and credit equivalents amounts of off-balance sheet items
assigned to the 20 percent risk category:
a. Assets recorded on the balance sheet:
(1) Claims conditionally guaranteed by the U.S. Government and
its agencies and other OECD central governments. . . . . . . . . 3798 154,943 5.a.(1)
(2) Claims collateralized by securities issued by the U.S.
Government and its agencies and other OECD central goverments;
by securities issued by U.S. Government-sponsored agencies; and
by cash on deposit . . . . . . . . . . . . . . . . . . . . . . . 3799 0 5.a.(2)
(3) All Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3800 1,217,498 5.a.(3)
b. Credit equivalent amount of off-balance sheet item. . . . . . . . . . 3801 298,504 5.b.
6. Assets and credit equivalent amounts of off-balance sheet items
assigned to the 80 percent risk category:
a. Assets recorded on the balance sheet. . . . . . . . . . . . . . . . . 3802 319,605 6.a.
b. Credit equivalent amount of off-balance sheet items. . . . . . . . . 3803 51,269 6.b.
7. Assets and credit equivalent amounts of off-balance sheet items
assigned to the 100 percent risk category:
a. Assets recorded on the balance sheet. . . . . . . . . . . . . . . . . 3804 6,289,360 7.a.
b. Credit equivalent amount of off-balance sheet items . . . . . . . . . 3805 731,708 7.b.
8. On-balance sheet asset values excluded from the calculation of the
risk-based capital ratio(2). . . . . . . . . . . . . . . . . . . . . . . . 3806 (3,367) 8.
9. Total assets recorded on the balance sheet (sum of
items 4.a., 5.a., 6.a., 7.a., and 8, column A) (must equal Schedule RC,
item 12 plus items 4.b and 4.c). . . . . . . . . . . . . . . . . . . . . . 3807 8,207,011 9.
--------------------- ---------------------
Memoranda
----------------------
Dollar Amounts in Thousands RCFD Bil Mil Thou
- -------------------------------------------------------------------------------------------------- ----------------------
1. Current credit exposure across all off-balance sheet derivative contracts covered by the
risk-based capital standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8764 65,056 M.1.
----------------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------
With a remaining maturity of
-----------------------------------------------------------------
(Column A) (Column B) (Column C)
One year or less Over one year Over five years
through five years
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
2. Notional principal amounts of RCFD Tril Bil Thou RCFD Tril Bil Thou RCFD Tril Bil Thou
off-balance sheet derivative contracts(3) -------------------- -------------------- --------------------
a. Interest rate contracts . . . . . . . . . 3809 6,760,205 8766 8,549,395 8767 527,564 M.2.a.
b. Foreign exchange contracts. . . . . . . . 3812 72,494 8769 0 8770 0 M.2.b.
c. Gold contracts. . . . . . . . . . . . . . 8771 0 8772 0 8773 0 M.2.c.
d. Other precious metals contracts . . . . . 8774 0 8775 0 8776 0 M.2.d.
e. Other commodity contracts . . . . . . . . 8777 0 8778 0 8779 0 M.2.e.
f. Equity derivative contracts . . . . . . . A000 0 A001 0 A002 0 M.2.f.
-------------------- -------------------- --------------------
</TABLE>
- -----------
(1) Do not report in column B the risk-weighted amount of assets reported in
column A.
(2) Include the difference between the fair value and the amortized cost of
available-for-sale securities in item 8 and report the amortized cost of
these securities in items 4 through 7 above. Item 8 also includes
on-balance sheet asset values (or portions thereof) of off-balance sheet
interest rate, foreign exchange rate, and commodity contracts and those
contracts (e.g. future contracts) not subject to risk-based capital.
Exclude from item 8 margin accounts and accrued receivables as well as any
portion of the allowance for loan and lease losses of the amount that may be
included in Tier 2 capital.
(3) Exclude foreign exchange contracts with an original maturity of 14 days or
less and all futures contracts.
34
<PAGE>
Legal Title of Bank: BANK ONE, COLUMBUS, NA
Address: 100 East Broad Street
City, State Zip: Columbus, OH 43271-1066
FDIC Certificate No.: 06559 Page RC-25
OPTIONAL NARRATIVE STATEMENT CONCERNING THE AMOUNTS
REPORTED IN THE REPORTS OF CONDITION AND INCOME
at close of business on June 30, 1994
BANK ONE, COLUMBUS, NA Columbus , Ohio
- --------------------------------------------------------------------------------
Legal Title of Bank City State
The management of the reporting bank may, if it wishes, submit a brief narrative
statement on the amounts reported in the Reports of Condition and Income. This
optional statement will be made available to the public, along with the publicly
available data in the Reports of Condition and Income, in response to any
request for individual bank report data. However, the information reported in
column A and in all of Memorandum item 1 of Schedule RC-N is regarded as
confidential and will not be released to the public. BANKS CHOOSING TO SUBMIT
THE NARRATIVE STATEMENT SHOULD ENSURE THAT THE STATEMENT DOES NOT CONTAIN THE
NAMES OR OTHER IDENTIFICATIONS OF INDIVIDUAL BANK CUSTOMERS, REFERENCES TO THE
AMOUNTS REPORTED IN THE CONFIDENTIAL ITEMS IN SCHEDULE RC-N, OR ANY OTHER
INFORMATION THAT THEY ARE NOT WILLING TO HAVE MADE PUBLIC OR THAT WOULD
COMPROMISE THE PRIVACY OF THEIR CUSTOMERS. Banks choosing not to make a
statement may check the "No comment" box below and should make no entries of any
kind in the space provided for the narrative statement; i.e., DO NOT enter in
this space such phrases as "No statement," "Not applicable," "N/A," "No
comment," and "None."
The optional statement must be entered on this sheet. The statement should not
exceed 100 words. Further, regardless of the number of words, the statement
must not exceed 750 characters, including punctuation, indentation, and standard
spacing between words and sentences. If any submission should exceed 750
characters, as defined, it will be truncated at 750 characters with no notice to
the submitting bank and the truncated statement will appear as the bank's
statement both on agency computerized records and in computer-file releases to
the public.
All information furnished by the bank in the narrative statement must be
accurate and not misleading. Appropriate efforts shall be taken by the
submitting bank to ensure the statement's accuracy. The statement must be
signed, in the space provided below, by a senior officer of the bank who thereby
attests to its accuracy.
If, subsequent to the original submission, material changes are submitted for
the data reported in the Reports of Condition and Income, the existing narrative
statement will be deleted from the files, and from disclosure; the bank, at its
option, may replace it with a statement, under signature, appropriate to the
amended data.
The optional narrative statement will appear in agency records and in release to
the public exactly as submitted (or amended as described in the preceding
paragraph) by the management of the bank (except for the truncation of
statements exceeding the 750-character limit described above). THE STATEMENT
WILL NOT BE EDITED OR SCREENED IN ANY WAY BY THE SUPERVISORY AGENCIES FOR
ACCURACY OR RELEVANCE. DISCLOSURE OF THE STATEMENT SHALL NOT SIGNIFY THAT ANY
FEDERAL SUPERVISORY AGENCY HAS VERIFIED OR CONFIRMED THE ACCURACY OF THE
INFORMATION CONTAINED THEREIN. A STATEMENT TO THIS EFFECT WILL APPEAR ON ANY
PUBLIC RELEASE OF THE OPTIONAL STATEMENT SUBMITTED BY THE MANAGEMENT OF THE
REPORTING BANK.
- --------------------------------------------------------------------------------
No comment / / (RCON 6979) | C471 | C472 |
-- -----------------
BANK MANAGEMENT STATEMENT (please type or print clearly):
(TEXT 6980)
For regulatory purposes, the Bank defers the recognition of certain excess
income relating to securitized loan sales until cash is received. The effect of
this accounting method has decreased net income for the current year $59,300,000
and decreased retained earnings on a cumulative basis $168,198,000.
/s/ illegible 7/26/96
-------------------------------------- -----------------
Signature of Executive Officer of Bank Date of Signature
35
<PAGE>
Legal Title of Bank: BANK ONE, COLUMBUS, NA Page RC-26
Address: 100 East Broad Street
City, State Zip: Columbus, OH 43271-1066
FDIC Certificate No.: 06559
THIS PAGE IS TO BE COMPLETED BY ALL BANKS
- --------------------------------------------------------------------------------
NAME AND ADDRESS OF BANK OMB No. For OCC: 1557-0081
OMB No. For FDIC: 3064-0052
CALL NO. 196 31 06-30-96 OMB No. For Federal Reserve: 7100-0036
Expiration Date: 3/31/99
STBK: 39-1580 00088 STCERT: 39-06559
BANK ONE, COLUMBUS, NATIONAL ASSOCIA SPECIAL REPORT
100 EAST BROAD STREET (Dollar Amounts in Thousands)
COLUMBUS, OH 43271 ----------------------------------------------------------
CLOSE OF BUSINESS FDIC Certificate Number
DATE C-700
6/30/96 06559
- --------------------------------------------------------------------------------
LOANS TO EXECUTIVE OFFICERS (Complete as of each Call Report Date)
- --------------------------------------------------------------------------------
The following information is required by Public Laws 90-44 and 102-242, but does
not constitute a part of the Report of Condition. With each Report of
Condition, these Laws require all banks to furnish a report of all loans or
other extensions of credit to their executive officers made since the date of
the previous Report of Condition. Data regarding individual loans or other
extensions of credit are not required. If no such loans or other extensions of
credit were made during the period, insert "none" against subitem (a). (Exclude
the first $15,000 of indebtedness of each executive officer under bank credit
card plan.) See Sections 215.2 and 215.3 of Title 12 of the Code of Federal
Regulations (Federal Reserve Board Regulation 0) for the definitions of
"executive officer" and "extension of credit," respectively. Exclude loans and
other extensions of credit to directors and principal shareholders who are not
executive officers.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
-------------------------
a. Number of loans made to executive officers since the previous Call Report date . . . . . . . . . RCFD 3561 3 a.
-------------------------
b. Total dollar amount of above loans (in thousands of dollars) . . . . . . . . . . . . . . . . . . RCFD 3562 63 b.
-------------------------
c. Range of interest charged on above loans
(example: 9 3/4% = 9.75). . . . . . . . . . . . . . . . . . . . . . . RCFD 7701 9.25% to RCFD 7702 18.00% c.
---------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
SIGNATURE AND TITLE OF OFFICER AUTHORIZED TO SIGN REPORT DATE (Month, Day, Year)
/s/ Elizabeth G. Gilliland 7/30/96
- ----------------------------------------------------------------------------------------------------------------------------------
NAME AND TITLE OF PERSON TO WHOM INQUIRIES MAY BE DIRECTED (TEXT 8903) AREA CODE/PHONE NUMBER/EXTENSION
(TEXT 8904)
Elizabeth G. Gilliland, Assistant Vice-President (614) 248-8563
- ----------------------------------------------------------------------------------------------------------------------------------
FDIC 8040/53 (6-95)
</TABLE>
36
