<PAGE>
As filed with the Securities and Exchange Commission on June 4, 1996
Registration No. 33-_____
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
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)
Florida 6712,6035 65-0039856
- ------------------------------- ------------------------- -------------------
(State or other jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or organization) Industrial Classification Identification No.)
Code Number)
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:
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
_____________________
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. [ ]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Title of each Class of Proposed Maximum Amount of
Securities to be Aggregate Registration
Registered Offering Price(1) Fee
- --------------------------------------------------------------------------------
Common Stock, par
value $.01 per share $ 24,000,000 $ 8,275.86
Notes due 2003 $100,000,000 $34,482.76
------------ ----------
Total $124,000,000 $42,758.62
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933.
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>
CROSS REFERENCE SHEET
(Cross Reference Sheet pursuant to Item 501(b) of Regulation S-K showing
the location in the Prospectus contained herein of the responses to the Items of
Part I of Form S-1).
Prospectus
Item Number and Caption Caption (or Location)
- ---------------------------------------- -----------------------------------
1. Forepart of the Outside Front Cover Front Cover Page
Page of the Prospectus
2. Inside Front and Outside Back Cover Inside Front and Outside Back Cover
Pages of the Prospectus Pages
3. Summary Information, Risk Factors Summary; Risk Factors
and Ratio of Earnings to Fixed
Charges
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Underwriting
6. Dilution *
7. Selling Security Holders Selling Stockholders
8. Plan of Distribution Underwriting
9. Description of Securities to Be Description of Capital Stock;
Registered Description of Notes
10. Interests of Named Experts and *
Counsel
11. Information with Respect to the
Registrant
(a) Item 101 of Regulation S-K Business
(b) Item 102 of Regulation S-K Business-Offices
(c) Item 103 of Regulation S-K Business-Legal Proceedings
<PAGE>
Prospectus
Item Number and Caption Caption (or Location)
- ---------------------------------------- -----------------------------------
(d) Item 201 of Regulation S-K Cover page; Summary; Underwriting
(e) Financial Statements Index to Consolidated Financial
Statements
(f) Item 301 of Regulation S-K Selected Consolidated Financial and
Other Data
(g) Item 302 of Regulation S-K *
(h) Item 303 of Regulation S-K Management's Discussion and
Analysis of Financial Condition and
Results of Operations
(i) Item 304 of Regulation S-K *
(j) Item 401 of Regulation S-K Management
(k) Item 402 of Regulation S-K Management
(l) Item 403 of Regulation S-K Beneficial Ownership of Common
Stock
(m) Item 404 of Regulation S-K Management
12. Disclosure of Commission Position
on Indemnification for Securities *
Act Liabilities
_______________
* Not Applicable.
<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. The Common Stock Prospectus will be identical to
the Notes Prospectus, except for the front cover page and the outside back cover
page, which alternate pages appear immediately following the back cover page of
the Notes Prospectus.
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE ___, 1996
PROSPECTUS
$100,000,000
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 _______, 1996. On and after _______, 2001, the Notes
will be redeemable at any time at the option of the Company, in whole or in
part, at the redemption prices set forth herein. The Notes are not otherwise
redeemable prior to ______, 2001, except that until ______, 1999, the Company
may redeem, at its option, up to $____ 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 $____ million
principal amount of the Notes remains outstanding after such redemption. Upon
the occurrence of a Change of Control Event (as defined), 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.
See "Selling Stockholders" and "Underwriting." The Notes being offered hereby
and the shares of Common Stock offered by the Selling Stockholders 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 13 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Price to Underwriting Proceeds to
Public(1) Discount(2) Company(3)
- --------------------------------------------------------------------------------
Per Note . . . . . . . . . . 100% % %
Total(3). . . . . . . . . . $100,000,00 $ $
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Plus accrued interest, if any, from the date of issuance.
(2) The Company has agreed to indemnify the Underwriters 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 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 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
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>
IN CONNECTION WITH THE COMMON STOCK OFFERING AND THE NOTES OFFERING, THE
UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN
THE MARKET PRICES OF SUCH SECURITIES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. 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.
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 both holders of Common Stock and 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, THE INFORMATION CONTAINED IN THIS
PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVERALLOTMENT OPTION TO
PURCHASE ADDITIONAL SHARES OF COMMON STOCK. WITH THE EXCEPTION OF THE SHARE
DATA CONTAINED IN THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY CONTAINED
HEREIN, THE SHARE DATA CONTAINED HEREIN (INCLUDING WITHOUT LIMITATION THE NUMBER
OF SHARES OF COMMON STOCK OFFERED HEREBY) GIVES EFFECT TO (I) CERTAIN CHANGES TO
THE COMPANY'S AUTHORIZED AND OUTSTANDING CAPITAL STOCK (CONSISTING OF A TEN-FOR-
ONE SPLIT OF THE OUTSTANDING SHARES OF COMMON STOCK (THE "STOCK SPLIT"), AN
INCREASE IN THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK FROM 20,000,000
SHARES TO 200,000,000 SHARES, AN INCREASE IN THE NUMBER OF AUTHORIZED SHARES OF
PREFERRED STOCK FROM 250,000 SHARES TO 20,000,000 SHARES AND A DECREASE IN THE
PAR VALUE OF THE COMPANY'S AUTHORIZED PREFERRED STOCK FROM $1.00 TO $0.01 PER
SHARE) AND (II) A PLANNED INCREASE IN THE NUMBER OF SHARES OF COMMON STOCK WHICH
MAY BE ISSUED PURSUANT TO THE COMPANY'S STOCK OPTION PLAN FROM 6,000,000 TO
10,000,000 (AS ADJUSTED FOR THE STOCK SPLIT), ALL OF WHICH ACTIONS WILL BE
COMPLETED PRIOR TO THE CONSUMMATION OF THE COMMON STOCK OFFERING.
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. At March 31, 1996, the
Company had $1.9 billion of total assets and stockholders' equity of $142.1
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. This strategy has resulted in
significant profitability in recent years. 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 2.00%, 1.40% and 2.37% during 1995, 1994 and 1993,
respectively, and returns on average equity of 25.02%, 20.06% and 27.89% during
the same respective periods.
3
<PAGE>
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 from
the private sector 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 and
nationwide presence in this area make it one of the leaders in this relatively
new and evolving business. Between commencing these activities in mid-1991 and
March 31, 1996, the Company acquired over $2.3 billion of gross principal amount
of discounted loans, including $791.2 million and $826.4 million during 1995 and
1994, respectively. Recently, the Company formed a joint venture with an
institutional investor that successfully bid to acquire $679.3 million gross
principal amount of discounted single-family residential loans (net of
concurrent sales of loans) from the Federal Housing Administration ("FHA") of
the U.S. Department of Housing and Urban Development ("HUD"), which was
consummated in April 1996. At March 31, 1996, the Company's discounted loan
portfolio amounted to $606.4 million, net of $239.8 million of unaccreted
discount and an $8.2 million allowance for loan losses, or 32.2% of the
Company's total assets.
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 March 31, 1996, the Company's multi-family residential and
commercial real estate loans (including construction loans) available for sale
and held for investment aggregated $230.1 million, net, or 12.2% 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 $90.1 million or 4.8% of the Company's total assets at March 31,
1996.
4
<PAGE>
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 acquired $70.2 million
of single-family residential loans to non-conforming borrowers during the three
months ended March 31, 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 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 three months ended March 31, 1996, the Company sold
$62.0 million of such loans for a pre-tax gain of $901,000, and in April 1996
the Company entered into commitments to sell an additional $88.4 million of such
loans. At March 31, 1996, the Company's single-family residential loans to non-
conforming borrowers amounted to $208.7 million or 11.1% of the Company's total
assets.
5
<PAGE>
THE OFFERINGS
COMMON STOCK
Common Stock offered by the
Selling Stockholders . . . . 2,000,000 shares (plus up to 300,000
shares pursuant to the Underwriters'
overallotment option)
Common Stock outstanding . . . 23,812,270
Reserved Nasdaq National
Market Symbol . . . . . . . . OCWN
Dividend policy . . . . . . . . The Company has no current intention to
pay cash dividends on the Common Stock.
See "Dividend Policy."
NOTES
Amount offered . . . . . . . . $100 million aggregate principal amount.
Maturity date . . . . . . . . . _______ __, 2003.
Interest payment dates . . . . ______ __ and ______ __ of each year,
commencing ______ __, 1996.
Optional redemption . . . . . . The Notes will be redeemable at the
option of the Company, in whole or in
part, at any time on or after _____ __,
2001 at the redemption prices set forth
herein, plus accrued and unpaid interest,
if any, to the redemption date. The
Notes are not otherwise redeemable prior
to _____ __, 2001, except that until
_____ __, 1999, the Company may redeem,
at its option, up to $____ million
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 $____ million
principal amount of the Notes remains
outstanding after such redemption. See
"Description of Notes - Optional
Redemption."
Mandatory redemption . . . . . None.
6
<PAGE>
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. There can be no assurance
that the Company will have the funds
available to repurchase the Notes upon a
Change of Control Event or otherwise.
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
or other significant assets, create
certain liens and guarantees with respect
to pari passu or junior indebtedness 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, subject to
certain regulatory limitations, 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."
7
<PAGE>
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 portion of such net proceeds retained
by the Company will be available for
general corporate purposes. 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.
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered carefully by prospective purchasers of shares of Common Stock or
Notes.
8
<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 three months ended March 31,
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 three months ended
March 31, 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>
Three Months
Ended March 31, 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 $50,219 $27,895 $146,174 $137,736 $80,936 $71,723 $54,036
Interest expense 28,370 16,842 85,244 63,466 35,306 28,148 32,858
-------- -------- -------- -------- -------- -------- --------
Net interest income 21,849 11,053 60,930 74,270 45,630 43,575 21,178
Provision for loan losses 10,173(3) -- 1,262 -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net interest income after
provision for loan losses 11,676 11,053 59,668 74,270 45,630 43,575 21,178
-------- -------- -------- -------- -------- -------- --------
Gains on sales of interest-
earning assets, net 5,783 458 7,096 5,727 8,386 8,842 2,108
Gains from sales of branch offices(1) -- -- 5,430 62,600 -- -- --
Income (loss) on real estate owned, net (1,792)(3) 360 9,540 5,995 (1,158) 1,050 --
Fees on financing transactions(4) -- -- -- -- 15,340 6,760 8,486
Other non-interest income (expense) (232) 1,729 9,255 7,253 13,304 8,130 14,638
-------- -------- -------- -------- -------- -------- --------
Total non-interest income 3,759 2,547 31,321 81,575 35,872 24,782 25,232
-------- -------- -------- -------- -------- -------- --------
Non-interest expense 11,383 8,762 45,573 68,858 41,859 32,468 20,986
Income taxes 1,022 1,181 12,277 35,134 12,338 11,552 7,002
-------- -------- -------- -------- -------- -------- --------
Income from continuing operations 3,030 3,657 33,139 51,853 27,305 24,337 18,422
Discontinued operations, net of tax -- (1,550) (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 $3,030 $2,107 $25,467 $47,339 $25,232 $25,354 $27,547
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Income per share from continuing operations $0.11 $0.11 $1.19 $1.52 $0.80 $0.68 $0.54
Net income per share 0.11 0.06 0.92 1.39 0.74 0.71 0.80
<CAPTION>
Year Ended December 31,
March 31, --------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
-------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
LOAN ACQUISITION DATA:
Discounted Loans(5):
Single-family residential $ -- $272,800 $395,882 $291,198 $297,169 $49,996
Multi-family residential 18,669 141,159 315,454 -- -- --
Commercial real estate 16,249 377,236 115,055 3,161 -- --
Other Loans(5):
Single-family residential 74,371 284,896 7,119 477,908 70,239 85,123
Multi-family residential 17,866 83,530 378,400 290,702 -- --
Commercial real estate 21,000 214,875 22,486 19,575 1,014 --
Consumer -- 2,173 -- 31,175 130 --
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
December 31,
March 31, ----------------------------------------------------------------------
1996 1995(1) 1994(1) 1993(2) 1992 1991
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $1,880,401 $1,972,571 $1,268,358 $1,389,207 $833,117 $623,854
Securities available for sale(6) 310,090 358,724 187,717 527,183 340,404 65,124
Loans available for sale(5)(6) 253,583 251,790 102,293 101,066 754 2,058
Investment securities, net 8,905 18,665 17,011 32,568 30,510 9,100
Mortgage-related securities held for
investment, net -- -- 114,650 121,550 114,046 343,911
Loan portfolio, net(5): 277,048 295,605 57,045 88,288 41,015 49,260
Discounted loan portfolio(5):
Total loans 854,383 943,529 785,434 433,516 310,464 47,619
Unaccreted discount (239,843) (273,758) (255,974) (129,882) (97,426) (21,908)
Allowance for loan losses (8,168) -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Discounted loans, net 606,372 669,771 529,460 303,634 213,038 25,711
Investments in low-income housing
tax credit interests 90,119 81,362 49,442 16,203 -- --
Real estate owned(7) 151,256 166,556 96,667 33,497 4,710 528
Excess of cost over net assets
acquired, net -- -- -- 10,467 11,825 13,189
Deposits 1,498,074 1,501,646 1,023,268 871,879 339,622 292,263
Borrowings and other interest-bearing
obligations 196,431 282,008 34,087 373,792 361,799 209,615
Stockholders' equity 142,103 139,547(8) 153,383 111,831 94,396 68,998
Book value per share 5.97 5.86 4.76 3.47 2.71 1.99
</TABLE>
<TABLE>
<CAPTION>
At or For the
Three Months
Ended At or For the
March 31, Year Ended December 31,
----------------------- --------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA(9):
Average assets $1,956,202 $1,373,001 $1,517,930 $1,709,685 $1,150,819 $712,542 $573,857
Average equity 141,317 154,933 121,291 119,500 97,895 82,460 54,876
Return on average assets(10):
Income from continuing operations 0.62% 1.07% 2.18% 3.03% 2.37% 3.42% 3.21%
Net income 0.62 0.61 1.68 2.77 2.19 3.56 4.80
Return on average equity(10):
Income from continuing operations 8.58 9.44 27.32 43.39 27.89 29.51 33.57
Net income 8.58 5.44 21.00 39.61 25.77 30.75 50.20
Average equity to average assets 7.22 11.28 7.99 6.99 8.51 11.57 9.56
Net interest spread 5.22 3.77 5.22 4.97 4.08 4.66 1.43
Net interest margin 5.12 3.86 4.89 4.97 4.41 6.06 3.60
Efficiency ratio(11) 44.45 64.43 51.24 60.42 51.36 47.50 45.22
Ratio of earnings to fixed
charges(12):
Including interest on deposits 1.14 1.28 1.53 2.35 2.10 2.25 1.77
Excluding interest on deposits 1.73 3.71 4.26 5.48 3.33 3.88 2.41
Non-performing loans to loans at
end of period(13) 1.16 3.31 1.27 4.35 3.71 8.32 7.39
Allowance for loan losses to loans at
end of period(5) 0.94 1.29 0.65 1.84 0.99 1.80 1.86
Allowance for loan losses to
discounted loans at end of period(5) 1.33 -- -- -- -- -- --
Number of full-service offices at
end of period(1) 1 3 1 3 28 15 11
</TABLE>
10
<PAGE>
- ------------------------------
(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.
(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 $8.7 million of general
reserves related to the Company's discounted loan portfolio and $781,000 of
general reserves related to loans available for sale, and income (loss) on real
estate owned, net includes $2.9 million of general reserves related to real
estate owned, which in each case were established as a result of discussions
between the Bank and the Office of Thrift Supervision ("OTS") following an
examination of the Bank by the OTS. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Results of Operations -
Provision for Loan Losses."
(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 the related deferred tax asset.
See Note 1 to the Consolidated Financial Statements.
(5) 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 the Company's 50% interest in a
newly-formed company which acquired $679.3 million of gross principal amount of
discounted single-family residential loans (net of concurrent sales of loans)
from HUD in April 1996. See "Business - Investment in Joint Venture."
(6) Securities available for sale were carried at market value at March 31,
1996 and at December 31, 1995, 1994 and 1993, and such securities were carried
at amortized cost at
11
<PAGE>
December 31, 1992 and 1991. Loans available for sale are carried at the lower
of cost or market value.
(7) Real estate owned is primarily attributable to the Company's discounted
loan acquisition and resolution business.
(8) Reflects the Company's repurchase of 8,815,060 shares of Common Stock
during 1995 for an aggregate of $42.0 million.
(9) 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.
(10) 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.
(11) 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.
(12) 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.
(13) Non-performing loans do not include loans in the Company's discounted loan
portfolio or loans available for sale.
12
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS, AS
WELL AS THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, BEFORE DECIDING TO
MAKE AN INVESTMENT IN SHARES OF COMMON STOCK OR NOTES.
CONSISTENCY OF EARNINGS; NO ASSURANCE OF EXPANSION
GENERAL. The consistency of the earnings reported by the Company has
been and in the future may be affected by its corporate strategy, which
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 the substantial gains from
sales of branch offices in 1995 and 1994, 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 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
13
<PAGE>
activities. The Company also may use a significant portion of the net
proceeds returned 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.
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.
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 March 31, 1996, the Company's discounted
loan portfolio amounted to $606.4 million (net of $239.8 million of unaccreted
discount and an $8.2 million allowance for loan losses) or 32.2% of the
Company's total assets and included $307.8 million, $169.6 million, $375.3
million and $1.7 million gross principal amount of single-family residential
loans, multi-family residential loans, commercial real estate loans and other
loans, respectively. Although the Company has been actively involved in the
acquisition and resolution of discounted 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 concerning the ability of the
Company to continue to acquire the desired amount and type of discounted loans.
In addition, it is the Company's understanding that the OTS, the primary federal
banking regulator of the Company and the Bank, currently is preparing a policy
which is intended to provide guidance to institutions regulated by the OTS
regarding the valuation, classification and allowance for loan losses for
discounted loans. The Company cannot predict whether or when this policy will
be issued or, if issued, what its content will be. Although the Company
believes that its accounting for discounted loans is in acordance with generally
accepted accounting principles, there can be no assurance that the OTS will not
adopt a policy which requires the Company to further modify its accounting for
discounted loans, either prospectively or retroactively, in a manner which
affects the timing of the Company's recognition of income on discounted loans or
other aspects of its procedures regarding discounted loans. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Changes in Financial Condition - Discounted Loan Portfolio" and "Business -
Discounted Loan Acquisition and Resolution Activities."
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
14
<PAGE>
originates loans for the construction of multi-family residential real estate
and land acquisition and development loans. At March 31, 1996, multi-family
residential, commercial real estate and construction loans (including land
acquisition and development loans) available for sale and held for investment
aggregated $230.1 million or 12.2% 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 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. 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 March 31, 1996, the
Company's loans to non-conforming borrowers aggregated $208.7 million or 11.1%
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
15
<PAGE>
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 March 31, 1996, the Company's
investments in such interests amounted to $90.1 million or 4.8% 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, as evidenced
by provisions in 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. These provisions 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. 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 March 31, 1996, the Company's mortgage-
related securities available for sale amounted to $310.1 million or 16.5% of the
Company's total assets and included $115.7 million and $7.3 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
16
<PAGE>
as $69.7 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. 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 $105.0
million of the $115.7 million of IO strips owned by the Company at March 31,
in 1996) generally have provisions which prohibit and/or provide economic
disincentives to prepayments for specified periods. Other mortgage-related
securities, such as subordinates, also involve more credit risk than other
securities. The Company has sought to offset the risk of changing interest
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 - Investments."
REAL ESTATE OWNED
At March 31, 1996, the Company's real estate owned, net amounted to $151.3
million or 8.0% 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. 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. See "Business -
Asset Quality - Real Estate Owned."
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
17
<PAGE>
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.
ALLOWANCES FOR LOSSES
The Company believes that it has established adequate allowances for losses
on loans and real estate owned in accordance with generally accepted accounting
principles. Future additions to these allowances, in the form of provisions for
losses on loans and real estate owned, may be necessary, however, due to changes
in economic conditions and increases in loans and real estate owned. In
addition, the OTS, as an integral part of its examination process, periodically
reviews the Company's allowances for losses. During the three months ended
March 31, 1996, the Company established $12.4 million of general provisions for
losses on discounted loans, loans available for sale and real estate owned as a
result of discussions with representatives of the OTS following an examination
of the Bank. 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 general allowances for losses on these or
other assets in the future. 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 loan losses on its loan
portfolios on a quarterly basis. Increases in the Company's provisions for
losses on loans and real estate owned 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."
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
18
<PAGE>
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 average
life of the loans serviced for others. During the three months ended March
31, 1996, accelerated prepayments of loans resulted in a $928,000 valuation
adjustment to the Company's mortgage servicing rights, which amounted to $2.3
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.
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 March 31, 1996,
certificates of deposit obtained through national investment banking firms which
solicit deposits for the Company from their customers amounted to $1.1 billion
or 71.6% of total deposits, certificates of deposit obtained through regional
and local investment banking firms amounted to $127.4 million or 8.5% of total
deposits and certificates of deposits obtained from the Company's direct
solicitation of institutional investors and high net worth individuals amounted
to $202.7 million or 13.5% 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
19
<PAGE>
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.
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 Bank 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 March 31, 1996, the Company had loans with an unpaid
principal balance aggregating $500.5 million (including loans available for
sale) secured by properties located in California and $93.3 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 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 17 to the Consolidated Financial Statements.
20
<PAGE>
RECAPITALIZATION OF SAIF
The deposits of the Bank are insured by the Savings Association Insurance
Fund ("SAIF") administered by the Federal Deposit Insurance Corporation
("FDIC"), which, due to the large number of failed savings institutions in
recent years, 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 Fund to the required level.
Based on the level of reserves maintained by the SAIF Fund, it was anticipated
that the amount of the special assessment required to recapitalize the SAIF was
to be approximately 80 to 85 basis points of SAIF-assessable deposits. 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 SAIF
continue to be made. Based on the Bank's deposits as of March 31, 1995, a one-
time special assessment of 85 basis points would result in the Bank incurring a
pre-tax charge of approximately $9.4 million, 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 Bank Insurance Fund ("BIF") administered
by the FDIC, which insures the deposits of commercial banks and has attained the
reserve ratio required by law, 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 recently have filed applications 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."
21
<PAGE>
POSSIBLE ELIMINATION OF THE THRIFT CHARTER AND RELATED TAX BENEFITS
The Balanced Budget Act of 1995 also provided for the merger of the BIF and
SAIF on January 1, 1998, with such merger being conditioned upon the prior
elimination of the thrift charter. The Banking Committees of the House of
Representatives and the Senate in adopting the Balanced Budget Act of 1995
agreed that Congress should consider and act upon separate legislation as early
as possible in 1996 to eliminate the thrift charter. If adopted, 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 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"). 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. Management currently does not believe that such regulation
would have a material adverse effect on the Company, although there can be no
assurance that this would be the case.
In anticipation of the possible elimination of the thrift charter through
future legislation, the Balanced Budget Act of 1995 provided for the repeal of a
provision of the Code which provided thrift institutions, such as the Bank,
which meet certain definitional tests primarily relating to their assets and the
nature of their business, to establish a tax reserve for bad debts and to make
annual additions thereto, which additions may, within specified limitations, be
deducted in arriving at taxable income. In addition, the Balanced Budget Act of
1995 provided that a savings institution must recapture for federal income tax
purposes (i.e. take into income) certain of its bad debt reserves which were
previously established through deductions established under the percentage of
taxable income method. Although the Balanced Budget Act of 1995 was not enacted
into law, substantially similar proposals regarding bad debt reserves continue
to be made in the U.S. Congress. It is not anticipated that these provisions,
if enacted into law, would have a material adverse effect
22
<PAGE>
on the Company's financial condition or operations. See "Taxation - Federal."
Management of the Company currently is unable to predict whether elimination of
the thrift charter and/or elimination of related tax benefits 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 and the Bank.
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
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. See "Business - Management."
23
<PAGE>
CONTROL OF CURRENT STOCKHOLDERS
After giving effect to the Common Stock Offering, the Company's directors
and executive officers and their affiliates will in the aggregate beneficially
own or control approximately 63.0% 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 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. See "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. Moreover, any payment of dividends by the Bank to
the Company which would be deemed to be a distribution from the Bank's bad debt
reserves for federal income tax purposes would require a payment of taxes at the
then-current tax rate by the Bank on the amount of earnings deemed to be removed
from the reserves for such distribution. See "Taxation - Federal Taxation."
ABSENCE OF A MARKET FOR THE NOTES AND ABSENCE OF A PRIOR MARKET FOR THE COMMON
STOCK
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 Underwriters for the Notes Offering have indicated their intention
to make a market in the Notes following consummation of the Notes Offering, they
are 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.
Prior to the Common Stock Offering, there has been no public market for the
Common Stock. The Company has applied for quotation of the Common Stock on the
24
<PAGE>
Nasdaq National Market under the symbol "OCWN." Any approval of such
application will be 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 one or
more other 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 hereby 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 could adversely affect the market
price of the Common Stock. As of March 31, 1996, there were 23,812,270 shares
of Common Stock outstanding held by 71 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
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 6,821,290 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 the Company and Messrs. Erbey and Wish) after the date of this
Prospectus without the prior written consent of Friedman, Billings, Ramsey &
Co., Inc. After such restricted periods, there will be no restrictions on the
sale of these shares by such directors and officers of the
25
<PAGE>
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 9,317,380 shares of
Common Stock authorized for issuance under the Company's 1991 Non Qualified
Stock Option Plan, as amended (the "Stock Option Plan"). See "Management -
Stock Option Plan." As of March 31, 1996, 3,361,610 shares of Common Stock were
subject to outstanding options under the Stock Option Plan. 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.
26
<PAGE>
USE OF PROCEEDS
Net proceeds from the Notes Offering currently are estimated to be
$_______, 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. 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.
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."
27
<PAGE>
CAPITALIZATION
The following table presents the consolidated capitalization of the Company
and the regulatory capital ratios of the Bank at March 31, 1996, and as adjusted
to give effect to the issuance of the Notes offered hereby and the contribution
by the Company to the capital of the Bank of a portion of the estimated net
proceeds therefrom, respectively.
March 31, 1996
-------------------------
Actual As Adjusted
----------- -----------
(Dollars in Thousands)
Deposits $1,498,074 $1,498,074
---------- ----------
---------- ----------
Borrowings and other interest-bearing
obligations:
The Company:
____% Notes due 2003 $ -- $ 100,000
Short-term notes 7,615 7,615
The Bank:
FHLB advances 70,399 70,399
Subordinated debentures and other
interest-bearing obligations 110,032 110,032
Other subsidiaries:
Hotel mortgages payable 8,385 8,385
---------- ----------
Total borrowings and other interest-
bearing obligations $ 196,431 $ 296,431
---------- ----------
---------- ----------
Stockholders' equity:
Preferred Stock, $1.00 par value:
20,000,000 shares authorized; none
outstanding(1) $ -- $ --
Common Stock, $0.01 par value:
200,000,000
shares authorized; 23,812,270 shares 238 238
outstanding(1)(2)
Additional paid-in capital 10,449 10,449
Retained earnings 133,304 133,304
Unrealized loss on securities available
for sale, net of taxes (1,888) (1,888)
---------- ----------
Total stockholders' equity $ 142,103 $ 142,103
---------- ----------
---------- ----------
Regulatory capital ratios of the Bank(3):
Tangible capital 6.99% 9.43%
Core (leverage) capital 6.99 9.43%
Risk-based capital 11.41 13.51%
(FOOTNOTES ON NEXT PAGE)
28
<PAGE>
- ---------------------
(1) Reflects planned increases in the authorized capital stock of the Company
and a proposed ten-for-one split of the Common Stock to all stockholders of
record as of a to-be-determined date prior to consummation of the sale of Common
Stock offered hereby. See "Summary."
(2) Does not include 9,317,380 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."
(3) The calculations assume that $50 million of the estimated net proceeds
from the Notes Offering is contributed by the Company to the capital of the
Bank. The calculation of the risk-based regulatory capital ratio, as adjusted,
assumes that 25% of the estimated net proceeds from the Notes Offering which are
contributed to the capital of the Bank by the Company are invested in loans with
a risk-weight of 50% and 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 March 31, 1996.
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.
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 $645.5 million or 33.0% of total average assets during the
three months ended March 31, 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 $559.5 million or 28.6% 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.
29
<PAGE>
As a result of the historical and expected future growth in the discounted
loan portfolio and related real estate owned, particularly in the commercial
component, and as requested by the OTS, the Company modified its methodology for
valuing its assets held for disposition and resolution in the first quarter of
1996. This methodology resulted in a general valuation allowance which modified
the Company's practice of adjusting these assets to the lower of the recorded
investment or fair value through direct charges to interest income or non-
interest income, as applicable, with corresponding increases in the discount
associated with individual discounted loans, and valuation allowances associated
with loans available for sale and real estate owned. The Company established an
aggregate of $12.4 million of general provisions for losses during the first
quarter of 1996 pursuant to this change in methodology, $8.7 million, $2.9
million and $781,000 of which related to the discounted loan portfolio, real
estate owned and loans available for sale, respectively.
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 $1.6 million, $7.7 million, $4.5 million and $2.3 million during the
three months ended March 31, 1995 and the years ended December 31, 1995, 1994
and 1993, respectively.
The Company's income from continuing operations amounted to $3.0 million or
$0.11 per share and $3.7 million or $0.11 per share during the three months
ended March 31, 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 0.62% and 1.07% during the three months ended March 31, 1996
and 1995, respectively, and 2.00%, 1.40% and 2.37% during 1995, 1994 and 1993,
respectively, and returns on average equity of 8.58% and 9.44% during the three
months ended March 31, 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.
30
<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.
31
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------------------------------------------------------
1996 1995
----------------------------------------------------------------------------------
Average Average
Average Balance Interest Yield/Rate Average Balance Interest Yield/Rate
--------------- ------- ---------- --------------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Average Assets:
Federal funds sold and repurchase agreements $ 56,882 $ 769 5.41% $ 67,962 $ 1,030 6.06%
Securities available for sale(1) 350,019 7,918 9.05 192,755 4,281 8.88
Loans available for sale(2) 261,351 6,597 10.10 125,049 2,936 9.39
Mortgage-related securities held for investment -- -- -- 112,125 1,207 4.31
Loan portfolio(2) 298,188 10,010 13.43 64,330 1,520 9.45
Discounted loan portfolio 645,482 22,155 13.73 486,439 14,431 11.87
Investments in low-income housing tax
credit interests(3) 59,883 2,263 15.12 54,945 1,865 13.58
Investment securities and other 35,692 507 5.68 41,796 625 5.98
--------- -------- --------- ---------
Total interest-earning assets,
interest income 1,707,497 50,219 11.76 1,145,401 27,895 9.74
-------- ---------
Non-interest earning cash 5,821 30,469
Allowance for loan losses (2,849) (1,188)
Investments in low-income housing tax
credit interests(3) 25,545 --
Other assets 220,188 198,319
-------- ---------
Total assets $1,956,202 $1,373,001
-------- ---------
-------- ---------
Average Liabilities and Stockholders' Equity:
Interest-bearing demand deposits $ 24,457 184 3.01 $ 48,979 138 1.13
Savings deposits 3,446 21 2.44 22,739 129 2.27
Certificates of deposit 1,465,124 22,751 6.21 976,501 14,936 6.12
--------- -------- --------- ---------
Total interest-bearing deposits 1,493,027 22,956 6.15 1,048,219 15,203 5.80
Reverse repurchase agreements 44,985 653 5.81 12,139 180 5.93
Securities sold but not yet purchased -- -- -- 34,278 591 6.90
FHLB advances 70,399 1,039 5.90 5,399 128 9.48
Subordinated debentures and other
interest-bearing obligations 126,154 3,722 11.80 27,563 740 10.74
--------- -------- --------- ---------
Total interest-bearing liabilities,
interest expense 1,734,565 28,370 6.54 1,127,598 16,842 5.97
- -------- --------- ---------
Non-interest bearing deposits 4,043 11,877
Escrow deposits 37,167 10,179
Other liabilities 39,110 68,414
--------- ---------
Total liabilities 1,814,885 1,218,068
Stockholders' equity 141,317 154,933
--------- ---------
Total liabilities and stockholders' equity $1,956,202 $1,373,001
---------- ---------
---------- ---------
Net interest income $21,849 $11,053
------- --------
------- --------
Net interest spread 5.22% 3.77%
----- -----
----- -----
Net interest margin 5.12% 3.86%
----- -----
----- -----
Ratio of interest-earning assets to
interest-bearing liabilities 98% 102%
---- -----
---- -----
</TABLE>
32
<PAGE>
- --------------------------------
(1) Securities available for sale were carried at market value during the
indicated periods.
(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) The investments in low-income housing tax credit interests which are
accounted for under the effective yield method are included in interest-earning
assets. The pre-tax equivalent yield on these investments amounted to 23.26%
and 20.89% during the three months ended March 31, 1996 and 1995, respectively.
Investments in low-income housing tax credit interests which are accounted for
under the equity method or consolidated are included in non-interest earning
assets.
33
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------------------
1995 1994 1993
--------------------------------- ----------------------------- ---------------------------
Average Average Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average Assets:
Federal funds sold and
repurchase agreements $ 55,256 $ 3,502 6.34% $ 166,592 $ 8,861 5.32% $ 24,333 $ 873 3.59%
Securities available for
sale(1) 210,897 18,391 8.72 449,571 27,988 6.23 435,458 19,714 4.53
Loans available for sale(2) 167,011 15,608 9.35 179,962 19,353 10.75 45,757 5,376 11.75
Mortgage-related securities
held for investment 96,330 5,713 5.93 146,126 12,674 8.67 202,987 12,941 6.38
Loan portfolio(2) 130,901 15,430 11.79 81,070 5,924 7.31 73,854 6,232 8.44
Discounted loan portfolio 483,204 75,998 15.73 352,633 52,560 14.91 193,652 31,036 16.03
Investments in low-income
housing tax credit interests(3) 56,643 8,899 15.71 39,135 6,278 16.04 10,693 1,260 11.78
Investment securities and other 46,440 2,633 5.67 79,895 4,098 5.13 48,255 3,504 7.26
---------- ------- ---------- ------- ---------- -------
Total interest-earning assets,
interest income 1,246,682 146,174 11.73 1,494,984 137,736 9.21 1,034,989 80,936 7.82
------- ------- -------
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(3) 7,282 -- --
Other assets 247,431 189,673 $ 94,734
---------- ---------- ----------
Total assets $1,517,930 $1,709,685 $1,150,819
---------- ---------- ----------
---------- ---------- ----------
Average Liabilities and
Stockholders' Equity:
Interest-bearing demand deposits $31,373 1,031 3.29 $77,433 1,396 1.80 $99,201 1,056 1.06
Savings deposits 20,370 451 2.21 138,434 2,602 1.88 142,053 1,982 1.40
Certificates of deposit 1,119,836 70,371 6.28 928,209 40,963 4.41 416,658 16,001 3.84
---------- ------- ---------- ------- ---------- -------
Total interest-bearing
deposits 1,171,579 71,853 6.13 1,144,076 44,961 3.93 657,912 19,039 2.89
Reverse repurchase agreements 16,754 951 5.68 254,457 10,416 4.09 195,745 9,340 4.77
Securities sold but not yet
purchased 17,149 1,142 6.66 39,526 2,780 7.03 -- -- --
FHLB advances 14,866 1,126 7.57 26,476 1,232 4.65 64,130 2,834 4.42
Subordinated debentures and
other interest-bearing
obligations 88,512 10,172 11.49 33,618 4,077 12.13 26,572 4,093 15.40
---------- ------- ---------- ------- ---------- -------
Total interest-bearing
liabilities, interest expense 1,308,860 85,244 6.51 1,498,153 63,466 4.24 944,359 35,306 3.74
------- ------- -------
Non-interest bearing deposits 19,960 69,276 30,181
Escrow deposits 4,073 2,430 4,007
Other liabilities 63,746 20,326 74,377
---------- ---------- ----------
Total liabilities 1,396,639 1,590,185 1,052,924
Stockholders' equity 121,291 119,500 97,895
---------- ---------- ----------
Total liabilities and
stockholders' equity $1,517,930 $1,709,685 $1,150,819
---------- ---------- ----------
---------- ---------- ----------
Net interest income $60,930 $74,270 $45,630
------- ------- -------
------- ------- -------
Net interest spread 5.22% 4.97% 4.08%
----- ----- -----
----- ----- -----
Net interest margin 4.89% 4.97% 4.41%
----- ----- -----
----- ----- -----
Ratio of interest-earning
assets to interest-bearing
liabilities 95% 100% 110%
--- --- ---
--- --- ---
</TABLE>
34
<PAGE>
- ------------------------------------------
(1) Securities available for sale were carried at market value during 1995 and
1994, and at amortized cost during 1993.
(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) The investments in low-income housing tax credit interests which are
accounted for under the effective yield method are included in interest-earning
assets. The pre-tax equivalent yield on these investments amounted to 24.17%,
24.68% and 18.12% during 1995, 1994 and 1993, respectively. Investments in low-
income housing tax credit interests which are accounted for under the equity
method or consolidated are included in non-interest-earning assets.
35
<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>
Three Months Ended March 31, Year Ended December 31,
1996 vs. Three Months Ended -----------------------------------------------------------------
March 31, 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 Total
------ ------ ------- --------- -------- --------- ------ ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Federal funds sold and
repurchase agreements $(104) $(157) $(261) $1,445 $(6,804) $(5,359) $609 $7,379 $7,988
Securities available for sale 81 3,556 3,637 8,655 (18,252) (9,597) 7,616 658 8,274
Loans available for sale 236 3,425 3,661 (2,417) (1,328) (3,745) (493) 14,470 13,977
Mortgage-related securities
held for investment (604) (603) (1,207) (3,350) (3,611) (6,961) 3,929 (4,196) (267)
Loan portfolio 881 7,609 8,490 4,747 4,759 9,506 (882) 574 (308)
Discounted loan portfolio 2,505 5,219 7,724 3,041 20,397 23,438 (2,312) 23,836 21,524
Investments in low-income
housing tax credit interests 222 176 398 (132) 2,753 2,621 600 4,418 5,018
Investment securities and other (30) (88) (118) 395 (1,860) (1,465) (1,238) 1,832 594
------ ------ ------- --------- -------- --------- ------ ------- -------
Total interest-earning assets 3,187 19,137 22,324 12,384 (3,946) 8,438 7,829 48,971 56,800
------ ------ ------- --------- -------- --------- ------ ------- -------
Interest-Bearing Liabilities:
Interest-bearing demand
deposits 461 (415) 46 752 (1,117) (365) 610 (270) 340
Savings deposits 62 (170) (108) 395 (2,546) (2,151) 672 (52) 620
Certificates of deposit 231 7,584 7,815 19,777 9,631 29,408 2,704 22,258 24,962
------ ------ ------- --------- -------- --------- ------ ------- -------
Total interest-bearing
deposits 754 6,999 7,753 20,924 5,968 26,892 3,986 21,936 25,922
Reverse repurchase agreements (26) 499 473 2,926 (12,391) (9,465) (1,455) 2,531 1,076
Securities sold but not yet
purchased (296) (295) (591) (141) (1,497) (1,638) 1,390 1,390 2,780
FHLB advances (347) 1,258 911 574 (680) (106) 143 (1,745) (1,602)
Subordinated debentures and
other interest-bearing
obligations 80 2,902 2,982 (224) 6,319 6,095 (973) 957 (16)
------ ------ ------- --------- -------- --------- ------ ------- -------
Total interest-bearing
liabilities 165 11,363 11,528 24,059 (2,281) 21,778 3,091 25,069 28,160
------ ------ ------- --------- -------- --------- ------ ------- -------
Increase (decrease) in net
interest income $3,022 $7,774 $10,796 $(11,675) $(1,665) $(13,340) $4,738 $23,902 $28,640
------ ------ ------- --------- -------- --------- ------ ------- -------
------ ------ ------- --------- -------- --------- ------ ------- -------
</TABLE>
36
<PAGE>
THREE MONTHS ENDED MARCH 31, 1996 VERSUS THREE MONTHS ENDED MARCH 31, 1995
The Company's net interest income increased by $10.8 million or 97.7%
during the three months ended March 31, 1996, as compared to the comparable
period in the prior year. This increase resulted from a $22.3 million or 80.0%
increase in interest income due to a $562.1 million or 49.1% increase in average
interest-earning assets from period to period combined with a 202 basis point
increase in the weighted average yield on such assets. The increase in interest
income was offset in part by an $11.5 million or 68.5% increase in interest
expense due to a $607.0 million or 53.8% increase in average interest-bearing
liabilities, primarily certificates of deposit and subordinated debentures, and,
to a lesser extent, a 57 basis point increase in the weighted average rate paid
on interest-bearing liabilities.
The increase in interest income during the three months ended March 31,
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 three months ended March 31, 1996, as compared to
the comparable period in the prior year, which in the latter case was enhanced
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 three months ended March 31, 1996, as compared to the
comparable period in the prior year, as a result of a $488.6 million or 50.0%
increase in the average balance of certificates of deposit and a $98.6 million
or 358% 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. The
increase in the weighted average rate paid on the Company's interest-bearing
liabilities during the three months ended March 31, 1996, as compared to the
comparable period in the prior year, resulted primarily from a general increase
in market interest rates and the Bank's issuance of the Debentures in mid-1995.
1995 VERSUS 1994
The Company's net interest income decreased by $13.3 million or 18.0%
during 1995 as a result of a $21.8 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
37
<PAGE>
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 $8.4 million or
6.1% 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 4.97% during 1994 to
4.89% during 1995.
The weighted average yield on interest-earning assets increased from 9.21%
in 1994 to 11.73% 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 $248.3 million or 16.6% during 1995 as increases in the outstanding balances
of the Company's loan portfolios, as well as an increase in the average balance
of the Company's investments in low-income housing tax credit interests, 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 4.24% in 1994 to 6.51% 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 $189.3 million or 12.6% 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 $28.6 million or 62.8%
during 1994 as a result of a $56.8 million or 70.2% 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 4.41% in 1993 to
4.97% in 1994.
The weighted average yield on the Company's interest-earning assets
increased to 9.21% in 1994 from 7.82% 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
38
<PAGE>
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 the related deferred tax asset. See
"- Results of Operations - 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 the Company's mortgage-related securities held for investment
during this period.
The weighted average rate paid on the Company's interest-bearing
liabilities increased to 4.24% 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 14 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 discounted loan
portfolio, the loan portfolio and loans available for sale 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, the loan portfolio and
loans available for sale, historical loss experience, current economic
conditions and other relevant factors.
Prior to the three months ended March 31, 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 and established an $8.7 million general
provision for losses on the discounted loan portfolio during the three months
ended March 31, 1996. As a result of these discussions, the Company also
established an additional $781,000 general provision for losses on loans during
the three months ended March 31, 1996 related to single-family residential loans
to non-conforming borrowers available for sale and, to a lesser extent, other
loans available for sale. During this period, the Company also established a
$699,000 provision for losses related to its loan portfolio, which also was
primarily general in nature. Based on the types of lending activities currently
emphasized by the Company, the Company anticipates that
39
<PAGE>
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 and the
available-for-sale loan portfolio amounted to $1.3 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 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, 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 reasons 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 Company's allowances for loan losses and such agency may require
the Company to recognize changes to the allowances for loan losses based on its
judgment about information available to it at the time of examination.
NON-INTEREST INCOME. Non-interest income increased by $1.2 million or
47.6% during the three months ended March 31, 1996, as compared to the
comparable period in the prior year, and, 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 $6.9 million or 36.4% in 1995 and
decreased by $16.9 million or 47.1% in 1994. The increase in non-interest
income during the three months ended March 31, 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 a general provision for losses and valuation
adjustments related to real estate owned. 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, gains from the sale of interest-
earning assets.
40
<PAGE>
The following table sets forth the principal components of the Company's
non-interest income during the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
--------------------------- ------------------------------------
1996 1995 1995 1994 1993
------- ------- ------- ------- ------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Servicing fees and other charges $(681) $1,460 $2,870 $4,786 $3,800
Gain on sale of interest-earning assets, net 5,783 458 7,096 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 (1,792) 360 9,540 5,995 (1,158)
Gain on sale of hotel -- -- 4,658 -- --
Other income 449 269 1,727 2,467 5,669
------- ------- ------- ------- ------
Subtotal 3,759 2,547 25,891 18,975 35,872
Gains on sales of branches -- -- 5,430 62,600 --
------- ------- ------- ------- ------
Total $3,759 $2,547 $31,321 $81,575 $35,872
------- ------- ------- ------- ------
------- ------- ------- ------- ------
</TABLE>
Servicing fees and other charges decreased during the three months ended
March 31, 1996, as compared to the comparable period in the prior year, as a
result of 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 CMO in which the Company
acquired a subordinate interest. Mortgage servicing rights, net, amounted to
$2.3 million at March 31, 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.
Net gains on sales of interest-earning assets during the three months ended
March 31, 1996 were primarily comprised of a $5.4 million gain on the sale of
performing single-family residential loans in the Company's discounted loan
portfolio and a $901,000 gain on the sale of single-family residential loans to
non-conforming borrowers available for sale, which was offset in part by a
$558,000 adjustment to record delinquent single-family residential loans to non-
conforming borrowers available for sale to the lower of cost or market. 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
41
<PAGE>
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 the related deferred tax
asset. See "Business - Investment Activities - Mortgage-Backed and Related
Securities Held for Investment."
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>
Three Months Ended
March 31, Year Ended December 31,
--------------------------- -----------------------------------------
1996 1995 1995 1994 1993
------- ------- ------- ------- ------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Gains on sales $3,900 $4,089 $19,006 $21,308 $2,541
Provision for losses in fair value (3,489) (2,619) (10,510) (9,074) (2,980)
General provision for losses (2,889) -- -- -- --
Carrying costs, net of rental income 686 (1,110) 1,044 (6,239) (719)
-------- -------- -------- -------- --------
Income (loss) on real estate owned, net $(1,792) $ 360 $ 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 general provision for losses on real estate
owned during the three months ended March 31, 1996 was established as a result
of the above-mentioned change in methodology and discussions with
representatives of the OTS. For additional information relating to the
Company's real estate owned, see "Business - Asset Quality - Real Estate Owned."
42
<PAGE>
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 three months ended March 31, 1996, as
compared to the comparable period in 1995, as a result of the Company's receipt
of an additional premium earned in accordance with the original agreement to
sell 23 branch offices at the end of 1994. 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 March 31, 1996, OAM
had under management approximately $45.5 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 $2.6 million or
29.9% during the three months ended March 31, 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 three months ended March 31, 1996, as compared to
the comparable period in the prior year, was primarily attributable to increases
in compensation and employee benefits and other operating expenses. 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.
43
<PAGE>
The following table sets forth the principal components of the Company's
non-interest expense during the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
--------------------------- -----------------------------------------------
1996 1995 1995 1994 1993
------- ------- ------- ------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Compensation and employee benefits $6,087 $4,794 $23,787 $42,395 $23,507
Occupancy and equipment 2,045 1,792 8,360 11,537 9,106
Amortization of goodwill -- -- -- 1,346 1,301
Hotel operations expense (income), net 161 468 337 (723) (710)
Other operating expenses 3,090 1,708 13,089 14,303 8,655
------- ------- ------- ------- --------
Total $11,383 $8,762 $45,573 $68,858 $41,859
------- ------- ------- ------- --------
------- ------- ------- ------- --------
</TABLE>
The increase in compensation and employee benefits during the three months
ended March 31, 1996, as compared to the comparable period in the prior year,
was primarily attributable to a $1.0 million increase in the accrual for profit
sharing expense, which was due in part to the reversal of a portion of the 1994
accrual for profit sharing expense during the three months ended March 31, 1995.
The average number of employees decreased from 381 to 328 during the three
months ended March 31, 1995 and 1996, respectively. 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 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 increase in occupancy and equipment expense during the three months
ended March 31, 1996, as compared to the comparable period in the prior year,
was primarily attributable to $266,000 of depreciation expense associated with
the Company's investment in low-income housing tax credit interests. 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
44
<PAGE>
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 three months ended March 31, 1996, as
compared to the comparable period in the prior year, primarily as a result of a
$210,000 increase in loan expenses, a $200,000 increase in FDIC insurance
expense, a $322,000 increase in professional fees and $107,000 of amortized
costs in the first quarter of 1996 related to the Debentures. 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 22 to the Consolidated Financial Statements.
INCOME TAX EXPENSE. Income tax expense amounted to $1.0 million and $1.2
million during the three months ended March 31, 1996 and 1995, respectively, and
$12.3 million, $35.1 million and $12.3 million during 1995, 1994 and 1993,
respectively, reflecting the Company's income before income taxes during these
periods. The Company's effective tax rate amounted to 25.2% and 24.4% during
the three months ended March 31, 1996 and 1995, respectively, and to 27.0%,
40.4% and 31.1% during 1995, 1994 and 1993, respectively. The decrease in the
Company's effective tax rate in recent periods was primarily attributable to the
benefits of tax credits resulting from the Company's investment in low-income
housing tax credit interests. 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 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 18 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 of $3.2 million was recorded,
which consisted of a net loss of $2.0 million on the sale of assets and a net
loss of $1.2 million incurred from related operations until the sale and
disposition, which was substantially completed at December 31, 1995.
45
<PAGE>
The Company's statements of operations have been restated for all periods
presented to reflect the discontinuance of the above-described operations. See
Note 2 to the Consolidated Financial Statements.
EXTRAORDINARY GAIN. In October and December 1993, the Company purchased at
a discount loans which had been issued by 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.
46
<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,
March 31, ---------------------
1996 1995 1994
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Assets:
Securities available for sale $310,090 $358,724 $187,717
Loans available for sale 253,583 251,790 102,293
Investment securities, net 8,905 18,665 17,011
Mortgage-related securities held for
investment -- -- 114,650
Loan portfolio, net 277,048 295,605 57,045
Discounted loan portfolio, net 606,372 669,771 529,460
Investments in low-income housing tax
credit interests 90,119 81,362 49,442
Investment in joint venture 32,000 -- --
Real estate owned, net 151,256 166,556 96,667
Premises and equipment, net 27,066 25,359 38,309
Deferred tax asset 1,422 -- --
Total assets 1,880,401 1,972,571 1,268,358
Liabilities:
Deposits 1,498,074 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 126,032 126,848 28,688
Deferred income taxes payable -- 4,040 2,138
Total liabilities 1,738,298 1,833,024 1,114,975
Stockholders' equity 142,103 139,547 153,383
</TABLE>
SECURITIES AVAILABLE FOR SALE. Securities available for sale decreased by
$48.6 million during the three months ended March 31, 1996 primarily as a result
of the sale and repayment of $37.3 million of CMOs. Securities available for
sale increased by $171.0 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 -
47
<PAGE>
Mortgage-Backed and Related Securities" and Note 4 to the Consolidated Financial
Statements. The Company's investment in CMOs decreased by $79.2 million during
1995 prior to the transfer of $89.1 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 remained essentially
unchanged during the three months ended March 31, 1996 because during this
period the Company sold $62.0 million of single-family residential loans to non-
conforming borrowers, which substantially offset the acquisition of $70.2
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 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."
INVESTMENT SECURITIES. Investment securities, which are held by the
Company for investment purposes, decreased by $9.8 million during the three
months ended March 31, 1996 due to the maturity of $10.0 million of U.S.
Government securities. At March 31, 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 December 31, 1995 because
of its decision at year end to reclassify $89.1 million of securities in this
portfolio to available for sale.
LOAN PORTFOLIO, NET. The Company's net loan portfolio decreased by $18.6
million during the three months ended March 31, 1996 primarily as a result of
the repayment of $32.5 million of hotel loans. The Company's net loan portfolio
increased by $238.6 million 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."
48
<PAGE>
Loans which were past due 90 days or more ("non-performing loans") amounted
to $3.3 million or 1.16% of total loans at March 31, 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 March 31, 1996, non-performing loans
consisted primarily of $2.7 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 March 31, 1996 and December 31, 1995 and 1994,
respectively, and 79.4%, 50.5% and 40.3% of nonperforming loans at the same
dates, respectively. See "Business - Asset Quality" and Note 7 to the
Consolidated Financial Statements.
DISCOUNTED LOAN PORTFOLIO, NET. The Company's net discounted loan
portfolio decreased by $63.4 million during the three months ended March 31,
1996 because discounted loan acquisitions having an unpaid principal balance of
$34.9 million were more than offset by resolutions and repayments, loans
transferred to real estate owned and sales of discounted loans, which resulted
in decreases in all categories of discounted loans. Acquisitions during this
period do not reflect the Company's acquisition of a 50% interest in $679.3
million gross principal amount of discounted single-family residential loans
(net of concurrent sales of loans) from HUD in April 1996. See "Business -
Investment in Joint Venture." 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 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 8 to the Consolidated
Financial Statements.
At March 31, 1996, discounted loans which were performing in accordance
with original or modified terms amounted to $352.5 million or 41.3% 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 1.33% of the net discounted loan
portfolio at March 31, 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 March 31, 1996,
49
<PAGE>
the Company had $90.1 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 $6.0 million at March 31, 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 an immaterial amount in the three months
ended March 31, 1996, is recorded as non-interest income. For such limited
partnership investments made prior to May 18, 1995, which amounted to $61.2
million at March 31, 1996, the Company records its receipt of tax credits and
tax benefits as interest income. Low-income housing tax credit partnerships in
which the Company invests as both a limited and, through a subsidiary, a general
partner amounted to $22.9 million at March 31, 1996 and are presented on a
consolidated basis. See "Business - Investment Activities - Investments in Low-
Income Housing Tax Credit Interests" and Note 10 to the Consolidated Financial
Statements.
INVESTMENT IN JOINT VENTURE. The $32.0 million investment in joint venture
at March 31, 1996 represented the Bank's contribution to a newly-formed company
in which the Bank and a co-investor each have a 50% interest. This
contribution, along with the contribution of the Bank's co-investor, enabled
this joint venture to make a deposit with HUD in connection with a commitment to
purchase $741.2 million gross principal amount of single-family residential
loans auctioned by HUD in March 1996. This transaction was consummated in April
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 $153.2 million
or 99.4% of total real estate owned at March 31, 1996 and consisted of $69.6
million, $53.3 million and $30.4 million of properties attributable to single-
family residential loans, multi-family residential loans and commercial real
estate loans, respectively. Real estate owned decreased by $15.3 million during
the three months ended March 31, 1996 as a result of decreases in all categories
of real estate owned attributable to the discounted loan portfolio. The $69.9
million increase in the Company's net real estate owned during 1995 was entirely
attributable to increases in real estate owned related to the Company's
discounted loan portfolio, which reflects the growth in the Company's discounted
loan acquisition and resolution activities in recent periods.
The Company actively manages its real estate owned. During the three
months ended March 31, 1996, the Company sold 238 properties of real estate
owned related to its discounted loan portfolio with a carrying value of $28.7
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
50
<PAGE>
and $10.9 million during 1994 and 1993, respectively. See "Business - Asset
Quality" and Note 9 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 11 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 12 to the Consolidated Financial Statements.
FHLB ADVANCES AND REVERSE REPURCHASE AGREEMENTS. FHLB advances and reverse
repurchase agreements decreased by $84.8 million during the three months ended
March 31, 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 13 and
14 to the Consolidated Financial Statements.
SUBORDINATED DEBENTURES AND OTHER INTEREST-BEARING OBLIGATIONS.
Subordinated debentures and other interest-bearing obligations increased by
$98.2 million during 1995 primarily 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 subordinated notes which are privately issued from time to time
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 15 to the Consolidated Financial Statements.
DEFERRED TAX ASSET. At March 31, 1996, the Company had a net deferred tax
asset of $1.4 million. At the same date, the gross deferred tax asset amounted
to $40.6 million, of which $20.4 million related to (and was included in the
carrying value of) tax residuals, and the gross deferred tax liability amounted
to $18.8 million and consisted primarily of $8.0 million of bad debt reserves
established for tax purposes in excess of book reserves and $4.9
51
<PAGE>
million of deferred interest income on the discounted loan portfolio. At
December 31, 1995, the Company had a net deferred tax liability of $4.0
million after deducting $26.3 million of the gross deferred tax asset which
was related to (and included in the carrying value of) the Company's tax
residuals.
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 March 31, 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 March 31, 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
exptected to be realized. See Note 18 to the Consolidated Financial Statements.
STOCKHOLDERS' EQUITY. Stockholders' equity increased during the three
months ended March 31, 1996 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
52
<PAGE>
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 has utilized
interest rate exchange agreements in recent years, the Company had no interest
rate exchange agreements outstanding at March 31, 1996. Interest rate exchange
agreements had the effect of increasing the Company's net interest income by
$185,000 and $358,000 during the three months ended March 31, 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 16 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 March 31, 1996, the Company had
entered into Eurodollar futures (short) contracts with an aggregate notional
amount of $556.0 million and U.S. Treasury futures (short) contracts with an
aggregate notional amount of $196.3 million. Futures contracts had the effect
of decreasing the Company's net interest income by $221,000 and $619,000 during
the three months ended March 31, 1996 and the year ended December 31, 1995,
respectively, and increasing the Company's net interest income by $5,000 and
$650,000 during the three months ended March 31, 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 16
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
53
<PAGE>
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 March 31,
1996 based on the assumptions set forth in the notes thereto. 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, 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 $41.8 million at March 31, 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.
54
<PAGE>
<TABLE>
<CAPTION>
March 31, 1996
--------------------------------------------------------------------------------------
More Than One
Within Three Four to Twelve Year to Three Three Years and
Months Months Years Over Total
------------ -------------- ------------- --------------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Rate-Sensitive Assets:
Interest-earning cash $ 71,445 $ -- $ -- $ -- $ 71,445
Securities available for sale 31,509 56,170 77,256 145,155 310,090
Loans available for sale(1) 10,158 56,160 15,508 171,757 253,583
Investment securities, net -- -- -- 8,905 8,905
Loan portfolio, net(1) 31,616 45,102 37,524 162,806 277,048
Discounted loan portfolio, net 65,772 151,613 83,997 304,990 606,372
Investments in low-income housing
tax credit interests(2) 2,577 7,775 9,037 41,882 61,271
-------- -------- -------- -------- ---------
Total rate-sensitive assets 213,077 316,820 223,322 835,495 1,588,714
-------- -------- -------- -------- ---------
Rate-Sensitive Liabilities:
NOW and money market checking
deposits 787 2,116 2,328 8,550 13,781
Savings deposits 195 522 574 2,294 3,585
Certificates of deposit 221,991 625,209 248,792 342,679 1,438,671
-------- -------- -------- -------- ---------
Total interest-bearing deposits 222,973 627,847 251,694 353,523 1,456,037
FHLB advances 70,000 -- 399 -- 70,399
Subordinated notes and other
interest-bearing obligations 12,002 4,370 1,275 108,385 126,032
-------- -------- -------- -------- ---------
Total rate-sensitive liabilities 304,975 632,217 253,368 461,908 1,652,468
-------- -------- -------- -------- ---------
Interest rate sensitivity gap before
off-balance sheet financial
instruments (91,898) (315,397) (30,046) 373,587 (63,754)
Off-Balance Sheet Financial
Instruments:
Futures contracts 153,812 (41,862) (51,651) (60,299) --
-------- -------- -------- -------- ---------
Interest rate sensitivity gap $61,914 $(357,259) $(81,697) $313,288 $(63,754)
-------- -------- -------- -------- ---------
-------- -------- -------- -------- ---------
Cumulative interest rate sensitivity gap $61,914 $(295,345) $(377,042) $(63,754)
-------- -------- -------- --------
-------- -------- -------- --------
Cumulative interest rate sensitivity gap
as a percentage of total rate-
sensitive assets 3.90% (18.59)% (23.73)% (4.01)%
----- ------- ------- ------
----- ------- ------- ------
</TABLE>
- ------------------------------------------
(1) Balances have not been reduced for non-performing loans.
(2) Balances have been reduced for partnership interests accounted for under
the equity method or consolidated with the Company.
In recent periods the Company's interest rate sensitivity gap has become
increasingly negative as a result of increased investments in loans available
for sale and performing discounted commercial loans. The Company expects to
sell its loans available for sale and has experienced significant levels of
resolutions of performing discounted loans prior to maturity. Because sales and
anticipated prepayments are not reflected in the interest rate sensitivity gap,
these events would reduce the Company's liability sensitive position.
55
<PAGE>
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 March 31,
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%
decrease or increase, respectively. In addition, at March 31, 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 11% decrease or increase,
respectively. For a detailed presentation in this regard, see Note 17 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, COMMITMENTS AND OFF-BALANCE SHEET RISKS
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 March 31, 1996, the Company had $1.4
billion of certificates of deposit, including $946.5 million of non-cancelable
brokered certificates of deposit. At the same date, scheduled maturities of
certificates of deposit during the 12 months ending March 31, 1997 and 1998 and
thereafter amounted to $847.2 million, $248.8 million and
56
<PAGE>
$342.7 million, respectively. See Note 12 to the Consolidated Financial
Statements. 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 March 31, 1996,
the Company had $70.4 million of FHLB advances outstanding, was eligible to
borrow up to an aggregate of $460.3 million from the FHLB of New York and had
$184.2 million of single-family residential loans and approximately $27.2
million of multi-family residential 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 $283.1 million of unencumbered
investment securities and mortgage-backed and related securities which could be
used to secure such borrowings.
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 8.6% at March 31,
1996 and averaged 6.7%, 12.9%, 14.2% and 11.4% during the three months ended
March 31, 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.
At March 31, 1996, the Company's commitments included (i) commitments to
fund an additional $9.0 million on multi-family residential loans, (ii)
commitments to purchase $12.1 million of discounted commercial real estate
loans, (iii) a commitment to fund an additional $5.3 million on a loan secured
by land, (iv) a commitment to fund an additional $5.3 million of loans secured
by office buildings and (v) commitments to fund $25.5 million of loans secured
by hotels. The foregoing commitments do not include a $277.7 million commitment
at March 31, 1996 which relates to the Company's investment in a jointly-owned
company which was formed to purchase discounted single-family residential loans
57
<PAGE>
from HUD, which commitment was funded in April 1996. 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 24 to the Consolidated Financial Statements.
In addition to commitments to extend credit, the Company is party to
various off-balance sheet financial instruments in the normal course of business
to manage its interest rate risk. See "- Asset and Liability Management" above
and Note 16 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
March 31, 1996.
<TABLE>
<CAPTION>
March 31, 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% $ 27,763 6.99% $129,283 5.49% $101,520
Core (leverage) capital 3.00 55,526 6.99 129,283 3.99 73,757
Risk-based capital(2) 8.00 167,666 11.41 239,116 3.41 71,450
</TABLE>
- ------------------------------------------
(1) For a presentation of the Bank's regulatory capital position on a pro forma
basis at March 31, 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 March 31, 1996, the Company's supplementary capital included $100
million attributable to the Debentures and $9.8 million of general allowances
for loan losses.
58
<PAGE>
For a reconciliation of the Bank's regulatory capital and its stockholders'
equity under generally accepted accounting principles, see Note 21 to the
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 21 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.
BUSINESS
GENERAL
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. 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 March 31, 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.
59
<PAGE>
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 March 31, 1996, the
Company's net discounted loan portfolio amounted to $606.4 million or 32.2% of
the Company's total assets. Virtually all of the Company's discounted loan
portfolio is secured by first mortgage liens on real estate.
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,
March 31, ----------------------------------------------------------------
1996 1995 1994 1993 1992 1991
---------- -------- -------- -------- -------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Single-family residential loans $307,749 $376,501 $382,165 $430,355 $306,401 $34,549
Multi-family residential loans 169,592 176,259 300,220 -- -- --
Commercial real estate loans 375,324(1) 388,566 102,138 1,845 2,227 5,362
Other loans 1,718 2,203 911 1,316 1,836 7,708
--------- --------- --------- --------- --------- --------
Total discounted loans 854,383 943,529 785,434 433,516 310,464 47,619
Unaccreted discount (239,843)(2) (273,758) (255,974) (129,882) (97,426) (21,908)
Allowance for loan losses (8,168) -- -- -- -- --
--------- --------- --------- --------- --------- --------
Discounted loans, net $606,372(3) $669,771 $529,460 $303,634 $213,038 $25,711
--------- --------- --------- --------- --------- --------
--------- --------- --------- --------- --------- --------
</TABLE>
60
<PAGE>
- -----------------------------
(1) Consists of $166.2 million of loans secured by office buildings, $80.9
million of loans secured by hotels, $92.5 million of loans secured by retail
properties or shopping centers and $35.7 million of loans secured by other
properties.
(2) Consists of $75.8 million, $47.7 million, $116.0 million and $300,000
attributable to single-family residential loans, multi-family residential loans,
commercial real estate loans and other loans, respectively.
(3) Does not include the Company's 50% interest in a newly-formed company which
acquired $679.3 million gross principal amount of discounted single-family
residential loans (net of concurrent sales of loans) from HUD in April 1996.
See "Business - Investment in Joint Venture."
The properties which secure the Company's discounted loans are located
throughout the United States. At March 31, 1996, the five states with the
greatest concentration of properties securing the Company's discounted loans
were California, New Jersey, New York, Florida and Connecticut, which had $357.1
million, $102.5 million, $97.5 million, $56.0 million and $50.7 million
principal amount of discounted loans (before unaccreted discount), respectively.
For further information concerning the geographic location of the properties
which secure loans in the Company's discounted loan portfolio, see Note 8 to the
Consolidated Financial Statements. 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 March 31, 1996, the discounted loan portfolio included two loans with a
carrying value equal to or more than $15 million and less 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 March 31, 1996, approximately 90% of the loans in
the Company's discounted loan portfolio had been acquired from the private
sector.
61
<PAGE>
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 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.
62
<PAGE>
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.
63
<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>
Three Months
Ended Year Ended December 31,
March 31, ------------------------------------------------------
1996 1995 1994
---------------------- ---------------------- ------------------------
No. of No. of No. of
Balance Loans Balance Loans Balance Loans
-------- ------ ------- ------ ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period $943,529 4,543 $785,434 3,894 $433,516 5,160
Acquisitions(1) 34,918 7 791,195 2,972 826,391 2,781
Resolutions and repayments(2) (72,032) (285) (300,161) (960) (265,292) (2,153)
Loans transferred to real estate owned (25,533) (193) (281,344) (984) (171,300) (1,477)
Sales(3) (26,499) (256) (51,595) (379) (37,881) (417)
-------- ----- -------- ----- -------- ------
Balance at end of period $854,383 3,816 $943,529 4,543 $785,434 3,894
-------- ----- -------- ----- -------- ------
-------- ----- -------- ----- -------- ------
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------
1993 1992 1991
---------------------- ---------------------- ------------------------
No. of No. of No. of
Balance Loans Balance Loans Balance Loans
------- ------ ------- ------ ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period $310,464 5,358 $47,619 590 $ -- --
Acquisitions(1) 294,359 2,412 297,169 5,380 49,996 620
Resolutions and repayments(2) (116,890) (1,430) (28,194) (473) (2,377) (30)
Loans transferred to real estate owned (26,887) (602) (6,130) (139) -- --
Sales(3) (27,530) (578) -- -- -- --
-------- ----- -------- ----- -------- ------
Balance at end of period $433,516 5,160 $310,464 5,358 $47,619 590
-------- ----- -------- ----- -------- ------
-------- ----- -------- ----- -------- ------
</TABLE>
(1) In the three months ended March 31, 1996, acquisitions consisted of $18.7
million of multi-family residential loans and $16.2 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 $5.4 million of gains from the sale of discounted
loans during the three months ended March 31, 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.
64
<PAGE>
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,
March 31, ---------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
--------- -------- -------- ------- ------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loan status:
Current $352,533 $351,630 $113,794 $ 23,629 $ 25,463 $ --
Past due less than 90 days 53,394 86,838 57,023 15,175 4,063 --
Past due 90 days or more 418,830 385,112 413,506 254,413 31,808 47,619
Acquired and servicing not
yet transferred 29,626 119,949 201,111 140,299 249,130 --
-------- -------- -------- ------- ------- ------
854,383 943,529 785,434 433,516 310,464 47,619
Unaccreted discount (239,843) (273,758) (255,974) (129,882) (97,426) (21,908)
Allowance for loan losses (8,168) -- -- -- -- --
-------- -------- -------- ------- ------- ------
$606,372 $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 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 three months ended March 31, 1996 and the years ended December
31, 1995, 1994 and 1993, 88.3%, 93.2%, 92.7% and 83.4%, respectively, of the
Company's income on discounted loans was comprised of realized discount. At
March 31, 1996, the total amount of discount which had been accreted into the
Bank's interest income on
65
<PAGE>
discounted loans but which had not yet been realized was $2.6 million. For
additional information, see Note 8 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 $41.2 million at March 31, 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.
For additional information relating to the Company's discounted loan
acquisition and resolution activities, see "Risk Factors - Non-Traditional
Operating Activities - Discounted Loan Acquisition and Resolution Activities."
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, 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
66
<PAGE>
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.
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 will receive specified fees which are payable on a
monthly 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 $679.3 million gross
principal amount of the HUD Loans as of the date of acquisition, $661.8 million
had fixed interest rates and $17.5 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 28 states, the
District of Columbia and Puerto Rico. As of April 10, 1996, the five
jurisdictions with the greatest concentration of properties securing the HUD
Loans were Texas, California, Colorado, Tennessee and Oklahoma, which had $156.9
million, $88.7 million, $73.2 million $33.9 million and $29.4 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 verbal in nature, until the term of the forbearance agreement expires
or there is a default under the forbearance agreement.
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<PAGE>
The following table sets forth information relating to the payment status
of the HUD Loans as of the date indicated, which is based primarily on
information provided by HUD and is subject to change as a result of information
obtained by the Company in connection with its servicing activities.
<TABLE>
<CAPTION>
April 10, 1996
-------------------------------------------------------
% of HUD
Amount Loans
----------------- ------------------
(Dollars in Thousands)
<S> <C> <C>
HUD Loans without Forbearance Agreements:
Current $ 371 0.1%
Past due less than 90 days 56,435 8.3
Past due 90 days or more 217,477 32.0
--------- -----
Total 274,283 40.4
--------- -----
HUD Loans with Forbearance Agreements:
Current 286 --
Past due less than 90 days 27,704 4.1
Past due 90 days or more 377,018 55.5
--------- -----
Total 405,008 59.6
--------- -----
Total $ 679,291 100.0%
--------- -----
--------- -----
</TABLE>
In connection with the acquisition of the HUD Loans, the LLC established a
general allowance for loan losses in the amount of $2.9 million. This amount
was based primarily on the Company's evaluation of the credit risk inherent in
the HUD Loans and the methodology adopted by the Company during the three months
ended March 31, 1996 for establishing an allowance for loan losses related to
its discounted loan portfolio. The LLC expects to periodically add to its
allowance for loan losses in future periods in amounts which are not capable of
being determined at this time. Actual provisions for loan losses will be 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 CMO 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 CMOs 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.
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<PAGE>
In the event of a securitization of the HUD Loans, the CMO backed by the
HUD Loans likely will have 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 CMO backed by the HUD Loans. The Company also may seek to retain the rights
to service the HUD Loans which back the CMO, 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
will be 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 the date of
acquisition of the HUD Loans, the Company's investment in the LLC amounted to
$52.5 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.
UNAUDITED FINANCIAL INFORMATION. Set forth below is an unaudited statement
of financial condition of the LLC as of the date of acquisition of the HUD
Loans.
69
<PAGE>
BCBF, L.L.C.
Opening Statement of Financial Condition
April 10, 1996
(Unaudited)
(In Thousands)
Assets:
Discounted loans, net(1)(2) $582,319
Other assets 17,353
-------
Total assets $599,672
-------
-------
Liabilities:
Advances from members $ 11,350
Note payable 473,042
Other liabilities 10,230
-------
Total liabilities 494,622
-------
Equity:
The Company 52,525
Co-investor 52,525
Total equity 105,050
-------
Total liabilities and equity $599,672
-------
-------
- ---------------------------
(1) On March 22, 1996, the LLC was informed by HUD that it had submitted
the winning bid to acquire $741.2 million in principal balance of single-family
residential loans at an average price of 83.57% for settlement on April 10,
1996. On April 3, 1996, the LLC sold $61.9 million of principal balance of
loans for settlement on April 10, 1996 for a gain of $1.3 million.
(2) Discounted loans, net consist of the following:
Total loans $679,291
Unaccreted discount (94,046)
Allowance for losses (2,926)
-------
Discounted loans, net $582,319
-------
-------
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<PAGE>
LENDING ACTIVITIES
COMPOSITION OF LOAN PORTFOLIO. At March 31, 1996, the Company's net loan
portfolio amounted to $277.0 million or 14.7% 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. The Company generally
classifies its commercial real estate loans as held for investment and its
single-family residential loans to non-conforming borrowers as available for
sale.
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,
March 31, ------------------------------------------------
1996 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Single-family residential
loans $77,071 $75,928 $31,926 $30,385 $33,799 $41,895
Multi-family residential
loans:
Permanent 39,866 41,306 1,800 39,352 5,563 7,305
Construction 8,032 7,741 -- -- -- --
------- ------- ------ ------ ------ ------
Total 47,898 49,047 1,800 39,352 5,563 7,305
Commercial real estate
and land loans:
Hotels 113,933 125,791 19,659 14,237 -- --
Office buildings 61,339 61,262 -- -- -- --
Land 24,606 24,904 1,315 4,448 -- --
Other 2,063 2,494 4,936 4,059 1,908 2,009
------- ------- ------ ------ ------ ------
Total 201,941 214,451 25,910 22,744 1,908 2,009
Consumer and other
loans 3,156 3,223 1,558 3,639 2,395 2,195
------- ------- ------ ------ ------ ------
Total loans 330,066 342,649 61,194 96,120 43,665 53,404
Undisbursed loan proceeds (45,627) (39,721) -- -- -- --
Unaccreted discount (4,760) (5,376) (3,078) (6,948) (1,898) (3,210)
Allowance for loan losses (2,631) (1,947) (1,071) (884) (752) (934)
------- ------- ------ ------ ------ ------
Loans, net $277,048 $295,605 $57,045 $88,288 $41,015 $49,260
------- ------- ------ ------ ------ ------
------- ------- ------ ------ ------ ------
</TABLE>
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 March 31, 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, New Jersey, California, Illinois and
Florida, which had $70.1 million, $57.4 million, $39.2 million, $30.6 million
and $28.4 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.
71
<PAGE>
At March 31, 1996, the Company's loan portfolio included two 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 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 Years
One After One Year Through Ten After Ten
Year or Less Through Five Years 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.
72
<PAGE>
ACTIVITY IN THE LOAN PORTFOLIO. The following table sets forth the
activity in the Company's loan portfolio during the periods indicated.
<TABLE>
<CAPTION>
Three Months
Ended Year Ended December 31,
March 31, ------------------------------------------
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 4,179 14,776 7,119 32,668
Multi-family residential loans 7,410 48,664 -- 23,696
Commercial real estate and land loans 21,000 212,630 22,486 18,586
Consumer loans -- 207 -- 2,299
-------- -------- -------- --------
Total loans originated 32,589 276,277 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 (2,000) 4,353 (24,380) (139,297)
Principal repayments, net of capitalized
interest (42,929) (33,168) (39,073) (68,296)
Transfer to real estate owned (243) (51) -- --
-------- -------- -------- --------
Net increase (decrease) in net loans (12,583) 281,455 (34,926) 52,455
-------- -------- -------- --------
Balance at end of period $330,066 $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,
March 31, --------------------------------------------------------------
1996 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Single-family residential loans $222,047 $221,927 $ 16,825 $ 30,217 $754 $2,059
Multi-family residential loans 30,550 28,694 83,845 44,919 -- --
Consumer loans 986 1,169 1,623 25,930 -- --
------- ------- ------- ------- -------- -------
$253,583 $251,790 $102,293 $101,066 $754 $2,059
------- ------- ------- ------- -------- -------
------- ------- ------- ------- -------- -------
</TABLE>
73
<PAGE>
At March 31, 1996 and December 31, 1995, loans available for sale were net
of an allowance for losses of $1.1 million and $324,000, respectively. See
"Business - Asset Quality - Allowances for Losses."
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, $104.2 million or 41.1%
of the Company's loans available for sale at March 31, 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.
74
<PAGE>
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.
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 acquired a total of $70.2 million of single-family residential
loans to non-conforming borrowers during the three months ended March 31, 1996
and $240.3 million of such loans during 1995, including $158.6 million during
the last six months of the year. At March 31, 1996, the Company had $208.7
million of single-family residential loans to non-conforming borrowers, which
had a weighted average yield of 9.95%.
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
75
<PAGE>
for sale at March 31, 1996. During the three months ended March 31, 1996, the
Company sold $62.0 million of single-family residential loans to non-conforming
borrowers for a gain of $901,000 and during 1995 the Company sold $25.3 million
of such loans for a gain of $188,000. In addition, in April 1996 the Company
entered into commitments to sell $88.4 million of single-family residential
loans to non-conforming borrowers. In the event that the Company securitizes
loans to non-conforming borrowers, it is anticipated that the Company will sell
the senior class or classes of such securities in the secondary market to
provide funds for additional lending and retain the subordinated class or
classes of such securities. See "Business - Investment Activities - Mortgage-
Backed and Related Securities."
As a result of the risks associated with loans to non-conforming borrowers,
the Company anticipates that there will be higher levels of default than would
be the case with conforming loans. Although the Company anticipates relatively
high levels of default, it believes that the borrower's equity in the security
property and its expertise in the area of resolution of non-performing loans
will make this 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 March 31,
1996, the Company's permanent multi-family residential loans originated or
purchased under this program amounted to $30.6 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
76
<PAGE>
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 $21.3 million carrying value at March 31, 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 for investment
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 March 31, 1996, the Company had $8.0
million of multi-family residential construction loans, of which $7.2 million
had been funded, and $39.9 million of acquisition and rehabilitation loans, of
which $31.7 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.
77
<PAGE>
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, as
well as the refurbishment of distressed properties. At March 31, 1996, the
Company's loans secured by commercial real estate (and land) amounted to $201.9
million and consisted primarily of $113.9 million and $61.3 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.
78
<PAGE>
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.
Also included in the Company's commercial real estate lending activities
are land loans, including land acquisition and development loans. At March 31,
1996, the Company had $24.6 million of land loans. The Company's largest land
loan at March 31, 1996 was a $21.4 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 $14.5 million had been funded
at such date. The remainder of the Company's land loans at March 31, 1996
consisted of two loans which aggregated $3.2 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.
For additional information relating to the Company's multi-family
residential, commercial real estate and construction lending activities, see
"Risk Factors - Non-Traditional Operating Activities."
79
<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. 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.
<TABLE>
<CAPTION>
December 31,
March 31, --------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-performing loans:
Single-family residential loans $2,686 $2,923 $2,478 $2,347 $2,955 $ 712
Multi-family residential loans 423 731 152 664 269 1,006
Commercial real estate and
land loans -- -- -- -- -- 1,710
Consumer and other loans 203 202 29 556 407 517
------ ------ ------ ------ ------ ------
Total $3,312 $3,856 $2,659 $3,567 $3,631 $3,945
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
Non-performing loans as
a percentage of:
Total loans(1) 1.16% 1.27% 4.35% 3.71% 8.32% 7.39%
Total assets 0.18 0.20 0.21 0.26 0.44 0.63
Allowance for loan losses as a
percentage of:
Total loans(1) 0.94 0.65(2) 1.84 0.99 1.80 1.86
Non-performing loans 79.44 50.49 40.28 24.78 20.71 23.68
</TABLE>
- ----------
(1)Total loans is exclusive of undisbursed loan proceeds, unaccreted discount
and allowance for loan losses.
80
<PAGE>
(2) 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.
At March 31, 1996, loans available for sale included $10.3 million of non-
performing single-family residential loans which were made primarily to non-
conforming borrowers, which represented 4.6% of total single-family residential
loans available for sale, and $132,000 of non-performing consumer loans.
For information relating to the payment status of loans in the Company's
discounted loan portfolio, see "Business - Discounted Loan Acquisition and
Resolution Activities."
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 $5.7 million at March 31,
1996. In addition, at the same date the Company also had a $2.9 million general
valuation allowance related to its real estate owned.
The following table sets forth certain information relating to the
Company's real estate owned at the dates indicated.
<TABLE>
<CAPTION>
December 31,
March 31, --------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Discounted loan portfolio:
Single-family residential $ 69,555 $ 75,144 $ 86,426 $ 33,369 $ 4,390 $ 93
Multi-family residential 53,291 59,932 -- -- -- --
Commercial real estate 30,396 31,218 8,801 -- -- --
-------- -------- -------- -------- -------- --------
Total 153,242 166,294 95,227 33,369 4,390 93
Loan portfolio 406 262 1,440 128 320 435
Loans available for sale
portfolio 497 -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total 154,145 166,556 96,667 33,497 4,710 528
Allowance for loan losses (2,889) -- -- -- -- --
-------- -------- -------- -------- -------- --------
Real estate owned, net $151,256 $166,556 $96,667 $33,497 $4,710 $ 528
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
81
<PAGE>
The following table sets forth certain geographical information at March
31, 1996 related to the Company's real estate owned attributable to the
Company's discounted loan acquisitions.
<TABLE>
<CAPTION>
March 31, 1996
--------------------------------------------------------------------------------------
Multi-Family Residential and
Single-Family Residential 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 $19,318 121 $73,968 69 $93,286 190
New York 24,079 342 2,324 14 26,403 356
Connecticut 8,366 156 308 7 8,674 163
New Jersey 5,068 81 2,692 17 7,760 98
Pennsylvania 1,645 11 2,012 11 3,657 22
Other 11,079(1) 189 2,383(2) 5 13,462 194
-------- --- -------- --- -------- -----
$69,555 900 $83,687 123 $153,242 1,023
-------- --- -------- --- -------- -----
-------- --- -------- --- -------- -----
</TABLE>
- -------------------------
(1) Consists of properties located in 27 other states, none of which aggregated
over $2.0 million in any one state.
(2) Consists of properties located in two other states, none of which
aggregated over $2.4 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,
Three Months Ended ---------------------------------------------------------------------
March 31, 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 15,645 196 209,567 1,281 173,556 1,875 40,457 770
Sales (28,697) (238) (138,500) (1,221) (111,698) (1,386) (10,900) (347)
General loss provision (2,853) -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Balance at end of period $150,389 1,023 $166,294 1,065 $95,227 1,005 $33,369 516
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
82
<PAGE>
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,
March 31, --------------------------
1996 1995 1994
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
One to two months $13,865 $25,398 $20,989
Three to four months 9,346 22,672 22,985
Five to six months 20,981 25,742 16,369
Seven to 12 months 75,121 76,782 29,499
Over 12 months 33,929 15,700 5,385
-------- -------- --------
$153,242 $166,294 $ 95,227
-------- -------- --------
-------- -------- --------
</TABLE>
The average period during which the Company held the $28.7 million, $138.5
million and $111.7 million of real estate owned related to its discounted loan
acquisitions which was sold during the three months ended March 31, 1996 and the
years ended December 31, 1995 and 1994, respectively, was 11 months, eight
months and seven months, respectively.
From time to time the Company makes loans to finance the sale of real
estate owned. At March 31, 1996, such loans amounted to $10.4 million and
consisted of $7.2 million of single-family residential loans and $3.2 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 March 31, 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
83
<PAGE>
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. 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. Pursuant to a policy adopted by
the Company, only certain of the loans and real estate owned related to the
Company's discounted loan acquisition and resolution activities (generally loans
and real estate owned which do not meet expected resolution timelines) are
classified by it pursuant to the above requirements.
Excluding assets which have been classified loss and fully reserved by the
Company, the Company's classified assets at March 31, 1996 consisted of $42.8
million of assets classified as substandard and $596,000 of assets classified as
doubtful. In addition, at the same date $68.1 million of assets was designated
as special mention.
Substandard assets at March 31, 1996 consisted primarily of $19.4 million
of loans and real estate owned related to the Company's discounted single-family
residential loan program, $13.3 million of loans and real estate owned related
to the Company's discounted commercial real estate loan program and $10.0
million of single-family residential loans to non-conforming borrowers. Special
mention assets at March 31, 1996 consisted primarily of loans and real estate
owned related to the Company's discounted loan programs, consisting of $55.0
million and $11.1 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, discounted loan portfolio and loans available for
sale at a level which management considers adequate to provide for potential
losses based upon an evaluation of known and inherent risks in such portfolios.
84
<PAGE>
The following table sets forth the breakdown of the Company's allowances
for losses on the Company's loan portfolio, discounted loan portfolio and loans
available for sale 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,
March 31, --------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
------------- ------------- ------------- ------------- ------------- --------------
Amount % Amount % Amount % Amount % Amount % Amount %
------ --- ------ --- ------ --- ------ --- ------ --- ------ ---
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loan portfolio:
Single-family
residential loans $358 23.3% $346 22.2% $615 52.2% $174 31.6% $ 20 77.3% $ 28 78.4%
Multi-family
residential loans 1,124 14.5 683 14.3 -- 2.9 333 40.9 281 12.7 272 13.7
Commercial real
estate and land
loans 1,071 61.2 875 62.6 218 42.3 218 23.7 220 4.6 399 3.8
Consumer and other
loans 78 1.0 43 0.9 238 2.6 159 3.8 231 5.4 235 4.1
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total $2,631 100.0% $1,947 100.0% $1,071 100.0% $884 100.0% $752 100.0% $934 100.0%
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Discounted loan
portfolio(1):
Single-family
residential loans $4,040 36.0%
Multi-family
residential loans 1,315 19.9
Commercial real
estate loans 2,813 43.9
Other loans -- 0.2
------ -----
Total $8,168 100.0%
------ -----
------ -----
Loans available
for sale(2):
Single-family
residential loans $791 87.6% $179 88.1%
Multi-family
residential loans 90 12.0 -- 11.4
Consumer and other
loans 224 0.4 145 0.5
------ ----- ------ -----
$1,105 100.0% $324 100.0%
------ ----- ------ -----
------ ----- ------ -----
</TABLE>
- -------------------------
(1) Not applicable prior to March 31, 1996.
(2) Not applicable 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.
85
<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>
Three Months
Ended Year Ended December 31,
March 31, --------------------------------------------------------------------
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 699 1,121 -- -- -- --
Charge-offs:
Single-family residential loans (8) (131) (302) (150) (138) (8)
Multi-family residential loans -- -- -- (170) (3) (96)
Commercial real estate
and land loans (7) (40) -- -- -- (135)
Consumer loans -- (92) (170) (16) (88) (37)
------ ------ ------ ------ ------ ------
Total charge-offs (15) (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 (15) (245) 187 132 (182) (236)
------ ------ ------ ------ ------ ------
Balance, end of period $2,631 $1,947 $1,071 $ 884 $ 752 $ 934
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
Net (charge-offs) recoveries as
a percentage of average loan
portfolio (0.01)% (0.19)% 0.28% 0.10% (0.37)% (0.46)%
</TABLE>
During the three months ended March 31, 1996, the sole activity in the
allowance for loan losses related to the discounted loan portfolio was an $8.7
million general provision for losses and $525,000 of charge-offs on multi-family
residential and commercial real estate loans. During the three months ended
March 31, 1996 and the year ended December 31, 1995, the sole activity in the
allowance for losses related to loans available for sale were general provisions
of $781,000 and $324,000 during the respective periods.
The Company also maintains a valuation allowance for its real estate owned.
For a description of the Company's accounting for real estate owned, see
"Business - Asset Quality - Real Estate Owned" above and Note 1 to the
Consolidated Financial Statements - Real Estate Owned.
86
<PAGE>
The following table presents the activity in the valuation allowance on the
Company's real estate owned during the periods indicated.
<TABLE>
<CAPTION>
Three Months
Ended Year Ended December 31,
March 31, --------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
------------ -------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of period $4,606 $3,937 $2,455 $ 102 $ 34 $ --
Provision for loss in fair value 3,489 10,510 9,074 2,980 131 34
General loss provision 2,889 -- -- -- -- --
Charge-offs on sales (2,394) (9,841) (7,592) (627) (63) --
------ ------ ------ ------ ------ ------
Balance, end of period $8,590 $4,606 $3,937 $2,455 $102 $ 34
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
</TABLE>
The provisions for losses in fair value during the indicated periods were
primarily attributable to adjustments to ensure that real estate owned related
to the discounted loan portfolio was carried at the lower of cost or fair value
less estimated costs to dispose, and the charge-offs during these periods
resulted from actual losses incurred at the time of sale.
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 14 to the
Consolidated Financial Statements.
Mortgage-related securities include regular and residual interests in CMOs
and REMICs. The regular interests of some CMOs are like traditional debt
instruments because they have stated principal amounts and traditionally defined
interest-rate terms. Purchasers of certain other CMOs 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 CMOs
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 CMO.
87
<PAGE>
A senior-subordinated structure often is used with CMOs 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.
The following table sets forth the Company's mortgage-related securities
available for sale at the dates indicated.
<TABLE>
<CAPTION>
December 31
March 31, -----------------------------------------
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 10,776 11,774 1,996 --
Principal only 7,313 8,218 11,490 --
CMOs-AAA rated 101,548 138,831 75,032 187,059
PAC securities and tax residuals 15,988 21,818 -- --
REMIC residuals 472 472 -- --
Subordinates 28,020 27,310 -- --
Futures contracts (678) (1,598) 1,143 --
-------- -------- -------- --------
Total 163,439 206,825 89,661 187,059
Multi-family residential and commercial:
CMOs -- -- 53,939 --
Interest only 104,960 109,193 -- --
Subordinates 41,706 42,954 22,095 --
Futures contracts (15) (248) (609) --
-------- -------- -------- --------
Total 146,651 151,899 75,425 --
-------- -------- -------- --------
Total $310,090 $358,724 $184,185 $526,373
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
88
<PAGE>
The following table sets forth the Company's mortgage-related securities
held for investment at the dates indicated.
<TABLE>
<CAPTION>
December 31,
March 31, -------------------------------
1996 1995(1) 1994 1993
-------- ------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C>
CMOs $ -- $ -- $ 90,153 $114,884
PAC securities and tax residuals -- -- 23,727 5,480
REMIC residuals -- -- 770 1,186
-------- -------- -------- --------
Total $ -- $ -- $114,650 $121,550
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
- -------------------------
(1) Reflects the transfer of $89.1 million of securities to available for
sale pursuant to guidance issued by the FASB in November 1995.
At March 31, 1996, the Company's mortgage-related securities included one
security with a carrying value equal to $25 million or more and less than $30
million and six securities with a carrying value equal to $15 million or more
and less than $25 million.
At March 31, 1996, all of the Company's $101.5 million of CMOs were rated
AAA by national rating agencies and were fixed-rate securities.
At March 31, 1996, the carrying value of the Company's investment in IO
strips and PO strips amounted to $123.0 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. 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
March 31, 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.
At March 31, 1996, the carrying value of the Company's investment in
subordinate classes of mortgage-related securities amounted to $69.7 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,
89
<PAGE>
1995. At March 31, 1996, the Company's subordinate securities supported senior
classes of securities having an aggregate outstanding principal balance of
$786.7 million.
At March 31, 1996, the Company's mortgage-related securities included $16.0
million of planned amortization class ("PAC") securities and tax residuals,
consisting of $575,000 of PAC securities and $15.4 million of tax residuals. A
PAC security is a type of CMO which has a class to which principal payments are
allocated before any other class, thereby giving this class of the CMO (the PAC)
the most certainty with respect to prepayments. 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 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, 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 related deferred tax
asset. 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 related deferred tax asset. The $15.4 million of tax residuals at March 31,
1996 represents the deferred tax asset, net of unamortized fees, relating to the
underlying tax residuals sold and unsold at December 31, 1995. 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 March 31, 1996, the
Company had approximately $44.5 million of net operating loss carryforwards for
federal income tax purposes which were attributable to sales of tax residuals.
See Notes 1 and 18 to the Consolidated Financial Statements.
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.
90
<PAGE>
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 "Risk Factors - Non-Traditional Operating Activities -
Investments in Mortgage-Related Securities" and Notes 4 and 6 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,
March 31, -------------------------------
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 107 109 131 131
-------- -------- -------- --------
Total 8,905 18,665 17,011 32,568
-------- -------- -------- --------
Total investment securities $ 8,905 $ 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.
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<PAGE>
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 March 31, 1996, the Company's investments in low-income housing tax
credit interests amounted to $90.1 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.
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<PAGE>
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
$67.2 million in the aggregate at March 31, 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 March 31, 1996, the Company's investments in low-income housing tax credit
interests included $22.9 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 $13.9 million and the Company had commitments to
make $20.4 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.
Commitments to fund additional investments in low-income housing tax credit
partnerships in which the Company acts solely as a limited partner and which
were made prior to May 18, 1995 have been established as a liability of the
Company and included in other interest-bearing obligations. Such liabilities
amounted to $10.0 million at March 31, 1996. See Note 15 to the Consolidated
Financial Statements.
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 March 31, 1996, the Company had $10.4 million of
construction loans outstanding to low-income housing tax credit partnerships and
commitments to fund an additional $37.6 million of such loans. Approximately
$7.8 million of such funded construction loans at March 31, 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 "Risk Factors - Non-Traditional
Operating Activities - Multi-family Residential, Commercial Real Estate and
Construction Lending Activities."
The affordable housing projects owned by the low-income housing tax credit
partnerships in which the Company had invested at March 31, 1996 are
geographically located throughout the United States. At March 31, 1996, the
Bank's largest funded investment in a low-income housing tax credit partnership
was a $17.1 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 $22.1 million
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<PAGE>
commitment to fund equity and debt investments in a partnership which will
construct a 257-unit qualifying project in San Francisco, California, of which
$636,000 of equity and $2.1 million of debt was funded as of such date.
At March 31, 1996, the Company had invested in or had commitments to invest
in 23 low-income housing tax credit partnerships, of which 11 had been allocated
tax credits. The Company estimates that its investment in low-income housing
tax credit interests at March 31, 1996 will provide approximately $145.0 million
of tax credits. The Company currently intends to sell approximately $18.4
million of its investment in low-income housing tax credit interests and may,
depending on available prices, its ability to utilize tax credits and other
factors, seek to sell other such 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%. 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
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.
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<PAGE>
Investments made pursuant to the affordable housing tax credit program of
the Code are subject to numerous risks resulting from changes in the Code. See
"Risk Factors - Non-Traditional Operating Activities - Investments in Low-Income
Housing Tax Credit Interests."
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 $1.1 billion or
71.6% of the Company's total deposits at March 31, 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 March 31, 1996, $127.4 million or 8.5% 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 March 31, 1996, $202.7 million or 13.5% 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 mid-1996.
The Company's brokered deposits at March 31, 1996 were net of $8.2 million
of unamortized deferred fees. The amortization of deferred fees is computed
using the interest method and is included in interest expense on certificates of
deposit.
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<PAGE>
The Company believes that the effective cost of brokered and other
wholesale deposits is more attractive to the Company than deposits obtained on a
retail basis from branch offices after the general and administrative expense
associated with the maintenance of branch offices is taken into account.
Moreover, brokered and other wholesale deposits generally give the Company more
flexibility than retail sources of funds in structuring the maturities of its
deposits, and may include provisions which make them non-cancelable during their
terms. At March 31, 1996, $946.5 million or 88.2% of the Company's $1.1 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.
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." For a description of other risks related to brokered
deposits, see "Risk Factors - Brokered Deposits."
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 March 31, 1996, the
deposits which were allocated to this office amounted to $49.4 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,
March 31, ----------------------------------------------------------------------
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 $41,838 --% $48,482 --% $35,943 --% $45,096 --%
NOW and money market
checking accounts 13,980 4.24 17,147 3.37 18,934 2.17 115,402 1.07
Savings accounts 3,585 2.30 3,471 2.30 24,007 2.30 167,026 1.20
---------- ---------- ---------- ----------
59,403 69,100 78,884 327,524
---------- ---------- ---------- ----------
Certificates of deposit(1) 1,446,840 1,440,240 950,817 537,147
Unamortized (deferred fees)
purchase accounting discount (8,169) (7,694) (6.433) 7,208
---------- ---------- ---------- ----------
1,438,671 6.28 1,432,546 5.68 944,384 5.50 544,355 4.22
---------- ---------- ---------- ----------
Total deposits $1,498,074 6.08 $1,501,646 5.46 $1,023,268 5.17 $ 871,879 3.01
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
96
<PAGE>
- -------------------------
(1) At March 31, 1996 and December 31, 1995 and 1994, certificates of deposit
issued on an uninsured basis amounted to $77.7 million, $80.0 million and $21.1
million, respectively.
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,
March 31, ----------------------------------------
1996 1995 1994 1993
---------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
2.99% or less $ 1,672 $ 222 $ 3,613 $ 121,266
3.00-3.50% 12 39 642 194,650
3.51-4.50 5,732 42,751 221,459 165,862
4.51-5.50 612,777 454,653 242,383 42,206
5.51-6.50 584,010 660,745 310,898 6,251
6.51-7.50 233,980 273,655 165,197 6,460
7.51-8.50 488 481 192 3,794
8.51-9.50 -- -- -- 3,866
---------- ---------- ---------- ----------
$1,438,671 $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 March 31, 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 $ 128 $ 1,395 $ -- $ 149 $ 1,672
3.00-3.50% 8 -- -- 4 12
3.51-4.50 4,920 686 106 20 5,732
4.51-5.50 245,695 168,397 77,903 120,782 612,777
5.51-6.50 200,146 173,690 111,558 98,616 584,010
6.51-7.50 1,095 51,040 59,225 122,620 233,980
7.51-8.50 -- -- -- 488 488
---------- ---------- ---------- ---------- ----------
$ 451,992 $ 395,208 $ 248,792 $ 342,679 $1,438,671
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
97
<PAGE>
At March 31, 1996, the Company had $77.7 million of certificates of deposit
in amounts of $100,000 or more outstanding maturing as follows: $5.5 million
within three months; $23.1 million over three months through six months; $21.0
million over six months through 12 months; and $28.1 million thereafter.
For additional information relating to the Company's deposits, see Note 12
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.
The Company's borrowings also include subordinated debentures and notes.
At March 31, 1996, this category of borrowings consisted primarily of $100
million principal amount of 12% Subordinated Debentures due 2005 issued by the
Bank in June 1995. At March 31, 1996, this category of borrowings also included
$7.6 million of short-term notes which are privately issued by the Company from
time to time to certain stockholders of the Company.
At March 31, 1996, borrowings also included a hotel mortgage payable in
connection with a hotel in Columbus, Ohio which is owned by the Company, and
other interest-bearing obligations related to the Company's investments in low-
income housing tax credit interests.
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<PAGE>
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,
March 31, --------------------------------------
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 7,615 8,627 1,012 14,578
Hotel mortgages payable 8,385 8,427 19,099 26,347
Other interest-bearing obligations 10,032 9,794 8,577 --
-------- -------- -------- --------
126,032 126,848 28,688 40,925
-------- -------- -------- --------
$196,431 $282,008 $ 34,087 $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
Three Months Ended At or For the Year Ended December 31,
March 31, -----------------------------------------
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 5.90% 7.57% 4.65% 4.42%
At end of period 5.84 5.84 9.59 4.02
Reverse repurchase agreements:
Average amount outstanding
during the period $44,985 $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 5.81% 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
13, 14 and 15 to the Consolidated Financial Statements.
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<PAGE>
OFFICES
At March 31, 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 March 31, 1996.
Net Book Value of
Property or Leasehold
Location Owned/Leased Improvements
-------- ------------ ---------------------
(Dollars in Thousands)
Executive Offices:
1675 Palm Beach Lakes Blvd.
West Palm Beach, FL Leased $5,636
Main Office:
1350 Sixteenth Street
Fort Lee, NJ Leased 6
Loan Production Office:
100 Menlo Park Drive
Suite 200
Edison, New Jersey Leased 11
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
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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 March 31, 1996, the Company had 320 full-time employees. 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.
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
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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. For information regarding certain possible changes
in the regulation of the Company and the Bank, see "Risk Factors - Regulation."
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 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
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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.
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
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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
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associations on a case-by-case basis. At March 31, 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 $2.3 million at March 31, 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 March 31, 1996.
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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%
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
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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 March 31, 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 March 31, 1996, the
qualified thrift investments of the Bank were approximately 69.4% 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
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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 standards applicable on December 31, 1994, as modified
to reflect any applicable individual minimum capital requirement imposed upon
the association. At March 31, 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 March 31, 1996, the Bank's unimpaired capital and surplus amounted to
$239.1 million, resulting in a general loans-to-one borrower limitation of $35.9
million under applicable laws and regulations. See "Business - Discounted Loan
Acquisition and
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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 March 31, 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, Commitments and Off-Balance Sheet Risks."
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
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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
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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
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, are
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.
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. The Bank anticipates
that at least
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60% of its assets will continue to be qualifying assets in the immediate future.
If this ceases to be the case, the Bank may be required to restore its bad debt
reserve to taxable income in the future.
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 is subject to certain limitations. These limitations are not
expected to restrict the Bank from taking maximum advantage of the percentage of
taxable income method in the future, although there can be no assurances in this
regard.
To the extent (i) a savings association's reserve for losses on qualifying
real property loans under the percentage of taxable income method exceeds the
amount that would have been allowed under the experience method and (ii) a
savings association makes distributions to stockholders (including distributions
in redemption, dissolution or liquidation) that are considered to result in
withdrawals from that excess bad debt reserve, the amounts considered withdrawn
will be included in the savings association's taxable income. The amount that
would be deemed withdrawn from such reserves upon such distribution and which
would be subject to taxation at the savings association level at the normal
corporate tax rate would be an amount equal to the amount actually distributed
plus the amount necessary to pay the corporate income tax with respect to the
withdrawal. Dividends will not be considered to result in withdrawals from an
association's bad debt reserves to the extent of current or accumulated earnings
and profits as calculated for federal income tax purposes. Dividends in excess
of a savings association's current and accumulated earnings and profits,
distributions in redemption of stock, and distributions in partial or complete
liquidation will be considered to come first from its bad debt reserve. In
accordance with generally accepted accounting principles, deferred taxes have
not been provided with respect to the bad debt deductions of the Bank to the
extent of the bad debt reserve balance at December 31, 1987, which amounted to
approximately $5.7 million; deferred taxes have been provided on tax deductions
in excess of that amount, however, which amounted to $8.0 million at March 31,
1996. Any taxes incurred under the conditions set forth above in excess of such
deferred taxes would result in a charge to earnings. The Bank has no intention
of paying dividends or taking any other action which would result in recapture
of its bad debt reserves for tax purposes.
The Balanced Budget Act of 1995, which was vetoed by the President of the
United States in December 1995, would have (i) repealed the provision of the
Code which authorized use of the percentage of taxable income method by
qualifying savings institutions to determine deductions for bad debts and (ii)
required that a savings institution recapture for tax purposes (i.e. take into
income) over a six-year period the excess of the balance of its bad debt
reserves over the balance of such reserves as of December 31, 1987, which
recapture would be suspended for each of two successive taxable years beginning
January 1, 1996 in which a savings institution originates a minimum amount of
certain residential loans based upon the average of the principal amounts of
such loans made by a savings institution during its six taxable years preceding
1996. In part because the Bank has
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provided 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, if enacted into law in the
future, would have a material adverse effect on the Company's financial
condition or operations.
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 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.
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 18 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
Name Age(1) Position Director Since
- --------------------- ------ --------------------------------- --------------
William C. Erbey 46 Chairman, President and Chief 1988
Executive Officer(2)
Barry N. Wish 54 Chairman, Emeritus(2) 1988
Howard H. Simon 55 Director 1996(3)
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Name Age(1) Position
- --------------------- ------ ---------------------------------
John R. Barnes 53 Senior Vice President
Rory A. Brown 33 Managing Director
John R. Erbey 55 Managing Director and Secretary
Christine A. Reich 34 Managing Director and Chief
Financial Officer
Stephen C. Wilhoit 35 Senior Vice President
- ---------------------------
(1) As of March 31, 1996.
114
<PAGE>
(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.
(3) To be elected at the annual meeting of stockholders of the Company to be
held in June 1996.
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
Credit 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.
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.
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.
115
<PAGE>
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 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 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.
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 May
1993 until June 1994 and as Vice President from January 1990 until January 1993.
Ms. Reich has served as 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.
116
<PAGE>
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 William C.
Erbey (Chairman) and Barry N. 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 sole member of the Audit Committee is
Director Simon.
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 sole member of the Nominating and Compensation
committee is Director Simon.
117
<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>
Annual compensation Long-term compensation
------------------------------------ ----------------------------------
Awards
----------------------------------
Number of 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 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 1995 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.
118
<PAGE>
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 9,317,380 shares of Common Stock currently may be acquired
upon the exercise of options granted under the Stock Option Plan. As of March
31, 1996, options to acquire 3,361,610 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 March 31, 1996, the average exercise price of the
outstanding options granted under the Stock Option Plan was $1.29 and the book
value per share of Common Stock was $5.97.
The Stock Option Plan currently is administered and interpreted by either
the Board of Directors of the Company or, to the extent authority is delegated,
the stock option committee thereof. After the offerings, the Stock Option Plan
will be administered by a committee consisting of not less than two
"disinterested" directors within the meaning of Rule 16b-3 under the Exchange
Act. In the event that the outstanding shares of Common Stock are affected by
reason of a merger, consolidation, reorganization, recapitalization, combination
of shares, stock split or dividend, the number and kind of shares to which any
option relates and the exercise price of any option shall be appropriately
adjusted as determined solely by the Board of Directors of the Company or the
Nominating and Compensation Committee. In the event of a liquidation or
dissolution of the Company, an optionee generally shall have the right,
immediately prior to such dissolution or liquidation, to exercise any
outstanding options in whole or in part.
119
<PAGE>
OPTION GRANTS FOR 1995
The following table provides information relating to option grants made
pursuant to the Stock Option Plan to the individuals named in the Summary
Compensation Table for services rendered in 1995.
<TABLE>
<CAPTION>
Potential realizable value
at assumed rates of stock
price appreciation for
Individual grants option term(3)
---------------------------------------------------------------------------------- --------------------------
Percent of
Number of securities Book value per
securities underlying total share of Ocwen
underlying options options granted Exercise common stock at Expiration
Name granted (#)(1)(2) to employees(2) price($/sh) December 31, 1995 date 0%($) 5%($) 10%($)
- ------------------ ----------------- ------------ ----------- ----------------- ----------- ----- ------- -------
<S> <C> <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 4,450 168,655 420,080
Rory A. Brown 44,500 14.6 5.76 5.86 2006 4,450 168,655 420,480
Christine A. Reich 44,500 14.6 5.76 5.86 2006 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
Company employees 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.
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<PAGE>
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
December 31, 1995 December 31, 1995(1)
Number of --------------------------- ---------------------------
shares acquired
Name on exercise Value 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.
BOARD OF DIRECTORS COMPENSATION
Directors of the Company, other than employees and stockholders of the
Company, receive a monthly fee of $1,000. In addition, the Chairman of the
Audit Committee of the Board of Directors is paid an annual retainer of $1,000.
Directors also are reimbursed for their travel and other reasonable expenses
incurred in performing their duties as directors of the Company.
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
The Company's policy since 1988 has been not to make loans to directors,
executive officers, members of their immediate families or affiliated entities.
As of March 31, 1996, the only loan outstanding to any such person or entity was
a residential mortgage loan with an interest rate of 8.5% which was made by the
Company (through the Bank) in 1987 to Howard H. Simon, a director of the
Company. The principal balance of this loan amounted to $128,567 at March 31,
1996, and the highest principal balance of this loan during 1996 was $132,427.
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<PAGE>
From time to time the Company raises funds by privately issuing short-term
notes to its stockholders. At March 31, 1996, the Company had $7.6 million of
such short-term notes outstanding, including $1.0 million, $750,000, $250,000
and $100,000 which were held by William C. Erbey, Barry N. Wish, John R. Erbey
and Christine Reich (or their affiliates), respectively. All of such short-term
notes bear interest at 10.5% per annum and matured on May 1, 1996 (when an
aggregate of $7.4 million of such notes were reissued on substantially the same
terms to certain of the holders thereof).
BENEFICIAL OWNERSHIP OF COMMON STOCK
At March 31, 1996, the Company had 23,812,270 shares of Common Stock
outstanding which were held by 71 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 March 31, 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 as Shares Beneficially Owned After
of March 31, 1996 the Offering of Common Stock
---------------------------- -------------------------------
Name of Beneficial Owner Amount(1) Percent(1) Amount(1) Percent(1)
- -------------------------------- --------------- ----------- --------------- -----------
<S> <C> <C> <C> <C>
Harold D. Price 2,048,400(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) 17,812,770(7) 66.9 16,852,770 63.3
</TABLE>
122
<PAGE>
- -----------------------------
(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 March 31, 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 March 31, 1996.
(5) Includes options to acquire 747,880 shares of Common Stock which were
exercisable at or within 60 days of March 31, 1996.
(6) Consists of options to acquire shares of Common Stock which were
exercisable at or within 60 days of March 31, 1996.
(7) Includes options to acquire 2,821,790 at or within 60 days of March 31,
1996.
123
<PAGE>
DESCRIPTION OF NOTES
GENERAL
The Notes will be issued pursuant to an Indenture (the "Indenture") between
the Company and __________, 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 _____ __, 1996, 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 "Regulation."
124
<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.
125
<PAGE>
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 or an Event of Default has occurred
and is continuing with respect to the Notes, the Company will issue definitive
Notes in exchange for the Notes represented by the Global Notes. In addition,
the Company may at any time and in its sole discretion determine to discontinue
use of the Global Notes and, in such event, will issue definitive securities in
exchange for the securities represented by the Global Notes. Notes so issued
will be issued in registered form only, in denominations of $1,000 and integral
multiples thereof, without coupons.
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Notes will be made in immediately available funds. All
payments of principal and interest on the Notes will be made by the Company in
immediately available funds. The Notes will trade in the Depositary's SDFS
System until maturity, and, therefore, the Depositary will require secondary
trading activity in the Notes to be settled in immediately available funds.
OPTIONAL REDEMPTION
The Notes may not be redeemed prior to _____ ___, 2001 except as described
below. On or after such date, the Notes may be redeemed, in whole or in part,
at the following redemption prices (expressed as a percentage of the principal
amount) plus accrued and unpaid interest to (but excluding) the redemption date,
if redeemed during the 12-month period beginning _____ ___, of the years
indicated below:
126
<PAGE>
Redemption
Year Price
------ ------------
2001 %
2002
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 the third anniversary of the issuance of the Notes, 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
127
<PAGE>
to, or otherwise permit to exist, any Pari Passu Indebtedness or Junior
Indebtedness (other than Acquired Indebtedness) unless the Stated Maturity of
principal (or any required repurchase, redemption, defeasance or sinking fund
payments) of such Pari Passu Indebtedness or Junior Indebtedness is after the
final Stated Maturity of principal of the Notes.
The Company will not create, incur, assume, guarantee or otherwise become
responsible for the payment of any Funded Indebtedness (including any Funded
Indebtedness assumed in connection with the acquisition of assets from
another Person) unless at the time of such event either (i) the principal
amount of total Funded Indebtedness of the Company (which includes the Notes)
would not exceed 100% of the Company's Consolidated Tangible Net Worth, or
(ii) if the Notes are then rated by a nationally recognized statistical
rating organization in an investment grade category, after the incurrence,
assumption, guarantee or creation by the Company of the additional Funded
Indebtedness, (A) the Notes continue to retain such investment grade rating,
and (B) the Company's pro forma ratio of earnings to fixed charges for the
four preceding fiscal quarters, excluding interest on deposits but after
giving effect to such additional Funded Indebtedness, is greater than 300%.
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 Bank's supplementary capital does not exceed 65% of the Bank's core
capital (in each case as calculated for purposes of 12 C.F.R. Part 567 or any
successor regulation).
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 DISPOSITIONS 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 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
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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
(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
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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 which are secured by assets of such Subsidiary;
(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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(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 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), the Company
delivers to the Trustee a written opinion of an Independent Appraiser to the
effect that the transactions 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.
Section 1468(b) and any rules and regulations of the OTS thereunder, or (v)
any transaction or series of transactions in which the total amount involved
does not exceed $250,000.
LIMITATIONS ON LIENS AND GUARANTEES. (a) 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)
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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.
(b) The Company will not permit any Subsidiary of the Company, directly
or indirectly, to guarantee or assume, or subject any of its assets to a Lien
to secure, any Pari Passu Indebtedness or Junior Indebtedness UNLESS (i) such
Subsidiary simultaneously executes and delivers a supplemental indenture to
the Indenture providing for a guarantee of, or pledge of assets to secure,
the Notes by such Subsidiary on terms at least as favorable to the Holders of
the Notes as such guarantee or security interest in such assets is to the
holders of such Pari Passu Indebtedness or Junior Indebtedness, except that
in the event of a guarantee or security interest in such assets with respect
to (x) Pari Passu Indebtedness, the guarantee or security interest in such
assets under the supplemental indenture shall be made PARI PASSU to the
guarantee or security interest in such assets with respect to such Pari Passu
Indebtedness or (y) Junior Indebtedness, any such guarantee or security
interest in such assets with respect to such Junior Indebtedness shall be
subordinated to such Subsidiary's guarantee or security interest in such
assets with respect to the Notes to the same extent as such Junior
Indebtedness is subordinated to the Notes and (ii) such Subsidiary waives and
will not in any manner whatsoever claim, or take the benefit or advantage of,
any rights of reimbursement, indemnity or subrogation or any other rights
against the Company or any other Subsidiary of the Company as a result of any
payment by such Subsidiary under its guarantees.
OFFER TO PURCHASE UPON A CHANGE OF CONTROL. If a Change of Control Event
shall occur at any time, then each Holder will have the right to require the
Company to repurchase such Holder's Notes (pursuant to an offer made to all
Holders), in whole or in part, in integral multiples of $1,000 at a purchase
price in cash equal to 101% of the principal amount of such Notes, plus accrued
and unpaid interest, if any, to the date of repurchase.
PROVISION OF REPORTS. Whether or not required by the rules and regulations
of the Commission, so long as any Notes are outstanding, the Company will
furnish to Holders of Notes, upon the written or oral request of such Holder,
(i) all quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the Company
were 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 filed such reports.
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.
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ADDITIONAL COVENANTS. The Indenture will also contain covenants with
respect to, among other things, the following matters: (i) payment of
principal, premium and interest; (ii) maintenance of corporate existence; (iii)
payment of taxes and other claims; (iv) maintenance of properties; and
(v) maintenance of insurance.
MERGER AND CONSOLIDATION
The Indenture will provide that the Company may not, in a single
transaction or a series of transactions, consolidate with or merge into any
other Person or sell, assign, convey, transfer, lease or otherwise dispose of
all or substantially all of its assets to any Person or group of affiliated
Persons unless (a) either (i) the Company shall be the continuing entity, or
(ii) the Person (if other than the Company) formed by such consolidation or into
which the Company is merged or the Person that acquires by sale, assignment,
conveyance, transfer, lease or other disposition of all or substantially all of
the assets of the Company (the "Surviving Entity") is organized under the laws
of the United States or a state thereof or the District of Columbia and such
Surviving Entity assumes by supplemental indenture, executed and delivered to
the Trustee in form reasonably satisfactory to the Trustee, all obligations of
the Company on the Notes and under the Indenture, (b) immediately after giving
effect to such transaction or series of transactions, no Default or Event of
Default shall have occurred and be continuing, (c) the Company or the Surviving
Entity, as applicable, could incur at least $1.00 of additional Funded
Indebtedness without violating the covenant described above under "Limitation on
Indebtedness" and (d) the Company or the Surviving Entity, as applicable, shall
have delivered, or caused to be delivered, to the Trustee, in form and substance
reasonably satisfactory to the Trustee, an officers' certificate and an opinion
of counsel, each to the effect that such consolidation, merger, transfer, sale,
assignment, conveyance, transfer, lease or other disposition and the
supplemental indenture in respect thereto comply with the Indenture and that all
conditions precedent provided for relating to such transaction have been
complied with.
MODIFICATION OF THE INDENTURE; WAIVER OF COVENANTS
Modifications and amendments of the Indenture may be made by the Company
and the Trustee with the consent of the Holders of greater than 50% in aggregate
principal amount of the Notes then outstanding; PROVIDED, HOWEVER, that no such
modification or amendment may, without the consent of the Holder of each
outstanding Note affected thereby, (i) change the Stated Maturity of the
principal of, or any installment of interest on, any Note or reduce the
principal amount thereof, premium, if any, or the rate of interest thereon, or
any premium payable upon the redemption thereof, 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
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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;
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(ii) failure by the Company to pay the principal on any Note when due
and payable at maturity or upon redemption, acceleration or otherwise;
(iii) failure by the Company to comply with any other agreement or
covenant contained in the Indenture if such failure continues for a period
of 30 days after notice to the Company by the Trustee or to the Company and
the Trustee by the holders of at least 25% in principal amount of the Notes
then outstanding;
(iv) indebtedness of the Company or any subsidiary of the Company is
not paid within any applicable grace period after final maturity or in the
event that final maturity is accelerated because of a default and, in
either case, the total amount of such indebtedness unpaid or accelerated is
equal to or greater than 5% of the Company's Consolidated Tangible Net
Worth;
(v) failure by the Bank to comply with any of its Regulatory Capital
Requirements; provided, that an Event of Default under this clause (v)
shall not be deemed to have occurred (a) during the 60 day period following
the first day on which the Bank fails to comply with any of its Regulatory
Capital Requirements, if within such 60 day period the Bank files a capital
plan with the OTS, (b) during the 90 day period following the initial
submission of a capital plan to the OTS by the Bank (or, if the OTS
notifies the Bank in writing that it needs a longer period of time to
determine whether to approve such capital plan, such longer period as is so
specified by the OTS), unless prior to such date the OTS shall have
notified the Bank of its determination not to approve such capital plan, or
(c) during the period that the Bank is operating in material compliance
with a capital plan approved by the OTS; PROVIDED, FURTHER, that if the
Bank meets the minimum amount of capital required to meet each of the
industry-wide regulatory capital requirements pursuant to 12 U.S.C. Section
1464(t) and 12 C.F.R. Section 567 (and any amendment to either thereof) or
any successor law or regulation, notwithstanding the Bank's failure to meet
an individual minimum capital requirement pursuant to 12 U.S.C. Section
1464(s) and 12.C.F.R. Section 567.3 (and any amendment to either thereof)
or any successor law or regulation, no 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 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.
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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.
DEFEASANCE OR COVENANT DEFEASANCE OF THE INDENTURE
The Company may, at its option and at any time, elect to have its
obligation and the obligation of any of its Subsidiaries with respect to the
outstanding Notes discharged ("defeasance"). Such defeasance means that the
Company shall be deemed to have paid and discharged the entire indebtedness
represented by the outstanding Notes, except for the rights of Holders of
outstanding Notes to receive payments in respect of the principal of, premium,
if any, and interest on such Notes when such payments are due and certain
provisions of the Indenture with respect to the registration and transfer of the
Notes. In addition, the Company may, at its option and at any time, elect to
have its obligations and the obligations of any of its Subsidiaries with respect
to certain covenants described in the Indenture released ("covenant defeasance")
and thereafter any failure to comply with such covenants shall not constitute a
Default or an Event of Default. In the event of a covenant defeasance, certain
other events (not including prepayment, bankruptcy, receivership or insolvency
events) described under "Events of Default" will no longer constitute a Default
or an Event of Default with respect to the Notes.
In order to exercise either defeasance or covenant defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the Holders of Notes, cash in United States Dollars, U.S. Government Obligations
(as defined in the Indenture), or a combination thereof (collectively, the
"trust fund"), in such amounts as will be sufficient (without considering any
reinvestment of amounts earned on such U.S. Government Obligations), in the
opinion of a nationally recognized firm of independent public accountants, to
pay and discharge interest on the outstanding Notes as it becomes due and to pay
and discharge the principal of and premium, if any, on the outstanding Notes at
redemption or maturity; (ii) in the case of defeasance, the Company must deliver
to the Trustee an opinion of independent counsel in the United States stating
that (A) the Company has received from, or there has been published by, the
Internal Revenue Service a ruling or (B) since the date of the Indenture, there
has been a change in the applicable federal income tax law, in either case to
the effect that, and based thereon such opinion of counsel in the United States
shall confirm that, the Holders of the outstanding Notes will not recognize
income, gain or loss 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
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manner and at the same times as would have been the case if such defeasance had
not occurred; (iii) in the case of covenant defeasance, the Company must deliver
to the Trustee an opinion of independent counsel in the United States to the
effect that the Holders of the outstanding Notes will not recognize income, gain
or loss for federal income tax purposes as a result of such covenant defeasance
and will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such covenant
defeasance had not occurred; (iv) no Default or Event of Default may have
occurred and be continuing on the date of such deposit and after giving effect
thereto; (v) such defeasance or covenant defeasance may not cause the Trustee
for the Notes to have a conflicting interest with respect to any securities of
the Company; (vi) such defeasance or covenant defeasance may not result in a
breach or violation of, or constitute a Default under, the Indenture or any
material agreement or instrument to which the Company is a party or by which it
is bound; (vii) the Company must deliver to the Trustee an opinion of
independent counsel in the United States to the effect that the trust fund will
not be subject to the effect of any applicable bankruptcy, insolvency,
receivership, conservatorship, reorganization or similar laws affecting
creditors' rights generally (including, without limitation, fraudulent and
avoidable transfers); (viii) the Company must deliver to the Trustee an
officers' certificate stating that the deposit was not made by the Company with
the intent of preferring the Holders of the Notes over the other creditors of
the Company or with the intent of defeating, hindering, delaying or defrauding
creditors of the Company; (ix) no event or condition may exist that would
prevent the Company from making payments of the principal of, premium, if any,
and interest on the Notes, on the date of such deposit; and (x) the Company must
deliver to the Trustee an officers' certificate and an opinion of independent
counsel in the United States, each stating that all conditions precedent
relating to either the defeasance or the covenant defeasance, as the case may
be, have been complied with.
SATISFACTION AND DISCHARGE
The Indenture will cease to be of further effect (except as to surviving
rights of registration of transfer or exchange of the Notes, as expressly
provided for in the Indenture) as to all outstanding Notes when (i) either (a)
all the Notes theretofore authenticated and delivered (except lost, stolen or
destroyed Notes which have been replaced or paid) have been delivered to the
Trustee for cancellation or (b) all Notes not theretofore delivered to the
Trustee for cancellation have become due and payable, or will become due and
payable or are to be called for redemption within one year, and the Company has
irrevocably deposited or caused to be deposited with the Trustee funds in an
amount sufficient to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal of, and
premium, if any, and interest on the Notes to the date of deposit together with
irrevocable instructions to the Trustee from the Company directing the Trustee
to apply such funds to the payment thereof at maturity or redemption, as the
case may be; (ii) the Company has paid all other sums payable under the
Indenture by the Company; and (iii) the Company has delivered to the Trustee an
officers' certificate and an
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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
_________, 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 _________.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a person (i) existing at the
time such Person becomes a Subsidiary of 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 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
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into corporate stock, partnership interests or other capital stock), warrants or
options exchangeable for or convertible into such corporate stock, partnership
interests or other capital stock.
"Change of Control Event" means an event or series of events by which
(a) any "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act), other than the Existing Principal
Stockholders, is or becomes after the date of issuance of the Notes the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act as in effect on the date of the Indenture), of more than 40% of the
total voting power of all Voting Stock of the Company then outstanding;
(b) (1) another corporation merges into the Company or the Company
consolidates with or merges into any other corporation, or
(2) the Company conveys, transfers or leases all or
substantially all its assets to any person or group, in one transaction or
a series of transactions other than any conveyance, transfer or lease
between the Company and a Wholly-Owned Subsidiary of the Company,
in each case, with the effect that a person or group, other than the Existing
Principal Stockholders, is or becomes the beneficial owner of more than 40% of
the total voting power of all Voting Stock of the surviving or transferee
corporation of such transaction or series of transactions;
(c) during any period of two consecutive years, individuals who at
the beginning of such period constituted the Company's Board of Directors,
or whose nomination for election by the Company's shareholders was approved
by a vote of a majority of the Directors then still in office who were
either directors at the beginning of such period or whose election or
nomination for election was previously so approved, cease for any reason to
constitute a majority of the Directors then in office; or
(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.
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"Consolidated Net Income (Loss)" of any Person means, for any period, the
consolidated net income (or loss) of such Person and its consolidated
Subsidiaries for such period as determined in accordance with GAAP, adjusted, to
the extent included in calculating such net income (loss), by excluding, without
duplication, (i) all extraordinary gains and losses (other than those relating
to the use of net operating losses of such Person carried forward), less all
fees and expenses relating thereto, net of taxes, (ii) the portion of net income
(or loss) of any other Person (other than any of such Person's consolidated
Subsidiaries) in which such Person or any of its Subsidiaries has an ownership
interest, except to the extent of the amount of dividends or other distributions
actually paid to such Person or its consolidated Subsidiaries in cash by such
other Person during such period, (iii) net income (or loss) of any Person
combined with such Person or any of its Subsidiaries on a "pooling of interests"
basis attributable to any period prior to the date of combination, (iv) any gain
or loss, net of taxes, realized upon the termination of any employee pension
benefit plan or (v) the net income of any consolidated Subsidiary of such Person
to the extent that the declaration or payment of dividends or similar
distributions by that Subsidiary of that income is not at the time permitted,
directly or indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulations applicable to that Subsidiary or its shareholders; PROVIDED that,
upon the termination or expiration of such dividend or distribution
restrictions, the portion of net income (or loss) of such consolidated
Subsidiary allocable to such Person and previously excluded shall be added to
the Consolidated Net Income (Loss) of such Person to the extent of the amount of
dividends or other distributions available to be paid to such Person in cash by
such Subsidiary.
"Consolidated Tangible Net Worth" of any Person and its Subsidiaries mean
as of the date of determination all amounts that would be included under
stockholders' equity on a consolidated balance sheet of such Person and its
Subsidiaries determined in accordance with GAAP less an amount equal to the
consolidated intangible assets (other than capitalized mortgage servicing
rights) of such Person and its Subsidiaries determined in accordance with GAAP.
"Control" when used with respect to any specified Person means the power to
direct the management and policies of such Person directly or indirectly,
whether through ownership of voting securities (or pledge of voting securities
if the pledgee thereof may on the date of determination exercise or control the
exercise of the voting rights of the owner of such voting securities), by
contract or otherwise; and the terms "to Control, " "Controlling" and
"Controlled" have meanings correlative to the foregoing.
"Default" means an event or condition the occurrence of which would, with
the lapse of time or the giving of notice or both, become an Event of Default.
"Disqualified Capital Stock" means any Capital Stock which, by its terms
(or by the terms of any security into which it is convertible or exchangeable),
or upon the happening of any event, matures or is mandatorily redeemable,
pursuant to a sinking fund obligation
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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.
"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.
"Funded Indebtedness" with respect to any Person as of the date of
determination includes any of the following obligations of such Person with a
maturity in excess of one year: (i) any obligation, contingent or otherwise, for
borrowed money or for the deferred purchase price of property or services; (ii)
all obligations (including the Notes, in the case of the Company) evidenced by
bonds, notes, debentures or other similar instruments, (iii) all Indebtedness
created or arising under any conditional sale or other title retention agreement
with respect to property acquired, but excluding trade payables and other
accrued liabilities arising in the ordinary course of business if and to the
extent such indebtedness would appear as a liability on a balance sheet of such
Person prepared in accordance with generally accepted accounting principles,
(iv) all Capital Lease Obligations; (v) all Indebtedness referred to above
secured by (or for which the holder of such debt has an existing right,
contingent or otherwise, to be secured by) any Lien upon or on property
(including, without limitation, accounts and contract rights), even though such
Person has not assumed or become liable for the payment of such debt, and (vi)
written or unwritten guarantees of any of the foregoing.
"GAAP" means generally accepted accounting principles, consistently
applied.
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"Guaranteed Indebtedness" of any Person means, without duplication, all
Indebtedness of any other Person guaranteed directly or indirectly in any manner
by such Person, or in effect guaranteed directly or indirectly by such person
through an agreement (i) to pay or purchase such Indebtedness or to advance or
supply funds for the payment or purchase of such Indebtedness, (ii) to purchase,
sell or lease (as lessee or lessor) property, or to purchase or sell services,
primarily for the purpose of enabling the debtor to make payment of such
Indebtedness or to assure the holder of such Indebtedness against loss, (iii) to
supply funds to, or in any other manner invest in, the debtor (including any
agreement to pay for property or services without requiring that such property
be received or such services be rendered), (iv) to maintain working capital or
equity capital of the debtor, or otherwise to maintain the net worth, solvency
or other financial condition of the debtor, or (v) otherwise to assure a
creditor with respect to Indebtedness against loss; provided that the term
"guarantee" shall not include endorsements for collection of deposit, in either
case in the ordinary course of business.
"Holders" means the registered holders of the Notes.
"Indebtedness" means, with respect to any Person, without duplication, (i)
all indebtedness of such Person for borrowed money or for the deferred purchase
price of property or services, excluding any trade payables and other accrued
current liabilities arising in the ordinary course of business, but including,
without limitation, all obligations, contingent or otherwise, of such Person in
connection with any letters of credit issued under letter of credit facilities,
and in connection with any agreement by such Person to purchase, redeem,
exchange, convert or otherwise acquire for value any Capital Stock of such
Person now or hereafter outstanding, (ii) all obligations of such Person
evidenced by bonds, notes, debentures or other similar instruments, (iii) all
indebtedness of such Person created or arising under any conditional sale or
other title retention agreement with respect to property acquired by such Person
(even if the rights and remedies of the seller or lender under such agreement in
the event of default are limited to repossession or sale of such property), but
excluding trade payables arising in the ordinary course of business, (iv) all
obligations under interest rate agreements of such Person, (v) all Capital Lease
Obligations of such Person, (vi) all Indebtedness referred to in clauses (i)
through (v) above of other Persons and all dividends payable by other Persons,
the payment of which is secured by (or for which the holder of such Indebtedness
has an existing right, contingent or otherwise, to be secured by) any Lien, upon
or with respect to property (including, without limitation, accounts and
contract rights) owned by such Person, even though such Person has not assumed
or become liable for the payment of such Indebtedness (the amount of such
obligations 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 Redeemable 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 Redeemable Capital Stock
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which does not have a fixed repurchase price shall be calculated in accordance
with the terms of such Redeemable Capital Stock as if such Redeemable 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 Redeemable 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 Redeemable Capital
Stock, and (y) Indebtedness is deemed to be incurred pursuant to a revolving
credit facility each time an advance is made thereunder.
"Junior Indebtedness" means any Indebtedness of the Company subordinated in
right of payment of either principal, premium (if any) or interest thereon to
the Notes.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
security interest, hypothecation or other encumbrance upon or with respect to
any property of any kind, real or personal, movable or immovable, now owned or
hereafter acquired.
"Liquid Assets" shall include: (i) cash; (ii) any of the following
instruments that have a remaining term to maturity not in excess of 90 days from
the determination date: (a) repurchase agreements on obligations of, or are
guaranteed as to timely receipt of principal and interest by, the United States
or any agency or instrumentality thereof when such obligations are backed by the
full faith and credit of the United States provided that the party agreeing to
repurchase such obligations is a primary dealer in U.S. government securities,
(b) federal funds and deposit accounts, including but not limited to
certificates of deposit, time deposits and bankers' acceptances of any U.S.
depository institution or trust company incorporated under the laws of the
United States or any state, provided that the debt of such depository
institution or trust company at the date of acquisition thereof has been rated
by Standard & Poor's Corporation in the highest short-term rating category or
has an equivalent rating from another nationally recognized rating agency, or
(c) commercial paper of any corporation incorporated under the laws of the
United States or any state thereof that on the date of acquisition is rated
investment grade by Standard & Poor's Corporation or has an equivalent rating
from another nationally recognized rating agency; (iii) any debt instrument
which is an obligation of, or is guaranteed as to the receipt of principal and
interest by the United States, its agencies or any U.S. government sponsored
enterprise, or (iv) any mortgage-backed or mortgage-related security issued by
the United States, its agencies, or any U.S. government sponsored enterprise
which the payment of principal and interest from the mortgages underlying such
securities will be passed through to the holder thereof and which such security
has a remaining weighted average maturity of 15 years or less. Notwithstanding
the foregoing, Liquid Assets shall not include any debt instruments, securities
or collateralized mortgage obligations (real estate mortgage investment
conduits) that would be classified as a "High-Risk Mortgage Security" pursuant
to the policy statement adopted by the Federal Financial Institutions
Examination Counsel on February 10, 1992, as reflected in Volume I of the
Federal Reserve Report Service, Part 3-1562.
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"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) 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 (a) shall be in a principal amount that does not
exceed an amount equal to the sum of (i) 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, (ii) 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
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reasonably determined by the Company as necessary to accomplish such refinancing
by means of a tender offer, privately negotiated repurchase or otherwise and
(iii) 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 (a), 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; (b) (x) if such refinanced Indebtedness has an Average
Life to Stated Maturity shorter than that of the Notes or a final Stated
Maturity earlier than the final Stated Maturity of the Notes, such new
Indebtedness shall have an Average Life to Stated Maturity no shorter than the
Average Life to Stated Maturity of such refinanced Indebtedness and a final
Stated Maturity no earlier than the final Stated Maturity of such refinanced
Indebtedness or (y) 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 on or after the final Stated Maturity of principal of
the Notes; and (c) is (x) made expressly subordinated to or PARI PASSU with the
Notes to substantially the same extent as the Indebtedness being refinanced or
(y) 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.
"Redeemable Capital Stock" means any Capital Stock that, either by its
terms or by the term of any security into which it is convertible or
exchangeable or otherwise, is, or upon the happening of an event or passage of
time would be, required to be redeemed prior to any Stated Maturity of the
principal of the Notes or is redeemable at the option of the holder thereof at
any time prior to any such Stated Maturity of principal, or is convertible into
or exchangeable for debt securities at any time prior to any such Stated
Maturity of principal at the option of the holder thereof.
"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
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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
Company's Capital Stock (other than dividends or distributions in Qualified
Capital Stock of the Company and dividends or distributions on Preferred Stock
of the Company);
(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 Person that would not be an Affiliate
of the Company but for the Company's direct or indirect ownership of 20% or
more of the Voting Stock of such Person); or
(c) prior to any Stated Maturity of principal or scheduled redemption
or defeasance of, or any scheduled sinking fund payment on, any Junior
Indebtedness or Pari Passu Indebtedness, the making of any principal payments
on, or repurchase, redemption, defeasance, retirement or other acquisition for
value, directly or indirectly, such Junior Indebtedness or Pari Passu
Indebtedness.
"Securitization Entity" means any pooling arrangement or entity formed or
originated for the purpose of holding, and/or issuing securities representing
interests in, one or more pools of mortgages, leases, credit card receivables,
home equity loan receivables, automobile loans, leases or installment sales
contracts, other consumer receivables or other financial assets of the Company
or any Subsidiary, and shall include, without limitation, any partnership,
limited liability company, liquidating trust, grantor trust, owner trust or real
estate mortgage investment conduit.
"Significant Subsidiary" means, with respect to any Person, any
consolidated Subsidiary of such Person for which the net income of such
Subsidiary was more than 25% of the Consolidated Net Income of such Person in
both of the two prior fiscal years.
"Stated Maturity" when used with respect to any Indebtedness (including,
without limitation, the Notes) means the dates specified in the instrument
governing such Indebtedness as the fixed dates on which any principal amount of
such Indebtedness is due and payable (including, without limitation, by reason
of any required redemption, purchase, defeasance or sinking fund payment) and,
when used with respect to any installment of interest on Indebtedness, means the
date on which such installment is due and payable.
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the voting power
of Voting Stock thereof is at
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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.
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 March
31, 1996, there were 23,812,270 shares of Common Stock outstanding and no shares
of Preferred Stock were outstanding. See "Summary."
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.
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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 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 ______________.
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. At
an annual meeting of stockholders to be held prior to the consummation of the
sale of Common Stock offered hereby, the stockholders of the Company will
consider a proposal to amend the Stockholders Agreement 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.
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SHARES AVAILABLE FOR FUTURE SALE
As of March 31, 1996, there were 23,812,270 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
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 6,821,290 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 (238,120 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 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 the Company and Messrs. Erbey and Wish)
after the date of this Prospectus without the prior written consent of Friedman,
Billings, Ramsey & Co., Inc. (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). After such restricted periods, there will be no
restrictions on the sale of these shares other than those imposed by Rule 144.
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Under the Company's Stock Option Plan, 9,317,380 shares may be issued upon
exercise of outstanding options or future grants of stock options. See
"Management -Stock Option 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. Shares of Common Stock issued under the Stock Option
Plan after the effective date of such Registration Statement, other than shares
held by affiliates of the Company, will be eligible for resale in the public
market without restriction.
SELLING STOCKHOLDERS
The following table sets forth information regarding security ownership of
the Selling Stockholders:
<TABLE>
<CAPTION>
Shares of Common Stock Shares of Common Stock
Benefically to be Beneficially
Owned as of Number of Owned After
March 31, 1996 Shares of Offering
Name of ------------------------------ Common ----------------------
Selling Stockholder Number Percent Stock Offered Number Percent
- ------------------------ ------------- -------------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Affiliates of the Company(1)
Barry N. Wish 6,011,020 25.1% 960,000 5,051,020 21.1%
Non-Affiliates of the Company(1)
Harold D. Price 2,048,480 8.6 327,760 1,720,720 7.2
</TABLE>
[to be completed]
- ----------------------------
(1) Except for Mr. Wish, who currently is Chairman of the Company and is 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.
UNDERWRITING
NOTE UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement
with respect to the Notes Offering (the "Note Underwriting Agreement") among the
Company, and each of the underwriters named below (collectively, the "Note
Underwriters"), the Company has agreed to sell to each of the Note Underwriters,
and each of the Note
150
<PAGE>
Underwriters, for whom Friedman, Billings, Ramsey & Co. is acting as
representative, have severally agreed to purchase, the respective principal
amount of the Notes set forth opposite their names below.
Principal
Note Underwriters Amount
----------------- ------
Friedman, Billings, Ramsey & Co., Inc. .......................... $
------------
Total....................................................... $100,000,000
------------
------------
The Note Underwriting Agreement provides that, subject to the terms and
conditions set forth therein, the Note Underwriters are obligated to purchase
all of the Notes if any are purchased.
The Note Underwriters propose 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 Underwriters 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 Underwriters and is subject to prior sale and to
withdrawal, cancellation or modification of the offer without notice. The Note
Underwriters reserve 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 Underwriters.
The Company has agreed to indemnify the Note Underwriters against certain
liabilities, including civil liabilities under the federal securities laws, or
to contribute to payments that the Note Underwriters may be required to make in
respect thereof.
COMMON STOCK 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"), the Selling
Stockholders have agreed to sell to each
151
<PAGE>
of the Common Stock Underwriters, and each of the Common Stock Underwriters, for
whom Friedman, Billings, Ramsey & Co., Inc. is acting as representative,
severally has agreed to purchase from the Selling Stockholders, the aggregate
number of shares of Common Stock set forth opposite its name below.
Number
Common Stock Underwriters Shares
------------------------- ------
Friedman, Billings, Ramsey & Co., Inc. ....................
Total................................................. ----------
2,000,000
----------
----------
The Common Stock Underwriting Agreement provides that, subject to the terms
and conditions set forth therein, the Share 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.
152
<PAGE>
The Company and the Selling Stockholders have agreed to indemnify the
several Common Stock Underwriters against certain liabilities, including civil
liabilities under 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 has been determined by negotiations among the Company, the Selling
Stockholders and the Underwriters. Among the factors considered in such
negotiations were the history of, and prospects for, the Company and the
industry in which it competes, an assessment of management, the Company's past
and present operations, its past and present earnings and the trend of such
earnings, the prospects for future earnings of the Company, the general
condition of the securities markets at the time of the Common Stock Offering and
the market prices of publicly-traded common stocks of comparable companies in
recent periods.
LEGAL MATTERS
The legality of the Notes and the shares of Common Stock offered in the
Notes Offering and the Common Stock Offering, respectively, 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 and the Common Stock
Offering will be passed upon for the 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.
153
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
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-6
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 1995 F-7
Notes to Consolidated Financial Statements F-9
INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED):
Consoidated Statements of Financial Condition at March 31, 1996
and December 31, 1995 F-56
Consolidated Statements of Operations for the three months ended
March 31, 1996 and 1995 F-57
Consolidated Statements of Changes in Stockholders' Equity for the
three months ended March 31, 1996 F-58
Consolidated Statements of Cash Flows for the three months ended
March 31, 1996 and 1995 F-59
Notes to Interim Consolidated Financial Statements F-61
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 disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Fort Lauderdale, Florida
February 16, 1996
F-2
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
December 31, 1995 1994
- -------------------------------------------------- ---------- ----------
<S> <C> <C>
Assets
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 358,724 187,717
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 - 114,650
Loan portfolio, net 295,605 57,045
Discounted loan portfolio, net 669,771 529,460
Investments in low income housing tax credit interests 81,362 49,442
Principal, interest and dividends receivable 12,636 6,152
Real estate owned, net 166,556 96,667
Premises and equipment, net 25,359 38,309
Income taxes receivable 1,005 -
Other assets 36,466 32,862
----------- ----------
$ 1,972,571 $ 1,268,358
----------- ----------
----------- ----------
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 126,848 28,688
Income taxes payable - 10,025
Deferred income taxes payable 4,040 2,138
Accrued expenses, payables and other liabilities 45,330 45,457
----------- ----------
Total liabilities 1,833,024 1,114,975
----------- ----------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; 20,000,000 shares
authorized; 2,381,227 and 3,219,471 shares
issued and outstanding at December 31, 1995
and 1994, respectively 24 32
Additional paid-in capital 10,663 13,942
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
---------- ----------
$ 1,972,571 $ 1,268,358
---------- ----------
---------- ----------
</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 5,713 12,674 12,941
Loans 15,430 5,924 6,232
Discounted loans 75,998 52,560 31,036
Investments in low income housing tax credit interests 8,899 6,278 1,260
Investment securities and other 2,633 4,098 3,504
--------- --------- ---------
146,174 137,736 80,936
--------- --------- ---------
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 10,172 4,077 4,093
--------- --------- ---------
85,244 63,466 35,306
--------- --------- ---------
Net interest income before provision for loan losses 60,930 74,270 45,630
Provision for loan losses 1,262 - -
--------- --------- ---------
Net interest income after provision for loan losses 59,668 74,270 45,630
--------- --------- ---------
Non-interest income:
Servicing fees and other charges 2,870 4,786 3,800
Gains on sales of interest earning assets, net 7,096 5,727 8,386
Fees on financing transactions - - 15,340
Gains on sales of branches 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
--------- --------- ---------
31,321 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 45,416 86,987 39,643
Income tax expense 12,277 35,134 12,338
--------- --------- ---------
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
--------- --------- ---------
--------- --------- ---------
</TABLE>
(continued on next page)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
For the years ended December 31, 1995 1994 1993
- ----------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Earnings per share:
Income from continuing operations $ 11.93 $ 15.21 $ 7.96
Discontinued operations, net of tax benefit (2.76) (1.32) (0.66)
Extraordinary gain on extinguishment of debt,
net of taxes - - 0.45
Cumulative effect of a change in accounting
principle - - (0.39)
--------- --------- ---------
Net income $ 9.17 $ 13.89 $ 7.36
--------- --------- ---------
--------- --------- ---------
Weighted average common shares outstanding 2,776,908 3,408,416 3,428,585
--------- --------- ---------
--------- --------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
For the years ended December 31, 1993, 1994 and 1995
Unrealized
gain (loss)
Common Stock on securities
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 3,481,092 $ 35 $ 21,455 $ 72,906 $ - $ 94,396
Net income - - - 25,232 - 25,232
Exercise of common stock options 25,000 - 450 - - 450
Repurchase of common stock (286,588) (3) (7,970) - - (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 3,219,504 32 14,016 94,891 2,892 111,831
Net income - - - 47,339 - 47,339
Repurchase of common stock options - - (73) - - (73)
Repurchase of common stock (33) - (1) - - (1)
Change in unrealized loss on securities
available for sale, net of tax benefit - - - - (5,713) (5,713)
----------- ---------- ---------- ---------- -------------- ----------
Balances at December 31, 1994 3,219,471 32 13,942 142,230 (2,821) 153,383
Net income - - - 25,467 - 25,467
Repurchase of common stock options - - (132) - - (132)
Exercise of common stock options 43,262 1 1,419 - - 1,420
Repurchase of common stock (881,506) (9) (4,566) (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 2,381,227 $ 24 $ 10,663 $ 130,275 $ (1,415) $ 139,547
----------- ---------- ---------- ---------- -------------- ----------
----------- ---------- ---------- ---------- -------------- ----------
</TABLE>
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
(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 in operating activities:
Net cash provided from trading activities 84 1,840 1,183
Proceeds from sales of loans available for sale 103,110 385,951 28,815
Purchases and originations of loans available for sale (274,039) (549,908) (74,645)
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 (7,096) (5,727) (8,386)
(Gain) loss on sale of real estate owned, net (8,496) (12,234) 439
Gains on sales of branches (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 in operating activities (189,426) (108,807) (52,349)
---------- ---------- ----------
Cash flows from investing activities:
Proceeds from sales of securities available for sale 836,247 877,911 811,757
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 35,161 423,886
Purchases and originations of discounted loans and loans held for investment (818,587) (547,243) (324,860)
Principal payments received on discounted loans and loans held for investment 251,485 163,098 104,759
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) 234,522 197,902
---------- ---------- ----------
</TABLE>
(Continued on next page)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-7
<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
- ------------------------------------------------------------------------ ---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from financing activities:
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 subordinated notes 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
---------- ---------- ----------
---------- ---------- ----------
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
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-8
<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. 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 $90,636 and a market value
of $89,148, to securities available for sale.
F-9
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
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. 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.
Mortgage-related securities held for investment include deferred tax assets, net
of deferred fees, which result from the ownership of Real Estate Mortgage
Investment Conduit ("REMIC") tax residual securities. Beginning in December
1995 such amounts are included in securities available for sale. 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.
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
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.
TRADING ACTIVITIES
From time to time the Company purchases investment and mortgage-backed and
related securities into its trading account. 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 $10,067, $275,403 and $78,595 in aggregate sales proceeds during the
years ended December 31,
F-10
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
1995, 1994 and 1993, respectively, resulting in net gains of $84, $1,840 and
$1,183 for the years ended December 31, 1995, 1994 and 1993, respectively.
LOAN 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. General valuation allowances are
also established for the inherent risks in the loan portfolio which have yet to
be specifically identified. 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. 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
F-11
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
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.
F-12
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
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.
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 earned tax credits and tax benefits as interest income. 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,
F-13
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
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.
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.
F-14
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
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
F-15
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
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.
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.
F-16
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
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.
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 net 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.
F-17
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
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 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 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.
F-18
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
The methodologies used and key assumptions made to estimate fair value, the
estimated fair values determined and recorded carrying values follow:
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.
F-19
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
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-20
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Fair Carrying Fair
Amount Value Amount Value
----------- --------- ----------- ----------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents $ 54,632 $ 54,632 $ 36,750 $ 36,750
Securities available for sale 358,724 358,724 187,717 187,717
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 - - 114,650 108,280
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 126,848 130,192 28,688 28,570
OTHER:
Loan commitments 54,405 54,405 41,027 41,027
</TABLE>
F-21
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 4 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 Fair
DECEMBER 31, 1995: Cost Gains Losses 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") and tax residuals 22,003 - (185) 21,818
REMIC residuals 616 - (144) 472
------- ----- ----- -------
210,734 291 (4,200) 206,825
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
------- ----- ----- -------
$360,969 $3,992 $(6,237) $358,724
------- ----- ----- -------
------- ----- ----- -------
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-22
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1994:
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>
F-23
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
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>
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 $811,757
---------- --------- ---------
---------- --------- ---------
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 $ 103,110 $ 385,951 $ 28,815
---------- --------- ---------
---------- --------- ---------
</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 14).
F-24
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 5 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 13).
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>
F-25
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 6 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 and tax residuals 23,727 - (19) 23,708
REMIC residuals 770 - (327) 443
------- ------ ------ -------
$114,650 $ - $(6,370) $108,280
------- ------ ------ -------
------- ------ ------ -------
</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 (1,424) (5,931) (4,266)
------ ------ ------
Net discount accretion $ (772) $(4,888) $ 828
------ ------ ------
------ ------ ------
</TABLE>
Included in discounts accreted to interest income 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.
F-26
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 7 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-27
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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
F-28
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
purchased mortgage servicing rights was $3,433 and $41 at December 31, 1995 and
1994, respectively, and is included in other assets.
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 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
13).
NOTE 8 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
F-29
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
adjusted accordingly. Upon receipt of title to the property, the loans are
transferred to real estate owned.
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
------------ ------------
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>
F-30
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
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>
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>
Commercial
Single 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>
F-31
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 9 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-32
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 10 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.
NOTE 11 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-33
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 2).
NOTE 12 DEPOSITS
The Company's deposits consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
------------------------- -------------------------
Weighted Weighted
Average Book Average Book
Rate Value Rate 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.
F-34
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
The contractual maturity of the Company's certificates of deposit at December
31, 1995 follows:
<TABLE>
<CAPTION>
CONTRACTUAL REMAINING MATURITY:
<S> <C>
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 $(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.
F-35
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 13 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 14 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 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.
F-36
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
<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 15 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% subordinated notes due May 1 7,615 -
Other interest bearing obligations 9,794 8,577
------- ------
18,421 9,589
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
------- ------
$126,848 $ 28,688
------- ------
------- ------
</TABLE>
The subordinated notes due in 1996 are payable to current or former shareholders
and executive officers.
F-37
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
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, 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.
Other interest bearing obligations of $9,794 and $8,577 at December 31, 1995 and
1994, respectively, represent contractual obligations to fund certain limited
partnerships which invest in low income housing tax credit interests.
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
F-38
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
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 16 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>
Notional Libor Floating Rate
Maturity Amount Index Fixed Rate at End of 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 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.
F-39
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
Terms and other information on interest rate futures contracts sold short are as
follows:
<TABLE>
<CAPTION>
Maturity Notional 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
Eurodollar U.S. 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.
F-40
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
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.
NOTE 17 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 16).
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, with
F-41
<PAGE>
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>
(UNAUDITED)
Four to More Than One
Within Three Twelve Year to Three Three Years
Months Months Years and Over Total
------ ------ ----- -------- -----
<S> <C> <C> <C> <C> <C>
AT DECEMBER 31, 1995:
Rate-sensitive assets $ 236,076 $ 360,341 $ 277,905 $ 853,056 $ 1,727,378
Rate-sensitive liabilities 355,368 742,615 202,770 434,419 1,735,172
------- ------- ------- ------- ---------
Interest rate sensitivity gap
before off-balance sheet
financial instruments (119,292) (382,274) 75,135 418,637 (7,794)
Off-balance sheet financial
instruments 104,612 (38,518) (34,496) (31,598) -
------- ------- ------- ------- ---------
Interest rate sensitivity gap $ (14,680) $(420,792) $ 40,639 $ 387,039 $ (7,794)
--------- ------- --------- --------- ----------
--------- ------- --------- --------- ----------
Cumulative interest rate
sensitivity gap $ (14,680) $(435,472) $ (394,833) $ (7,794)
--------- -------- --------- ---------
--------- -------- --------- ---------
Cumulative interest rate sensitivity
gap as a percentage of total rate
sensitive assets (0.85)% (25.21)% (22.86)% (0.45)%
----- ------ ------ -----
----- ------ ------ -----
AT DECEMBER 31, 1994:
Rate-sensitive assets $ 166,818 $ 416,454 $ 302,937 $ 175,205 $ 1,061,414
Rate-sensitive liabilities 182,045 315,751 377,502 146,114 1,021,412
------- ------- ------- ------- ---------
Interest rate-sensitivity gap
before off-balance sheet
financial instruments (15,227) 100,703 (74,565) 29,091 40,002
Off-balance sheet financial
instruments 185,535 (127,060) (13,069) (45,406) -
------- ------- ------- ------- ---------
Interest rate sensitivity gap $ 170,308 $ (26,357) $ (87,634) $ (16,315) $ 40,002
--------- -------- --------- --------- ----------
--------- -------- --------- --------- ----------
Cumulative interest rate
sensitivity gap $ 170,308 $ 143,951 $ 56,317 $ 40,002
------- -------- --------- ---------
------- -------- --------- ---------
Cumulative interest rate sensitivity
gap as a percentage of total rate-
sensitive assets 16.05% 13.56% 5.31% 3.77%
----- ----- ---- ----
----- ----- ---- ----
</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 forecasting the impact of alternative interest rate
F-42
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
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.
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>
(UNAUDITED)
Estimated Change in
-------------------------------------------------------
Change (In Basis Net Interest Income MVPE
Points) in Interest -------------------------- -------------------------
Rates 1995 1994 1995 1994
----- ----------- ----------- ----------- -----------
<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.
F-43
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 18 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 $12,277 $35,134 $12,338
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)
------ ------- -------
$ 7,805 $32,868 $13,049
------ ------- -------
------ ------- -------
</TABLE>
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>
CURRENT: Federal $ 9,125 $30,157 $ 5,006
State 5,011 2,261 260
------ ------ -----
14,136 32,418 5,266
------ ------ -----
DEFERRED: Federal 2,025 2,542 7,018
State (3,884) 174 54
------ --- --
(1,859) 2,716 7,072
------ ----- -----
Total $12,277 $35,134 $12,338
------ ------ ------
------ ------ ------
</TABLE>
F-44
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
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 $15,896 $30,217 $13,875
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 (2,700) (1,886) (678)
Tax effect of minority interests - - (105)
Other (196) 1,134 (546)
---- ----- ----
Actual income tax expense $12,277 $35,134 $12,338
------ ------ ------
------ ------ ------
</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.
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.
F-45
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
The net deferred tax liability 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 assets 22,263 20,695
Less amount included in PAC securities and tax residuals 26,303 22,833
------ ------
Net deferred tax liability $ 4,040 $ 2,138
------ ------
------ ------
</TABLE>
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
F-46
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
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 19 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.
F-47
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 20 STOCKHOLDERS' EQUITY
During 1995, the Company repurchased from stockholders and retired 881,506
shares of common stock for the aggregate price of $41,997.
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
Granted Price Exercised Repurchased Vested
------------- ------------- ------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
1991: 113,332 $ 3.00 45,000 9,999 58,333
1992: 82,667 4.50 12,222 6,889 63,556
1993: 100,360 17.37 11,040 13,515 75,805
1994: 114,932 7.87 - 6,914 108,018
1995: 29,738 57.60 - - -
1995: 711 9.44 - - -
</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.
F-48
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 21 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. The following comparison of the Bank's
regulatory capital to its regulatory capital requirements at December 31, 1995
and related additional discussion are unaudited:
<TABLE>
<CAPTION>
(UNAUDITED)
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 of making the distribution.
F-49
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 22 OTHER 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-50
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 23 BUSINESS LINE REPORTING
The following table presents operational data by major lines of business:
<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 32,607 6,029 356,690
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) 32,688
----- ---- ------
$146,174 $45,416 $ 1,972,571
------- ------ ---------
------- ------ ---------
DECEMBER 31, 1994:
Asset acquisition and resolution $ 53,357 $18,008 $ 656,125
Residential finance 4,573 (303) 59,513
Commercial finance 27,844 9,306 175,958
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 14,801
----- ------ ------
$ 137,736 $86,333 $ 1,268,358
------- ------ ---------
------- ------ ---------
DECEMBER 31, 1993:
Asset acquisition and resolution $ 31,036 $19,426 $ 341,098
Residential finance 6,056 447 71,292
Commercial finance 4,148 1,131 101,134
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 57,322
----- ------ ------
$ 80,936 $39,643 $ 1,389,207
------- ------ ---------
------- ------ ---------
</TABLE>
F-51
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
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.
Investment management includes the results of the securities 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 24 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.
F-52
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
At December 31, 1995 the Company was committed to lend up to $9,884 under
outstanding unused lines of credit. The Company also had (i) commitments to
originate multi-family construction loans with aggregate principal balances of
$8,907, (ii) a commitment to purchase $4,800 of residential discounted loans,
(iii) a commitment to originate $5,390 of loans secured by office buildings, and
(iv) a commitment to 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. 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.
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 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.
F-53
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 25 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
Securities available for sale 3,160 171
Loan portfolio, net 520 -
Prepaid expenses and other assets 94 1,731
------- -------
$157,762 $159,676
------- -------
------- -------
LIABILITIES
Notes payable $ 8,627 $ 1,012
Other liabilities 9,588 5,281
------- -------
Total liabilities 18,215 6,293
STOCKHOLDERS' EQUITY
Total stockholders' equity 139,547 153,383
------- -------
$157,762 $159,676
------- -------
------- -------
</TABLE>
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>
F-54
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 26 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 $ 47,094 $ 34,759 $ 36,426 $ 27,895
Interest expense (26,911) (22,971) (18,520) (16,842)
Provision for loan losses (1,262) - - -
------- ------- ------- ------
Net interest income after provision for loan losses 18,921 11,788 17,906 11,053
Gain on sale of branches 5,430 - - -
Gain on sale of hotel 4,658 - - -
Non-interest income 8,222 4,084 6,380 2,547
Non-interest expense (13,407) (10,274) (13,130) (8,762)
------- ------- ------- ------
Income before income taxes and
discontinued operations 23,824 5,598 11,156 4,838
Income taxes (6,619) (1,129) (3,348) (1,181)
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 $6.66 $1.74 $3.04 $1.08
Earnings (loss) after discontinued operations $6.66 $(0.03) $2.42 $0.62
<CAPTION>
Quarters Ended
--------------------------------------------------------------------------
December 31, September 30, June 30, March 31,
1994 1994 1994 1994
--------------- --------------- --------------- ---------------
Interest income $ 43,777 $33,726 $ 33,128 $ 27,105
Interest expense (21,774) (15,735) (14,003) (11,954)
Provision for loan losses - - - -
------- ------- ------- ------
Net interest income after provision for loan
losses 22,003 17,991 19,125 15,151
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 61,345 9,355 9,432 6,855
Income taxes (26,780) (2,942) (2,580) (2,832)
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 $10.16 $1.88 $2.01 $1.18
Earnings after discontinued operations $9.52 $1.60 $1.88 $0.89
</TABLE>
F-55
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
----------- ------------
<S> <C> <C>
Assets
Cash and amounts due from depository institutions $ 6,322 $ 4,200
Interest bearing deposits 26,445 50,432
Federal funds sold 45,000 -
Securities available for sale, at market value 310,090 358,724
Loans available for sale, at lower of cost or market 253,583 251,790
Investment securities, net 8,905 18,665
Loan portfolio, net 277,048 295,605
Discounted loan portfolio, net 606,372 669,771
Investments in low income housing tax credit interests 90,119 81,362
Principal, interest and dividends receivable 12,533 12,636
Real estate owned, net 151,256 166,556
Investment in joint venture 32,000 -
Premises and equipment, net 27,066 25,359
Income taxes receivable 1,852 1,005
Deferred tax asset 1,422 -
Other assets 30,388 36,466
----------- -----------
$ 1,880,401 $ 1,972,571
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 1,498,074 $ 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 126,032 126,848
Deferred income taxes payable - 4,040
Accrued expenses, payables and other liabilities 43,793 45,330
----------- -----------
Total liabilities 1,738,298 1,833,024
----------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; 20,000,000 shares authorized;
2,381,227 shares issued and outstanding 24 24
Additional paid-in capital 10,663 10,663
Retained earnings 133,304 130,275
Unrealized loss on securities available for sale, net of taxes (1,888) 1,415
----------- -----------
Total stockholders' equity 142,103 139,547
----------- -----------
$ 1,880,401 $ 1,972,571
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-56
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended March 31, 1996 1995
- ---------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Interest income:
Federal funds sold and repurchase agreements $ 769 $ 1,030
Securities available for sale 7,918 4,281
Loans available for sale 6,597 2,936
Mortgage-related securities held for investment - 1,207
Loans 10,010 1,520
Discounted loans 22,155 14,431
Investments in low income housing tax credit interests 2,263 1,865
Investment securities and other 507 625
----------- -----------
50,219 27,895
----------- -----------
Interest expense:
Deposits 22,956 15,203
Securities sold under agreements to repurchase 653 180
Advances from the Federal Home Loan Bank 1,039 128
Subordinated debentures and other interest bearing obligations 3,722 740
Securities sold but not yet purchased - 591
----------- -----------
28,370 16,842
----------- -----------
Net interest income before provision for loan losses 21,849 11,053
Provision for loan losses 10,173 -
----------- -----------
Net interest income after provision for loan losses 11,676 11,053
----------- -----------
Non-interest income:
Servicing fees and other charges (681) 1,460
Gains on sales of interest earning assets, net 5,783 458
Income (loss) on real estate owned, net (1,792) 360
Other income 449 269
----------- -----------
3,759 2,547
----------- -----------
Non-interest expense:
Compensation and employee benefits 6,087 4,794
Occupancy and equipment 2,045 1,792
Hotel operations expense, net 161 468
Other operating expenses 3,090 1,708
----------- -----------
11,383 8,762
----------- -----------
Income from continuing operations before income taxes 4,052 4,838
Income tax expense 1,022 1,181
----------- -----------
Income from continuing operations 3,030 3,657
Discontinued operations:
Loss from operations of discontinued divisions
net of tax benefit of $859 for the period
ended March 31, 1995 - (1,550)
----------- -----------
Net income $ 3,030 $ 2,107
=========== ===========
Earnings per share:
Income from operations $ 1.15 $ 1.08
Discontinued operations, net of tax benefit - (0.46)
----------- -----------
Net income $ 1.15 $ 0.62
=========== ===========
Weighted average common shares outstanding 2,644,537 3,389,722
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-57
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except share data)
(Unaudited)
Three Months Ended March 31, 1996 and Year Ended December 31, 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, 1994 3,219,471 $ 32 $ 13,942 $ 142,230 $ (2,821) $ 153,383
Net income - - - 25,467 - 25,467
Repurchase of common stock options - - (132) - - (132)
Exercise of common stock options 43,262 1 1,419 - - 1,420
Repurchase of common stock (881,506) (9) (4,566) (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 2,381,227 24 10,663 130,275 (1,415) 139,547
Net income - - - 3,029 - 3,029
Change in unrealized loss on securities
available for sale, net of taxes - - - - (473) (473)
--------- ------ ---------- --------- ------------- ---------
Balances at March 31, 1996 2,381,227 $ 24 $ 10,663 $ 133,304 $ (1,888) $ 142,103
========= ====== ========== ========= ============= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-58
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
For the years ended March 31, 1996 1995
- ------------------------------------------------------------------------------------ --------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,030 $ 2,107
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Proceeds provided from trading activities, net - 69
Proceeds from sales of loans available for sale 62,939 -
Purchases and originations of loans available for sale (80,648) (39,180)
Principal payments received on loans available for sale 16,481 670
Discount accretion, net (917) (1,812)
Depreciation and amortization 914 1,252
Provision for loan losses 10,173 -
Loss on sales of premises and equipment 97 -
Gains on sales of interest earning assets, net (5,765) (469)
Gain on sale of real estate owned (3,900) (4,089)
Provision for losses on real estate owned 6,378 2,619
Decrease in principal, interest and dividends receivable 280 1,686
Increase in income taxes receivable (744) (9,738)
Increase in other assets (6,312) (15,664)
(Decrease) increase in accrued expenses, payables and other liabilities 5,754 (6,030)
--------- ----------
Net cash provided (used) by operating activities 7,760 (68,579)
--------- ----------
Cash flows from investing activities:
Proceeds from sales of securities available for sale 37,309 301,470
Purchases of securities available for sale (5,740) (283,951)
Maturities of and principal payments received on securities available for sale 12,445 6,737
Maturities of and principal payments received on securities held for investment 10,025 3,652
Purchases of low income housing tax credit interests (6,409) (8,667)
Proceeds from sales of discounted loans and loans held for investment 22,095 14,978
Purchases and originations of discounted loans and loans held for investment (58,832) (42,286)
Investment in joint venture (32,000) -
Principal payments received on discounted loans and loans held for investment 100,633 42,331
Proceeds from sales of real estate owned 29,144 32,467
Purchases of real estate owned in connection with discounted loan purchases (1,198) (3,337)
Proceeds from sale of premises and equipment 233 -
Additions to premises and equipment (2,940) (5,842)
Other, net (274) 2,015
--------- ----------
Net cash provided by investing activities 104,491 59,567
--------- ----------
</TABLE>
(Continued on next page)
The accompanying notes are an integral part of
these consolidated financial statements.
F-59
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
For the years ended March 31, 1996 1995
- ------------------------------------------------------------------------------------ --------- ----------
<S> <C> <C>
Cash flows from financing activities:
Payment on long term borrowings (1,012) -
Increase (decrease) in deposits (4,047) 53,888
Increase on interest bearing obligations 238 -
Decrease in securities sold under agreements to repurchase (84,761) -
Payments and repurchase of notes and mortgages payable (43) (74)
Dividend payments on common stock (525) -
Repurchase of common stock options and common stock - (41,054)
--------- ----------
Net cash provided (used) by financing activities (90,150) 12,760
--------- ----------
Net increase in cash and cash equivalents 22,101 3,748
Cash and cash equivalents at beginning of period 54,632 35,896
--------- ----------
Cash and cash equivalents at end of period $ 76,733 $ 39,644
========= ==========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 23,606 $ 13,994
========= ==========
Income taxes $ 1,869 $ 10,918
========= ==========
Supplemental schedule of non-cash investing and financing activities:
Real estate owned acquired through foreclosure $ 15,125 $ 59,669
========= ==========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-60
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 three month period ended March
31, 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 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 Statements of Operations have been restated for 1995
to reflect the discontinuance of these operations.
NOTE 3 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>
MARCH 31, 1996: Maturity Notional Principal Fair Value
-------- ------------------ ----------
<S> <C> <C> <C>
Eurodollar futures 1996 $ 311,000 $ (607)
1997 245,000 (71)
U.S. Treasury futures 1996 196,300 173
DECEMBER 31, 1995:
Eurodollar futures 1996 $ 386,000 $ (1,598)
1997 26,000 (168)
U.S. Treasury futures 1996 11,100 (80)
</TABLE>
F-61
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------
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 4 REGULATORY REQUIREMENTS
The Company's primary subsidiary, Berkeley Federal Bank & Trust FSB
("Berkeley") is a federally chartered savings bank regulated by the Office of
Thrift Supervision ("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 March 31, 1996 and related additional discussion follows:
<TABLE>
<CAPTION>
Tangible Core Risk-Based
Capital Capital Capital
--------- --------- ----------
<S> <C> <C> <C>
GAAP capital $ 127,620 $ 127,620 $ 127,620
Nonallowable assets:
Implementation of Financial Accounting
Standard No. 115 1,888 1,888 1,888
Excess qualifying purchased mortgage
servicing rights (225) (225) (225)
Additional capital items:
Subordinated debentures - - 100,000
General valuation allowances - - 9,833
--------- --------- ----------
Regulatory capital-computed 129,283 129,283 239,116
Minimum capital requirement 27,763 55,526 167,666
--------- --------- ----------
Regulatory capital excess $ 101,520 $ 73,757 $ 71,450
========= ========= ==========
CAPITAL RATIOS:
Required 1.50% 3.00% 8.00%
Actual 6.99% 6.99% 11.41%
</TABLE>
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 March
31, 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.
NOTE 5 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 OTS, the Company has modified its
methodology for valuing its assets held for disposition and resolution
beginning in the first
F-62
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------
quarter of 1996. This methodology results in a general valuation allowance
which supplements the Company's current practice of adjusting these assets to
the lower of the recorded investment or fair value through direct charges to
interest income or non-interest income, as applicable, with corresponding
increases in the discount associated with individual discounted loans and
valuation allowances associated with loans available for sale and real estate
owned.
NOTE 6 COMMITMENTS AND CONTINGENCIES
At March 31, 1996 the Company had (i) commitments to fund an additional
$8,989 on multi-family residential loans, (ii) commitments to purchase
$12,123 of commercial discounted loans, (iii) commitments to fund an
additional $5,339 on loans secured by office buildings, (iv) commitments to
fund $25,539 of loans secured by hotel properties and (v) a commitment to
fund an additional $5,259 on a loan secured by land. A joint venture, formed
in March 1996, in which the Company and another investor each own 50%, has an
outstanding commitment to acquire approximately $741.2 million of
single-family discounted loans from the Department of Housing and Urban
Development, for approximately $619.4 million. The Company has a recourse
obligation of $4,715 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 $69,953 at March 31, 1996,
supports senior classes of securities having an outstanding principal balance
of $786,721.
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 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 Company'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 tax (35.85% assumed tax rate). Should
this law be enacted as proposed, the Company believes that Berkeley's current
capital is sufficient to enable it to remain a well-capitalized institution.
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
consolidated financial statements.
F-63
<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
PAGE
Available Information...................................................
Summary ................................................................
Selected Consolidated Financial
and Other Data........................................................
Risk Factors............................................................
The Company.............................................................
Use of Proceeds.........................................................
Dividend Policy.........................................................
Capitalization .........................................................
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations............................................................
Business................................................................
Regulation..............................................................
Taxation................................................................
Management..............................................................
Beneficial Ownership of
Common Stock..........................................................
Description of Notes....................................................
Description of Capital Stock............................................
Shares Available for Future Sale........................................
Selling Stockholders....................................................
Underwriting............................................................
Legal Matters...........................................................
Experts.................................................................
Index to Consolidated
Financial Statements.................................................. F-1
___________________
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.
OCWEN FINANCIAL CORPORATION
$100,000,000
____% of Notes due 2003
____________________
PROSPECTUS
____________________
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
______________ ___, 1996
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<PAGE>
COMMON STOCK PROSPECTUS COVER PAGE
SUBJECT TO COMPLETION, DATED __________ ___, 1996
PROSPECTUS
OCWEN FINANCIAL CORPORATION
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
$_____ and $____ per share. See "Underwriting" for information relating to the
factors to be considered in determining such initial public offering price. The
Company has applied for quotation of the Common Stock 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 $______ principal amount
of ____% Notes due ____ (the "Notes") of the Company (the "Notes Offering").
See "Description of the Notes" and "Underwriting." 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 ____ 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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Price to Underwriting Proceeds to
Public Discount(1) Selling Stockholders(2)
-------- ------------ -----------------------
Per Share................ $ $ $
Total(3)........ $ $ $
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(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>
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>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
COMMON STOCK PROSPECTUS BACK COVER 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
PAGE
Available Information...................................................
Summary ................................................................
Selected Consolidated Financial
and Other Data........................................................
Risk Factors............................................................
The Company.............................................................
Use of Proceeds.........................................................
Dividend Policy.........................................................
Capitalization .........................................................
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations............................................................
Business................................................................
Regulation..............................................................
Taxation................................................................
Management..............................................................
Beneficial Ownership of
Common Stock..........................................................
Description of Notes....................................................
Description of Capital Stock............................................
Shares Available for Future Sale........................................
Selling Stockholders....................................................
Underwriting............................................................
Legal Matters...........................................................
Experts.................................................................
Index to Consolidated
Financial Statements.................................................. F-1
___________________
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 when acting as an Underwriter and with respect to their unsold
allotments or subscriptions.
OCWEN FINANCIAL CORPORATION
____________________
2,000,000
shares of Common Stock
____________________
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.
SEC registration fee.............................................. $ 42,759
NASD and NASDAQ fees..............................................
Legal fees and expenses........................................... *
Accounting fees and expenses ..................................... *
Printing, postage and delivery expenses .......................... *
Blue Sky fees and expenses ....................................... *
Trustee fees...................................................... *
Miscellaneous expenses ........................................... *
--------
Total ........................................................ $ *
---------
---------
- ---------------------------------
* To be completed by amendment.
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. Section 607.0850, 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
II-1
<PAGE>
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 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.
II-2
<PAGE>
(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
II-3
<PAGE>
bylaw, agreement, vote of shareholders or 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;
II-4
<PAGE>
(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;
(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.
II-5
<PAGE>
(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: Page No.
--------
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
12.0 Statement regarding the computation of the ratio
of earnings to fixed charges
II-6
<PAGE>
(a) Exhibits: Page No.
--------
21.0 Subsidiaries (see "Business - General" in the Prospectus)
23.1 Consent of Elias, Matz, Tiernan & Herrick L.L.P.
(to be contained in the opinion included
as Exhibit 5) *
23.2 Consent of Price Waterhouse LLP
25.0 Form T-1 *
99.0 Consent of Howard H. Simon
- ------------------------------------
* 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
II-7
<PAGE>
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-8
<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 May 31, 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.
/s/ William C. Erbey Date: May 31, 1996
- ------------------------------------------------
William C. Erbey
President and Chief Executive Officer
(principal executive officer)
/s/ Barry N. Wish Date: May 31, 1996
- ------------------------------------------------
Barry N. Wish, Chairman
/s/ Christine A. Reich Date: May 31, 1996
- ------------------------------------------------
Christine A. Reich
Managing Director and Chief Financial Officer
(principal financial and accounting officer)
II-9
<PAGE>
EXHIBIT 4.0
NUMBER SHARES
OCWEN FINANCIAL CORPORATION
Incorporated Under the Laws of the State of Florida
This certifies that __________________ is the owner of ________ (___) fully
paid and non-assessable shares of the common stock, par value $.01 per share, of
Ocwen Financial Corporation
transferable only on the books of the Corporation by the holder hereof, in
person or by duly authorized attorney, upon surrender of this certificate
properly endorsed.
This Certificate is not valid unless countersigned and registered by the
Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
- ---------------------------- --------------------------------
John R. Erbey William C. Erbey
Managing Director and Secretary Chairman, President and Chief
Executive Officer
<PAGE>
(FORM OF STOCK CERTIFICATE -- BACK SIDE)
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship and not as
tenants in common
UNIF GIFT MIN ACT - .........Custodian..........under Uniform
(Cust) (Minor)
Gifts to Minors Act..........................
(State)
For value received, ________________________________________
_______________________ hereby sell assign and transfer
PLEASE INSERT SOCIAL SECURITY OR OTHER
TAXPAYER IDENTIFYING NUMBER OF ASSIGNEE
----------------------------------------------------------------
----------------------------------------------------------------
unto ____________________________________________________________
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
_________________________________________________ Shares of common stock
represented by this certificate, and do hereby irrevocably constitute and
appoint ________________________, Attorney, to transfer the said Shares on the
books of the within named Corporation, with full power of substitution in the
premises.
Dated _________________________, 199_
______________________________
Signature
______________________________
Signature
Notice: The signature to this assignment must correspond with the name written
upon the face of this certificate in every particular without alteration or any
change whatever.
<PAGE>
EXHIBIT 10.2
OCWEN FINANCIAL CORPORATION
ANNUAL INCENTIVE PLAN
PURPOSE
The Annual Incentive Plan (the "Plan") is intended to (a) provide an incentive
for key employees of the Corporation and its subsidiaries to exert their best
efforts to create shareholder value; (b) attract and retain persons of
outstanding ability to contribute significantly to the business and (c) further
the identity of interest of those employees with those of the Corporation's
shareholders.
ADMINISTRATION
The Plan will be administered by the President of the Corporation. The
President is authorized to interpret the Plan and determine when, to whom, in
what manner or form, in what amount, over what period of time and under what
terms, conditions and limitations awards under the Plan will be made. Except as
otherwise provided herein, the President's determination will be conclusive and
binding on all parties. The President may delegate the selection of
participants and the amounts of their respective awards to one or more officers
reporting directly to the President.
ELIGIBILITY
Participation in the Plan will be limited to those employees selected by the
President who are in a position to make substantial contributions to the
management, growth and success of the Corporation and its subsidiaries.
INCENTIVE AWARDS
Incentive awards may be made in an aggregate amount not to exceed twenty
percent (20%) of the net income from continuing operations before taxes and
payment of the incentive awards of the Corporation. The incentive awards may
be paid in cash or in any other form approved by the Board of Directors. The
President annually will present to the Board of Directors a summary report of
the operation of the Plan. This report will include outstanding awards and
awards paid for the previous year.
AMENDMENT
The Plan may be amended in whole or in part or terminated at any time by the
Board of Directors. The President shall have the right to make any amendments
to the Plan that relate solely to the administration of the Plan and that do not
materially change the benefits or materially increase the cost of the Plan.
MISCELLANEOUS
No right or benefit under this Plan shall be assignable. This Plan shall be
governed by and construed in accordance with the laws of the State of Delaware.
<PAGE>
EXHIBIT 12.0
OCWEN FINANCIAL CORPORATION (CONSOLIDATED)
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
1st Quarter 1st Quarter
1996 1995
----------- -----------
Income from continuing
operations before income
taxes $4,052 $4,838
Fixed Charges:**
Interest expense 5,414 1,639
Rentals:
Buildings - 33.3% 113 147
------- -------
Total Fixed Charges 5,527 1,786
------- -------
Income from continuing
operations before income
taxes and fixed charges $9,579 $6,624
------- -------
------- -------
Ratio of Earnings to
Fixed Charges 1.73 3.71
------- -------
------- -------
** Interest expense does not include interest on deposits
<PAGE>
OCWEN FINANCIAL CORPORATION (CONSOLIDATED)
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
1st Quarter 1st Quarter
1996 1995
----------- -----------
Income from continuing
operations before income
taxes $ 4,052 $ 4,838
Fixed Charges:*
Interest expense 28,370 16,842
Rentals:
Buildings - 33.3% 113 147
------- -------
Total Fixed Charges 28,483 16,989
------- -------
Income from continuing
operations before income
taxes and fixed charges $32,535 $21,827
------- -------
------- -------
Ratio of Earnings to
Fixed Charges 1.14 1.28
------- -------
------- -------
* Interest expense includes interest on deposits
<PAGE>
OCWEN FINANCIAL CORPORATION (CONSOLIDATED)
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(dollars in thousands)
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income from continuing
operations before income
taxes $ 45,416 $ 86,987 $ 39,643 $ 35,889 $ 25,424
Fixed Charges*:
Interest expense 85,244 63,466 35,306 28,148 32,858
Rentals:
Buildings-33.3% 556 908 717 532 366
-------- -------- -------- -------- --------
Total Fixed Charges 85,800 64,374 36,023 28,680 33,224
-------- -------- -------- -------- --------
Income from continuing
operations before income
taxes and fixed charges $131,216 $151,361 $ 75,666 $ 64,569 $ 58,648
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Ratio of Earnings to
Fixed Charges 1.53 2.35 2.10 2.25 1.77
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
*Interest expense includes interest on deposits
<PAGE>
OCWEN FINANCIAL CORPORATION (CONSOLIDATED)
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(dollars in thousands)
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income from continuing operations $ 45,416 $ 86,987 $ 39,643 $ 35,889 $ 25,424
before income taxes
Fixed Charges**:
Interest expense 13,391 18,505 16,267 11,944 17,685
Rentals:
Buildings-33.3% 556 908 717 532 366
-------- -------- -------- -------- --------
Total Fixed Charges 13,947 19,413 16,984 12,476 18,051
-------- -------- -------- -------- --------
Income from continuing operations
before income taxes and fixed charges $ 59,363 $106,400 $ 56,627 $ 48,365 $ 43,475
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Ratio of Earnings to Fixed Charges 4.26 5.48 3.33 3.88 2.41
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
**Interest expense does not include interest on deposits
<PAGE>
EXHIBIT 23.2
Consent of Independent Certified Public Accountants
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated February 16, 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."
Price Waterhouse LLP
Fort Lauderdale, Florida
June 3, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 6,322
<INT-BEARING-DEPOSITS> 26,445
<FED-FUNDS-SOLD> 45,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 310,090
<INVESTMENTS-CARRYING> 8,905
<INVESTMENTS-MARKET> 8,905
<LOANS> 1,137,003
<ALLOWANCE> 11,904
<TOTAL-ASSETS> 1,880,401
<DEPOSITS> 1,498,074
<SHORT-TERM> 78,014
<LIABILITIES-OTHER> 43,793
<LONG-TERM> 118,417
0
0
<COMMON> 24
<OTHER-SE> 142,079
<TOTAL-LIABILITIES-AND-EQUITY> 1,880,401
<INTEREST-LOAN> 38,762
<INTEREST-INVEST> 10,950
<INTEREST-OTHER> 507
<INTEREST-TOTAL> 50,219
<INTEREST-DEPOSIT> 22,956
<INTEREST-EXPENSE> 28,370
<INTEREST-INCOME-NET> 21,849
<LOAN-LOSSES> 10,173
<SECURITIES-GAINS> 35
<EXPENSE-OTHER> 11,384
<INCOME-PRETAX> 4,052
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,029
<EPS-PRIMARY> 1.15
<EPS-DILUTED> 0
<YIELD-ACTUAL> 0
<LOANS-NON> 3,312
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,952
<ALLOWANCE-OPEN> 1,947
<CHARGE-OFFS> 15
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2,631
<ALLOWANCE-DOMESTIC> 2,631
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE>
EXHIBIT 99.0
CONSENT
The undersigned hereby consents to being named as a prospective director of
Ocwen Financial Corporation in the Registration Statement on Form S-1 filed by
Ocwen Financial Corporation with the Securities and Exchange Commission on or
about May 31, 1996, to which Registration Statement this Consent is an Exhibit,
and an in any amendments (including post-effective amendments) thereto.
/s/ Howard H. Simon
-------------------
Howard H. Simon
Date: May 31, 1996
